Pledge

Pledge is a contract wherein the debtor delivers to the creditor or

to a third person a movable property susceptible of appropriation or a
document evidencing incorporeal rights 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.

There are two kinds of pledge namely: Voluntary or Conventional,

one which is created by agreement of parties and Legal, one which is
created by operation of law.

Characteristics of Contract of Pledge:

1. Real Contract- it is perfected by the delivery of the thing
pledged.
2. Unilateral Contract- it creates an obligation solely on the part of
the creditor to return the thing upon fulfillment of the principal
obligation.
3. Nominate Contract- it is given a specific name by the Civil Code.
4. Accessory Contract- its existence is dependent in another
contract.
5. Formal Contract- a particular form is required for the contract of
pledge.
6. Onerous or Gratuitous Contract- if pledge was given by the
debtor, it is an onerous contract as the debtor granted the
pledge in consideration of the loan or the principal obligation
being secure; it is gratuitous contract if a third-party pledgor
receives no compensation for entering into the pledge
agreement.

In case of doubt as to whether the transaction is one of pledge or

dacion en pago, the presumption is that it is a pledge as this involves
lesser transmission of rights and interest.

There are two parties to the contract of pledge; first, the

Pledgor who may either be the debtor or third person that must be
the absolute owner of the thing pledged, must have free disposal of
their property and in the absence thereof, must be legally authorized
for the purpose and the Pledgee which is the creditor.

Since pledge is a real contract it requires delivery for the

perfection of contract of pledge as provided under Article 2093.
Without delivery, therefore, there cannot be a pledge. The type of
delivery depends upon the nature of he thing pledged. There are two
kinds: first is the Actual Delivery, in general, the delivery of the thing
pledged is made by actual delivery of the thing; while the second one
is the Constructive Delivery, since the civil code does not provide that
delivery must necessarily be an actual delivery, it is enough that the
ting pledged must be placed under the effective control and possession
of the pledgee or third person by common agreement. The pledgor
must cease to have effective control and possession of the thing
pledged, thus delivery of the thing can be made by traditio brevi manu
or delivery with the short hand.

The subject matter of pledge are: all movable property, which

are within the commerce of men and susceptible of possession as
provided under Article 2094 and incorporeal rights evidenced by
documents whether negotiable or not may also be pledged, and such
documents must be delivered to the creditor, if negotiable, it must be
indorsed in favor of the creditor as provided under Article 2095. The
instrument must be of such nature that the delivery or indorsement of
the instrument is capable of transferring ownership over the right or
property to the recipient of the instrument since delivery of ordinary
contracts does not transfer ownership.
Under Article 2096, to bind third persons, it is necessary that
contract of pledge be in a public instrument. 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. The public instrument must contain
the description of the thing pledged and the date of pledge, without
which the contract of pledge cannot adversely affect third persons. Its
purpose is to forestall fraud because a debtor may attempt to conceal
his property from his creditors when he sees it in danger of execution
by simulating a pledge thereof with an accomplice. Non-compliance
with this requirement will nevertheless render the contract of pledge
valid and is binding upon parties to the pledge if all essential requisites
of the contract of pledge are present and the pledgor has delivered the
subject of the pledge.

The pledgor retains his ownership of the thing pledged. He may,

therefor, sell the same provided the pledgee consents to the sale as
also provided in Article 2097. When the pledgee consents, the
ownership is transferred to the vendee subject to the rights of the
pledgee namely:
a.) to alienate to satisfy the obligation; and
b.) that the pledgee must continue in possession of the thing
pledged during existence of the pledge.

By virtue of the pledge, the creditor acquires two fundamental

rights over the thing pledged. First, Jus retinendi or right to retain the
thing as provided under Article 2098 and second, Jus distrahendi or
right to proceed before a notary public to the sale of the thing pledged
under Article 2112. The possession of the pledgee of the thing pledged
constitutes his security. Thus, debtor cannot demand for its return until
the debt secured by it is paid. But the right of retention is limited only
to the fulfillment of the principal obligation for which the pledge was
created.