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REVIEW OF PROPERTY
AND CONTRACTS
! e.
PROPERTY
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(1) Property are all things which are (already in the possession
of man) or may be (susceptible of appropriation)
(2) Requisites of property
1. Utility - capacity to satisfy a human need
2. Substantivity or Individuality - independent existence
3. Appropriability - susceptibility to ownership/possession,
even if not yet actually appropriated
Properties not susceptible of appropriation:
a. Common things (res commones)
Exception: Those that may be appropriated under
certain conditions in a limited way (ex. Electricity)
b. Not susceptible due to physical impossibility
ex. the sun
c. Not susceptible due to legal impossibility
ex. the human body
(3) Rights of an owner
1. Jus Possidendi - right to possess
2. Jus Utendi - right to use
3. Jus Fruendi - right to the fruits
4. Jus Abutendi - right to abuse
5. Jus Reinvindicandi - right to recover
! 6. Jus Dispodendi - right to dispose
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CLASSIFICATION OF PROPERTY
ACCORDING TO MOBILITY
1. Real
a. Nature - by its very nature is immovable, cannot be
carried from place to place
b. Incorporation - those which are attached to an
immovable in a fixed manner and is considered as
an integral part thereof
c. Destination - things placed in buildings or on lands
by the owner of the immovable or hi agent in such
a manner that it reveals the intention to attach
them permanently thereto
d. Analogy - classified by express provision of law
List of Immovable Properties (Art. 415)
a. Lands, buildings, roads and constructions of all
kinds adhered to the soil
b. Trees, plants and growing fruits, while they are
attached to the land or form an integral part of an
immovable
c. Everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated
therefrom without breaking the material or
deterioration of the object
Res Vinta - those immovable by incorporation,
which when separated from the immovable, they
regain their condition as movable
d. Statues, reliefs, painting or other objects for use or
ornamentation, placed in buildings or on lands by
the owner of the immovable in such a manner that
SERVE THE PEOPLE!
it reveals the intention to attach them permanently
to the tenements
* Maam LRs example: The statue of the Virgin Mary at the
UST Hospital
Machinery, receptacles, instrument or implements
intended by the owner of the tenement for an
industry or works which may be carried on in a
building or on a piece of land and which tend
directly to meet the needs of the said industry or
works.
* Maam LRs example: The desk chairs and the
blackboards in UST placed in the classrooms by the
Dominican owners. The objects to be immovable by
destination must be essential and principal to the industry
or works, not merely incidental
f. Animal houses, pigeon-houses, beehives, fish
ponds or breeding places of similar nature, in case
their owner has placed them or preserves them
with the intention to have them permanently
attached to the land, and forming a permanent
part of it; the animals in these places are included;
g. Fertilizer actually used on a piece of land;
h. Mines, quarries, and slag dumps, while the matter
thereof forms part of the bed, and waters either
running or stagnant;
i. Docks and structures which, though floating, are
intended by their nature and object to remain at a
fixed place on a river, lake, or coast;
j. Contracts for public works, and servitudes and
other real rights over immovable property.
2. Personal
a. Movables susceptible of appropriation which are
not included in Art. 415
b. Real property which by any special provision of
law considers as personal (ex. growing crops
under the Chattel Mortgage Law)
c. Forces of nature which are brought under the
control of man through science (ex. Electricity
generated by power plants)
d. In general, all things which can be transported
from place to place without impairment of the real
property to which they are fixed
e. Obligations and actions which have for their object
movables or demandable sums
f. Shares of stock of agricultural, commercial and
! industrial entities, although they have real estate
ACCORDING TO OWNERSHIP
1. Private
2. Public
a. Public dominion
b. Patrimonial
3. Res Derelicta - susceptible to ownership but no owner,
! abandoned property
* Maam LR: Can public property be acquired by acquisitive
prescription? Yes, patrimonial property can be acquired by
prescription. However public property cannot be acquired by
prescription
What is the difference between properties for public use and for
properties for public service? Public use means anybody regardless of
!
any distinction can use the property, example: roads. Public service
means the property is meant to serve a particular need or a particular
! class of persons, example: Philippine General Hospital
ACCORDING TO CONSUMABILITY
1. Consumable - cannot be used in a manner appropriate
to its nature without being consumed
! 2. Non-consumable
ACCORDING TO SUBSTITUTION
1. Fungible - property which belongs to a common genus
permitting its substitution (ex. sugar or salt, oil, vinegar)
! 2. Non-fungible
GOOD FAITH vs. BAD FAITH
(4) Good faith is the reasonable belief that the person whom he
received the thing was the owner thereof and could transmit
his ownership to him.
(5) Bad faith is the knowledge of any defect in the title of the
person he is transacting with, reasonable doubt would also
result in bad faith if not inquired upon
RIGHTS AS PROPERTY
(6) Real rights (jus in re) - interest belonging to a person over a
specific/corporeal thing without a definite passive subject
against whom such right may be personally enforced
(against the whole world), like ownership.
Elements:
1. Ownership of an object by a subject.
2. General obligation of respect, there being no particular
passive subject.
3. Effective actions against anyone who may want to
disturb it.
(7) Personal rights (just in personam/ad rem) - the power of a
person (creditor) to demand from another (debtor) as a
definite passive subject, the fulfillment of the latters
obligation; the right of obligation.
Elements:
1. Subjects consisting of active (creditor-obligee) and
passive (debtor-obligor).
2. There is a particular passive subject who is bound to
observe the obligation.
! 3. Effective actions against the passive subject.
EXPENSES
(8) Ordinary expenses - expenses which naturally come with
the ordinary use of the object
(9) Extraordinary expenses
(10) Necessary expenses - are those which preserve the
property to prevent loss or deterioration
(11) Useful expenses - are those which increase utility and
productivity of the property, adds value to the property
(12) Luxurious expenses - introduced for mere pleasure,
! embellishment, comfort, convenience or enjoyment
CONTRACTS
! These are called solemn contracts, or contracts which the
SERVE THE PEOPLE!
(13) A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to give
something or to render some service.
(14) The elements of a contract may be classified as follows:
1. Essential are those elements without which there can be
no contract.
a. Consent of the contracting parties
b. Object certain which is the subject matter of the
contract (the prestation of the obligation)
c. Cause of the obligation which is established
2. Natural are those elements which are derived from the
nature of the contract and ordinarily accompany the
same. They are presumed by the law although they can
be excluded by the contracting parties if they so desire.
Example: Warranty against eviction is implied in a
contract of sale, although the contracting parties may
increase, diminish or even suppress it.
3. Accidental are those elements which exist only when
the parties expressly provide for them for the purpose
of limiting or modifying the normal effects of the
contract.
! Example: Conditions, terms and modes
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STAGES IN THE LIFE OF A CONTRACT
(15) The life of a contract has three phases or stages:
1. Generation comprehends the preliminary or preparatory
process for the formation of the contract
2. Perfection refers to the birth of the contract
3. Consummation refers to the fulfillment of the purpose
! for which the contract was constituted
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PERFECTION OF CONTRACTS
(16) Contracts may be classified according to their perfection:
1. Consensual are those which are perfected by the mere
agreement of the parties. Examples: sale, lease.
2. Real are those which require not only the consent of the
parties for their perfection, but also the delivery of the
object by one party to the other. Examples:
commodatum, deposit, pledge.
! 3. Formal or Solemn
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FORMALITIES OF CONTRACTS
(17) General rule: Whatever may be the form in which a contract
may have been entered into, according to Art. 1356, it shall
be obligatory provided all of the essential requisites for its
validity are present.
Exceptions to the general rule:
1. When the law requires that the contract must be in a
certain form in order to be valid
2. When the law requires that the contract must be in a
certain form in order to be enforceable
law requires to be in a particular form (in writing) in order to
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make them valid and enforceable.
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FORMALITIES FOR VALIDITY
(18) There are certain contracts for which the law prescribes
certain forms for their validity--which means if these
formalities are not followed, they are void. These contracts
may be classified as follows: first, those which must appear
in writing; second, those which must appear in a public
document; third, those which must be registered.
(19) The following must appear in writing:
1. Donations of personal property whose value exceeds
five thousand pesos. According to Art. 748, the
donation and the acceptance shall be made in writing,
otherwise, it shall be void.
2. Sale of a piece of land or any interest therein through an
agent. According to Art. 1874, the authority of the latter
shall be in writing, otherwise the sale shall be void.
3. Agreements regarding payment of interest in contracts
of loan. According to Art. 1956, no interest shall be due
unless it has been expressly stipulated in writing. The
validity of the contract of loan, however, is not affected.
4. Antichresis. According to Art. 2134, in contracts of
antichresis, the amount of the principal and of the
interest shall be specified in writing, otherwise the
contract shall be void.
(20) The following must appear in a public document:
1. Donations of immovable property. According to Art.
749, the donation must be made in a public document.
The acceptance, on the other hand, may be made in the
same deed of donation or in a separate public
document. Noncompliance with these formalities shall
render the donation void.
2. Partnerships where immovable property or real rights
are contributed to the common fund. According to Arts.
1771 and 1773, in a contract of partnership where
immovable property or real rights are contributed to the
common fund, it is necessary that the contract must
appear in a public instrument and that there must be an
inventory of the immovable property or real rights,
signed by the partners and attached to the public
instrument, otherwise the contract is void.
(21) The following must be registered:
1. Chattel mortgages. According to 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.
2. Sales or transfers of large cattle. According to the Cattle
Registration ACt, no sale or transfer of large cattle shall
be valid unless it is duly registered and a certificate of
! transfer is secured.
FORMALITIES FOR ENFORCEABILITY
(22) There are also certain contracts which are unenforceable by
action, unless they are in writing and properly subscribed.
These contracts are governed by the Statute of Frauds
which covers the following (Art. 1403):
1. An agreement that by its terms is not to be performed
within a year from the making thereof
2. A special promise to answer for the debt, default or
miscarriage of another
SERVE THE PEOPLE!
3. An agreement made in consideration of marriage other
than a mutual promise to marry
4. An agreement for the sale of goods, chattels or things in
action, at a price not less than five hundred pesos,
unless the buyer accept and receive part of such goods
and chattels, or the evidence, or some of them, of such
things in action, or pay at the time some part of the
purchase money, but when a sale is made by auction
and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of
property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is
made, it is sufficient memorandum
5. An agreement for the leasing for a longer period than
one year, or for the sale of real property or of an interest
therein
6. A representation as to the credit of a third person
(23) The Statute of Frauds simple provides the method by which
the contracts enumerated may be proved. It does not
declare that said contracts are invalid because they are not
! reduced into writing.
FORMALITIES FOR CONVENIENCE
(24) Art. 1358 enumerates certain kinds of contracts which must
appear either in a public or in a private document. The
purpose of the requirement, however, is not to validate or to
enforce the contract but to insure its efficacy. In other words,
the form requires is neither for validity nor enforceability but
for the convenience of the contracting parties.
(25) The following must appear in a public document for
convenience:
1. Acts and contracts which have for their object the
creation, transmission, modification or extinguishment
of real rights over immovable property, sales of real
property or of an interest therein are governed by Arts.
1403, No. 2, and 1405
2. The cession, repudiation or renunciation of hereditary
rights or of those of the conjugal partnership of gains
3. The power to administer property, or any other power
which has for its object an act appearing or which
should appear in a public document, or should
prejudice a third person
4. The cession of actions or rights proceeding form an act
appearing in a public document
All other contracts where the amount involved exceeds
P500.00 must appear in writing, even a private one. But
sales of goods, chattels or things in action are governed by
Arts. 1403, No. 2 and 1405.
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INTRODUCTION TO really no consideration for they are considered as a
favor by one party to the party benefited

CREDIT - Bailments for hire or mutual-benefit bailments

- Arises when goods are left with the bailee for
TRANSACTIONS some use or service by him and is always for

! some compensation
- Hire of things (where goods are delivered for the
temporary use of the hirer); Hire of service (where
CREDIT TRANSACTIONS IN goods are delivered for some work or labor upon
GENERAL it by the bailee like contract for a piece of work);
(1) Credit transactions include all transactions involving the Hire for carriage of goods (where goods are
purchase or loan of goods, services, or money in the present delivered either to a common carrier or to a
with a promise to pay or deliver in the future. private person for the purpose of being carried
form place to place; Hire of custody (where goods
Credit transactions are really contracts of security, and
are either supported by a collateral or an encumbrance
of property or supported only by a promise to pay or the
! are delivered for storage).

! personal commitment of another.

!
Kinds of Credit Transactions
(6) As to contracts of real security:
SECURITY 1. Contracts of real security
(2) Security is something given, deposited, or serving as a Real estate mortgage, antichresis, pledge, chattel
means to ensure the fulfillment or enforcement of an mortgage
obligation or of protecting some interest in property. 2. Contracts of personal security
1. Personal security - as when an individual becomes a Guaranty, Surety
surety or a guarantor (7) As to their existence:
2. Property or real security - as when a mortgage, pledge, 1. Principal Contracts - They can exist alone. Their
antichresis, charge or lien or other device used to have existence does not depend on the existence of another
property held, out of which the person to be made contract (ex. commodatum, mutuum, deposit)

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BAILMENT
secure can be compensated for loss.
(3) Bailment is the delivery of property of one person to another
in trust for a specific purpose, with a contract, express or
implied that the trust shall be faithfully executed and the
property returned or duly accounted for when the special
purpose is accomplished or kept until the bailor reclaims it.
(4) Parties to a bailment are the:
1. Bailor (comodatario) - the giver; the party who delivers
2. Accessory Contracts - They have to depend on another
contract. These accessory contracts depend on the
existence of a principal contract of loan. (ex. Pledge,
real mortgage, chattel mortgage, antichresis)
(8) As to their consideration:
1. Onerous - This is a contract where there is
consideration or burden imposed like interest
2. Gratuitous - This is a contract where there is no
consideration or burden imposed (ex. commodatum)
!

2.
the possession or custody of the thing bailed
Bailee (comodante) - the recipient; the party who
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receives the possession or custody of the thing thus
delivered.
In every bailment, there is an obligation on the part of the
bailee to restore the subject matter of the bailment in the
same or in altered form or to account therefor.
(5) Kinds of bailment.The classification of bailment is generally
with reference to compensation under which bailments are
divided into three:
1. Those for the sole benefit of the bailor
- Gratuitous deposit
- Mandatum or the bailment of goods without
recompense where the mandatory or person to
whom the property is delivered undertakes to do
some act with respect to the same (as simply to
carry it, or keep it, or otherwise to do something with
respect to it gratuitously)
2. Those for the sole benefit of the bailee
- Commodatum
- Mutuum or gratuitous simple loan
3. Those for the benefit of both parties
- Gratuitous bailments - Deposit for a compensation
(including involuntary deposit); Pledge - there is

SERVE THE PEOPLE!

!
LOAN Loan Discounting of paper
! Interest is usually taken at the
expiration of a credit
Interest is deducted in advance

GENERAL PROVISIONS
! On a single-name paper (a
promissory note with no
indorsement other than the
On a double-name paper (one
on which two signatures
appear with both parties liable
Art. 1933. By the contract of loan, one of the parties delivers to signature of the maker) for payment)
another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the
contract is called commodatum; or money or other consumable (6) Commodatum and mutuum distinguished:
thing, upon the condition that the same amount of the same kind
and quality shall be paid, in which case the contract is simply called Commodatum Mutuum
a loan or mutuum.
Commodatum is essentially gratuitous. Character Purely personal Note purely
Simple loan may be gratuitous or with a stipulation to pay (Art. 1939) personal
interest.
In commodatum the bailor retains the ownership of the thing Kind of Subject Real or personal Money or other
Matter property (Art. personal thing

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loaned, while in simple loan, ownership passes to the borrower.

(1) Like any other contract, the contract of loan is governed by

1937)

Nature of subject Ordinarily, Money or other

the rules as to the requisites and validity of contracts in matter something not consumable thing
general. consumable (Art.
1936)
(2) Characteristics of the contract of loan:
1. A real contract - The delivery of the thing loaned is Ownership of the Retained by the Transferred to
necessary for the perfection of the contract thing loaned lender (Art. the borrower
2. A unilateral contract - Once the subject matter has been 1933)
delivered, it created obligations on the part of only one Nature Gratuitous (Art. Gratuitous or
of the parties (the borrower). 1933) onerous (with
interest)
(3) Kinds of loan:
1. Commodatum - Where the bailor (lender) gives to the Thing to be Same thing Something of the
bailee (borrower) a non-consumable thing so that the returned loaned same kind and
latter may use it for a certain time and return the quality
identical thing. Purpose For use or For consumption
2. Simple loan or Mutuum - Where the lender delivers to temporary
the borrower money or other consumable thing upon possession (Art.
the condition that the borrower shall pay the same 1935)
amount of the same kind and quality.
When demand for Bailor may The lender may
A thing is consumable when it is consumed when used in a the return of the demand before not demand
manner appropriate to its purpose or nature, like rice, thing loaned may the expiration of before the lapse
gasoline, money, fruit, firewood, etc. be made the term in case of the term
of urgent need agreed upon.
(4) Loan distinguished from credit: (Art. 1946)

Loan Credit As to who will Bailor, since he is Borrowee, even if

Delivery by one party (lender/
creditor) and the receipt by
the other party (borrower/
debtor) of a given sum of
money or other consumable
thing upon an agreement,
express or implied, to repay
the same amount of the same
kind and quality
suffer the loss of the owner (Art. caused
An individuals ability to the subject 1942, Art. 1174) exclusively by a
borrow money or things by
virtue of the confidence or matter fortuitous event.
trust reposed by a lender that
he will pay what he may
promise within a specified Art. 1934. An accepted promise to deliver something by way of
period commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the

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delivery of the object of the contract.

(7) Delivery is necessary in view of the purpose of the contract

Credit is debt considered form the creditors standpoint. It
presupposes a creditor-debtor relationship, and may be said
to imply ability to make a promised payment.
(8)
(5) Loan distinguished from discounting of paper:
(9)
which is to transfer either the use or ownership of the thing
loaned. (Real contract)
An accepted promise to make a future loan is a consensual
contract and, therefore, binding upon the parties but it is only
after delivery when the real contract of loan arises.
There are no formal requisites for the validity of a contract of
loan except if there is a stipulation for the payment of
interest. A stipulation for the payment of interest must be in

! writing.

COMMODATUM
SERVE THE PEOPLE!
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Art. 1935. The bailee in commodatum acquires the use of the thing Art. 1939. Commodatum is purely personal in character.
loaned but not its fruits; if any compensation is to be paid by him Consequently:

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who acquires the use, the contract ceases to be a commodatum.

(1) The purpose of the contract of commodatum is the

temporary use of the thing loaned. If the bailee is not entitled
to the use of the thing, the contract may be a deposit and
(1) The death of either the bailor or the bailee extinguishes the
contract;
(2) The bailee can neither lend nor lease the object of the
contract to a third person. However, the members of the bailees
household may make use of the thing loaned, unless there is a
stipulation to the contrary, or unless the nature of the thing

(2)
not a commodatum.
Commodatum is essentially gratuitous, the contract ceases
! forbids such use.

(8) Commodatum is a purely personal contract, the lender

to be a commodatum if any compensation is to be paid by
having in view the character, credit, and conduct of the
the borrower who acquires the use. In such a case, there
borrower. Hence, the death of either party terminates the
arises a lease contract.
contract unless by stipulation, the commodatum is
(3) Commodatum is similar to a donation in that it confers a transmitted to the heirs of either or both parties.
benefit to the recipient. The presumption is that the bailor
If there are two or more borrowers, the death of one does not
has loaned the thing having no need therefore.
extinguish the contract in the absence of stipulation to the
(4) Extent of bailees right to use. The right to use is limited to contrary.
the thing loaned but not to its fruits unless there is a
Art. 1939 constitutes an exception to the general rule that all
stipulation to the contrary (Art. 1940). The bailor, as the
rights acquired in virtue of an obligation are transmissible.
owner of the thing loaned, is naturally entitled to the fruits.
Generally, the bailee can neither lend nor lease the object
(5) It is an essential feature of the contract of commodatum that
of the contract to a third person, in the absence of some
the use of the property of another shall be for a certain
understanding or agreement to that effect.
time. (Art. 1933, par. 2)
However, members of the bailees household may make use
(6) Kinds of commodatum
of the thing loaned except: if there is a stipulation to the
1. Ordinary commodatum contrary, or if the nature of the thing forbids it.
2. Precarium - whereby the bailor may demand the thing
loaned at will.
!
Art. 1940. A stipulation that the bailee may make use of the fruits of
!
(7) Commodatum in simple terms is hiram

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the thing loaned is valid.

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SUBJECT MATTER OF THE CONTRACT
(9) The enjoyment of the fruits must only be incidental to the
use of the thing itself for if it is the main cause, the contract
Art. 1936. Consumable goods may be the subject of commodatum
if the purpose of the contract is not the consumption of the object, ! may be one of usufruct.

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as when it is merely for exhibition.
Obligations of the Bailee/Borrower
!
Art. 1937. Movable or immovable property may be the object of

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commodatum.

(8) The subject matter of a commodatum is generally non-

Art. 1941. The bailee is obliged to pay for the ordinary expenses for

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the use and preservation of the thing loaned.

consumable things, whether real or personal, because the
bailee cannot return the identical thing were it to be
consumed by its use.
However, if the the purpose is merely for exhibition, a
consumable thing may be made the subject of a
Art. 1942. The bailee is liable for the loss of the thing, even if it
should be through a fortuitous event:
(1) If he devotes the thing to any purpose different from that for
which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has

! commodatum been constituted;

(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
Art. 1938. The bailor in commodatum need not be the owner of the responsibility in case of a fortuitous event;

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thing loaned. (4) If he lends or leases the thing to a third person, who is not a
member of his household;
(5) If he being able to save either the thing borrowed or his own
(9) The bailor need not be the owner of the thing loaned
since by the loan, ownership does not pass to the borrower.
A mere lessee of the thing or the usufructuary may lend but
! thing, he chose to save the latter

Art. 1943. The bailee does not answer for the deterioration of the
the borrower or bailee himself may not lend nor lease the
thing loaned to him to a third person.
It is sufficient if the bailor has such possessory interest in the
!
thing loaned due only to the use thereof and without his fault.

Art. 1944. The bailee cannot retain the thing loaned on the ground
subject matter or right to its use which he may assert against that the bailor owes him something, even though it may be by
the bailee and the third persons although not against the reason of expenses. However, the bailee has a right of retention for

! rightful owner.
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damages mentioned in Article 1951.

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

SERVE THE PEOPLE!

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(10) Standard of care required. The bailee must take care of the
thing loaned with the diligence of a good father of a family.
(Art. 1163)
(11) Liability for ordinary expenses. The bailee is obliged to pay
for ordinary expenses (for the use and preservation of the
thing loaned.)
(12) Liability for fortuitous events. The bailee is not liable for the
loss or damage due to a fortuitous event (Art. 1174) since the
bailor retains the ownership of the thing loaned.
Exceptions:
1. If the bailee devotes the thing to any purpose different
from that which it had been loaned (because here there
is bad faith);
2. If the bailee keeps it longer that the period stipulated, or
after the accomplishment of the use for which the
commodatum has been constituted (delay);
3. If the thing loaned has been delivered with an appraisal
of its value (because the parties are presumed to have
intended that the borrower be liable in any case, and
this is the reason why they had the subject appraised
first), unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event;
4. If he lends or leases the thing to a third person, who is
not a member of his household (because commodatum
is purely personal);
5. If, being able to save whether the thing borrowed or his
own thing, he chooses to save his own thing (because
this shows ingratitude).
(13) Liability for deterioration of the thing. The bailee is not
liable for the ordinary deterioration or wear and tear of the
thing that comes as a natural consequence of its use. This is
borne by the lender.
Reason: The lender retains ownership so he should bear the
loss from ordinary deterioration. Also, because the purpose
of commodatum is for the borrower to use the thing.
Deterioration is a natural result of such use.
(14) Obligation to return the thing loaned. The bailee must
return the thing as soon as the period stipulated expires or
the purpose has been accomplished. He cannot keep the
thing as security for anything that the lender may owe him.
Exception: If the thing loaned has hidden defects and the
bailee suffers damages as a result of the hidden defect, the
bailee can claim damages against the lender. Pending
payment of the damages by lender to borrower, borrower
can keep the thing as security.
(15) Liability of two or more bailees. When there are two or
more bailees to whom a thing is loaned in one contract, their
! liability is solidary.
Obligations of the Bailor/Lender
! 2.
Art. 1946. The bailor cannot demand the return of the thing loaned
till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent
need of the thing, he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession of
!
the bailor.
SERVE THE PEOPLE!
Art. 1947. The bailor may demand the thing at will, and the
contractual relation is called precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which
the thing loaned should be devoted, has been stipulated;
! (2) If the use of the thing is merely tolerated by the owner.
Art. 1948. The bailor may demand the immediate return of the thing
!
if the bailee commits any act of ingratitude specified in Article 765.
Art. 1949. The bailor shall refund the extraordinary expenses during
the contract for the preservation of the thing loaned, provided the
bailee brings the same to the knowledge of the bailor before
incurring them, except when they are so urgent that the reply to the
notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the
actual use of the thing by the bailee, even though he acted without
fault, they shall be borne equally by both the bailor and the bailee,
!
unless there is a stipulation to the contrary.
Art. 1951. The bailor who, knowing the flaws of the thing loaned,
does not advise the bailee of the same, shall be liable to the latter
!
for the damages which he may suffer by reason thereof.
(16) Obligation to respect the duration of the loan. The lender
cannot demand the return of the thing until after the
expiration of the period or after the accomplishment of the
use for which the commodatum was constituted. However,
he may demand its return or temporary use if he should have
urgent need of the thing.
Exceptions:
1. Precarium
2. Acts of ingratitude on the part of the bailee
(17) Precarium. Precarium is the kind of commodatum where the
lender may demand the thing at will. Precarium exists in the
following cases:
1. If there is no stipulation as to the duration of the
contract or to the use to which the thing loaned should
be devoted.
2. If the use of the thing is merely tolerated by the bailor.
But the bailor may not demand the thing capriciously,
arbitrarily, or whimsically since this would give rise to an
action on the part of the bailee for abuse of right under Arts.
19, 20 and 21.
(18) Right to demand return of thing for acts of ingratitude. If
the borrower commits any of the acts enumerated in Art.
765, the lender may demand the immediate return of the
thing from the borrower.
What does Art. 765 provide:
1. If the [donee] should commit some offense against the
person, the honor or the property of the donor, or of his
wife or children under his parental authority
If the [donee] imputes to the [donor] any criminal
offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the act
has been committed against the [donee] himself, his
wife or children under his authority
3. If he unduly refuses him support when the [donee] is
legally or morally bound to give support to the [donor].
(19) Obligation to refund extraordinary expenses
1. For the preservation of the thing. The bailor should
refund the bailee the extraordinary expenses for the
preservation of the thing, provided that the bailee
!
informs the bailor before incurring the expense, unless
the need is so urgent that the lender cannot be notified
without danger.
2. For the actual use of the thing. Extraordinary expenses
arising on the occasion of the actual use of the thing
shall be borne by the bailor and bailee on a 50-50 (fifty-
fifty) basis, unless there is a contrary stipulation.
(20) Liability for damages for known hidden defects. The
bailor is penalized for his failure to disclose hidden defects
which causes damage because he is in position to prevent
the damage from happening.
Requisites:
1. There is a flaw or defect in the thing loaned
2. The flaw or defect is hidden
3. The bailor is aware thereof
4. He does not advise the bailee of the same
5. The bailee suffers damages by reason of the flaw or
defect
Art. 1950. If, for the purpose of making use of the thing, the bailee
incurs expenses other than those referred to in Articles 1941 and
!
1949, he is not entitled to reimbursement.
(21) Expenses not necessary for the use and preservation of the
thing must be borne by the borrower. These include
expenses for ostentation.
Art. 1952. The bailor cannot exempt himself form the payment of
!
expenses or damages by abandoning the thing to the bailee.
(22) Can the bailor tell the bailee, I dont want to pay for the
extraordinary expenses and damages that I owe you. Just
keep the thing, and lets forget about my obligation?
No. The bailor cannot exempt himself from the payment of
the expenses or damages by abandoning the thing to the
bailee. This is because the expenses and damages may
exceed the value of the thing loaned, and it would, therefore
be unfair to allow the bailor to just abandon the thing instead
!
of paying for said expenses or damages.
MUTUUM
Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay
!
to the creditor an equal amount of the same kind and quality.
(1) A simple loan or mutuum is a contract whereby one of the
parties delivers to another money or other consumable things
with the understanding the the same amount of the same
kind and quality shall be paid.
A simple loan involves the payment of the equivalent and not
the identical thing because the bailee acquires ownership of
the thing loaned. The tern return is not used since the
distinguishing character of simple loan from commodatum is
the consumption of the thing.
(2) Obligation of the debtor is to pay.
1. This includes the accessory duty to pay interest
2. Involves the return of the equivalent only and not the
identical thing because the bailee acquires ownership
3. Such promise of the bailee to pay is the consideration
of the bailor to furnish the loan
(3) No criminal liability for estafa for failure to pay. There is
no criminal liability for failure to pay a simple loan because
SERVE THE PEOPLE!
the bailee acquires ownership of the thing. Since ownership
is transferred, the bailee can dispose of the thing borrowed
and his act will not be considered misappropriation thereof.
(4) Fungible and consumable things. Fungible things are
usually dealt with by number, weight, or measure, so that any
given unit or portion is treated as the equivalent of any other
unit or portion. Those which may be replaced by a thing of
equal quality and quantity. Example: Rice, oil, sugar. If it
cannot be replaced with an equivalent thing, then it is non-
fungible.
Consumable things are those which cannot be used without
being consumed.
Whether a thing is consumable depends upon the things
nature. Whether a thing is fungible or not depends upon the
!
intention of the parties.
Barter
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.
(5) Barter is a contract where one of the parties binds himself to
give one thing in consideration of the others promise to give
another thing. In short, exchange of property.
If one person agrees to transfer 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, the contract isa contract of barter.
(6) Distinctions between mutuum, commodatum and barter
Mutuum Commodatum Barter
Subject matter Money or other Non-fungible things
fungible things
Obligation of the Return the Return the Return the
bailee equivalent identical thing equivalent
Gratuitous? May be
borrowed
Always Onerous
gratuitous or gratuitous
onerous
Form of payment
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.
(7) If the object is money. Payment must be made in the
currency stipulated otherwise it is payable in the currency
which is legal tender in the Philippines.
According to Art. 1955, Art. 1250 is applicable in payment of
loans. Art. 1250 provides that in case of extraordinary
inflation or devaluation, the value of the currency at the time
of the establishment of the obligation should be the basis for
payment.
(8) If the object is a fungible thing other than money. Bailee
must pay bailor another thing of the same kind, quality and
!
quantity. In case it is impossible to do so, the borrower shall
! pay its value at the time of the perfection of the loan.
Interest
! Answer: It is a clause which authorizes the automatic
Art. 1956. No interest shall be due unless it has been expressly
!
stipulated in writing.
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.
Art. 1958. In the determination of the interest, if it is payable in kind,
its value shall be appraised at the current price o the products or
!
goods at the time and place of payment.
Art. 1959. Without prejudice to the provisions of Article 2212,
interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest due
!
and unpaid, which as added principal, shall earn new interest.
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
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.
(9) There is no more Usury Law.
(10) Requisites in order that interest may be chargeable:
1. Interest must be expressly stipulated
2. Agreement must be in writing
Exception:
a. Interest by way of damages
b. Interest accruing from unpaid interest - interest
due shall earn interest form the time it is judicially
demanded
3. Interest must be lawful
There is no Usury Law anymore but an interest rate
may still be struck down for being unconscionable.
The test of unconscionable interest rate is relative
and there is a need to look at the parity/disparity in
the status of the parties and in their access to
information during the negotiations.
(11) Stipulation of interest:
1. The interest rate stipulated by the parties, not the legal
rate of interest, is applicable
2. Default rule: If the parties do not stipulate an interest
rate, the legal rate for loan and forbearances of money
is 12%. For other sources of obligations, such as sale,
and damages arising from injury to persons and loss of
property which do not involve a loan, the legal rate of
interest is 6%
3. Increases in interest must also be expressly stipulated.
4. It is only in contracts of loan, with or without security,
that interest may be stipulated and demanded
5. Stipulation of interest must be mutually agreed upon by
the parties and may not be unilaterally increase by only
one of the parties. This would violate consensuality and
mutuality of the contract. But the parties can agree
SERVE THE PEOPLE!
upon a formula for determining the interest rate, over
which neither party has control
Question: What is an escalation clause?
increase in interest rate. It is valid when it is accompanied by
a de-escalation clause. A de-escalation clause is a clause
which provides that the rate of interest agreed upon will also
be automatically reduced based on the same formula as its
increase. Meaning, the important thing is that there must be
a specified formula for arriving at the automatically adjusted
interest rate, over which neither party has any discretion.
(12) When the borrower is liable for interest even without a
stipulation:
1. Indemnity for damages - The debtor in delay is liable
to pay legal interest as indemnity for damages even
without a stipulation for the payment of interest.
Where to base the rate of damages:
a. Rate in the penalty clause agreed upon by the
parties
b. If there is no penalty clause, additional interest
based on the regular interest rate of the loan
c. If there is no regular interest rate, additional
interest is equivalent to the legal interest rate (12%)
Illustration: Victory Bank lends P10,000 at 10% interest
rate with penalty interest at 6%. On due date, borrower
Mike fails to pay. Mike only pays a year after. How much
should he pay?
Answer: Mike should pay the principal (10k) + interest
on the loan (10% = 1k) + penalty interest (.6k) for a total
of P11,600.
If there is no penalty interest stipulated, Mike will pay
P12,000 because penalty interest will be deemed the
same rate as the regular interest.
2. Interest accruing from unpaid interest - Interest due
shall earn interest from the time it is judicially demanded
although the obligation may be silent on this point (Art.
2212)
(13) If interest is payable in kind. If interest 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.
Take note that you should not confuse this with the rule
when the principal obligation consists of goods other
than money. If the principal obligation consists in the
payment of goods and it is impossible to deliver the
goods, the borrower should pay the value of the thing at
the time of the constitution of the obligation. But if
interest is payable in kind, it should be appraised at its
value at the time of payment.
(14) Accrued interest shall NOT earn interest.
Exception:
1. When judicially demanded (Art. 2212)
2. Express stipulation - also called compounding
interest where the parties agree that accrued interest
shall be added to the principal and the resulting total
amount shall earn interest. This must be in writing.
Question: What if the borrower pays interest when there
is no stipulation providing for it?
Answer: If the debtor pays unstipulated interest by mistake,
he may recover, since this is a case of solutio indebiti or
!
undue payment. But if the debtor voluntarily pays interest
(either unstipulated or stipulated but not in writing) because
of some moral obligation, he cannot later recover. The
obligation to return the interest is a natural obligation.
!

SERVE THE PEOPLE!

!
DEPOSIT c. Where property is saved from destruction without

! knowledge of the owner. In this case, the owner is

bound to pay the person who saved his property just

Art. 1962. A deposit is constituted from the moment a person

receives a thing belonging to another, with the obligation of safely
! compensation

Deposit distinguished from Simple Loan (Mutuum)

keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no Deposit Mutuum

!
deposit but some other contract.
Purpose
When return can be
Safekeeping
Depositor can
Consumption
Lender must wait
Art. 1963. An agreement to constitute a deposit is binding, but the demanded demand return of the until the expiration of

!
deposit itself is not perfected until the delivery of the thing. thing at will the period granted to
the debtor

!
Art. 1964. A deposit may be constituted judicially or extrajudicially. Subject Matter Personal and real
property (if deposit is
judicial)
Only money and any
other fungible thing

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

an agreement to the contrary, or unless the depositary is engaged Deposit distinguished from Commodatum

!
in the business of storing goods.

Purpose
Deposit
Safekeeping
Commodatum
Transfer of the use of

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

Gratuitous? May be gratuitous,

the subject mater
Always gratuitous

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

(1) A DEPOSIT is a contract whereby a person (depositor)

Subject Matter
may be onerous
In extra-judicial
deposit, only
Both personal and
real property
delivers a thing to another (depositary), for the principal personal property
purpose of safekeeping it, with the obligation of returning it
when demanded. !
It is essential that the depositary is not the owner of the Deposit distinguished from Agency: In agency, the custody of
property deposited. the thing is merely an incidental obligation of the agent, and the
contract is generally onerous or for compensation.
A contract of deposit is constituted from the moment a
person receives a thing belonging to another, with the Deposit distinguished from Lease: In deposit, the principal
obligation of safely keeping it and returning the same purpose is the safekeeping of the thing deposited and its return

! upon demand. upon demand. In lease, the principal purpose is the use of the
thing with compensation called rentals. Return may be demanded
Characteristics of Deposit:
1. Real contract - Deposit is perfected by the delivery of the
!
upon the termination of the lease contract.

Deposit distinguished from Sale: The ownership of the thing in

subject matter.
deposit is not transferred to the depositary, but in sale the object
However, there can be a contract of future deposit which
is a consensual contract of promise to deliver something,
and is binding if accepted.
!
of the contract is transferred to the buyer.

2. Unilateral if the deposit is gratuitous because only the
depositary has an obligation.
Bilateral if the deposit is for compensation, which gives
rise to obligations on the part of both the depositary and
the depositor.
3. Only movable property can be the subject matter of
deposit. This is ordinary deposit or extra-judicial deposit.
However, in cases of judicial deposit, the subject mater
may be real property. The reason is that the purpose of
judicial deposit is to protect or safekeep the rights of the
parties to the suit.
4. The principal purpose of deposit is the safekeeping of
the thing delivered. If safekeeping is merely an accessory
or secondary obligation, it is not a deposit but another
contract such as commodatum, lease or agency.
5. General rule: Deposit is gratuitous
Exceptions:
a. Contrary stipulation
b. Depositary is engaged in the business of storing
Kinds of Deposit
1. Judicial (Sequestration) - Takes place when an
attachment or seizure of property in litigation is ordered.
2. Extra-Judicial
a. Voluntary - Delivery is made by the will of the
depositor or by two or more persons each of whom
believes himself to be entitle to the thing deposited.
b. Necessary - Made in compliance with a legal
obligation, or on the occasion of any calamity, or by
travelers in hotels and inns, or by travelers with
common carriers.
Voluntary Deposit
!
Art. 1968. A voluntary deposit is that wherein the delivery is made
by the will of the depositor. A deposit may also be made by two or
more persons each of whom believes himself entitled to the thing
deposited with a third person, who shall delivery it in a proper case
!
to the one whom it belongs.

goods (ex. warehouseman)

SERVE THE PEOPLE!

!
(1) Voluntary deposit is deposit wherein delivery is made by the
will of the depositor.
(2) Depositor need not be owner of the thing. Generally, the
depositor should be the owner of the thing to be deposited,
but it is not an essential element. The depositor need not be
the owner of the thing deposited because the purpose of the
contract is safekeeping and not transfer of ownership. The
depositary cannot even require the depositor to prove that
he is the owner of the thing.
(3) The main difference between voluntary and necessary
deposit is that in voluntary deposit, the depositor is free to
choose the depositary. In necessary deposit, the depositor
lacks the freedom to choose the depositary.
(4) Where there are several depositors. If there are two or
more persons each claiming the rightful ownership of a thing,
pending the resolution of their conflicting claims, they may
deposit the thing with a third person. The third person
assumes the obligation to deliver to the person to whom it
belongs.
The depositary can file an action for interpleader to compel
!
the depositors to settle their conflicting claims.
Art. 1969. A contract of deposit may be entered into orally or in
!
writing.
(5) Form of contract of deposit. There are no formal
requirements for the validity of a contract of deposit. The
! only thing necessary is delivery of the thing.
Art. 1970. If a person having capacity to contract accepts a deposit
made by one who is incapacitated, the former shall be subject to all
the obligations of a depositary, and may be compelled to return the
thing by the guardian, or administrator, of the person who made the
!
deposit, or by the latter himself if he should acquire capacity.
(6) Where depositary is capacitated and depositor
incapacitated. If the depositary is capacitated, he is subject
to all the obligations of a depositary whether or not the
depositor is capacitated. The depositary may be compelled:
1. To return the thing by and to the guardian or
administrator; or
2. The depositor himself if he should acquire capacity.
If the depositary returns the thing to the incapacitated
! depositor, he may be liable for its loss.
Art. 1971. If the deposit has been made by a capacitated person
with another who is not, the depositor shall only have an action to
recover the thing deposited while it is still in the possession of the
depositary, or to compel the latter to pay him the amount by which
he may have enriched or benefited himself with the thing or its
price. However, if a third person who acquired the thing acted in
bad faith, the depositor may bring an action against him for its
!
recovery.
(7) Where depositary is incapacitated and depositor
capacitated. The incapacitated depositary (like a minor or
an insane person) does not incur the obligation of a
depositary. However, he is liable:
1. To return the thing deposited while still in his
possession; and
2. To pay the depositor the amount by which he may have
benefited himself with the thing or its price subject to
SERVE THE PEOPLE!
the right of any third person who acquired the thing in
good faith.
Illustration: Victor deposited a watch with Lawrence, a
minor, who sold it to Mike. If Mike acted in bad faith,
Victor may recover the watch from him. But if Mike
acted in good faith, Victors only recourse is against
Lawrence to compel him to return the price received for
the watch or the amount by which he may have
benefited himself.
Obligations of the Depositary
!
Art. 1972. The depositary is obliged to keep the thing safely and
return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the
loss of the thing, shall be governed by the provisions of Title I of
!
this Book.
(8) Obligation to keep the thing deposited and return it.
There are two primary obligations of the depositary:
1.
2.
Obligation to keep the thing deposited; and
Obligation to return it.
Ordinarily, the depositary must exercise over the thing
deposited the same diligence as he would exercise over
his property because:
a. It is an essential requisite of the judicial relation
which involves the depositors confidence in his
b.
good faith and trustworthiness; and
Because of the presumption that the depositor, in
choosing the depositary, took into account the
diligence which the depositary is accustomed with
respect to his own property
The liability of the depositary for the care and delivery of
the thing is governed by the rules on obligations.
The thing deposited must be returned to the depositor
whenever he claims it, even though a specified term
may have been stipulated in the contract.
Art. 1973. Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If deposit
with a third person is allowed, the depositary is liable for the loss if
he deposited the thing with a person who is manifestly careless or
unfit. The depositary is responsible for the negligence of his
!
employees.
(9) Obligation not to transfer deposit. The depositary cannot
deposit the thing with a third person. If he does so without
authority, he is liable for the loss of the thing although there
is no negligence on his part and the third person.
Exception: When there is a stipulation to the contrary.
Exception to the exception, meaning the depositary will still
be liable despite the stipulation allowing him to deposit the
thing with a third person:
1. He transfers the deposit with a third person who is
manifestly careless or unfit, even in the absence of
negligence; or
2. The thing is lost through the negligence of his
employees whether the latter are manifestly careless or
not.
Art. 1974. The depositary may change the way of the deposit if
under the circumstances he may reasonably presume that the
depositor would consent to the change if he knew of the facts of
!
the situation. However, before the depositary may make such Art. 1978. When the depositary has permission to use the thing
change, he shall notify the depositor thereof and wait for his deposited, the contract loses the concept of a deposit and

!
decision, unless delay would cause danger.

(10) Obligation not to change way of deposit. The depositary

becomes a loan or commodatum, except where safekeeping is still
the principal purpose of the contract.
The permission shall not be presumed, and its existence must
may change the ay or manner of the deposit if there are
circumstances indicating that the depositor would consent to
!
be proved.

(14) Effect if permission to use is given if the thing deposited

the change. However, the depositary should first notify the
is:
depositor and wait for the latters decision.
Exception: If the delay because of the notice would cause
danger to the deposit.
Art. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary
in order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
Non-consumable - The contract loses the character of a
deposit and acquires that of a commodatum despite
the fact that the parties may have denominated it as a
deposit, unless safekeeping is still the principal purpose
of the contract.
Money or other consumable thing - The usage of the
thing will result in its consumption and converts the
contract into a simple loan or mutuum. But safekeeping

!
safety deposit boxes.

(11) Obligation to collect interest on choses in action

is still the principal purpose of the contract, it is still a
deposit but an irregular one; hence it is called an
irregular deposit. Bank deposits are in the nature of
deposited. If the thing deposited should earn interest, the irregular deposits but they are really loans governed by
depositary is under the obligation to: the law on loans.
1. Collect the interest as it becomes due, and (15) Irregular deposit distinguished from Mutuum:
2. To take such steps as may be necessary to preserve its
value and the rights corresponding to it. Irregular Deposit Mutuum
The depositary is bound to collect not only the interest When the thing may At will (by the When the time for
but also the capital itself when due. be demanded irregular depositor) payment as provided
in the contract arises
Contract for rent of safety deposit boxes. As contract
for the rent of safety deposit boxes is not an ordinary To whom the benefit To the depositor only To the borrower
accrues (However, a loan with
contract of lease of things but a special kind of deposit; a stipulation to pay
hence, it is not to be strictly governed by the provisions interest is for the
on deposit. The prevailing rule in the US is that the benefit of both the
relation between a bank renting out safety-deposit lender and borrower).
boxes and its customer with respect to the contents of Preference over other Depositor has Common creditors
the box is that of bailor and bailee. The fact that the creditors preference over other enjoy no preference
bank does not know, and that it is not expected that it creditors with respect in the distribution of
shall know, the character or description of the property to the thing the debtors property
deposited (Art. (Art. 2245)
which is deposited in such safety-deposit box or sage 2241(13))
does not change that relation.
The permission to use is not presumed except when
Art. 1976. Unless there is a stipulation to the contrary, the such use is necessary for the preservation of the thing
depositary may commingle grain or other articles of the same kind deposited (ARt. 1977). The burden is on the depositary
and quality, in which case the various depositors shall own or have
to prove that permission has been given (Art. 1878,
!
a proportionate interest in the same.

(12) Obligation not to commingle things deposited if so

part. 2)

stipulated. General rule: the depositary is permitted to
commingle grains or other articles of the same kind and
quality.
Exception: When there is a stipulation to the contrary.
Art. 1979. The depositary id liable for the loss of the thing through a
fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositors permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may

Art. 1977. The depositary cannot make use of the thing deposited
without the express permission of the depositor.
!
(5)
have been authorized to use the same.

Liability for loss through fortuitous event. Generally, the

Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires depositary is not liable for loss through a fortuitous event

!
it use, it must be used but only for that purpose.

(13) Obligation not to make use of the thing deposited unless

authorized. Deposit is for safekeeping of the subject matter
and not for its use. However, the depositary may make use
of the thing deposited even without the express permission
of the depositor where such use is necessary for its
preservation but in such case the use is limited for that
purpose only.
without his fault. The rule in this article is similar to Art. 1942
which mentions the instances when the bailee is liable for
loss of the thing loaned even if it should be through a
fortuitous event.
Art. 1980. Fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions
!
concerning simple loan.

SERVE THE PEOPLE!

!
(6) Relation between bank and depositor. Deposits of money
in banks are really loans to a bank because the bank can use
the same for its ordinary transactions and for the banking
business in which it is engaged.
Bank deposits are in the nature of irregular deposits;
they are really loans because they earn interest. Hence,
such deposits are governed by the provisions on
mutuum or simple loan. While the bank has the
obligation to return the amount deposited, it has,
however, no obligation to return or deliver the sam
money that was deposited.
Thus, the nature of the relation between a depositor and
bank is that of a creditor and debtor.
Art. 1981. When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition, and he
shall be liable for damages should the seal or lock be broken
through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
As regards the value of the thing deposited, the statement of
the depositor shall be accepted, when the forcible opening is
imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of the
depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the
!
depositarys fault, he shall keep the secret of the deposit.
Art. 1982. When it becomes necessary to open a locked box or
receptacle, the depositary is presumed authorized to do so, if the
key has been delivered to him; or when the instructions of the
depositor as regards the deposit cannot be executed without
!
opening the box or receptacle.
(7) Where the thing deposited is closed and sealed. Under
this article, the depositary has the obligation to:
1. Return the thing deposited when delivered closed and
sealed, in the same condition
2. Pay for damages should the seal or lock be broken
through his fault, which is presumed unless proved
otherwise
3. Keep the secret of the deposit when the seal or lock is
broken, with or without his fault
Reason for the rule: Without the rule in this article,
irresponsible depositaries may violate their trusts with
impunity, the depositor having constituted the deposit in
reliance upon the depositarys fidelity, the most
elementary sense of delicacy should move the
depositary to respect the secrets which the depositor
desired to keep and guard.
Question: When is depositary justified to open?
1. Presumed authority; or
! 2. Necessity
! (13) Right of two or more depositors. Three situations
Art. 1983. The thing deposited shall be returned with all its
products, accessories and accessions.
Should the deposit consist of money, the provisions relative to
!
agents in Article 1896 shall be applied to the depositary.
(8) Obligation to return products, accessories, and
accessions. The depositary has this duty, the depositor
being the owner or at least representing the owner of the
thing deposited.
SERVE THE PEOPLE!
(9) Obligation to pay interest on sums converted to personal
use. If what has been deposited is money, the depositary
has no right to make use thereof (Art. 1978) and thus, he is
not liable to pay interest.
If the depositary be in delay or has used the money without
permission, he shall be liable for interest as indemnity. The
depositary owes interest on the sums he has applied to his
own use from the day on which he did so, and those which
he still owes after the extinguishment of the deposit.
Art. 1984. The depositary cannot demand that the depositor prove
his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen
and who its true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be relieved of
all responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the former
!
may return the same.
(10) Depositor need not prove his ownership. To constitute a
deposit, it is not essential that the depositor be the owner of
the thing deposited. Furthermore, to acquire proof of
ownership may open the door to fraud and bad faith, for the
depositary, on the pretense of requiring proof of ownership,
may be able to retain the thing.
(11) Where third person appears to be the owner. Art. 1984,
pars. 2, 3 and 4 state the steps the depositary should take to
be relieved of all responsibility with respect to the thing
deposited.
1. Should he discover that the thing has been stolen and
who the true owner is, he must advise the owner of
the deposit.
2. If the owner, in spite of such information, does not
claim it within the period of one month, the
depositary shall be relieved of all responsibility by
returning the thing deposited to the depositor.
3. If the depositary has reasonable grounds to believe
that the thing has not been lawfully acquired by the
depositor, the depositary may return the same.
(12) Effect of failure of owner to claim within one month. The
period of one month provided in par. 3 is intended merely for
the protection of the depositary. If the thing is returned to the
depositor after one month, the true owner of the thing may
still recover it through other legal processes.
Art. 1985. When there are two or more depositors, if they are not
solidary, and the thing admits of division, each one cannot demand
more than his share.
When there is solidarity or the thing does not admit of division,
the provisions of Articles 1212 and 1214 shall govern. However, if
there is a stipulation that the thing should be returned to one of the
depositors, the depositary shall return it only to the person
!
designated.
contemplated in this article:
The thing deposited divisible and depositors not
solidary - Each depositor can demand only his share
proportionate thereto.
Obligation solidary or thing deposited not divisible - The
rules on active solidarity shall apply, to the effect that
each one of the solidary depositors (creditors) may do
whatever may be useful to the others but not anything
which may be prejudicial to the latter (Art. 1212), and
!
the depositary (debtor) may return the thing to any one
of the solidary depositors (creditors) unless a demand,
judicial or extrajudicial, for its return has been made by
one of them in which case delivery should be made to
him.
Return to one of depositors stipulated - The depositary
is bound to return the thing only to the person
designated although he has not made any demand for
its return.
Art. 1986. If the depositor should lose his capacity to contract after
having made the deposit, the thing cannot be returned except to
the persons who may have the administration of his property and
!
rights.
(14) Person to whom return must be made:
1. The depositary is obliged to return the thing deposited,
when required, to the depositor, or to his heirs and
successors, or to the person who may have been
designated in the contract.
2. If the depositor was incapacitated at the time of making
the deposit, to his guardian or administrator or the
depositor himself should he acquire capacity
3. If the depositor had capacity at the time of making the
deposit but he subsequently loses his capacity during
the deposit, the thing must be returned to his legal
representatives.
Art. 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take the
thing deposited to such place; but the expenses for transportation
shall be borne by the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the
same place where the deposit was made, provided that there was
!
no malice on the part of the depositary.
(15) Place of return. The thing must be returned:
1. At the place agreed upon by the parties
2. In the absence of stipulation, at the place where the
thing deposited might be even if it should not be the
same place where the original deposit was made;
provided, the transfer was made without malice on the
part of the depositary.
The rule in this article is similar to the general rule of law
regarding the place of payment.
Art. 1988. The thing deposited must be returned to the depositor
upon demand, even though a specified period or time for such
return may have been fixed.
This provision shall not apply when the thing is judicially
attached while in the depositarys possession, or should he have
been notified of the opposition of a third person to the return or the
removal of the thing deposited. In these cases, the depositary must
!
immediately inform the depositor of the attachment or opposition.
(16) Time of return. General rule: The depositor can demand the
return of the thing at will, whether or not there is a period
stipulated (since the period is for the benefit of the depositor,
and it may be waived by him). However, if the deposit is for
compensation, the depositary is entitled to the
compensation corresponding to the entire period. In this
case the period is also for the benefit of the depositary.
Exceptions: The depositary is not obliged to return the thing
deposited when:
SERVE THE PEOPLE!
1. The thing is judicially attached while in the
depositarys possession. This is because if the
depositary returns the thing, he would be disobeying
the judicial order of attachment
2. He is notified of the opposition of a third person to
the return or the removal of the thing deposited.
Art. 1989. Unless the deposit is for a valuable consideration, the
depositary who may have justifiable reasons for not keeping the
thing deposited may, even before the time designated, return it to
the depositor; and if the latter should refuse to receive it, the
!
depositary may secure its consignation from the court.
(17) Right of depositary to return thing deposited. This right
depends on whether or not the deposit is gratuitous.
Deposit is gratuitous - The depositary may return the
thing notwithstanding that a period was fixed, provided
there are also justifiable reasons which exist for its
return (ex. If depositary needs to go abroad). In case the
depositor refuses to receive the thing, the depositary
may deposit the thing at the disposal of judicial
authority.
Deposit is for valuable consideration - If the deposit is
for a valuable consideration, the depositary has no right
to return the thing deposited before the expiration of the
time designated even if he should suffer inconvenience
as a consequence. He is bound by the period and
restitution before its expiration constitutes a breach of
his obligation
Art. 1990. If the depositary by force majeure or government order
loses the thing and receives money or another thing it its place, he
!
shall deliver the sum or other thing to the depositor.
(18) Liability for loss by force majeure or government order.
The depositary has the obligation to return the thing
deposited. But he is not liable for loss of the thing by force
majeure or by government order. However, if in place of the
thing he receives money or another thing, he has the duty to
deliver to the depositor what he has received, otherwise, he
would enrich himself at the expense of the depositor.
Art. 1991. The depositors heir who in good faith may have sold the
thing which he did not know was deposited, shall only be bound to
return the price he may have received or to assign his right of
!
action against the buyer in case the price has not been paid him.
(19) Alienation in good faith by depositarys heir. This
envisions a situation where the depositary dies and the
object of the deposit is left with his heir who, in good faith,
sells it. The obligation of the heir is limited to the return of the
price received or to assign the right to collect the same if it
has not yet been paid and not the real value of the thing. The
rule is based on considerations of equity.
If the purchaser who acquired the thing acted in bad
faith, the depositor may bring an action against him for
its recovery.
If the heir acts in bad faith, he is liable for damages. The
sale or appropriation of the thing deposited constitutes
estafa.
Illustration: Believing in good faith that the Ipad
deposited by Joanna, worth P20,000, with Karla
belonged to Karla, Pochi, heir of Karla, sold the thing to
Lawrence who paid P10,000. Pochi is bound to return
P10,000 to Joanna or Pochi may assign to Joanna the
!
right to collect from Lawrence P10,000. If Pochi acted in
bad faith, she is liable to pay P20,000 plus damages
which Joanna may have suffered. Pochi is also
criminally liable for estafa.
Obligations of the Depositor
! 1.
Art. 1992. If the deposit is gratuitous, the depositor is obliged to
reimburse the depositary for the expenses he may have incurred
!
for the preservation of the thing deposited.
(20) Obligation to pay expenses of preservation. This article
applies only if the deposit is gratuitous. If the deposit is for
compensation, the expenses of preservation are borne by
the depositary because they are deemed included in the
compensation. There can, however, be a contrary stipulation.
This provision rests on equity. Without the duty of
reimbursement, the depositor would be enriching
himself at the expense of the depositary. The depositor
would have incurred these expenses anyway had the
thing remained with him.
The law makes no distinction, so the right to
reimbursement covers all expenses for preservation
whether ordinary or extraordinary
But these expenses are necessary expenses. Useful
expenses or those for pure luxury or mere pleasure are
not covered.
Art. 1993. The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, unless at the time
of the constitution of the deposit the former was not aware of, or
was not expected to know the dangerous character of the thing, or
unless he notified the depositary of the same, or the latter was
!
aware of it without advice from the depositor.
(21) Obligation to pay losses incurred due to character of
thing deposited. General rule: the depositary must be
reimbursed for loss suffered by him because of the character
of the thing deposited.
Exceptions: The depositor is freed from the responsibility of
paying the depositary when:
1. At the time of the constitution of the deposit the
depositor was not aware of the dangerous character of
2.
the thing
At the time of the constitution of the deposit, the
depositor was not expected to know the dangerous
character of the thing
3. The depositor notified the depositary of the dangerous
character of the thing
4. The depositary was aware of it without advise from the
depositor.
Art. 1994. The depositary may retain the thing in pledge until the
!
full payment of what may be due him by reason of the deposit.
(22) Depositarys right of retention. This is an example of a
pledge created by operation of law. The thing retained serves
as security for the payment of what may be due to the
depositary by reason of the deposit.
This rule is different in commodatum (see Arts. 1944,
1951).
Art. 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing deposited;
SERVE THE PEOPLE!
(2) In case of a gratuitous deposit, upon the death of either the
! depositor or the depositary.
(23) Causes of extinguishment of deposit.
2.
Loss or destruction of the thing deposited
Death of either the depositor or the depositary in case
of gratuitous deposit.
A deposit for compensation is not extinguished by
the death of either party because, unlike a
gratuitous deposit, an onerous deposit is not
personal in nature.
The causes mentioned here are not exclusive. There are
other causes such as:
3. Return of the thing
4. Novation, merger, expiration of the term, fulfillment of
the resolutory condition (remember Oblicon, Art. 1231)
Necessary Deposit
!
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such
!
as fire, storm, flood, pullage, shipwreck, or other similar events.
Art. 1997. The deposit referred to in No. 1 of the preceding article
shall be governed by the provisions of the law establishing it, and in
case of its deficiency, by the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be
regulated by the provisions concerning voluntary deposit and by
!
Article 2168.
Art. 1998. The deposit of effects made by travelers in hotels or inns
shall also be regarded as necessary. The keepers of hotels or inns
shall be responsible for them as depositaries, provided that notice
was given to them, or to their employees, of the effect brought by
the guests and that, on the part of the latter, they take the
precautions which said hotel-keepers or their substituted advised
!
relative to the care and vigilance of their effects.
Art. 1999. The hotel-keeper is liable for the vehicles, animals and
articles which have been introduced or placed in the annexes of the
!
hotel.
Art. 2000. The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal property of
the guests caused by the servants or employees of the keepers of
hotels or inns as well as by strangers but not that which may
proceed from any force majeure. The fact that travelers are
constrained to rely on the vigilance of the keeper of the hotel or inn
shall be considered in determining the degree of care required of
!
him.
Art. 2001. The act of a thief or robber, who has entered the hotel is
not deemed force majeure, unless it is done with the use of arms or
!
through an irresistible force.
Art. 2002. The hotel-keeper is not liable for compensation if the
loss is due to the acts of the guest, his family, servants or visitors,
or if the loss arises from the character of the things brought into the
!
hotel.
!
Art. 2003. The hotel-keeper cannot free himself form responsibility Art. 2006. Movable as well as immovable property may be the
by posting notices to the effect that he is not liable for the articles
brought by the guest. Any stipulation between the hotel-keeper and
the guest whereby the responsibility of the former as set forth in
!
object of sequestration.

!
ARticles 1998 to 2001 is suppressed or diminished shall be void. Art. 2007. The depositary of property or objects sequestered
cannot be relieved of his responsibility until the controversy which

Art. 2004. The hotel-keeper has a right to remain the things brought
in to the hotel by the guest, as a security for credits on account of
!
gave rise thereto has come to an end, unless the court so orders.

Art. 2008. The depositary of property sequestered is bound to

!
lodging, and supplies usually furnished to hotel guests.
comply, with respect to the same, with all the obligations of a good

Question: When is deposit considered as necessary?

1. When it is in compliance with a legal obligation
!
father of a family.

Art. 2009. As to matters not provided for in this Code, judicial

2. It takes place on the occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck, or other similar
events
!
sequestration shall be governed by the Rules of Court.

Question: When does judicial deposit (sequestration) take

3. Made by passengers with common carriers place?
4. Made by travelers in hotels or inns.
Answer: When an attachment or seizure of property in
Question: When can the keepers of hotels or inns be held litigation is ordered by a court.
responsible for loss of thing in case of deposit?
It is auxiliary to a case pending in court. The purpose is
When both are present: to maintain the status quo during the pendency of the
5. They have been previously informed by the guest about litigation or to insure the right of the parties to the
the effects the latter brought in property in case of a favorable judgment.
6. The guest has taken precautions prescribed for their Question: What may be the object of judicial
safekeeping sequestration?
They are liable regardless of the degree of care Answer: Movables and immovables.
exercised when:
Question: When will the properties sequestered cease to
a. Loss or injury is cause by his employees or even be in custodia legis?
by strangers
b. Loss is caused by act of thief or robber when there Answer: When the insolvency proceedings of a partnership
is no use of arms or irresistible force terminated because the assignee in insolvency has returned
the remaining assets to the firm, said properties cease to be
Question: What are the instances when the keepers of in custodia legis.
hotels or inns are not liable for the loss of the thing in
case of deposit? (1) Obligation of depositary of sequestered property. The
depositary of sequestered property is the person appointed
1. The loss or injury is caused by force majeure by the court. He has the obligation to take care of the
2. Loss due to the acts of guests, his family, his property with the diligence of a good father of a family and
employees or visitors he may not be relieved of his responsibility until the litigation
3. Loss arises from the character of the goods is ended or the court so orders.
Question: Are hotel or inn keepers still liable regardless of Judicial and extrajudicial deposits distinguished
the posting of notices exempting themselves from any
liability? Judicial Deposit Extra-Judicial Deposit
Answer: Yes. Hotel or inn-keepers cannot escape or limit Cause or origin is the will of the Cause or origin is the will of the
liability by stipulation or posting of notices. Any stipulation court parties
between the hotel keeper and the guest whereby the
Purpose is to serve as security Purpose is the custody and
responsibility of the former is suppressed or diminished shall and to secure the right of a party safekeeping of the thing
be void. to recover in case of a favorable
judgment
Question: Can the keepers of hotels or inns exercise the
right of retention? Movable or immovable property Only movable property
(but generally immovable)
Answer: Yes, as security for credits incident to the stay at the
hotel (in the nature of a pledge created by operation of law). Always renumerated (onerous) May be compensated or not, but
! In behalf of the person who, by
generally gratuitous
In behalf of the depositor or third
Sequestration or Judicial the judgment, has a right person designated.

Deposit !
! !
!
Art. 2005. A judicial deposit or sequestration takes place when an
!
!
attachment or seizure of property in litigation is ordered.
!!
SERVE THE PEOPLE!
!
GUARANTY AND
SURETYSHIP
! a. Single - constituted solely to guarantee or secure
NATURE AND EXTENT OF GUARANTY
! fulfillment of a prior guaranty; guarantees the
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 1 of this Book shall be
!
observed. In such case the contract is called a suretyship.
(1) Guaranty is a contract whereby the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.
(2) In its broad sense, guaranty includes pledge and mortgage
because the purpose of guaranty may be accomplished also
! by furnishing to the creditor for his security property.
Parties in Guaranty
1. Guarantor
! 2. Creditor
Characteristics of Guaranty
1. Accessory - it is dependent for its existence upon the
principal obligation guaranteed by it.
2. Subsidiary and Conditional - it takes effect only when
the principal debtor fails in his obligation subject to
limitation.
3. Unilateral - it gives rise to obligations on the part of the
guarantor in relation to the creditor and not vice-versa.
(Although after its fulfillment, the principal debtor should
indemnify the guarantor, but this obligation is only
incidental).
It may be entered into even without the intervention of the
principal debtor.
4. Distinct Person - it requires that the person of the
guarantor must be distinct from the person of the
principal debtor (you cannot guaranty your own debt).
However, in a real guaranty, a person may guarantee his
! own obligation with his own properties.
KINDS & CLASSIFICATION of Guaranty:
1. In the broad sense:
a. Personal - the guaranty is the credit given by the
person who guarantees the fulfillment of the principal
obligation (guarantor).
b. Real - the guaranty is property. If the guaranty is
immovable property, it is a real mortgage or
antichresis. If the guaranty is movable property, it is
pledge or chattel mortgage.
2. As to origin:
a. Conventional - by agreement of the parties
b. Legal - imposed by law
c. Judicial - required by a court to guarantee the
eventual right of one of the parties in a case.
3. As to consideration:
a. Gratuitous - the guarantor does not receive anything
for acting as guarantor
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b. Onerous - the guarantor receives valuable
consideration for acting as guarantor.
4. As to person guaranteed:
performance of the principal obligation.
b. Double or Sub-guaranty - constituted to secure
obligation of a guarantor.
5. As to scope and extent:
a. Definite - limited to the principal obligation only or to
a specific portion thereof, to the exclusion of
accessories
b. Indefinite or simple - includes not only the principal
obligation but also all its accessories, including
! judicial costs.
SURETYSHIP
!
(3) If a person binds himself solidarily with the principal debtor, it
is a contract of SURETYSHIP. The guarantor is called a
surety. Suretyship is governed by Arts. 1207 to 1222 of the
Civil Code on solidary obligations. Suretyship dispenses with
certain legal requirements/conditions precedent for
proceeding against a guarantor.
Question: What is the difference between passive solidarity
(solidarity among debtors) and suretyship?
Similarity: A solidary debtor, like a surety, stand for some
other person. In both passive solidarity and surety, both
debtor and surety, after payment, may require that they be
reimbursed.
Difference: The creditor cannot go after the surety right away.
There has to be default on the part of the principal debtor
before the surety becomes liable. If it were mere solidarity
among debtors, the creditor can go after any of the solidary
!
debtors on due date.
NATURE of Suretys Undertaking:
(4) Contractual and Accessory but Direct - the contractual
obligation of the surety is merely an accessory or collateral to
the obligation contracted by the principal. But, his liability to
the creditor is direct, primary and absolute.
(5) Liability is limited by the terms of the contract - The
extent of a suretys liability is determined only by the terms of
(6)
the contract and cannot be extended by implication.
Liability arises only if the principal debtor is held liable - If
the principal debtor and the surety are held liable, their
liability to pay the creditor would be solidary. But, the surety
does not incur liability unless and until the principal debtor is
held liable:
a. A surety is bound by a judgment against the principal
even though the party was not a party to the
proceedings
b. The creditor may sue, separately or together, the
principal debtor and the surety (since they are solidarily
bound).
c. Generally, a demand or notice of default is not required
to fix the suretys liability.
d. An accommodation party (one who signs an instrument
as maker, drawer, acceptor, or indorser without
consideration and only for the purpose of lending his
name) is in effect, a surety. He is thus liable to pay the
!
holder of the instrument, subject to reimbursement from
the accommodated party.
Question, Example: Victor accommodated Karla so that she
can obtain a loan from the bank. At the bottom of the loan
agreement, the following signature appears:
(sgd) Victor
Victor Villanueva
(sgd) Karla
Karla Tumaru
Is Victor a surety or a solidary debtor? Victor is a solidary
debtor. Remember the rule, I promise to pay signed by two
parties is a solidary obligation. To make sure that Victor is
merely a guarantor or surety, Victor should sign a separate
guaranty agreement. Besides, a guaranty must be express. It
is not presumed.
(7) Surety is not entitled to exhaustion - a surety is not
entitled to the exhaustion of the properties of the principal
debtor since the surety assumes a solidary liability for the
fulfillment of the principal obligation. (A guarantor on the
other hand, is entitled to exhaustion).
(8) The undertaking is to the creditor, not the principal
debtor - the debtor cannot claim that the surety breached its
obligation to pay for the principal obligation because there is
no obligation as between the surety and the debtor. If the
surety does not pay, the principal debtor is still not relieved
! of his obligation.
DIFFERENCE between Guaranty and Suretyship
Guaranty Suretyship
Guarantor/Surety promises to answer for the debt, default or
miscarriage of the principal
Liability of the guarantor depends Surety assumes liability as a
upon an independent agreement regular party to the undertaking
to pay the obligation if the
primary debtor fails to do so
The engagement of the guarantor Surety is charged as an original
is a collateral undertaking promisor
The guarantor is secondarily A surety is primarily liable
liable
(9) The main difference is that a surety undertakes to pay if the
principal does not pay (insurer of the debt) while a guarantor
binds himself to pay if the principal cannot pay (insurer of the
solvency of the debtor).
(10) Since the obligation of the surety is to pay so long as the
principal does not pay (even if he can, even if he is solvent),
the undertaking of the surety is more onerous than that of a
guarantor who pays only in the event that the principal is
broke.
Illustration: Denise borrows from Karla P10,000 with Victor
agreeing to be the surety. Denise refuses to pay Karla
because of some cat-fight. In this case, since Victor is a
surety, Karla can immediately demand payment from Victor.
If in this case Victor is a guarantor, Karla would have to
exhaust all the property of Denise before she can collect
from Victor. It is not enough that Denise refuses to pay even
if she can. She has to be unable to pay before Victor can be
liable.
Hypothetical Question: If you were a lender and the borrower
offers as security either X as guarantor or a real estate
mortgage, which one would you choose?
SERVE THE PEOPLE!
Choose the real estate mortgage. If you were the lender, a
real estate mortgage is more advisable because you can
collect against the property. In a guaranty/surety, you would
have to go against the guarantor or surety. You would have
to sue him, obtain judgment, and then execute judgment.
This is subject to a lot of delays. The guarantor or surety can
! ! stall your claim.
Art. 2048. A guaranty is gratuitous, unless there is a stipulation to
!
the contrary.
(11) General rule: Guaranty is gratuitous
Exception: Guaranty is onerous only if it is stipulated.
Question: What is the cause/consideration of a contract of
guaranty?
The cause of a contract of guaranty is the same cause which
supports the principal obligation of the principal debtor.
There is no need for an independent consideration in order
for the contract of guaranty to be valid. The guarantor need
not have a direct interest in the obligation nor receive any
benefit from it. It is enough that the principal obligation has
!
consideration.
Art. 2049. A married woman may guarantee an obligation without
the husbands consent, but shall not thereby bind the conjugal
!
partnership, except in cases provided by law.
(12) Art. 94 (3) of the Family Code states that the absolute
community of property shall be liable for debts and
obligations contracted by either spouse without the consent
of the other to the extent that the family may have been
benefited.
(13) A married woman who acts as guarantor without the consent
of the husband binds only her separate property unless the
debt benefited the family.
(14) There is no express prohibition against a married woman
acting as guarantor for her husband. Remember, in order to
bind the absolute community of property, the consent of
both spouses is needed. If only the consent of one spouse is
obtained, the absolute community will not be liable unless
the obligation redounded to the benefit of the family.
(15) When the husband acts as guarantor for another person
without the consent of the wife, the guaranty binds only the
husband since the benefit really accrues to the principal
debtor and not to the husband or his family. The exception is
if the husband is really engaged in the business of
guaranteeing obligations because in that case, his
occupation or business is deemed to be undertaken for the
!
benefit of the family.
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.
(16) Remember, a contract of guaranty is between the guarantor
and the creditor. It can be instituted without the knowledge
or even against the will of the debtor, since the purpose of
the contract is to give the creditor all the possible measures
to secure payment.
!
However, if the contract of guaranty is entered into without
the knowledge or consent or against the will of the principal
debtor, the effect is like payment by a third person.
The guarantor can only recover insofar as the payment
has been beneficial to the debtor
The guarantor cannot compel the creditor to subrogate
him in the creditors rights such as those arising from a
mortgage, guaranty or penalty.
If the guaranty was entered into with the consent of the
principal debtor, the guarantor is subrogated to the rights
which the creditor had against the debtor once he pays for
the obligation.
Illustration: Lawrence owes Mike P10,000. Without the
knowledge of Lawrence, Victor guarantees the obligation.
Victor pays Mike P10,000. Victor tries to collect the P10,000
from Lawrence but Lawrence tells him that he has already
paid Mike P4,000.
In this case, Victor can only collect P6,000 from Lawrence
because it was only the extent to which Lawrence was
benefited by Victors payment.
If the loan was secured by a mortgage, Victor cannot
foreclose the mortgage if Lawrence does not pay him
!
because he is not subrogated to the rights of Mike.
Art. 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or unenforceable contract. It may also
!
guarantee a natural obligation.
(17) A guaranty is an accessory contract and cannot exist without
a valid principal obligation. So if the principal obligation is
void, the guaranty is also void.
Exception: A guaranty may be constituted to guarantee the
following defective contracts and natural obligations:
1. Voidable - because the contract is binding until
annulled.
2. Unenforceable - because an unenforceable contract is
not void.
3. Natural obligations - even if the principal obligation is
not civilly enforceable, the creditor may still go after the
! guarantor.
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.
(18) Continuing guaranty - is a guaranty that is not limited to a
single transaction but which contemplates a future course of
dealings covering a series of transactions generally for an
indefinite time or until revoked.
A continuing guaranty is generally prospective in its
operation and is intended to secure future transactions
(generally does not include past transactions).
Examples:
Credit line - The bank allows you to borrow up to a
certain ceiling, but there is no release of funds yet. If
you have an obligation with a third person and you
default, the third person just needs to inform the bank
and the bank will release the money. The money
released will be considered as a loan from the bank to
SERVE THE PEOPLE!
you. The bank will allow the release of the money so
long as it doesnt exceed the ceiling.
Future debts may also mean debts that already exist
but whose amount is still unknown.
(19) Art. 2053 may be misleading because it says that a guaranty
may be constituted to secure future debts. The important
thing to remember int he guaranty of future debts is that
there must be an existing obligation already that is being
guaranteed. Without that existing obligation, the guaranty
would be void. Remember, guaranty is an accessory
obligation, so it cannot exist without a principal obligation.
Illustration: Joanna guarantees the P10,000 loan that Victor
owes Karla and any other indebtedness that Victor may incur
against Karla. This is a valid guaranty because there is
already an existing obligation.
However, lets say that Joanna guarantees the loan that
Victor and Karla will enter into tomorrow. This is not valid.
Although it is a future debt, it is not what is contemplated
in Art. 2053 because there is no principal obligation yet.
!
There is nothing to guarantee.
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.
(20) Since the contract of guaranty is a subsidiary and accessory
contract, the guarantors liability cannot exceed that of
the principal obligation. If the guarantor binds himself for
more than the liability of the principal debtor, his liability shall
be reduced.
(21) However, if the creditor sues the guarantor, the guarantor
may be made to pay costs, attorneys fees, and penalties
! even if this will make his liability exceed that of the principal.
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 comprise 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.
(22) Guaranty is never presumed. It must be express. Because
the guarantor assumes an obligation to pay for anothers
debt without any benefit to himself. Thus, it has to be certain
that he really intends to incur such an obligation and that he
! proceeds with consciousness of what he is doing.
FORM REQUIRED for Guaranty:
(23) Guaranty must be in writing.
A contract of guaranty, to be enforceable, must be in writing
because it falls under the Statute of Frauds as a special
promise to answer for the debt, default or miscarriage of
another. (De Leon textbook says that surety is not covered
by Statute of Frauds, but some professors say that surety is
still covered by it because it is still a promise to answer for
the debt of another person. What is not covered by the
! Statute of Frauds is being a solidary co-debtor).
CONSTRUCTION of Guaranty
!
(24) Guaranty is strictly construed against the creditor and in
favor of the guarantor and is not to be extended beyond its
terms or specific limits. Doubts should be resolved in favor of
the guarantor or surety.
However, this rule of construction is applicable only to an
accommodation surety or one that is gratuitous. It does not
apply where the surety is compensated with consideration.
In such cases, the agreement is interpreted against the
surety company that prepared it.
(25) General Rule: It is not necessary for the creditor to expressly
accept the contract of guaranty since the contract is
unilateral; only the guarantor binds himself to do something.
Exception: If the guarantor merely offers to become guaranty,
it does not become a binding obligation unless the creditor
accepts and notice of acceptance is given to the guarantor.
On the other hand, if the guarantor makes a direct or
unconditional promise of guaranty (and not merely an offer),
there is no need for acceptance and notice of such
!
acceptance from the creditor.
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
Art. 2057. If the guarantor should be convicted in the 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 guarantor.
(26) Ideally, the qualifications of a guarantor are the following:
integrity, capacity to bind himself, and sufficient property to
answer for the obligation which he guarantees. But the
creditor can waive these requirements.
(27) Jurisdiction over the guarantor belongs to the court where
the principal obligation is to be fulfilled, in accordance with
the rule that accessory follows the principal.
Question: What is the effect of subsequent loss of
qualifications?
Answer: The qualifications need only to be present at the
time of the perfection of the contract. The subsequent loss of
the qualifications would not extinguish the liability of the
guarantor, nor will it extinguish the contract of guaranty.
However, the creditor has the discretion to demand another
guarantor with the proper qualifications.
(28) The creditor may demand another guarantor:
1. In case the guarantor is convicted in the first instance
of a crime involving dishonesty.
2. In case the guarantor becomes insolvent (since he
loses sufficient property to answer for the obligations
which he guarantees). There is no need for a judicial
declaration of insolvency
Question: What is the effect of the guarantors death on the
guaranty?
Answer: The guaranty survives the death of the guarantor.
The general rule is that a partys contractual rights and
obligations are transmissible to his successors. The rules on
guaranty does not expressly provide that the guaranty is
SERVE THE PEOPLE!
extinguished upon the death of the guarantor. Applying Art.
2057, the supervening incapacity of the guarantor does not
extinguish the guaranty but merely gives the creditor the
right to demand a replacement. But the creditor can waive
this right and choose to hold the guarantor to his bargain. If
he so chooses, the creditors claim passes to the heirs of the
deceased guarantor.
Question: When may the creditor not demand another
guarantor?
Answer: Where the creditor has stipulated in the original
agreement that a specified person should be the guarantor,
he is bound by the terms of the agreement and he cannot
thereafter deviate from it.
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.
(29) Again, the liability of the guarantor is only accessory and
subsidiary. Thus, in order for the creditor to collect from the
guarantor, the following conditions must be fulfilled:
1. The creditor should have exhausted all the properties
of the debtor.
2. The creditor has resorted to all legal remedies against
the debtor (ex. accion pauliana, rescission of fraudulent
alienations).
Question: Can the creditor implead the guarantor as a co-
defendant with the debtor?
Answer: No, except in cases provided in Art. 2059. Article
2062 says that creditor should proceeds against the principal
!
debtor alone.
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it
(2) If he has bound himself solidarily with the debtor
(3) In case of insolvency of the debtor
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or a representative
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
! obligation
(29) General rule: The guarantor is entitled EXCUSSION or to
demand that the creditor first exhaust the properties of the
principal debtor before collecting from the guarantor.
Exceptions:
1. Those under Art. 2059
2. If the guarantor does not comply with Art. 2060
3. If the guarantor is a judicial bondsman and sub-
surety (Art. 2084)
4. Where a pledge or mortgage has been given by him as
a special security
5. If he fails to interpose it as a defense before judgment
is rendered against him
(30) Exceptions under Art. 2059
1. When the right is renounced or waived
The waiver must be made in express terms
2. When liability assumed by the guarantor is solidary
In this case, he becomes a surety with primary
liability
3. When the principal debtor is insolvent
!
Illustration: Stephen borrows from P100,000 from
Henry guaranteed by Jericson. Stephen has P1M
in assets which are still with him and P1.5M in
liabilities. Stephen defaults. Can Henry collect from
Jericson right away?
No. In this case, Jericson still has the benefit of
excussion. Why? Because even if Stephen is
apparently insolvent, there is still no claim against
his assets by the other creditors. They are still with
him and can still be accessed by Henry by filing an
action for collection of money against Stephen.
Illustration: Alden borrows P100,000 from Gary,
guaranteed by Kristine. On due date, Alden
defaults and has zero assets but has a P200,000
credit/receivable from Lawrence. Can Gary collect
from Kristine?
No. Gary must file an action for collection and an
accion subrogatoria so that he can exercise
Aldens right to collect money from Lawrence. Only
if these actions fail can Gary then collect from
Kristine.
4. When the principal debtor absconds or cannot be sued
locally
So even if the borrower has fled to Timbuktu, if he
still has properties in the Philippines, the lender
must sue against the property first before
collecting from the guarantor.
5. When resort to all legal remedies would be a useless
formality
If exhausting the properties of the debtor would be
useless since it would still not satisfy the
obligation, the guarantor cannot require the
creditor to resort to these legal remedies against
the debtor anymore, since doing so would be a
useless formality.
In this case, it is not even necessary that the
debtor is judicially declared insolvent or bankrupt.
Hypothetical Question: How can a lender get around
excussion?
If the lender wants to be able to go against the
guarantor right away without having to go through
excussion, he must get the guarantor to either sign a
waiver of the benefit of excussion or make him solidarily
liable (as a surety).
Hypothetical Question: Sarah borrowed from Samantha
P100,000 guaranteed by Mike. Sarah defaulted.
Samantha made a demand for payment against Mike.
Mike paid. Later, Mike found out that he had the benefit
of excussion. He demanded reimbursement from
Samantha. Can Mike recover?
!
No. Payment constitutes a waiver of the benefit.
Art. 2060. In order that the guarantor may make use of the benefit
of excussion, he must set it up against the creditor upon the latters
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.
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
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property, for the insolvency of the debtor resulting from such
!
negligence.
(31) Duty of creditor to make prior demand for payment from
guarantor. To collect from the guarantor, the creditor must
make a prior demand for payment from the guarantor.
When should demand be made? The demand can only be
made after judgment on the debt.
How should it be made? The demand must be an actual
demand. Joining the guarantor in the suit against the
principal is not the demand intended by law.
(32) Duty of guarantor to set up benefit of excussion. What
should the guarantor do to claim the benefit of excussion:
1. Set up the benefit of excussion against the creditor
upon demand for payment by the creditor from him; and
2. Point out to the creditor available property of the debtor
within Philippine territory sufficient to cover the amount
of debt. (Therefore, property located abroad or which is
not easily available is not included among those that the
guarantor can point out to the creditor).
(33) Duty of creditor to resort to all legal remedies. Once the
guarantor has fulfilled the requisites for making use of the
benefit of excussion, the creditor has the duty to exhaust all
the property of the debtor and to resort to all leal remedies
against the debtor. If he fails to do so, the creditor shall suffer
the loss to the extent of the value of the property he failed to
!
collect from the principal debtor.
Art. 2062. In every action by the creditor, which must be against the
principal debtor alone, except in cases mentioned in Article 2059,
the former shall ask the court to notify the guarantor of the action.
The guarantor may appear so that he may, if he so desires, 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.
(34) Procedure when the creditor sues:
1. Sue the principal first. The creditor must sue the
principal debtor alone. He cannot sue the guarantor
with the principal or the guarantor alone except in the
cases mentioned in Art. 2059 where the guarantor loses
the benefit of excussion.
In other words, adherence to the rule to sue the
principal alone can be overruled by the court when it is
proved that it would be a useless formality because no
different result would be attained if the plaintiff were
forced to institute separate actions against the principal
and the guarantor.
2. Notice to guarantor of the action. The guarantor must
be notified so that he may appear and set up his
defenses if he wants to. If the guarantor appears, he is
still given the benefit of exhaustion even if judgment
should be rendered against the principal debtor.
If he does not appear, judgment is not binding on him.
Lender must sue the guarantor to claim against him.
(35) So, collecting from the guarantor is really a two-step
process. The purpose of the two-step process is to allow the
guarantor to make use of the benefit of excussion. The
disadvantage is that there is a time lag between the
judgment against the principal debtor and the one against
!
the guarantor, which allows the guarantor to hide his assets
in the meantime.
How to get around this two-step process? A bank guaranty
or letter of credit. In a bank guaranty, if the debtor does not
pay, the creditor need only inform the bank of the default and
the bank releases the money. Its like a standing loan by the
bank in favor of the debtor to answer for a debt in favor of
!
third persons, in case he is unable to pay.
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.
(36) Effects of compromise. A compromise is a contract
whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already commenced. A
compromise cannot prejudice the guarantor or the debtor, as
the case may be, when he is not a party to such
compromise. Furthermore, if you remember, a guarantor may
not bind himself for more than the principal debtor both as
regards the amount and the onerous nature of the
conditions.
Exception: If the compromise has a benefit in the nature of a
stipulation in favor of a third person, the compromise may
bind that person.
Illustration: Victor owes Joanna P10,000 with Lawrence as
guarantor. Victor and Joanna agree to reduce the debt to
P8,000. Lawrences liability is also reduced to P8,000 in case
Victor does not pay, since the compromise is beneficial to
! Lawrence.
Art. 2064. The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and tot he principal
!
debtor.
(37) Sub-guarantors right to excussion. A sub-guarantor can
demand the exhaustion of the properties of both the
guarantor and the principal debtor before he pays the
creditor.
Art. 2065. Should there be several guarantor of only one debtor
and for the same debt, the obligation to answer for the same is
divided among all. The creditor cannot claim from the guarantors
except the shares which they are respectively bound to pay, unless
solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion
!
against the principal debtor.
(38) Benefit of division among several guarantors. This speaks
of the benefit of division. The following conditions must
concur in order that several guarantors may claim the
benefit:
1. There should be several guarantors
2. There is only one debtor
3. There is only one and the same debt
(39) In this case, the liability of the co-guarantors is joint. They
are not liable to the creditor beyond the shares which they
are bond to pay.
Exceptions:
1. If solidarity among the guarantors has been expressly
stipulated.
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2. The co-guarantors cannot avail themselves of the
benefit of division under circumstances enumerated in
Art. 2059
Illustration: Mike and Karla are guarantors of the debt of
Lawrence to Joanna in the amount of P10,000. Joanna can
demand from Mike or Karla only P5,000 unless Mike and
Karla had bound themselves solidarily with Lawrence in
which case they would be sureties and, therefore Joanna can
hold each of them responsible for P10,000. Joanna may also
demand from Mike or Karla the entire P10,000 in the cases
mentioned in Art. 2059 as where Mike or Karla has expressly
renounced the benefit of division.
Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;
(3) The expenses incurred by the guarantor after having notified
the debtor that payment had been demanded of him;
! (4) Damages, if they are due.
(40) Guaranty is a contract of indemnity. The debtor is directly
and principally liable to the creditor, therefore, the general
rule is that the guarantor who makes payment must be
indemnified by the said debtor.
(41) The indemnity comprises of:
1. Total amount of the debt - Guarantor cannot collect
more than what he has paid.
2. Legal interest thereon - even if the debt did not earn
interest for the credit, the guarantor is entitled to legal
interest from the time notice of payment of the debt was
made known to the debtor.
3. Expenses incurred by the guarantor - Only those
expenses that the guarantor has to satisfy in
accordance with the law as a consequence of the
guaranty.
Excludes: Those which depend upon guarantors will or
own acts or fault.
Limited to: Those incurred b the guarantor after having
notified the debtor that payment has been demanded of
him by the creditor.
4. Damages, if they are due.
(42) Exceptions or Qualifications to the right to indemnity or
reimbursement:
1. Where guaranty is constituted without the knowledge or
against the will of the principal debtor, the guarantor
can recover only insofar as payment had been
beneficial to the debtor (Art. 2050)
2. Payment by a third person who does not intend to be
reimbursed by the debtor is deemed a donation (which
requires the debtors consent, but in any case valid as
to the creditor who has accepted it)
3. When waiver of the right to demand reimbursement is
effected
Art. 2067. The guarantor who pays is subrogated by virtue thereof
to all the rights which the creditor has against the debtor.
If the guarantor has compromised with the creditor, he cannot
!
demand of the debtor more than what he has really paid.
!
(43) Guarantor has a right to subrogation. Subrogation
transfers to the person subrogated, the credit, with all the
rights thereto appertaining either against the debtor or
against third persons, be they guarantors or possessors of
mortgages, subject to stipulation in conventional
subrogation.
Except only for the change in person of the creditor by
the guarantor, the obligation subsists in all respects as
before payment.
The right to subrogation enables the guarantor to
enforce the indemnity.
Accrual: The right of subrogation arises by operation of
law upon payment to the creditor, who no longer has to
cede his rights against the debtor.
The benefit of subrogation cannot be invoked in cases
when the guarantor has no right to be reimbursed.
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.
(44) Effect of payment by guarantor without notice to debtor.
The debtor may interpose against the guarantor, those
defenses which he could have set up against the creditor at
the time payment was made (ex. If the debtor has already
paid the creditor when the guarantor pays, the debtor can
set up the defense of previous extinguishment of the
obligation against the guarantor).
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.
(45) Effect of payment by guarantor before maturity. Recall
that, if the debtors obligation is with a period, it becomes
demandable only when the day fixed comes. Consequently,
the guarantor who pays before maturity is not entitled to
reimbursement since there is no necessity for accelerating
payment. The guaranty being subsidiary in character, the
guarantor is not liable for the debt before it becomes due.
However, the debtor will be liable if the payment was
made with his consent or it was subsequently ratified by
him (expressly or impliedly).
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 gratuitous
guaranty, if the guarantor was prevented by a fortuitous event form
advising the debtor of the payment, and the creditor becomes
insolvent, the debtor shall reimburse the guarantor for the amount
!
paid.
(46) Effect of repeat payment by the debtor. General rule:
Before the guarantor pays the creditor, he must notify the
debtor (Art. 2068). If he fails to give such notice and the
debtor repeats payment, the guarantors only remedy is to
collect form the creditor even if the latter should become
insolvent.
However, the guarantor may still claim reimbursement
from the debtor in spit of lack of notice if the following
conditions are present:
1. The creditor becomes insolvent
SERVE THE PEOPLE!
2. The guarantor was prevented by fortuitous event
to advise the debtor of the payment; AND
3. The guaranty is gratuitous
Art. 2071. The guarantor, even before having paid, may proceed
against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such nature
that it cannot be extinguished except within a period longer than
ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
!
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall protect
him from any proceedings by the creditor and from the danger of
!
insolvency of the debtor.
(47) Right of guarantor to proceed against debtor before
payment. General rule: the guarantor has no cause of action
against the debtor until the former has paid the obligation
(Art. 2066). This applies also to suretyship
The exceptions are:
1. When the guarantor is sued for payment
2. In case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve the
guarantor from the guaranty within a specified period,
and this period has expired
4. When the debt has become demandable, by reason of
the expiration of the period for payment
5. After lapse of ten years, when the principal obligation
has no fixed period for maturity, unless it be of such
nature that it cannot be extinguished
6. Reasonable grounds to fear that the principal debtor
intends to abscond
7. If the principal debtor is in imminent danger of
becoming insolvent
The alternative remedies to which the guarantor is entitled
are:
1. To obtain release from the guaranty
2. To remand a security that shall protect him from any
proceedings by the creditor, and against the danger of
insolvency of the debtor.
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
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debtor for reimbursement.
(48) Guarantor of a third person at the request of another.
The guarantor who guarantees the debt of an absentee at
the request of another has a right to claim reimbursement
after satisfying the debt either from the person who
requested him to be a guarantor, or the debtor.
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
proportionately 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.
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The provisions of this article shall not be applicable, unless the
payment has been made in virtue of a judicial demand or unless the
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principal debtor is insolvent.
(49) Right of contribution of guarantor who pays. The
obligation of several guarantors of the same debtor and for
the same debt is joint. Each is bound to pay only his
proportionate share.
Illustration: Eilleen, Joanna and Karla guaranty the
P90,000 loan of Denise. Eilleen paid P90,000. Eilleen
can collect P30,000 each from Joanna and Karla.
But unlike in an ordinary joint obligation, if one of the
guarantors is insolvent, the co-guarantors must answer
for his share. In this sense the obligation behaves like a
solidary obligation.
Art. 2074. In the case of the preceding article, the co-guarantors
may set up against the one who paid, the same defenses which
would have pertained to the principal debtor against the creditor,
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and which are not purely personal to the debtor.
(50) Defenses available to co-guarantors. Co-guarantors may
avail themselves of all defenses which the debtor would have
interposed against the creditor but not those which cannot
be transmitted for being purely personal to the debtor (see
Arts. 2068 and 2081).
Illustration: Victor, Mike and Alden guaranty the
obligation of Lawrence. Victor pays even if the
obligation has prescribed already. Victor demands
reimbursement from Mike and Alden. Mike and Alden
can refuse to pay by invoking the defenses inherent in
the obligation, such as prescription.
Illustration: Victor, Mike and Alden guaranty the
obligation of Lawrence, a minor. Victor pays. Can Mike
and Alden refuse to reimburse him on the ground that
Lawrence is a minor? No, because the defense is
personal to Lawrence.
Art. 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
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guarantors in the same terms as the guarantor.
Illustration: Jeric, Stephen and Marco are guarantors of
Henry. Shara is a guarantor of Jeric. Marco pays the
entire obligation. Jeric becomes insolvent. Can Marco
claim the share of Jeric from Shara? Yes.
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
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other obligations.
(51) Extinguishment of guaranty. Guaranty may be
extinguished (1) by ordinary extinguishment or (2) by the
release of the guarantor by the creditor. Being accessory and
subsidiary, guaranty is also extinguished when the principal
obligation is extinguished.
But the extinguishment of the guaranty does not always
carry with it the extinguishment of the principal
obligation.
(52) Material alternation of the principal contract. Any
agreement between the creditor and the principal debtor
which essentially varies the terms of the principal contract
without the consent of the surety will release the surety from
liability. This is because the alteration would result in a
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novation of the principal contract which is consequently
extinguished and replaced with a new one.
When is an alteration material? There must be a change
which imposes a new obligation or addd burden or
which takes away some obligation already imposed,
changing the legal effect of the contract; (Example:
increase in the principal amount, regardless of the
extent of the liability assumed by the guarantor;
substitution of the principal debtor; shortening the term
of the principal debt.)
But if the change is beneficial to the guarantor,
example, if the principal obligation is decreased, the
guaranty subsists.
Art. 2077. If the creditor voluntarily accepts immovable or other
property in payment of the debt, even if he should afterwards lose
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the same through eviction, the guarantor is released.
(53) This is a case of dacion. Since dacion extinguishes the
principal obligation, the accessory obligation is also
extinguished and is not revived even if the creditor is
subsequently evicted from the property.
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
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extent of the share of the guarantor to whom it has been granted.
(54) Release of a co-guarantor without the consent of others.
Self-explanatory.
Illustration: Eilleen, Joanna and Karla are guarantors of
Denise for P90,000. The creditor, Victor, releases Eilleen
without the consent of Joanna and Karla. The release
should benefit Joanna and Karla to the extent of
P30,000 (Eilleens share). They shall be liable only for
P60,000.
Illustration: Eilleen, Joanna and Karla are guarantors of
Denise for P90,000. The creditor, Victor, releases Eilleen
with the consent of Joanna and Karla. Joanna and
Karlas liability is still P90,000.
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. The
mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of
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time referred to herein.
(55) Release by extension of term granted by the creditor to
the debtor. If the creditor grants an extension of time to the
debtor without the consent of the guarantor, the guarantor is
discharged from his undertaking. The purpose of this rule is
to avid prejudice to the guarantor. The debtor may become
insolvent during the extension, thus depriving the guarantor
or surety of his right to reimbursement.
But if the guarantor or surety consents or waives his
right under this article in advance, the extension will not
extinguish the guaranty.
It is immaterial whether the guarantor or surety suffers
actual prejudice as a result of the extension. The length
of time of the extension is also immaterial. As long as
the period is extended, the guaranty is extinguished.
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
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(56) Release when guarantor cannot be subrogated. Art. 2067 !
entitles the guarantor to be subrogated to the rights of the !
creditor. If there can be no subrogation because of the fault
!
of the creditor, as when the creditor releases or fails to
register a mortgage, the guarantors are thereby released !
(even if the guarantors are solidary).
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Art. 2081. The guarantor may set up against the creditor all the !
defenses which pertain to the principal debtor and are inherent in
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the debt; but not those that are personal to the debtor.
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(57) Defenses available to the guarantor against the creditor.
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This article provides for defenses, which may be interposed
by the guarantor against the creditor except those which are !
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purely personal to the debtor.
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LEGAL AND JUDICIAL BONDS
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Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications

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prescribed in Articles 2056 and in special laws

Art. 2083. If the person bound to give a bond in the case of the
preceding article, should not be able to do so, a pledge or
mortgage considered sufficient to cover his obligation shall be

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admitted in lieu thereof.

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

the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion

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of the property of the debtor or of the surety.

(58) A legal bond is a surety, therefore there is no benefit of

excussion.
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COMMON PROVISIONS ON
PLEDGE AND MORTGAGE
! Property acquired subsequently - a pledge or mortgage
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence thereof,
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that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation
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may secure the latter by pledging or mortgaging their own property.
Art. 2086. The provisions of Article 2052 are applicable to a pledge
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or mortgage.
Art. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
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mortgage consists may be alienated for the payment to the creditor.
Essential Requirements of Pledge &
Mortgage
1. Constituted to secure the fulfillment of a valid principal
obligation.
2. Pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged.
3. They must have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the
purpose.
4. The debtor retains the ownership of the thing given as
security
5. When the principal obligation becomes due and no
payment is made by the debtor, the things in which the
pledge or mortgage consists may be alienated for the
payment.
(1) Constituted to secure the fulfillment of a principal
obligation. Pledge and mortgage, being purely accessory
contracts, cannot exist without a valid obligation. They may
also secure voidable, unenforceable, natural and conditional
obligations.
The character of the transaction between the parties is to be
determined by their intention, regardless of the language
used or the form of the transfer. Example, if a transfer of
property by the debtor to a creditor, even if sufficient on its
face to make an absolute conveyance, should be treated as
a pledge (or mortgage) I the debt continues in existence and
is not discharged by the transfer.
In case of doubt as to whether a transaction is a pledge
(or mortgage) or a dation in payment, the presumption
is in favor of pledge, pledge being the lesser
transmission of rights and interests.
(2) Constituted by the absolute owner. It is essential that the
contract be constituted only by the absolute owner of the
thing pledged or mortgaged, or at least by the pledgor or
mortgagor with the authority or consent of the owner of the
property pledged or mortgaged. A pledge or mortgage
constituted by an impostor is void and the pledgee or
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mortgagee in such a case acquires no right whatsoever in
the property.
Future property cannot be pledged or mortgaged
executed by one who is not the owner of the property
pledged or mortgaged is without legal existence.
Registration cannot validate it. Thus, a mortgage
executed before the mortgagor became the owner of
the property is void and ineffective
Share in co-ownership - the effect of alienation or the
mortgage, with respect to the co-owner, shall be limited
to the portion which may be allotted to him in the
division upon the termination of the co-ownership.
Property covered by Torrens title - an innocent
purchaser for value relying on a Torrens title is
protected. This is the doctrine of the mortgagee in
good faith. What does this mean? While it is true that it
is essential that the mortgagor be the absolute owner of
the property mortgaged, a mortgagee has the right to
rely upon what appears in the certificate of title and
does not have to inquire further. So if a mortgagee
accepts a mortgage from a purported owner, relying on
what appears to be a valid certificate of title, he shall be
protected. This, however, does not apply to banks, who
has to exercise a higher degree of diligence in
accepting property as mortgage.
(3) Free disposal of the property. The act of pledging or
mortgaging is an act of strict ownership involving as it does
an alienation or transmission of real rights in property. Free
disposal of property means that the property must not be
subject to any claim of a third person.
(4) Thing pledged or mortgaged may be alienated. Although
this condition is not expressly stated in the contract, it is
necessarily implied as an inherent element of the transaction
of mortgage or pledge.
The mortgagor or pledgor remains the owner during the
pendency of the pledge and prior to foreclosure and
sale.
The only remedy given to the mortgagee or pledgee
(creditor) is to have the security given sold at public
auction and the proceeds of the sale applied to the
payment of the obligation. To do this, the creditor is not
obligated to file an independent action for the
enforcement of his credit. To do so would be a
nullification of his lien and would defeat the purpose of
the pledge or mortgage which is to give him preference
over the property given as security for the satisfaction
of his credit.
Question: What is the meaning of the right of the mortgagee
or pledgee to foreclose?
Answer: If the debtor failed to pay on maturity date, the thing
pledged or mortgaged may be sold at public auction as
provided by law so that the proceeds may be used for
payment of the obligation.
(5) Pledgor or mortgagor may be a third person. It is not
necessary that the principal debtor should always be the
pledgor or mortgagor (Art. 2085, par. 2). The pledgor or
mortgagor may provide an accommodation pledge or
accommodation mortgage.
The creditor is required to exercise due care and
prudence by making proper inquiry where the debtor
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borrows money and mortgages another persons
property to secure the loan without the consent of the
latter and he is guilty of negligence if he relied solely on
the representations made by the debtor.
Where the pledge or mortgage is purely gratuitous, the
same should be strictly construed to effect the least
transmission of rights or interests as possible.
Question: Who is an accommodation mortgagor?
Answer: He is a third person who is not a party to the
principal obligation and secures the latter by mortgaging or
pledging his own property. An accommodation mortgagor or
pledgor is not ordinarily himself the recipient of the loan, but
its okay, the pledge or mortgage is valid as long as the
principal debtor consents.
An accommodation mortgagor is not solidarily bound with
the principal debtor.
Question: What is the extent of the liability of an
accommodation pledgor or mortgagor?
Answer: It extends up to the loan value of their mortgaged
property and not to the entire loan itself. He is not liable for
the payment of any deficiency, should the property not be
sufficient to cover the debt
Illustration: Karla delivered to Denise, as her agent, for sale
on commission, a diamond ring. Denise, without consent of
Karla, pledged it to Victory Pawnshop, who was in good
faith, to obtain a loan. Karla filed an action for replevin
against Victory Pawnshop to recover the ring. Can Victory
Pawnshop collect the sum it loaned to Denise from Karla?
Answer: No. The contract of pledge was null and void since
Denise was not the owner of the ring pledged,
notwithstanding that she was an agent she had no
authority to alienate Karlas ring.
The owner of personal property may recover the possession
of the same from a pawnshop where another person had
pledged it without authority to do so. Art. 599 applies and
the defense that the pawnshop acquired possession of the
thing without notice of any defect in the title of the pledgor is
unavailing. The owner is not estopped from pursuing an
action against the pawnshop for the recovery of the
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possession of the property.
Art. 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage or dispose of them. Any stipulation to the
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contrary is null and void.
Pactum Commissorium
(6) Pactum Commissorium is a stipulation whereby the thing
pledged or mortgaged or under antichresis shall
automatically become the property of the creditor in the
event of nonpayment of the debt within the term fixed. This
is forbidden by law and such stipulation is null and void (only
the stipulation will be void, but the contract of pledge or
mortgage will remain valid).
Pactum commissorium has two requisite elements:
1. There should be a pledge, mortgage or antichresis of
property by way of security for the payment of a
principal obligation
2. There should be a stipulation for an automatic
appropriation by the creditor of the property in the
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event of nonpayment of the obligation within the
stipulated period.
(7) Right of the creditor where the debtor fails to comply
with his obligation. If the debtor fails to comply with the
obligation, the creditor is merely entitled to move for the sale
of the thing pledged or mortgaged and collect the amount of
his claim from the proceeds. The pledgor or the mortgagors
default does not operate to vest in the pledgee or mortgagee
the ownership of the property.
(8) Permissible stipulations that are not pactum
commissorium. What pactum commissorium prohibits is
the automatic appropriation by the creditor of the thing
pledged or mortgaged upon failure of the debtor to pay his
debt within the period agreed upon by virtue of authority or
right previously given the creditor, thus, the following
stipulations are permissible
Subsequent modification of original contract - the
stipulations that are prohibited are those executed or
made simultaneously with the original contract, not
those subsequently entered into. The principle does not
prohibit the modification of the original contract by
subsequent agreement such as the parties may see fit
to adopt.
Subsequent voluntary cession of property - the
prohibition does not include a subsequent voluntary act
of the debtor making cession of the property mortgaged
in payment of the debt which amounts in its legal effect
to a novation of the original contract.
Promise to assign or sell - the prohibition does not
apply to a promise to assign or sell a property in
payment of the obligation if, upon maturity, it is not
paid, because the title thereto remains in the debtor.
The promise is merely a personal obligation of the
mortgagor and does not in any way bind the property.
Authority to take possession of property upon
foreclosure - such stipulation is in consonance with
provisions of Art. 2132 regarding antichresis and Rule
59 of the Rules of Court regarding the appointment of a
receiver as a convenient and feasible means of
preserving and administering the property in litigation.
(9) Risk of loss to property pledged or mortgaged. Res perit
domino suo the debtor-owner bears the loss of the property,
since ownership is not transferred to the creditor. Likewise,
the principal obligation secured by the pledge or mortgage is
not extinguished by the loss of the pledged or mortgaged
property.
Indivisibility of Pledge & Mortgage
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 debtors 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 creditors heir who received his share of the
debt return the pledge or cancel the mortgage, to the prejudice of
the other heirs who have not been paid.
From these provisions is excepted the case in which, there
being several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have the right to the
extinguishment of the pledge or mortgage as the portion of the
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debt for which each thing is specially answerable is satisfied
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effect of fusing both securities in to an indivisible whole.
Art. 2090. The indivisibility of a pledge or mortgage is not affected
They both remain to be distinct agreements. Thus, a
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by the fact that the debtors are not solidarily liable.

(10) Pledge or mortgage is indivisible. A pledge or mortgage is

mortgagee may legally foreclose the real estate mortgage
extrajudicially and waive the chattel mortgage foreclosure,
and maintain instead a personal action for the recovery of
one and indivisible as to the contracting parties even if the
the unpaid balance of the credit.
obligation is joint and not solidary. Generally, the divisibility of
the principal obligation is not affected by the indivisibility of
the pledge or mortgage.
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Art. 2091. The contract of pledge or mortgage may secure all kinds
The consequences of indivisibility on the following of obligations, be they pure or subject to a suspensive or resolutory
circumstances are:
Single thing - every portion of the property pledged or
mortgaged is answerable for the whole obligation as
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condition.

(14) Any kinds of obligations can be secured by pledge or

soon as it falls due
Several things - when several things are pledged or
mortgaged to secure the same debt in its entirety, all of
them are liable for the totality of the debt and the
creditor does not have to divide his action by
distributing the debt among the various things pledged
or mortgaged. Even when only a part of the debt
remains unpaid, all the things are liable for such
balance.
Debtors heir/creditors heir - the debtors heir who has
paid a part of the debt cannot ask for the proportionate
mortgage. The same applies in a guaranty which may also
secure a conditional obligation. Pledge agreements may
stipulate that the pledge will also stand as security for any
future advancements or renewals thereof.
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
encumbered, things which he knew were subject to some burden,
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or by misrepresenting himself to be the owner of the same.

extinction of the pledge or mortgage (Art. 2089, par. 2)
nor can the creditors heir who has received his share of
the debt return the pledge or cancel the mortgage if the
debt is not completely satisfied (Art. 2089, par. 3).
(11) Exceptions to the rule of indivisibility
(15) Promise to constitute pledge or mortgage creates no real
right. It gives rise only to a personal right binding upon the
parties and creates no real right in the property. What exists
is only a right of action to compel the fulfillment of the
promise but there is no pledge or mortgage yet.

1. Where each one of several things guarantees (16) Criminal responsibility of pledgor - estafa. It is essential
determinate portion of debt. (Actually, it is not strictly an that fraud or deceit be practiced upon the vendee at the time
of the sale.
exception because in such a case, there would be as
many pledges or mortgages as there are things given in !
pledge or mortgage)
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2. Where only portion of loan was released. In case of
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default by the borrower, the mortgage can only be
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foreclosed to the extent of the loan. (Example, if only
50,000 out of 100,000 loan was released, only 50% of, !
say, a 10 hectare piece of land, which was mortgaged
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3.
to secure such loan, may be foreclosed).
Where there was failure of consideration. As where the !!
mortgagee bank took over the management of the
borrowing corporation as one of the conditions granting
the loan, and said corporation was led to bankruptcy
thru mismanagement, thereby defeating the very
purpose of the loan, for it is as if the loan was never
delivered.
4. Where there is no debtor-creditor relationship. From the
wordings of the law, indivisibility arises only when there
is a debt. A third person who did not take part in the
constitution of the principal obligation is not bound by
the indivisibility.
(12) Foreclosure of mortgage constituted on several
properties. The rule that real property consisting of several
lots, should be sold separately, applies to sales in execution
and not to foreclosure of mortgages. A mortgage, even if
constituted on two or more properties, is one and indivisible
and the mortgagee has the right to have the properties either
or both, jointly or singly, sold to satisfy his claim.
(13) Where real mortgage and chattel mortgage is one
instrument. The mere embodiment of a real estate mortgage
and a chattel mortgage in one document does not have the

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PLEDGE
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(1) Pledge is a contract by virtue of which the debtor delivers to
the creditor or to a third person a movable (Art. 2094) or
document evidencing incorporeal rights (Art. 2095) for the
purpose of securing the fulfillment of a principal obligation
with the understanding that when the obligation is fulfilled,
the thing delivered shall be returned with all its fruits and
accessions.
Parties to a Pledge
1. Pledgor - the owner of the personal property who delivers
it to another (creditor or third person agreed upon) to
secure the loan acquired by him or of another.
2. Pledgee - the creditor; the one who receives the property
pledged aside from a third person who is designated by
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Kinds of Pledge
the parties by common agreement.
1. Voluntary or conventional - one which is created by
agreement of the parties.
! 2. Legal - one created by operation of law (see Art. 2121)
Characteristics of Pledge:
1. Real - perfected by the delivery of the thing pledged by
the debtor who is called the pledgor to the creditor who is
called the pledgee, or to a third person by common
agreement.
2. Accessory - it has no independent existence of its own.
3. Unilateral - it creates an obligation solely on the part of
the creditor to return the thing subject thereof upon the
fulfillment of the principal obligation.
4. Subsidiary - the obligation incurred does not arise until
the fulfillment of the principal obligation which is secured.
(2) Cause or consideration in pledge. The cause in pledge,
insofar as the pledgor is concerned, is the principal
obligation, since pledge is an accessory contract. But if the
pledgor is not the debtor (Art. 2085, part. 2), the cause is the
compensation stipulated for the pledge or the mere liberality
of the pledgor.
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
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third person by common agreement.
(3) Necessity of delivery. The thing pledged must be delivered
to the creditor or to a third person by common agreement.
Without delivery, there can be no pledge because, precisely,
in this delivery lies the security of pledge. (This is in contrast
with mortgage where as a general rule, the debtor retains the
possession of the property given as security). A pledge, after
all, is a real contract.
(4) Types of delivery depends upon nature of thing pledged.
1. Actual delivery - the delivery of possession referred to in
Art. 2093 as essential to the validity of a pledge means
actual possession of the property pledged and a mere
symbolic delivery is not sufficient.
2. Constructive delivery - it has been held, however, that
the symbolical transfer of goods was sufficient to
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constitute a pledge, such as delivery of the keys to a
warehouse where the goods stored was pledged.
Whether or not a symbolic or constructive delivery is
sufficient to validate a pledge would depend on the
peculiar nature of the thing pledged.
Art. 2094. All movables which are within commerce may be
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pledged, provided they are susceptible of possession.
Art. 2095. Incorporeal rights, evidenced by negotiable instruments,
bills of lading, shares of stock, bonds, warehouse receipts and
similar documents may also be pledged. The instrument proving
the right pledged shall be delivered to the creditor, and if
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negotiable, must be indorsed.
Subject matter of Pledge
1. Personal property, except those which are outside the
2.
commerce of men and those not susceptible of
possession.
Incorporeal rights evidenced by documents whether
negotiable or not may also be pledged. The document
must be delivered to the creditor; if negotiable, it must be
! indorsed in favor of the creditor.
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
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appear in a public instrument.
Formalities required in Pledge
(5) Public instrument necessary to bind third persons. Even
if all the essential requisites are present the contract of
pledge is not effective against third persons unless in
addition to delivery of the thing pledged, it is embodied in a
public instrument which must contain:
a. Description of the thing pledged
b. Date of the pledge
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
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transferee as soon as the pledgee consents to the alienation.
(6) Alienation by the pledgor of thing pledged. The pledgor
retains his ownership of the thing pledged, but he may sell
the same provided that the pledgee consents to the sale.
As soon as the pledgee gives his consent, the ownership of
the thing pledged is transferred to the vendee subject to the
rights of the pledgee:
a. That the pledged object sold may be alienated to satisfy
the obligation
b. That the pledgee must continue in possession during
the existence of the pledge
Rights & Obligations of the Pledgor and
the Pledgee
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
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whom it has been delivered, until the debt is paid.
(7) Right of the pledgee to retain the thing pledged. The
possession of the pledgee constitutes his security, hence the
debtor cannot demand for its return until the debt secured by
it is paid.
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Illustration: Lawrence owes Mike P5,000. As security,
Lawrence pledged his expensive leather shoes. Later,
Lawrence again borrowed P2,000. Mike has a right to
retain the shoes until the P5,000 is paid but he cannot
retain the shoes until the P2,000 is paid. Mikes right of
retention is limited to the payment of the original loan
for which the shoes was given for in pledge.
If the creditor wants the original pledge to apply also to
the new loan, he should so demand at the time the
latter obligation is entered into. It cannot be fairly
presumed that the debtor consented to the new pledge.
Art. 2099. The creditor shall take care of the thing pledged with the
diligence of a good father of a family; he has the 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.
(8) Obligation of the pledgee to take due care of the thing
pledged. The pledge has the obligation to take care of the
thing with the diligence of a good father of a family.
The pledgee is entitled to reimbursement of the
expenses incurred for the preservation of the object.
In case of loss or deterioration of the thing pledged due
to fortuitous event, the pledgee cannot be held
responsible.
The pledgee is liable for loss or deterioration by reason
of fraud, negligence, delay or violation of the terms of
the contract.
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.
(9) Obligation of the pledgee not to deposit thing pledged
with another. While the pledge is entitled to retain the
possession of the thing pledged until the debt is paid, he is
not authorized to transfer the possession to a third person.
Exception: When there is a stipulation authorizing the
pledgee to do so.
The pledgee is responsible for the acts of his agents
or employees with respect to the thing pledged.
Art. 2101. The pledgor has the responsibility as a bailor in
!
commodatum in the same case under Art. 1951.
(10) Obligation of the pledgor to advise the pledgee of hidden
defects. Art. 1951 refers to the liability of the bailor to pay
damages for known hidden flaws.
The requisites for the pledgee not to be liable for loss or
damage due to hidden defects, and instead the pledgor
would be are:
1. There is a flaw or defect in the thing pledged
2. The flaw or defect is hidden
3. The pledgor is aware thereof
4. He does not advise the pledgee of the same
5. The pledgee suffers damage by reason of said flaw or
defect.
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
SERVE THE PEOPLE!
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 the animals pledged, but shall be subject to
!
the pledge, if there is no stipulation to the contrary.
(11) Right of the pledgee to compensate earnings of pledge
with debt. Pledgee has no right to use the thing pledged or
to appropriate the fruits thereof without the authority of the
owner (Art. 2104). But the pledgee can apply the fruits,
income, dividends, or interests earned or produced by the
thing pledged to the payment of interest, if owing, and
thereafter to the principal of his credit.
Unless there is a stipulation to the contrary, the interest and
earnings of the right pledged and in case of animals, their
offsprings, are included in the pledge.
Illustration: Joanna borrowed from Victor P100,000 at
12% interest, with certificate of stock as security. The
interest is payable six months after the execution of the
contract. If the stocks earn dividends, the same shall
also be subject to the pledge if there is no stipulation to
the contrary. Victor shall apply such dividends to the
interest, if any, owing him after six months. If none is
owing him or insofar as the dividends may exceed the
interests due, Victor shall credit it to the principal of
P100,000 when it matures.
Art. 2103. Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof. Nevertheless, the creditor may
bring actions which pertain to the owner of the thing pledged in
!
order to recover it from, or defend it against a third person.
(12) Right of the pledgee against third persons. The pledgee/
creditor is authorized to bring such actions as pertaining to
the owner in order to recover or defend the thing pledged
from third persons.
The right of the pledgee is a real right enforceable
against third persons but it is necessary that the
contract of pledge be embodied in a public instrument
which shall contain a description of the thing pledged
and the date of the pledge (Art. 2096)
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.
(13) Obligation of the pledgee not to use the thing pledged.
The pledgee who is in possession of the thing pledged has
no right to make use of it without permission from the owner.
Exception: If however, the thing pledged, is of such character
that use is necessary in properly caring for it, then it
becomes his duty to use it so that I will not suffer from its
disuse.
(14) Right of the pledgor to ask that the thing pledged be
deposited (judicially or extrajudicially). The owner may ask
that the thing pledged be deposited judicially or
extrajudicially in the following circumstances:
1. If the creditor uses the thing without authority
2. If the creditor misuses the thing in any other way
3. If the thing is in danger of being lost or impaired
because of the negligence or the willful act of the
pledgee (Art. 2106)
!
! Art. 2109. If the creditor is deceived on the substance or quality of
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.
(15) Right of the pledgor to demand return of the thing
pledged. The pledgor can only demand the return of the
thing pledged when he has paid the debt and its interests,
with expenses in a proper case. Until then, he has no right to
do so.
Prescription will not begin to run on the action to
demand the return of the thing pledged while the
obligation subsists. Neither will the possession of the
pledgee ripen into ownership by prescription because
such possession is not in the concept of an owner.
Exception: Pledgor is allowed to substitute the thing
pledged which is in danger of destruction or impairment
with another thing of the same kind or value. (Art. 2107)
Art. 2106. If through the negligence or willful act of the pledgee, the
thing pledged is in danger of being lost or impaired, the pledgor
!
may require that it be deposited with a third person.
! See notes on Art. 2104
Art. 2107. If there be 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 in pledge, 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 provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of
!
any danger to the thing pledged.
(16) Right of the pledgor to substitute the thing pledged. Two
remedies are actually granted by Art. 2107: (1) to the pledgor,
the right to demand the return of the thing pledged; and (2)
to the pledgee, the right to cause the same to be sold at a
public sale (Art. 2108).
The following are the requisites for the application of Art.
2107:
1. The pledgor has reasonable grounds to fear the
destruction or impairment of the thing pledged
2. There is no fault on the part of the pledgee
3. The pledgor is offering in place of the thing, another
thing in pledge which is of the same kind and quality as
the former
4. The pledgee does not choose to exercise his right to
cause the thing pledged to be sold at public auction.
The pledgee, then, has the first right.
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.
(17) Right of the pledgee to cause sale of the thing pledged.
The pledgees right to have the thing pledged sold at public
sale granted under Art. 2108 is superior to that given to the
pledgor to substitute the thing pledged under Art. 2107. The
sale must be a public sale an the pledgee shall keep the
proceeds of the sale as security for the fulfillment of the
principal obligation.
SERVE THE PEOPLE!
the thing pledged, he may either claim another thing in its stead, r
!
demand immediate payment of the principal obligation.
(18) Right of the pledgee to demand substitute or immediate
payment. If the pledgee is deceived on the substance or
quality of the thing pledged, he has two remedies:
1. To claim another thing in pledge
2. To demand immediate payment of the principal
obligation
The remedies are alternative, that is, he is privileged to
choose only one and not both.
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 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 pledge.
(19) Extinguishment of the pledge by the return of the thing.
Pledge is extinguished if the object is returned by the
pledgee, and this is true notwithstanding any stipulation that
the pledge would continue although the pledgee is no longer
in possession.
(20) Presumption of extinguishment of pledge. The possession
by the debtor or owner of the thing pledged subsequent to
the perfection of the pledge gives rise to a prima facie
presumption that the thing has been returned and, therefore,
that the pledge has been extinguished.
This presumption may be rebutted by evidence to the
contrary (example, if the return was merely for the
substitution of the thing pledged, or that the thing was
stolen and given by the thief to the pledgor or owner).
There is jurisprudence supporting the proposition that
the pledgee can temporarily entrust the physical
possession to the pledgor (example, vessels) without
invalidating the pledge. In such case, the pledgor is
merely regarded as holding the pledged property merely
as trustee for the pledge.
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.
(21) Extinguishment of the pledge by renunciation or
abandonment. The pledge is a personal right of the pledgee
which may be waived. The waiver transforms the pledge into
a depositary with the rights and obligations of one. The
principal debt, however, is not affected by the waiver of the
pledge.
But, the waiver of the principal obligation carries with it
the pledge.
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 shall be made at public auction and with the
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.
(22) Right of the pledgee to cause the sale of the thing
pledged. One of the essential requisites of pledge is that the
object pledged may be alienated for the payment to the
creditor when the principal obligation becomes due (Art.
2087).
The formalities required for such sale are the following:
1. The debt is due and unpaid
2. The sale must be at a public auction
3. There must be notice to the pledgor and owner, stating
the amount due; and
4. The sale must be made with the intervention of a notary
public.
The sale is actually extrajudicial in character without
intervention by the courts.
(23) Right of the pledgee to appropriate the thing pledged.
This is not actually pactum commissorium because the
appropriation is not automatic. The creditor has to go
through the process of holding a public sale, and upon the
failure of two sales, he may appropriate the thing. If the
creditor appropriates the thing, it shall be considered as full
payment for his entire claim. He is thus obliged to give an
acquittance for the same.
The debtor is not entitled to the excess in case the
value of the thing pledged is more than the principal
obligation.
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.
(24) Right of the pledgor and the pledgee to bid at public
sale. If the debt is not paid and a public sale takes place,
both the pledgor and the pledgee may bid.
The pledgor shall be preferred if he offers the same
terms as the highest bidder
To avoid fraud, the pledgee is not allowed to acquire the
thing pledged if he is the only bidder
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 received the purchase price, as far as the pledgor
!
or owner is concerned.
Bid must be for cash.
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.
(25) Effect of the sale of the thing pledged. The sale of the
thing pledged extinguishes the principal obligation whether
the price of the sale is more or less than the amount due.
If the price of the sale is more than the amount due the
creditor, the debtor is not entitled to the excess unless
the contrary is provided.
SERVE THE PEOPLE!
In the same way, if the price of the sale is less, neither is
the creditor entitled to recover the deficiency. A contrary
stipulation is void.
Art. 2116. After the public auction, the pledgee shall promptly
!
advise the pledgor owner of the result thereof.
(26) Obligation of the pledgee to advise the pledgor or owner
of the result of the sale. The purpose is to enable the
pledgor or owner to take steps for the protection of his rights
where he has reasonable grounds to believe that the sale
was not an honest one.
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.
(27) Right of third person to satisfy the obligation. As a
general rule, the creditor is not bound to accept payment or
performance by a third person who has no interest in the
fulfillment of the obligation. Under this article, a third person
who has any right in or to the thing pledged (as when the
pledgor has contracted to sell it to him) may pay the debt as
soon as it becomes due and demandable and the creditor
cannot refuse to accept payment.
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 hi claim, and deliver
!
the surplus, should there be any, to the pledgor.
(28) Right of pledgee to collect and receive amount due on
credit pledged. Remember, incorporeal rights such as
credits due, may be pledged. The pledgee has the right to
collect and receive the amount due if credit is pledged to
him. It is only a right, but it is also his obligation in Art. 2099
to collect such amounts due id such delay would endanger
the recovery of the amounts.
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 things as
!
are necessary for the payment of the debt.
(29) Right of pledgee to choose which of several things
pledged shall be sold. The right of choice given to the
pledgee as to which of the things pledged he shall cause o
be sold is limited only by stipulation. After sufficient property
has been sold to satisfy the obligation plus interests and
expenses, no more shall be sold.
Art. 2120. If a third person secures an obligation by pledging his
own movable property under the provisions of Article 2085 he shall
have the same rights as guarantor under Articles 2066 to 2070, and
Articles 2077 to 2081. He is not prejudiced by any waiver of
!
defence by the principal obligor.
(30) A third person who pledges his own movable property for the
obligation of a debtor is in effect like a guarantor. The law
grants him the same rights as a guarantor.
Illustration: Mike pledged his car as security for
Joannas debt due on April. By March, Mike paid
Joannas debt (to get his car back) without notifying
Joanna. Mike can claim reimbursement for the total
amount of the debt from Joanna but not until the debt
! was due on April (Art. 2069)
!
Pledge by Operation of Law Summary
! Question: What are the rights and obligations of the
pledgee?
Art. 2121. Pledges created by operation of law, such as those
referred to in Articles 546, 1731, and 1994, are governed by the Answer: An accommodation mortgagor is not solidarily
foregoing articles on the possession, care and sale of the thing as bound with the principal debtor.
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 Question: What are the rights and obligations of the

!
be delivered to the obligor.
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
pledgor?
Answer: An accommodation mortgagor is not solidarily
bound with the principal debtor.
Question: In sum, how is pledge extinguished?
Answer: Pledge is extinguished through the following:

!
the return of the thing
(31) Legal Pledges. Pledge by operation of law or Legal Pledges
are those constituted or created by operation of law. This
refers to the right of retention.
(32) Instances of pledge by operation of law:
1. Art. 546 Right of the possessor in good faith to retain
the thing until refunded of necessary expenses.
1.
2.
3.
If the object of the pledge is returned by the pledgee
Payment of the principal debt (Art. 2105)
Renunciation or abandonment of the pledge (Art. 2111)
4. Sale of the thing pledged at public auction (Art. 2115)
5. Extinguishment of the principal obligation through
prescription, loss of the thing, merger, compensation,
novation, etc. (Art. 1231, on extinguishment of
! obligations)

2. Art. 1707 Lien on the goods manufactured or work

done by a laborer until his wages had been paid.
3. Art. 1731 Right to retain of a worker who executed
work upon a movable until he is paid.
4. Art. 1914 Right of an agent to retain the thing subject
of the agency until reimbursed of his advances and
damages (Arts. 1912 and 1913).
5. Art. 1994 Right of retention of a depositary until full
payment of what is due him by reason of the deposit.
6. Art. 2004 Right of the hotelkeeper to retain things of
the guest which are brought into the hotel, until his hotel
bills had been paid.
(33) Rules in cases of pledge by operation of law:
The rules governing conventional pledge applies.
There is no definite period for the payment of the
principal obligation. The pledge must, therefore, make a
demand for the payment of the amount due him.
Without such demand, he cannot exercise the right of
sale at public auction.
The pledgee must proceed with the sale within one
month after demand, otherwise, the debtor may require

! him to return the thing retained.

Rules as to pawnshops and other

establishments
!
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.

P.D. 114 regulates the establishment and operation of

! pawnshops

SERVE THE PEOPLE!

!
REAL MORTGAGE be stipulated without affecting the character of the mortgage

!
(1) Real mortgage (Real estate mortgage) is a contract whereby
contract.
If it is expressly agreed that the mortgagee-creditor
shall apply the fruits of the property, to the payment of
the debtor secures to the creditor the fulfillment of a principal interest, if owing, and thereafter to the principal of his
obligation, specially subjecting to such security immovable credit, the contract is an antichresis.
property or real rights over immovable property which
(4) Cause or Consideration in mortgage. Since mortgage is an
obligation shall be satisfied with the proceeds of the sale of
accessory contract, its consideration is that of the principal
said property or rights in case the said obligation is not
contract from which it receives its life, without which it
complied with at the time stipulated.
cannot exist as an independent contract.
Parties to a Real Mortgage
(5) Future property cannot be the object of mortgage. A
1. Mortgagor stipulation whereby the mortgagor constitutes a mortgage on

! 2. Mortgagee

Characteristics of Real Mortgage:

those properties he might acquire in the future is not a valid
mortgage, because one cannot legally mortgage any
property he did not yet own.
1. Real However, a stipulation subjecting the mortgage lien,
2. Accessory properties (improvements) which the mortgagor may
3. Subsidiary subsequently acquire, install, or use in connection with
4. Unilateral because it creates only an obligation on the real property already mortgaged belonging to the
part of the creditor who must free the property from the mortgagor is valid.

! encumbrance once the obligation is fulfilled.

Kinds of Real Mortgage

1. Voluntary - one which is agreed to between the parties or
constituted by the will of the owner of the property on
which it is created.
2. Legal - one required by law to be executed in favor of
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

3.
certain persons.
Equitable - one which, although it lacks the proper !
of the document in which the mortgage is formalized.

formalities of a mortgage, shows the intention of the Question: Again, what are the essential requirements of a

! parties to make the property as security for the debt. mortgage based on Art. 2085?
1. Constituted to secure the fulfillment of a valid
Art. 2124. Only the following property may be the object of a principal obligation.
contract of mortgage: 2. Mortgagor be the absolute owner of the thing pledged
(1) Immovables; or mortgaged.
(2) Alienable real rights in accordance with the laws, imposed

!
upon immovables.

Nevertheless, movables may be the object of a chattel

3. They must have the free disposal of their property, and
in the absence thereof, that they be legally authorized
for the purpose.

!
mortgage. 4.

5.
The debtor retains the ownership of the thing given as
security
When the principal obligation becomes due and no
Subject Matter of Real Mortgage:
payment is made by the debtor, the things in which the
1. Immovables pledge or mortgage consists may be alienated for the

! 2. Alienable real rights over immovables

Laws that govern real estate mortgage:

(6)
payment.
Mortgage must appear in a public instrument duly
recorded in the Registry of Property. In addition to the
1. Act 3135 (Extra-Judicial Foreclosure) requisites stated above, it is indispensable in order that a
2. Rule 68, Rules of Court mortgage may be validly constituted that it appears in a
3. Sec. 47, General Banking Law (where mortgagee/bidder public document duly recorded in the Registry of Property.

!
(2)
is a bank)

Possession remains with the mortgagor. In a contract of

mortgage, the mortgagor-debtor, as a general rule, retains
possession of the property mortgaged as security for the
payment of the sum borrowed from the mortgagee-creditor.
The mortgagor-debtor merely subjects the property to a
lien but ownership thereof is not parted with
Ones status as a mortgagee cannot be the basis of
possession.
(3) Payment of interest on mortgage credit. It is also not an
essential requisite of the contract of mortgage that the
principal of the mortgage credit bears interest. Interest may
When the mortgage is in a private document, the
creditor has the right to compel the debtor to execute a
contract of mortgage in a public instrument. No valid
mortgage is constituted where the alleged deed of
mortgage is a mere private document and not
registered.
When mortgage is not recorded in the Registry of
Property, the mortgage is nevertheless binding between
the parties. In other words, registration only operates as
notice of the mortgage to others. Thus, an order for
foreclosure cannot be refused on the ground that the
mortgage is not registered provided no innocent third
parties are involved.

SERVE THE PEOPLE!

!
The mortgagee is entitled to the registration of the
mortgage as a matter of right.
The registration is not a declaration by the state that
such an instrument is valid and subsisting interest in
land. It is merely a declaration that the record of the title
appears to be burdened with the mortgage inscribed.
A registered mortgage over property previously sold is
inferior to the buyers unregistered right. The
unrecorded sale is preferred since if the original owner
had already parted with his ownership he can no longer
mortgage it.
Question: What is the doctrine of mortgagee in good
faith?
Answer: (Remember our lessons in Land Titles and Deeds)
A mortgagee has a right to rely in good faith on the
certificate of title of the mortgagor and has no obligation to
undertake further investigation. Hence, even if the mortgagor
is not the rightful owner of the property, but the Torrens title
on its face and without any indication of cloud, appears to be
the real owner with a clean title, the mortgagee in good faith
is protected.
Exception: When there is something in the certificate of title
to indicate any cloud or vice in the ownership of the property,
such as when the mortgagee is aware of sufficient facts to
induce a reasonably prudent man to inquire into the status of
a property. Greater care and diligence is required when the
mortgagee is a bank.
Question: What are the effects of the invalidity of a
mortgage, on the principal obligation?
1. The principal obligation remains valid. What is only lost
is the right to foreclose the mortgage as a special
remedy to satisfy the indebtedness.
2. The mortgage deed remains as evidence of the
! principal obligation.
Effect of Mortgage
Art. 2126. The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose security it was
!
constituted.
(7) Mortgage creates a real right. It creates a right in rem, a
real right, a lien inseparable from the property mortgaged,
which is enforceable against the whole world. Until
discharged upon payment of the principal obligation, it
follows the property wherever it goes and subsists
notwithstanding changes of ownership.
Thus, if the mortgagor sells the mortgaged property, the
property remains subject to the fulfillment of the
obligation secured by it. All subsequent purchases of
the property must respect the mortgage, whether the
transfer to them be with or without the consent of the
mortgagee. BUT, the mortgage must be registered or, if
not registered, the buyer must know of its existence
(because actual knowledge of defect of title is
equivalent to notice of registration).
The right or lien of a innocent mortgagee for value upon
the mortgaged property must be respected and
protected, even if the mortgagor obtained his title
through fraud (remember the mortgagee in good faith
doctrine!) The remedy of the persons prejudiced is to
SERVE THE PEOPLE!
bring an action for damages against the person who
caused the fraud and if the latter is insolvent, an action
against the Treasurer of the Philippines may be filed for
the recovery of damages against the Assurance Fund.
Illustration: Karla mortgaged her house to Victory Bank,
this mortgage was registered. After that, Eilleen bought
Karlas house and the sale was recorded in the Register
of Deeds. For failure of Karla to pay the mortgage debt,
Victory Bank foreclosed Karlas house and the land was
sold to Lawrence as the highest bidder. Lawrence
opposed the application for registration filed by Eilleen.
In whose name should the land be registered, Lawrence
or Eilleen?
It should be registered in the name of Lawrence, but
subject to Eilleens equitable right of redemption which
right should be exercised within 3 months (see Rule 68
of the Rules of Court) from the date the decision
becomes final. Eileens equity of redemption is
registrable but only as an encumbrance on a registered
title of ownership. Eilleen does not become the owner
of the land until she has exercised the right to redeem.
(8) Mortgage creates merely an encumbrance. A mortgage is
merely a security for a debt, an encumbrance upon the
property and does not extinguish the title of the debtor who
does not lose his principal attribute as owner, that is, the
right to dispose.
A mortgage does not involve a transfer, cession or
conveyance of property but only constitutes a lien
thereon.
The only right of the mortgagee in case of non-payment
of the debt secured would be to foreclose the mortgage
and have the encumbered property sold to satisfy the
outstanding indebtedness.
Mortgagors default does not operate to vest in the
mortgagee the ownership of the encumbered property.
That is a pactum commissorium and is prohibited.
(9) Subsequent mortgage over the same property during the
redemption period is valid. Since the mortgagor remains
the absolute owner of the property during the redemption
period and has the free disposal of his property, there would
be compliance with Art. 2085 for the constitution of another
mortgage on the property.
!
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.
(10) Extent of mortgage. The following are deemed included in a
mortgage of real property:
1. New plantings
2. Fruits, except those collected before the obligation falls
due, and those removed and stored when it falls due
3. Accrued and unpaid rents, as well as those which
should have to be paid while the credit remains wholly
unsatisfied
!
4. Buildings, machinery and accessories belonging to the
mortgaged land or building, although they may have
been placed there after the execution of the mortgage
5. All objects permanently attached to a mortgaged
property, although placed there after execution of
mortgage
6. A more costly building erected in place of the
mortgaged building which was torn down by the debtor.
(11) Stipulation in mortgage contract including after-acquired
properties. Such a stipulation is valid. The attachment of lien
on such new and future properties/improvements is
retroactive to the date of the recording and registration of the
deed of mortgage not to the time said improvements were
constructed.
(12) Dragnet clause It is also called a blanket mortgage
clause. It is a stipulated that the mortgage is to secure
future loans or advancements, the amount covered shall
extend to such future indebtedness. It is a clause which is
specifically phrased and stipulated in a mortgage contract to
subsume all debts of past or future origin. It operates as a
convenient accommodation to debtors as it makes them
borrow additional funds without having to execute additional
security documents.
When there is a dragnet clause, the mortgaged property
is considered as a continuing security and the mortgage
is not discharged by the repayment of the original
amount named in the mortgage, but by the payment of
! the full amount of all the advancements paid.
Rights of the Mortgagee
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.
(13) Alienation or assignment of mortgage credit. Mortgage
credit may be alienated or assigned to third persons by the
mortgagee who is the owner of the said right. Such
alienation or assignment is valid even if it is not registered. In
the event of non-payment, the assignee may foreclose the
mortgage.
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.
(14) Right of the mortgagee-creditor against the transferee of
mortgaged property. The fact that the mortgagor-debtor
has transferred the mortgaged property to a third person
does not relieve him from his obligation to pay the debt tot
he mortgagee-creditor in the absence of novation. The
mortgage on the property may still be foreclosed despite the
transfer.
The creditor may demand from any possessor the
payment only of the part of the credit secured by said
property. It is necessary, however, that prior demand for
payment must have been made on the debtor and the
latter failed to pay.
Illustration: Xtine mortgaged his land worth P500,000 in
favor of Victory Bank to secure her debt of P600,000.
Xtine then sold the land to Mike. In this case, the
obligation of Xtine to pay the debt is not affected by the
transfer. On the due date of the obligation, Victory Bank
may demand payment from Xtine and if Xtine fails to
SERVE THE PEOPLE!
pay, Victory Bank may foreclose the mortgage. Victory
Bank has the right to claim from Mike the payment of
P500,000 which is part of the credit secured by the
property sold to Mike. Mike is not liable for any
deficiency in the absence of a contrary stipulation. The
remedy of Mike is to proceed against Xtine.
Art. 2130. A stipulation forbidding the owner from alienating the
!
immovable mortgaged shall be void.
(15) Stipulation forbidding alienation of mortgaged property.
The mortgagor may sell the mortgaged property even
without the consent of the mortgagee. However, the buyer/
transferee of the property is bound to respect the
encumbrance because being a real right, the property
remains subject to the fulfillment of the obligation for whose
guaranty it was constituted.
(16) Stipulation granting right of first refusal. However, there
is nothing wrong in a stipulation granting the mortgagee the
right of first refusal over the mortgaged property in the even
the mortgagor decides to sell the same.
Thus, while the mortgagor has every right to sell the
mortgaged property without securing the consent of the
mortgagee, he has the obligation under a right of first refusal
stipulation (which is perfectly valid) to notify the mortgagee
of his intention to sell the property and give him priority over
other buyers. A sale made in violation of the mortgagees
contractual right of first refusal is rescissible. The buyer is
presumed to have been notified thereof by the registration of
the mortgage deed containing such stipulation, which
equates to notice to the whole world.
!
FORECLOSURE OF
MORTGAGE
!
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.
(17) Foreclosure is the remedy available to the mortgagee by
which he subjects the mortgaged property to the satisfaction
of the obligation to secure which the mortgage was given.
Foreclosure is only valid when the debtor is in default in
the payment of his obligation.
The right of foreclosure cannot be exercised by any
person other than the creditor-mortgagee or his
assigns.
Foreclosure must be limited to the amount mentioned in
the mortgage document (unless there is a dragnet
clause).
As a general rule, demand before foreclosure is
essential.
A mortgage contract may contain an acceleration
clause which is a stipulation stating that, on the
occasion of the mortgagors default in any installment
due, the whole sum remaining unpaid automatically
becomes due and payable. The failure of the mortgagor
to pay any installment will trigger the activation of the
acceleration clause and give the mortgagee the right to
!
foreclose the mortgage against the contention of
! prematurity.
Kinds of Foreclosure
1. Judicial
! 2. Extra-Judicial
JUDICIAL FORECLOSURE under Rule 68 of the Rules of Court
1. Judicial action for the purpose. A mortgage may be
foreclosed judicially by bringing an action for the purpose
in the court which has jurisdiction over the area where the
real property involved or a portion thereof is situated
2. Order to mortgagor to pay mortgage debt. If the court
finds the complaint to be well-founded, it shall order the
mortgagor to pay the amount due within a period not less
than 90 days nor more than 120 days from the entry of
judgment.
3. Sale to the highest bidder at public auction. Upon
failure to pay during the specified time, upon motion, the
court shall order the property to be sold to the highest
bidder at public auction.
4. Confirmation of the sale. Mortgagee shall file a motion
for the confirmation of the sale. When the sale is
confirmed by the order of the court, it shall operate to
divest the rights of all parties to the action and to vest
their rights in the purchaser, subject to the right of
redemption.
5. Application of proceeds of sale. The proceeds of the
sale shall be applied to the payment of the:
a. Costs of the sale
b. Amount due the mortgage
c. Claims of junior encumbrances or persons holding
subsequent mortgages in the order of their priority
d. The balance if any shall be paid to the mortgagor or
his duly authorized agent
6. Execution of the sheriffs certificate. The foreclosure is
(19) Nature of extra-judicial foreclosure proceedings
not complete until the sheriffs certificate is executed,
acknowledged and recorded. In the absence of a
certificate of sale, no title passes by the foreclosure
proceedings to the vendee.
(18) Nature of judicial foreclosure proceedings
1. It is an action quasi in rem. It is based on a personal
claim against a specific property of the defendant
2. It results from failure to pay indebtedness.
3. It survives the death of the mortgagor because the claim
(20) Stipulation of upset price in mortgage contract void.
is not pure money claim but an action to enforce a
! mortgage lien.
EXTRA-JUDICIAL FORECLOSURE under Act. No. 3135
(21) Effect of inadequacy of price in foreclosure sale. The
1. Express authority to sell given to mortgagee. Only
when the real estate mortgagee is given a special power
or express authority to do so in the deed itself or in a
document annexed thereto.
The authority to sell is not extinguished by the death of
the mortgagor (or mortgagee) as it is an essential and
inseparable part of a bilateral agreement.
2. Publication of notice of auction sale. Publication is
required to give the foreclosure sale a reasonable wide
publicity such that those interested might attend the
public sale.
SERVE THE PEOPLE!
Publication is mandatory, failure to comply with the
statutory requirements as to publication of notice of
auction sale constitutes a jurisdictional defect which
invalidates the sale.
The object of the notice is to inform the public of the
nature and condition of the property sold, and of the
time, place and terms of the sale. Unless required in
the mortgage contract, the lack of personal notice to
the mortgagor is not a ground to set aside a
foreclosure sale.
Notice of sale in at least 3 public places at the
municipality/city where the property is situated and
publication in a newspaper of general circulation
3. Foreclosure sale
Payment of cash by the highest bidder. Where the highest
bidder is the mortgagee and the amount of his bid
represented the total mortgage debt, it is not necessary
for him to pay cash. In case of surplus in the purchase
price, the mortgagee must account for the proceeds as if
the price were paid in cash.
Surplus proceeds from foreclosure sale. They are
constructively, at least, real property and belong to the
mortgagor or his assigns. Surplus money, in case of
foreclosure sale, gains much significance when there are
junior encumbrances on the mortgaged property. When
there are several liens upon the property, the surplus
money must be applied to their discharge in the order of
their priority.
A senior mortgagee who realized more than the amount of
his credit on a foreclosure sale is regarded as a trustee for
the benefit of the mortgagor and junior encumbrancers.
4. Redemption. The debtor has the right to redeem the
property sold within the term of one year from and after
the date of the sale. The reckoning date in case of
registered land is from the registration of the certificate of
sale.
1. Primarily an authority conferred upon the mortgagee for
his own protection.
2. It is an ancillary stipulation supported by the same
cause or consideration for the mortgage and forms an
essential and inseparable part of the bilateral
agreement.
3. The power to foreclose is the prerogative of the
mortgagee.
Fixing an upset price (the minimum price at which the
property shall be sold) in the event of foreclosure sale at
public auction is null and void.
general rule is that inadequacy of price is not material
because the judgment debtor may reacquire the property or
sell his right to redeem and thus recover any loss he claims
to have suffered by reason of the price obtained at the
auction sale.
Exception: The sale shall be set aside if the price is so
inadequate as to shock the conscience of the court
considering the peculiar circumstances attendant thereto.
The property may be sold at less than its fair marker
value upon the theory that the lesser the price the easier
it is for the owner to effect redemption.
!
(22) Waiver of security by mortgagee. The mortgagee may
institute either: (a) a personal action for debt or; (b) a real
action to foreclose the mortgage. These two remedies are
alternative not cumulative. The creditor may waive the right
to foreclose his mortgage and maintain instead a personal
action for recovery of the indebtedness.
In either case, the creditor is entitled to obtain a
deficiency judgment for whatever sum might be due
after the liquidation of the property covered by the
mortgage.
Question: What are the options of the mortgagee in case
of death of the debtor?
Answer: The secured creditor holding a real estate mortgage
has 3 distinct, independent and mutually exclusive remedies
that can be alternatively pursued by him for the satisfaction
of his credit in case the mortgagor dies:
1. Waive the mortgage and claim the entire debt from the
estate of the mortgagor as an ordinary claim
2. Foreclose the mortgage judicially and prove any
deficiency as an ordinary claim
3. Rely on the mortgage exclusively, foreclosing the same
at any time before it is barred by prescription, without
! right to file a claim for any deficiency
Redemption in Real Mortgage
!
(23) Redemption may be defined as a transaction by which the
mortgagor reacquires or buys back the property which may
have passed under the mortgage or divests the property of
the lien which the mortgage may have created.
Kinds of Redemption
1. Equity of redemption - the right of the mortgagor in case
of judicial foreclosure to redeem the property after his
default but before the confirmation of the sale of the
mortgaged property.
2. Right of redemption - the right of the mortgagor in case
of extrajudicial foreclosure to redeem the property within a
!
certain period after the sale.
EQUITY OF REDEMPTION
(24) Equity of redemption. It is simply the right of the defendant
mortgagor to extinguish the mortgage and retain ownership
of the property by paying the secured debt within the 90-day
period after the judgment becomes final in accordance with
Rule 98.
The date of reckoning of the 90-day period is from the
date of the service of such order. The order referred to
is the order requiring the debtor to pay the judgment
within 90 days.
The period is a substantive right granted to the
mortgagor as the last opportunity to pay the debt and
save his property from final disposition at foreclosure
sale. Thus, an order for the sale of the mortgaged
property within the 90-day period would be a denial of a
substantive right and void.
(25) Confirmation of court of auction sale. It is the confirmation
of the court that cuts off all the rights or interests of the
mortgagor and of the mortgagee, and with them the equity of
redemption in the property and vests them in the purchaser.
SERVE THE PEOPLE!
Confirmation retroacts to the date of sale.
! It is a final order, not interlocutory.
RIGHT OF REDEMPTION
(26) Right of redemption. In all cases of extrajudicial sale, the
individual mortgagor may redeem the property at any time
within the term of one year from and after the date of the sale
(the date of registration of the certificate of sale with the
appropriate Registry of Deeds).
The amendment by the General Banking Law of 2000
barred the juridical mortgagors (like partnerships and
corporations) from the right of redemption of mortgaged
property sold in an extrajudicial foreclosure, after the
registration of the certificate of foreclosure with the
Register of Deeds. Before, they have the one year to
redeem, now, they just have 3 months to begin from the
date of the foreclosure sale but not after the registration
of the certificate of foreclosure sale whichever comes
first.
If no redemption is made during the prescribed period,
the purchaser has the absolute right to a writ of
possession. His inchoate title over the property is
consolidated. Hence, the mortgagor loses his right over
the property.
(27) Effect of exercise of right of redemption. What is actually
effected where redemption is seasonably exercised by the
judgment or mortgage debtor is not the recovery of the
property sold at foreclosure because ownership was not yet
lost.
The redemption by the debtor simply eliminates but from his
title the lien created by the levy or attachment or judgment or
registration of the mortgage thereon. The redemption defeats
the inchoate right of the purchaser and restores the property
to the same condition as if no sale had been made. It does
not give to the mortgagor a new title, but merely restores him
the title freed of the encumbrance of the lien foreclosed.
When the mortgagor sells the property to a third person
during the redemption period, what is transferred is only
the right to redeem and the right to possess, use and
enjoy the property during the said period.
The right of redemption, as long as the exercise of
which is within the period prescribed, may be exercised
irrespective of whether or not the mortgagee has
subsequently conveyed the property to some other
party. (That other party has to run after the bank, as its
remedy).
Redemption is optional and not compulsory, it is entirely
upon the will and discretion of the redemptioner.
(28) Requisites of valid redemption
1. The redemption must be made within one (1) year
form the date of the registration of the certificate of
sale, not form the date of the foreclosure sale.
2. Payment of the purchase price of the property plus
1% interest per month together with the taxes thereon,
if any paid by the purchaser and the amount of his prior
lien, if any, with the same rate of interest computed form
the date of registration of the sale, up to the time of
redemption.
3. Written notice of redemption must be served on the
officer who made the sale and a duplicate filed with the
proper Registry of Deeds.
!
4. The mortgagor or his assignee is required to tender Answer: A mortgagee in possession is one who has lawfully
payment within the prescribed period to make the acquired actual or constructive possession of the property
redemption valid, or to preserve the right of redemption mortgaged to him, standing upon his rights as mortgagee
for future enforcement beyond such period of and not claiming another title. He holds such property as an
redemption. antichresis creditor.
Question: What if the right of redemption is exercised Question: What is the vendee/purchasers right of
after the statutory period, and the buyer at the possession of the property sold to him at foreclosure
foreclosure sale did not object and allowed it? sale?
Answer: Redemption is valid even after the lapse of the Answer: Before the expiration of the date of redemption, the
statutory period if the buyer at the foreclosure sale does not right to possession is contingent upon the failure of the
object but even consents to the redemption. Such amounts mortgagor to redeem. After the redemption period is
to waiver of the statutory period of redemption. terminated, the right to redeem is barred and the vendee-
purchasers right of possession becomes final. Upon failure
(29) Payment of redemption money.
to redeem, consolidation of title becomes a matter of right on
Two whom it may be made: the part of the auction buyer, and the issuance of a
a. to the purchaser at the auction sale certificate of title in favor of the purchaser becomes
b. for such purchaser to the officer who made the ministerial upon the Register of Deeds.
sale
(32) Right of purchaser to writ of possession. A writ of
c. to the sheriff
possession is generally understood to be an order by a court
Amount payable: whereby the sheriff is commanded to place in possession of
d. Purchase price at the auction sale real or personal property the person entitled thereto such as
e. 1% interest per month from the date of the when a property is extrajudicially foreclosed.
registration of the certificate of sale up to the time
of redemption Before the lapse of the redemption period. Purchaser
acquires right to take possession of the foreclosed
f. Necessary expenses incurred by the purchaser (to
property upon filing of an ex parte application and
preserve the property during the period of
posting of a bond. It is ministerial upon the court to
redemption)
issue a writ of possession in favor of the purchaser in a
(30) Rights of persons with subordinate interests. A second or foreclosure sale provided no rights of third persons are
junior mortgagee acquires only the equity of redemption involved.
vested in the mortgagor, and his rights are strictly
subordinate to the superior lien of the first mortgagee. Thus , After the lapse of the redemption period. The purchaser
may either ask for a writ of possession without the
a second mortgagee has to wait until after the debtors
necessity of filing a bond or bring an appropriate
obligation to the first mortgagee has been fully settled.
independent action.
Aside from acquiring the right to repurchase, the
second mortgagee is entitled to the payment of his A mortgagee who has foreclosed the mortgaged
property and has purchased the same can be granted a
credit the excess of the proceeds of the auction sale,
writ of possession despite the fact that the premises are
after covering the mortgagors obligations to the first
in the possession of a lessee and whose lease has not
mortgagee. In case the credit of the first mortgagee has
yet been terminated. Exception: Unless the lease had
absorbed the entire proceeds of the sale, the second
been previously registered in the Registry of Property or
mortgage is extinguished with it because said mortgage
unless despite non-registration, the mortgagee had
cannot be enforced by the second mortgagee beyond
prior knowledge of the existence and duration of the
the total value of the mortgaged property.
lease.
(31) Persons entitled to exercise the right of redemption:
1. Mortgagor or one in privity of title with mortgagor
!
2. Mortgagors sucessor-in-interest. These include:
a. One to whom the judgment debtor has transferred
his right of redemption
b. One to whom the debtor has conveyed his interest
in the property for the purpose of redemption
c. One who succeeds to the interest of the debtor by
operation of law
d. One or more joint debtors who were joint owners
of the property sold
e. Wife as regards her husbands property
3. Those authorized under the Rules of Court
a. The judgment debtor, or his successor-in-interest
b. A creditor having a lien by attachment, judgment
or mortgage on the property sold
The transfer of the right of redemption need not be
registered with the Register of Deeds to enable the
transferee or assignee to exercise the same.
Question: What is a mortgagee in possession?

SERVE THE PEOPLE!

!
CHATTEL MORTGAGE (4) Extent of chattel mortgage. Sec. 7, par. 4 of the Chattel

! Mortgage law provides, A chattel mortgage shall be

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
deemed to cover only the property described therein and not
like or substituted property thereafter acquired by the
mortgagor and placed in the same depositary as the
property originally mortgaged, anything in the mortgage to
the contrary notwithstanding.

!
chattel mortgage.

(1) Chattel Mortgage is that contract by virtue of which

personal property is recorded in the Chattel Mortgage
Register as security for the performance of an obligation.
Characteristics of Real Mortgage:
1. Accessory - because it is for the purpose of securing the
performance of a principal obligation
2. Formal - because its validity, registration in the Chattel
Mortgage Register is indispensable
3. Unilateral - because it produces only obligations on the
part of the creditor to free the thing from the
encumbrance on fulfillment of the obligation.
4. It does not convey dominion but is only a security
5. It creates a real right or a lien which is being recorded and
follows the chattel wherever it goes
Stipulation including after-acquired property. A
stipulation in the mortgage, extending its scope and
effect to after acquired property is valid and binding
where the after-acquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale
of such goods, etc.
A pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long
as these future debts are accurately described. A
chattel mortgage however, can only cover obligations
existing at the time the mortgage is constituted.
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

Laws governing Chattel Mortgage: (5) Applicability of the provisions on pledge. The provisions
1. Chattel Mortgage Law on pledge shall apply to chattel mortgage only insofar as
2. Civil Code they are not in conflict with any provision of the Chattel
3. Revised Administrative Code Mortgage Law

! 4. Revised Penal Code

Subject matter of chattel mortgage

(6) Offenses involving chattel mortgage. Under the Revised
Penal Code, the following acts are punishable:
1. Knowingly removing any personal property mortgaged
1. Shares of stock in a corporation under the Chattel Mortgage Law
2. Interest in business
2. Selling or pledging personal property already
3. Machinery and house of mixed materials treated by
mortgaged, or any part thereof without the consent of
parties as personal property and no innocent third person
the mortgagee written o the back of the mortgage and
will be prejudiced thereby
duly recorded in the Chattel Mortgage Register
4. Vessels, the mortgage of which have been recorded with
the Philippine Coast Guard in order to be effective as to Chattel mortgage distinguished from Pledge:
third persons
5. Motor vehicles, the mortgage of which had been Chattel Mortgage Pledge
registered both with the Land Transportation Commission Delivery Delivery is not Delivery is necessary
and the Chattel Mortgage Registry in order to affect third necessary
persons
Registration Registration in the Registration in the
6. House which is intended to be demolished (for what is
Chattel Mortgage Registry Property is
really mortgaged are the materials thereof) register is necessary not necessary
7. House built on rented land for its validity

!
(2)
8. Growing crops and large cattle

No absolute criterion between personal and real

Law governing the
sale
Procedure for the
sale of the thing given
as security (Sec. 14,
Art. 2112, Civil Code

property. There is no absolute criterion for discriminating Act. No. 1508)

between the two for purposes of the application of the Excess If the property is If the property is sold,
Chattel Mortgage Law. It is undeniable that the parties to a foreclosed, the the debtor is not
contract may by agreement, treat as personal property that excess goes to the entitled to the excess
which by nature would be real property; and it is a familiar debtor unless otherwise
phenomenon to see things classed as real property for agreed
purposes of taxation which on general principles might be Recovery of The creditor is The creditor is not
considered as personal property. Deficiency entitled to recover the entitled to recover the
deficiency from the deficiency
(3) Subject matter to be described and identified. Sec. 7 of debtor except if the notwithstanding any
the Chattel Mortgage Law only requires that the description chattel mortgage is a stipulation to the
of the mortgage property be such as to enable the parties to security for the contrary.
purchase of property
the mortgaged property be such as to enable the parties to in installments.
the mortgage or any other person to identify the same after a
seasonable investigation and inquiry. Possession Possession remains Possession is vested
with the debtor in the creditor

SERVE THE PEOPLE!

!
2. Adds nothing to the mortgage. Registration adds
Contract Formal contract Real contract
nothing to the instrument considered as source of title
Recording in a public Must be recorded in a Must be recorded in a and affect nobodys rights except as a species of
instrument public instrument to public instrument to
notice.
bind third persons bind third persons,
plus it must contain (10) Registration of assignment of mortgage not required.
description of the Applying by analogy Art. 2128 of the Civil Code to a chattel
thing pledged and the
mortgage, it appears that a chattel mortgage may be
!
Similarities between Chattel mortgage and Pledge:
date
alienated or assigned to a third person. While such
assignment may be recorded, the law is permissive and not
mandatory. It is clear that the debtor is protected if he pays
1. Both are executed to secure the performance of a his creditor without actual knowledge that the debt has been
principal obligation assigned.
2. Both are constituted only on personal property
(11) Affidavit of Good Faith is an oath in a contract of chattel
3. Both are indivisible
mortgage wherein the parties severally swear that the
4. Both constitute a lien on property
mortgage is made for the purpose of securing the obligation
5. In both cases, the creditor cannot appropriate the
specified in the conditions thereof and for no other purposes
property to himself in payment of the debt
and that the same is a just and valid obligation and one not
6. In both cases, when the debtor defaults, the property
entered into for the purpose of fraud.
must be sold for the payment of the creditor
7. Both are extinguished by the fulfillment of the principal The absence of the affidavit vitiates a mortgage only as
obligation or by the destruction of the property against third persons without notice like creditors and

! pledged or mortgaged.

subsequent encumbrancers.
This special affidavit is required only for the purpose of
Chattel mortgage distinguished from Real Mortgage: transforming an already valid mortgage into a preferred
mortgage. Thus, it is not necessary for the validity of
Chattel Mortgage Real Mortgage the chattel mortgage itself but only to give it a preferred
Subject Matter
Requirement of
Personal Property
Essential for the
Real Property
Merely for the
! status.

Registration validity of the purpose of binding Foreclosure in Chattel Mortgage

contract third persons.
Question: How is chattel mortgage foreclosed?
Foreclosure Procedure for the foreclosure of chattel 1. Public sale. If the mortgagor defaults in the payment of
proceedings mortgage is dierent from the procedure of
foreclosure for real estate mortgage the secured debt or otherwise fails to comply with the

! conditions of the mortgage, the creditor has no right to

Registration of Chattel Mortgage
(7) Creation of chattel mortgage. The law as it now stands,
provides only one way for executing a valid chattel
mortgage, through the registration of the personal property in
the Chattel Mortgage Register.
Under the special law, if the property is situated in a
different province form that in which the mortgagor
resides, the registration must be in both registers,
otherwise the chattel mortgage is void.
If the chattel mortgage is not recorded, it is
nevertheless binding between the parties
(8) Period within which registration should be made. The law
does not provide any specific time within which a chattel
mortgage should be recorded in the Chattel Mortgage
Register. It has been held that the law is substantially and
sufficiently complied with where the registration is made by
the mortgagee before the mortgagor has complied with his
principal obligation and no right of innocent third persons is
prejudiced.
(9) Effect of registration:
1. Creates a real right. The registration of the chattel
mortgage is an effective and binding notice to other
creditors of its existence and creates a real right or a
lien which, being recorded, follows the chattel mortgage
wherever it goes. The registration gives the mortgagee
symbolical possession.
appropriate to himself the personal property because he
is permitted only to recover his credit from the proceeds
of the sale of the property at public auction through a
public officer in the manner prescribed in the Chattel
Mortgage Law.
The Chattel Mortgage Law allows the mortgagee
to have the property mortgaged sold in almost the
same manner as that which governs extrajudicial
foreclosure of real estate mortgage
2. Private Sale. There is nothing illegal, immoral or against
public order in an agreement for the private sale of the
personal properties covered by the chattel mortgage.
The mortgagor is in estoppel to question a private sale
if it is expressly stipulated in the contract, except on the
ground of fraud or duress.
(12) Procedure to foreclose chattel mortgage:
1. The mortgagee may, after thirty (30) days from the time
of the condition broken, cause the mortgaged property
to be sold at public auction by a public officer. The 30-
day period to foreclose is the minimum period after
violation of the mortgage condition of the mortgage.
2. There has to be at least ten (10) days notice to the
mortgagor and posting of public notice of time, place
and purpose of such sale.
3. After the sale of the chattel at public auction, the right
of redemption is no longer available to the mortgagor.
(13) Application of the proceeds of sale:
1. Costs and expenses of keeping and sale

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2. Payment of the obligation secured by the mortgage judgment against a mortgagor upon his credit waived
3. Claims of persons holding subsequent mortgages in thereby his right to enforce the mortgage securing it.
their order (18) Ordinary action to recover possession of chattel. In case
4. The balance, if any, shall be paid to the mortgagor or of refusal of the mortgagor to surrender the possession of
person holding under him. the mortgaged chattel sold by the sheriff, the remedy of the
Redemption in Chattel Mortgage purchaser is to bring an ordinary action for recovery of

!
(14) Who may exercise the right of redemption in chattel
possession, instead of merely asking for a writ of
possession, in order to give the mortgagor the opportunity to
be heard not only regarding possession but also regarding
mortgage. When the condition of the chattel mortgage is the obligation covered by the mortgage.
broken, the following may redeem:
(19) Right of mortgagee to recover deficiency. The creditor
1. The mortgagor may maintain an action for the deficiency although the
2. A person holding a subsequent mortgage Chattel Mortgage Law is silent on this point. The reason is
3. A subsequent attaching creditor that a chattel mortgage is only given as a security and not as
payment for the debt in case of failure of payment. Both the
An attaching creditor who so redeems shall be
subrogated to the rights of the mortgagee and entitled Chattel Mortgage Law and the law on extrajudicial
to foreclose the mortgage in the same manner that the foreclosure of real estate mortgage do not contain any
mortgagee could foreclose it. provision precluding the mortgagee from recovering
deficiency of the principal obligation.
The redemption is made by paying or delivering to the
mortgagee the mount due on such mortgage and the The action may be brought within ten (10) years from
costs and expenses incurred by such breach of the time the cause of action accrues, even if it is not
upon a written contract.
condition before the sale thereof.
(15) Right acquired by second mortgagee and subsequent !
purchaser.
Before payment of debt. After a chattel mortgage is
executed, there remains in the mortgagor a mere right
of redemption and only this right passes to the second
mortgagee in case of a second mortgage. As between
the first and second mortgagees, therefore, the latter
can only recover the property from the former by paying
him the mortgage debt.
After payment of debt. The judgment or attaching
creditor who purchased the property at the execution
sale could only acquire the right of redemption. He is
not entitled to the actual possession and delivery of the
property without first paying the mortgage debt.
(16) Right of the mortgagee to possession
After default. When the default occurs and creditor
desires to foreclose, the right of the creditor to take the
mortgaged property is clearly implied from the provision
which gives him the right to sell.
Before default. A chattel mortgagee is not entitled to the
possession of the property upon the execution of the
chattel mortgage for otherwise, the contract becomes a
pledge and ceases to be a chattel mortgage.
Where mortgagor refuses to surrender possession.
Where the debtor refuses to yield the property, the
creditors remedy is to institute an action either to effect
a judicial foreclosure directly or to secure possession as
a preliminary to the sale contemplated in Sec. 14 of the
Chattel Mortgage Law.
Where right of mortgagee conceded/disputed. When
such is conceded, the action need only be maintained
against him who so possesses the property. Persons
having a special right of property in the goods the
recovery of which is sought, such as a chattel
mortgagee, may maintain an action for replevin therefor.
(17) Civil action to recover credit. The mortgagee is not
obligated to file an independent action for the enforcement
of his credit. A mortgagee who sues and obtains a personal

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ANTICHRESIS Obligation to pay Creditor, unless there Creditor has no such

! taxes and charges is a stipulation to the obligation

contrary, is obliged to
pay the taxes and
charges upon the
Art. 2132. By the contract of antichresis the creditor acquires the
estate
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.

(1) Antichresis is a contract whereby the creditor acquires the

Difference between Antichresis and Pledge

Antichresis Pledge
right to receive the fruits of an immovable of the debtor, with
the obligation to apply them to the payment of interest, if Kinds of property Real property Personal property
owing, and thereafter to the principal of his credit. Perfection Perfected by mere Perfected by the
consent (consensual delivery of the thing
It is not essential that the loan should earn interest in contract) pledged (real
order that it can be guaranteed with a contract of contract)
antichresis. Antichresis is susceptible of guaranteeing
all kinds of obligations, pure or conditional. In writing Principal and interest Need not be in
must be specified in writing, oral evidence
A stipulation authorizing the antichretic creditor to writing, otherwise the may be allowed to
appropriate the property upon the non-payment of the contract is void prove the same
debt within the period agreed upon is void. Pactum
Both antichresis and pledge are similar in that the

! Commissorium.

Characteristics of Antichresis
debtor loses control of the subject matter of the
contract.
(4) Application of the fruits to interest and then to principal.
1. Accessory contract To be an antichresis, it must be expressly agreed between
2. Formal contract creditor and debtor that the former, having been given
3. It deals only with immovable property possession of the properties given as security, is to apply
4. It is a real right their fruits to the payment of interest, if owing, and thereafter
5. The creditor has the right to receive the fruits of the to the principal of his credit.
immovable
6. It is a real contract Thus, if a contract of loan with security does not

! 7. It can guarantee all kinds of valid obligations
(2) Delivery of property. Antichresis requires the delivery by the
debtor of the property given as security to the creditor. But
such delivery is required only in order that the creditor may
receive the fruits and not in order that the contract shall be
binding. The contract does not cover the immovable but only
its fruits.
(3) Right of the creditor to the fruits. Antichresis normally
covers all the fruits of the encumbered property, but the law
stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the real property
constituted as security for the payment therefor, in order
that the creditor may administer the same and avail
himself of its fruits, without stating that said fruits are to
be applied to the payment of the interest, if any, and
afterwards to that of the principal of the credit, the
contract shall b considered to be one of mortgage and
not of antichresis.
Art. 2133. The actual market value of the fruits at the time of the

! gives the parties the freedom to stipulate otherwise.

Difference between Antichresis and Real Estate Mortgage

application thereof to the interest and principal shall be the

!
measure of such application.

(5) Measure of application of fruits to interest and principal.

Antichresis Real Estate The fruits of the immovable which is the object of the
Mortgage antichresis must be appraised at their actual market value at
Delivery Property is delivered Debtor usually retains the time of the application. This rule is intended to forestall
to the creditor possession of the the use of antichresis for purposes of usury.
property
Art. 2134. The amount of the principal and of the interest shall be
The right to receive Creditor acquires Creditor does not specified in writing; otherwise the contract of antichresis shall be
fruits, and real rights only the right to have any right to
receive the fruits of
the property; does
not produce a real
receive the fruits, but
mortgage creates a
real right over the
!
void.

(6) Form of the contract. Art. 2134 is an instance when the law
right unless property which is requires that a contract be in some form in order that it may
registered enforceable against
the whole world
be valid and not only to affect third persons.

Obligation to apply There is an express There is no such Art. 2135. The creditor, unless there is a stipulation to the contrary,
fruits stipulation that the obligation on the part is obliged to pay the taxes and charges upon the estate.
creditor shall apply of the mortgagee He is also bound to bear the expenses necessary for its
the fruits to the preservation and repair.
payment of the The sums spent for the purposes stated in this article shall be
interest, if owing, and
thereafter to the
principal of the debt. !
deducted form the fruits.

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(7) Obligations of the antichretic creditor. The creditor
acquires, by virtue of the contract of antichresis, the right to
enjoy the fruits of the property delivered to him. This right
carries with it two obligations which are the necessary
consequences of the contract because they arise from its
very nature.
1. Payment of taxes and charges upon the estate. The
creditor is obliged, unless there is a stipulation to the
contrary, to pay the taxes and charges upon the estate.
If he does not pay the taxes, he is by law (Art.
1170) requires to pay indemnity for damages to the
debtor.
Where the debtor has paid for the taxes on the
property which the creditor should have paid, the
amount is to be applied to the payment of the debt
and the debtor is entitled to the return of the
property free form all encumbrances if he, in effect,
by advancing the taxes, has already discharged
the debt.
The parties, however, may agree on an
extrajudicial foreclosure in the same manner as
they are allowed in contracts of mortgage and
pledge
(10) Acquisition by creditor of property by prescription. The
creditor and his successors-in-interest cannot ordinarily
acquire by prescription the land given to him, any agreement
to the contrary being void. Possession, for the purpose of
acquisitive prescription, must be in the concept of an owner.
The possession of an antichretic creditor is not in the
concept of an owner. He cannot acquire the ownership of the
real estate subject of the antichresis unless he repudiates his
status as an antichretic creditor.
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.

The rate of interest on loan or forbearance of money,

2. Application of the fruits of the estate. To apply the goods, or credit is no longer subject to any ceiling
fruits to the interest, if owing, and thereafter to the prescribed under the Usury Law.
principal in accordance with the provisions of Art. 2133
or Art. 2138. Hence, the duty of the creditor to render Art. 2139. The last paragraph of Article 2085, and Articles 2089 to
an account of said fruits to the debtor, and the
corresponding right of the latter to apply said fruits to
the debt.
!
2091 are applicable to this contract.

(11) Last paragraph of Art. 2085 says, Third persons who are
Art. 2136. The debtor cannot reacquire the enjoyment of the not parties to the principal obligation may secure the latter
immovable without first having totally paid what he owes the by pledging or mortgaging their own property. Thus, in
creditor. antichresis, third persons may also have their properties
But the latter, in order to exempt himself form the obligations serve in a contract of antichresis in favor of a debtor and
imposed upon him by the preceding article, may always compel the creditor.
debtor to enter again upon the enjoyment of the property, except

!
when there is a stipulation to the contrary.

(8) Right of the antichretic debtor to reacquire enjoyment of

property. The property delivered stands as security for the
payment of the obligation of the debtor in antichresis. Hence,
the debtor cannot demand its return until the debt is totally
paid.
However, if the creditor does not want to pay the taxes
and incur the expenses necessary for the preservation
and repair of the property, he may compel the debtor to
reacquire the enjoyment of the same except when there
is a contrary stipulation.
(12) Arts. 2089 and 2090 is about indivisibility of pledge or
mortgage. Thus, antichresis is likewise one and indivisible
as to the contracting parties even if the obligation is joint and
not solidary. Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the pledge or
mortgage.
(13) Art 2091 speaks, The contract of pledge or mortgage may
secure all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition.

Art. 2137. The creditor does not acquire the ownership of the real
estate for nonpayment 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.

(9) Remedy of the creditor in case of nonpayment of debt. If

the debt is not paid, it is clear enough that the creditor does
not acquire ownership of the real estate since what was
transferred is not the ownership but merely the right to
receive the fruits. A stipulation authorizing the antichretic
creditor to appropriate the property upon the nonpayment of
the debt within the period agreed upon is void. The remedies
of the creditor are:
1. To bring an action for specific performance
2. To petition for the sale of the real property as in a
foreclosure of mortgages under Rule 68

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