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CREDIT TRANSACTIONS • May be an express or implied contract

Key Notes and Lectures – Atty. Lerma • Parties to bailment—


Credit Transactions Book – De Leon (2013) (1) Bailor (comodatario) – the giver; the party who delivers
With Help from Notes by Mickey Ingles the possession or custody of the thing bailed
(2) Bailee (comodante) – the recipient; the party who
INTRODUCTION receives the possession or custody of the thing bailed
• In bailment, there is also involved a substantial measure of
Credit Transactions control over the property, rather than just mere custody
Credit transactions include all transactions involving the:
• Purchase or loan of goods, services or money in the present Kinds of Contractual Bailment
• With a promise to pay or deliver in the future (1) Those for the sole benefit of the bailor
Credit transactions are usually contracts of security • Gratuitous deposit
• Security – something given, deposited or serving as means to • Mandatum – bailment of gods without recompense
ensure the fulfillment or enforcement of an obligation or of • Gratuitous, with obligations imposed by law
protecting some interest in property (2) Those for the sole benefit of the bailee
• Commodatum
Two Types of Credit Transactions • Gratuitous simple loan or mutuum
• Secured transactions or contracts of real security • Gratuitous, with obligations imposed by law
o Supported by a collateral or an encumbrance of (3) Those for the benefit of both parties (mutual-benefit bailments)
property
• Deposit for a compensation
o Ex. Pledge, mortgage, antichresis, etc.
• Usually resulting from business transactions
• Unsecured transactions or contracts of personal security
• Ex. involuntary deposit, bailments for hire, pledge
o Secured or supported only by a promise to pay or the
personal commitment of another
Kinds of Bailment for Hire (locatio et conductio)
o Ex. Guarantor/surety
• Arises when goods are left with the bailee for some use or
Bailment service by him; always for some compensation
The delivery of property of one person to another in trust for a specific (1) Hire of things (locatio rei) – where goods are delivered for
purpose; returned when special purpose is accomplished the temporary use of the hirer (i.e., lease)
(2) Hire of service (locatio operis faciendi) – where goods are
• With a contract, express or implied, that the trust shall be
delivered for some work or labor upon it by the bailee (i.e.,
faithfully executed & the property returned or duly accounted for
contract for a piece-of-work)
when the special purpose is accomplished or kept until the
(3) Hire for carriage of goods (locatio operis mercium
bailor reclaims it
vehendarum) – where goods are delivered either to a
• Generally only involves personal or movable property
common carrier, or to a private person for the purpose of
o BUT commodatum, a form of bailment, can involve
being carried from place to place
movable or immovable property
(4) Hire for custody (locatio custodiae) – where goods are
• May be by contractual relation or by operation of law delivered for storage
• “Bailment” is more specific & falls within the umbrella of “credit
transactions” Lerma’s Lectures
• No purchase is involved

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Bailment involves a specific purpose + return of the same thing or same 2. Unilateral – once the subject matter has been delivered, it
quantity of same kind of same type. It involves the duration & purchase; creates obligations on the part of only one of the parties (i.e.,
thus, it’s more specific [than credit transactions]. There is no purchase the borrower)
involved, only lending.
Credit v. Loan
TITLE XI. LOAN • Credit – ability to borrow money or things by virtue of the trust
or confidence reposed by the lender in the borrower that he will
GENERAL PROVISIONS pay as promised within a specified period
o The concession of a “credit” necessarily involves the
Art. 1933. By the contract of loan, one of the parties delivers to another, granting of “loans” up to the limit of the amount fixed in
either something not consumable so that the latter may use the same the “credit”
for a certain time and return it, in which case the contract is called a • Loan (mutuum) – the delivery by one party & the receipt by the
commodatum; or money or other consumable thing, upon the condition other, the latter becoming the owner, of a given sum of money
that the same amount of the same kind & quality shall be paid, in which or other consumable upon agreement that such will be repaid in
case the contract is simply called a loan or mutuum. the same amount of the same kind & quality, with or without
Commodatum is essentially gratuitous. interest
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, Credit v. Loan (Illustrative Example)
while in simple loan, ownership passes to the borrower. If bank gives you credit of P300,000, the bank believes that you have,
based on your money, assets, etc. that that is the extent of their trust in
Cause/Consideration in a Contract of Loan your ability to pay them back. It helps them determine how much of a
• As to the borrower – the acquisition of the thing loan they would be willing to grant you.
• As to the lender – the right to demand its return or its If bank gives you a loan of P300,000, the bank will loan you P300,000
equivalent and you may have to pay interest as well.

Two Kinds of Loan Credit v. Debt


1. Commodatum – the bailor will deliver to the bailee a non- • Credit – the sum credited on the books of a company to a
consumable thing so that the bailee may use it for a certain person who seems to be entitled to it; implies the ability to
time & return the identical thing make a promised payment
2. Simple loan or mutuum – the lender delivers to the borrower o Debt considered from the creditor’s standpoint
money or other consumable thing upon the condition that the • Debt – the amount owed by a debtor to his creditor
latter shall pay the same amount of the same kind & quality
• Consumable – when it is consumed when used in a Discount (mode of loaning money) Loan
manner appropriate to its nature or purpose (e.g. rice, Interest is deducted in advance Interest is usually taken at the
gas, money, fruitwood, etc.) expiration of the credit
Double-name paper – one in which Single-name paper – no
Characteristics of the Contract 2 signatures appear with both indorsement other than the
1. Real – delivery of the thing loaned is necessary for the parties liable for payment signature of the maker
perfection of the contract Slightly more expensive for the Interest is deducted at expiration
borrow, as interest is calculated on of the credit, making it cheaper

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


the loan & not on the amount People v. Concepcion
actually received • Facts: X is the President of PNB. He authorized an extension of
credit of P300,000 to a partnership which is 50% owned by his
Illustration: Discounting a Paper v. Loan wife. A law, however, states that as President of PNB he cannot
On a loan of P1,000 at 16% interest p.a. directly or indirectly extend loans to himself.
• If loan – the borrower would pay P1,160 at the end of the year. • Held: The extension of credit is essentially a loan. The
• If discounted – the interest is deducted from the principal in concession of a “credit” necessarily involves the granting of
advance & thus would only receive P840, needing to pay back “loans” up to the limit of the amount fixed in the “credit.”
P1,000 at the end of the year Though the loan was granted to a partnership partly owned by
o Discount – P160 his wife, it was still considered an indirect loan.
o Proceeds – P840
De los Santos v. Jarra
Commodatum Mutuum • Facts: X lent Y 10 1st class carabaos. Y died without ever giving
Subject Ordinarily involves Money or other consumable them bank. X sued Y’s estate.
Matter something not thing • Held: This is a contract of commodatum & X is entitled to the
consumable carabaos themselves or their value if the carabaos have died.
Ownership Retained by the lender Transferred to the borrower
Consideration Essentially gratuitous May be gratuitous, but may Art. 1934. An accepted promise to deliver something by way
also be onerous (with of commodatum or simple loan is binding upon parties, but
stipulated interest) the commodatum or simple loan itself shall not be perfected until the
Property May involve real or Only personal property delivery of the object of the contract.
Involved personal property
Possession Use or temporary Consumption Gratuitous Loan
possession If the loan promised is gratuitous, since there is no consideration, the
Demand May be before expiration Lender may not demand owner may terminate the arrangement, provided he acts in good faith, to
of the term in case of return before the lapse of protect his interest
urgent need the term agreed upon
Loss Suffered by bailor, since Borrower suffers the loss Accepted Promise to Lend has Binding Effect
he is the owner even if caused exclusively by An accepted promise to make a future loan is a consensual contract; it
a fortuitous event; he is NOT has binding effect upon the parties but it is only after delivery that the
discharged from duty to pay real contract of loan will arise
Personal Purely personal in Not purely personal
character Class Scenario
Q: X agrees to lend Y P100,000 and signs the promissory note and
Kinds of Commodatum hands it to Y. What is this contract between the two parties called?
A: There is a contractual relationship. It’s only an accepted promise to
• Ordinary commodatum
loan. But the accepted promise to loan will only turn into a real contract
• Precarium – one whereby the bailor may demand the thing
of loan only by delivery. BUT there is a contract & Y can ask for damages
loaned at will
if X does not deliver the P100,000.
Case Doctrines

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Case Doctrines • As a result, commodatum is not enforceable as contract
Saura Import v. DBP • Any agreement to lend property by way of commodatum at a
• Facts: X applied for a loan with DBP for the building of X’s future time would be terminable at any time by the owner
factory & for the purchase of machinery. X already bought the without giving rise to action for damages
machines under a letter of credit with Prudential. DBP approved • Ex. When a borrower must pay a breeding fee for carabaos
the loan via board resolution; however, it did so with the borrowed, the contract is a lease
promise that X’s goods would all be locally produced. The loan
would be secured by the mortgage on the factory & machinery Extent of Bailor’s Right to Use
bought by X. Later, however, DBP found out that X could not Right is limited to the thing loaned but not its fruits, unless the contrary
fulfill its requirements (i.e., that the items would be locally is stipulated
produced) so X decided to cancel the mortgage. X failed to pay
Prudential & now wants to sue DBP for reneging on their Purpose of the Contract
contract. DBP insists there was no contract. Temporary use of the thing loaned for a certain time
• Held: There was a perfected consensual contract of loan. But • If the bailee is not entitled to use the thing, the contract may be
the parties mutually desisted, & by their mutual desistance, the a deposit
contract was extinguished. Thus, DBP cannot be held liable.
Naguait v. CA Case Doctrines
• Facts: X loaned P100,000 from Y through a check. X paid Y Republic v. Bagtas
back with a check as well, with a mortgage attached. However, • Facts: X borrowed 3 bulls from the government, for breeding
X’s check bounced when Y tried to encash it. When Y made a purposes, subject to a 10% breeding fee for 1 year. After 1 year,
demand on X, X said he never encashed the check given by Y, & X offered to buy the bulls at a discounted price, which the
thus could not be made liable. Y tried to foreclose on the government refused. The bulls then died in a Huk raid. X claims
mortgage. he is not liable, since it was commodatum.
• Held: Y cannot foreclose, as the loan was not perfected. The • Held: The contract is a commodatum, which ordinarily would
Civil Code provides that the delivery of checks shall produce the mean that the bailee is not liable for fortuitous events. But X is
effect of payment only when they have been cashed. It is only liable, despite the occurrence being force majeure, because he
after the checks have been produced the effect of payment that did not return the bulls at the expiration of the certain time
the contract of loan may have been perfected. given.

CHAPTER 1. – COMMODATUM Pajuyo v. CA


Section 1. - Nature of Commodatum • Facts: X allowed Y to live in X’s house, as long as Y kept the
house clean & maintained it. X now wants Y out and he claims
Art. 1935. The bailee in commodatum acquires the use of the thing that the contract between them was one of commodatum which
loaned but not its fruits; if any compensation is to be paid by him who was a precarium—thus, the non-consumable thing (i.e., the
acquires the use, the contract ceases to be a commodatum. house) should have been demandable at will.
• Held: The fact that Y was tasked to keep the house clean &
Commodatum Essentially Gratuitous maintain it is already considered a forbearance, which is
If any compensation is to be paid by the borrow to acquire the use of the contrary to the essentially gratuitous nature of the contract of
thing, it becomes a lease contract; if the consideration is service, an commodatum; thus, this is no longer a commodatum contract,
innominate contract will result but a contract of loan.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Lerma’s Lecture: The contract in Pajuya is actually a commodatum. It’s Generally non-consumable things, whether real or personal
technically use and preservation of the property (recall that ordinary • Real property & commodatum – when a person allows another
expenses is charged to the bailee in a commodatum). Any bailee in a to build a warehouse on his land so that the latter may use the
commodatum needs to maintain the property. If X lends Y an iPad, Y is property for a certain period without payment of rentals
supposed to take care of it so that the iPad does not break and is kept o If not time for use is specified, the contract is a
well. BUT for the purposes of THE BAR, Pajuyo v. CA still prevails. precarium
o If rental is paid, the contract is a lease1
Art. 1936. Consumable goods may be the subject of commodatum if the • If the purpose of the contract is not the consumption of the
purpose of the contract is not the consumption of the object, as when it object but just the exhibition of it, consumable goods may be
is merely for exhibition. the subject of commodatum

Case Doctrines Art. 1938. The bailor in commodatum need not be the owner of the
Producers Bank v. CA thing loaned.
• Facts: X approached Y, claiming he needed help to get his
business incorporated. X needed Y to put some money in the Bailor Need Not be Owner
bank under his & Y’s account, so that X would be able to show It is sufficient that the bailor has such possessory interest in the subject
authorities that he had money in the bank enough to matter or right to its use which he may assert against the bailee & third
incorporate. Y agreed, using a check to make the deposit. persons although not against the rightful owner
However, when Y checked the account again, X had already • A lessee of a thing or a usufructuary may lend the thing
withdrawn all the money. • A lessee may sublet the thing leased, where there is no express
• Held: The contract was one of commodatum though it involved prohibition in the lease contract
a consumable thing, because the money was meant only for • BUT the bailee or borrower himself MAY NOT lend or lease the
exhibition, as per the agreement of X & Y. Y thus had no right to thing loaned to him to a third person
use the money & must now pay X.
Class Scenario
Lerma’s Lecture: In this case, X lent P200,000 via check. Was Y tasked Q1: X lent Y an iPad on commodatum. It turns out that X is not the
to return the exact same check? No. So is the case correct? NO, owner, but Z is. Is the relationship between X & Y still a commodatum?
because what was asked to be returned was not actually the original A: YES.
money given.
WHEN YOU INCORPORTE, one of the incorporators, X, will be asked to be Q2: What if X stole the iPad from Z, who should Y return the iPad to &
a treasurer-in-trust. Said incorporator X will deposit money for the why?
account on his name and also on the name of the corporation. That A: Z, because X never obtained possessory interest.
amount deposited cannot be touched until the SEC will look into the
account and verify WON the amount is there. If the amount is there, SEC
will approve the incorporation. That was the initial purpose of lending Art. 1939. Commodatum is purely personal in character. Consequently:
the money. (1) The death of either the bailor or the bailee extinguishes the
contract;
Art. 1937. Movable or immovable property may be the object
of commodatum.
1 Art. 1643. In the lease of things, one of the parties binds himself to give another r the
enjoyment or use of a thing for a price certain, & for a period which may be definite or
Subject Matter of the Contract indefinite. However, no lease for more than 99 years shall be valid.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


(2) The bailee can neither lend nor lease the object of the contract A: NO. The nature of the dentist chair does not allow people who are not
to a third person. However, the members of the bailee's dentists to use the chair.
household may make use of the thing loaned, unless there is a
stipulation to the contrary, or unless the nature of the thing Art. 1940. A stipulation that the bailee may make use of the fruits of the
forbids such use. thing loaned is valid.

Commodatum: Purely Personal in Character Use of Fruits


Art. 1393 lists an exception to the general rule that all rights acquired by General Rule: The bailee is entitled to only the use of the thing loaned &
virtue of an obligation are transferable. not its fruits
• Unlike mutuum, commodatum is purely personal, the lender • Ex. Where an animal is the thing loaned, its young subsequently
considering the character, credit & conduct of the borrower born are not included in the contract, & belong to the bailor
• BUT if there are 2 or more borrowers, the death of one does not • EXCEPT – If there is stipulation to the contrary
extinguish the contract in the absence of stipulation to the BUT: The right to the enjoyment of the fruits must only be incidental to
contrary the use of the thing, otherwise the contract may be a usufruct.

Right of the Bailee to Lend the Thing Loaned to Third Persons SECTION 2. - Obligations of the Bailee
General Rule: The bailee can neither lend nor lease the object of the
contract to a third person, unless: Art. 1941. The bailee is obliged to pay for the ordinary expenses for the
(1) There is stipulation to the contrary; or use & preservation of the thing loaned.
(2) The use of the thing loaned is extended to just members of the
household (who are not considered third persons), EXCEPT— Liability for Ordinary Expenses
a. If there is stipulation to the contrary; or The borrower must take good care of the thing with the diligence of a
b. Of the nature of the thing forbids such use (e.g. dress) good father of a family.
• Ex. If B borrows the car of L, B must pay for the gas, motor oil,
Class Discussion washing, etc. B cannot demand reimbursement for such
Practical perspective: Why is commodatum purely personal in expenses.
character? Because the bailor takes personal characteristics of the
bailee into consideration before he entrusts the thing & because it’s for Class Scenario
free. Q1: X lent Y his iPhone to Y. What does Y have to pay for?
Members of the household pertain to your actual family members; yet A: The “load” that Y will use or whatever billings.
this is actually an arguable idea.
Q2: What if Y decides to bejewel the iPhone, must X pay?
Class Scenarios A: NO. This is not an expense for use or preservation.
Q1: X lends Y an antique sword. Y’s son starts playing with said antique
sword. Did Y violate the commodatum? Art. 1942. The bailee is liable for the loss of the thing, even if it should
A: YES, because the nature of the thing would forbid Y from allowing the be through a fortuitous event: (DKALS)
son to use it. (1) If he Devotes the thing to any purpose different from that for
which it has been loaned;
Q2: X is a dentist. Y, also a dentist, lends X a dentist chair to be used in (2) If he Keeps it longer than the period stipulated, or after the
X’s home clinic. Can members of the family use the dentist chair? accomplishment of the use for which the commodatum has
been constituted;

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


(3) If the thing loaned has been delivered with Appraisal of its Art. 1944. The bailee cannot retain the thing loaned on the ground that
value, unless there is a stipulation exempting the bailee from the bailor owes him something, even though it may be by reason of
responsibility in case of a fortuitous event; expenses. However, the bailee has a right of retention for damages
(4) If he Lends or leases the thing to a third person, who is not a mentioned in Art. 1951.
member of his household;
(5) If, being able to Save either the thing borrowed or his own thing, Obligation to Return the Thing Loaned
he chose to save the latter. General Rule: The borrow has no right to retain the thing loaned as
security for claims he has against the lender, even though they may be
General Rule by reason of extraordinary expenses
Bailee is NOT liable for loss or damage due to a fortuitous event. • EXCEPT – when it is kept for a claim for damages suffered
• EXCEPT as listed in Art. 1942 because of flaws of the thing loaned

Class Scenarios Effect of Failure to Return or Adverse Claim of Bailee


Q1: X lends Y an iPhone, but also gives Y the receipt showing how much • Mere failure to return the subject matter of the commodatum to
the iPhone cost. the bailor does not constitute adverse possession on the part of
A: This is appraisal. the bailee who holds the same in trust
• Declaring lots that were just borrowed from another for tax
Q2: X lends Y an iPhone six months ago. It was supposed to be returned declaration purposes can be considered an adverse claim
tomorrow, but today it was struck by lightning. When it got struck by which cannot, however, ripen into title through ordinary
lightning, Y was using it himself. BUT yesterday, Y let her yaya use it. Is Y acquisitive prescription
liable to pay for the iPhone because Y let her yaya use it even if the
phone was destroyed in Y’s possession and not her yaya’s? Right of Retention for Damages
A: YES. WON the thing was destroyed while in someone else’s The bailee’s right extends no further than to retention of the thing
possession, the trust was violated. loaned until he is reimbursed for the damages suffered by him.
• Bailee cannot lawfully sell the thing to satisfy the damages
Art. 1943. The bailee does not answer for the deterioration of the thing
loaned due only to the use thereof & without his fault. Class Scenarios
Q1: X lent Y his phone for 6 months. Prior to the lapse, Y lent X money,
Ordinary Wear & Tear due one day before the phone was supposed to be returned to X. X did
Depreciation caused by the reasonable & natural use of the thing is not pay and it is now the time that Y must return the phone to X. Must
borne by the bailor, unless there is stipulation to the contrary. the phone still be returned?
• BUT the bailee is liable if: A: YES.
o He is guilty of fraud or negligence; or
o He devotes the thing to any purpose different from that Q2: X lent Y his phone. Suddenly the phone exploded. Who pays for the
for which it has been loaned exploding phone?
A: X, because it’s an extraordinary expense.
Class Scenario
Q: If X lent Y a phone and Y returned it but there were minor scratches. Art. 1945. When there are two or more bailees to whom a thing is
Is Y liable? loaned in the same contract, they are liable solidarily.
A: NO. That’s just ordinary wear and tear.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


SECTION 3. - Obligations of the Bailor • Thing is subject to revocation by the bailor at any time, whether
or not the use for which the thing has been loaned has been
Art. 1946. The bailor cannot demand the return of the thing loaned till accomplished
after the expiration of the period stipulated, or after the accomplishment • As opposed to ordinary commodatum, where possession of the
of the use for which the commodatum has been constituted. However, if bailee is more secure & depends on the expiration or the period
in the meantime, he should have urgent need of the thing, he may agreed upon or the accomplishment of the purpose
demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is Case Doctrines
suspended while the thing is in the possession of the bailor. Mina v. Pascual
• Facts: X let Y, his brother, use his land. Y built a warehouse on
Instances Where the Thing Loaned is Returned (PAPUA) X’s land. Both of them died. Meanwhile, one of Y’s heirs sold a
(1) After the Period of time agreed upon has passed portion of the lot.
(2) Accomplishment of purpose for which the thing was loaned • Held: This is not a commodatum because there was no specific
(3) Precarium – when possession of the thing is by tolerance or period given for the lending of the thing.
there is no time or purpose specified for the thing • General Commentary of Legal Scholars: This is actually a
(4) Urgent need – suspends the commodatum commodatum, & it’s a precarium.
(5) Acts of ingratitude are committed by the borrower
Quintos v. Beck
Obligation to Respect Duration of Loan
• Facts: X leased Y his house. In the terms of the lease, X allowed
Primary obligation of bailor: to allow the bailee to use the thing loaned
Y to make use of the furniture inside the home, as long as Y
for the duration of the period stipulated or until the accomplishment of
returned the furniture upon X’s demand. When the period of the
the purpose for which the commodatum was constituted
lease ended, X sold the lot to Z, & told Y to surrender all the
• He is bound by the terms of the commodatum, which is for a furniture. Y said OK, but also said he wanted to keep some
certain time heaters & lamps. Furthermore, Y said that X could just swing by
• BUT the bailor may demand the return or temporary use of the and pick them up.
thing, which may be permanent or temporary, if he has urgent • Held: The contract, being one of precarium, meant the furniture
need for it or the bailee commits acts of ingratitutde was demandable at will & Y should have given them all back,
completely, to X, at the latter’s house. Y did not comply with this
Art. 1947. The bailor may demand the thing at will, & the contractual obligation when he merely placed the things at the disposal of X
relation is called a precarium, in the ff. cases: (DUTO) without physically returning them.
(1) If neither the Duration of the contract nor the Use to which the
thing loaned should be devoted, has been stipulated; or Art. 1948. The bailor may demand the immediate return of the thing if
(2) If the use of the thing is merely TOlerated by the owner.2 the bailee commits any act of ingratitude specified in Art. 765.
Precarium Art. 765: Acts of Ingratitude (OIR)
A kind of commodatum where the bailor may demand the thing at will (1) If the bailee should commit Offenses against the person, the
• A contract where the owner of a thing, at the request of another honor or the property of the bailor, or of his wife, or children
person, gives the latter the thing for use as long as the owner under his parental authority
shall please (2) If the bailee Imputes to the bailor any criminal offense, or any
act involving moral turpitude, even though he should prove it,
2 De Leon: Owner here should be bailor.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


unless the crime or act has been committed against the bailee Not ordinarily needed for use & preservation Use & preservation
himself, his wife or children under his authority Borne by bailor Borne by bailee
(3) If the bailee unduly Refuses the support when the bailee is
legally or morally bound to give support to the bailor Art. 1950. If, for the purpose of making use of the thing, the bailee
incurs expenses other than those referred to in Art. 1941 & 1949, he is
Applies in Ordinary Commodatum not entitled to reimbursement.
In the case of precarium, the bailor can always demand the thing at will.
No Obligation for Bailor to Assume Other Expenses
Art. 1949. The bailor shall refund the extraordinary expenses during the All other expenses are to be borne by the bailee for the purpose of
contract for the preservation of the thing loaned, provided the bailee making use of the thing (e.g., an extra tire on reserve for a trip) which
brings the same to the knowledge of the bailor before incurring them, are not actually necessary for use & preservation are to be borne by the
except when they are so urgent that the reply to the notification cannot bailee, including expenses for ostentation
be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of Art. 1951. The bailor who, knowing the flaws of the thing loaned, does
the thing by the bailee, even though he acted without fault, they shall be not advise the bailee of the same, shall be liable to the latter for the
borne equally by both the bailor & the bailee, unless there is a damages which he may suffer by reason thereof.
stipulation to the contrary.
Requisites for Liability to Pay Damages for Known Hidden Flaws
Extraordinary Expenses for Preservation (FHANS)
The expenses will be borne by the bailor (e.g., expenses for repairing a (1) There is a Flaw or defect in the thing loaned;
borrowed house damaged by a typhoon) (2) The flaw or defect is Hidden;
• If incurred by the bailee, the bailor must refund them provided (3) The bailor is Aware thereof;
the bailee brings the same to the knowledge of the bailor before (4) He does Not advise the bailee of the same; &
incurring them (5) The bailee Suffers damages by reason of said flaw or defect
• Notice is required as bailor has the discretion to decide what
can be done with his property Liability of Bailor
o EXCEPT when they are so urgent that the reply cannot The bailor is made liable for his bad faith, like a pledgor.
be awaited without danger • The bailee is given the right of retention until he is paid
• The right of the bailee to reimbursement is subject to the 2nd damages
par. of Art. 1949. • BUT where bailor does not know of the flaw, he cannot be held
liable
Extraordinary Expenses Arising from Use
The bailor & bailee bare the amount on a 50-50 basis when the Art. 1952. The bailor cannot exempt himself from the payment of
expenses caused by a fortuitous event arise on the occasion of the expenses or damages by abandoning the thing to the bailee.
actual use of the thing loaned (i.e., a borrowed jeep was damaged in a
collision) CHAPTER 2. – SIMPLE LOAN OR MUTUUM
• BUT the parties, by stipulation, may provide for a different
arrangement Art. 1953. A person who receives a loan of money or any other fungible3

Extraordinary Expenses Ordinary Expenses


3 For purposes of this class, this is the same as a consumable.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


thing acquires the ownership thereof, & is bound to pay to the creditor • WON a thing is consumable depends on its nature
an equal amount of the same kind & quality. • WON a thing is fungible depends on the intent of the parties
• Ex. Wine is consumable by nature, but it is non-fungible if the
Simple loan or mutuum intention is to use it merely for display or exhibition
A contract whereby one party delivers to another money or other
consumable thing with the understanding that the same amount of the Case Doctrines
same kind & quality will be paid Republic v. Grijaldo
• Implies the return of the equivalent only, & not the identical • Facts: X obtained crop loans from the bank—these are loans of
thing money which are secured by mortgaged crops growing on X’s
• The borrower acquires ownership of the thing loaned land. Before X could pay the loans, however, WW2 came & his
• A loan of money, however, may be payable in kind crops were destroyed during the war. X now claims his
• The use of the word “to pay” implies consumption of the thing obligation to pay the loan was extinguished via force majeure.
loaned • Held: X is still liable to pay the loan to the bank. In an obligation
• May include the accessory duty of paying interest to deliver a generic thing, the loss or destruction of anything of
• Bilateral – the promise of borrower to pay is the consideration the same kind does not extinguish the obligation. Money is
giving rise to the obligation of the lender to furnish the loan consumable & generic, thus, it can never be destroyed by
fortuitous event. Furthermore, the crops were just the securities
Rent Simple Loan on the loan, not the loan itself.
Ownership Delivery of something Delivery of money or
non-consumable, to be some other consumable Martinez v. Ramos
used by the borrower & thing to another with a • Facts: X lent Y money. The document evidencing Y’s loan said, “I
returned to the lender; promise to repay the have received P3,000 from X which I will return in 3 years.” Y,
the owner simply loses equivalent amount of however, did not want to pay when X made a demand. Y
control over the property the same kind or claimed that the money was actually used to finance his
but does not loser quality; loses ownership parents’ business, & he only signed on their behalf.
ownership • Held: Y must pay X back. Whatever contract Y had with others
Relationship Landlord-tenant Obligor-obligee did not change the nature of his debt to X, given that an
Compensation Owner of the thing Creditor receives obligation is binding between the parties that agree to it, & do
receives compensation payment for his loan not involve third parties not privy to the contract. Further, The
or price either in money, contract states that Y, and nobody else, will return to X the
chattel, provisions from money. Obligations arising from contracts have legal force
the occupant in return between the contracting parties & must be fulfilled in
for its use accordance with their stipulations.

Fungible Things Art. 1954. A contract whereby one person transfers the ownership of
Things which are usually dealt with by number, weight or measure such non-fungible things to another with the obligation on the part of the
as rice, oil, sugar, etc. so that any given unit or portion is treated as the latter to give things of the same kind, quantity, & quality shall be
equivalent of any other unit or portion considered a barter.

Fungible v. Consumable Barter

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Under Art. 1954, barter pertains to the transfer of ownership of a non- o A check is not legal tender & cannot constitute valid
fungible thing; however, there are other definitions of barter which tender of payment
include fungible things, but which are covered by different provisions in • Loan of fungible thing – If what was loaned was a fungible thing
the Civil Code (i.e., Art. 1638) other than money, the borrower must pay the lender another:
(1) Another thing of the same kind, quality & quantity; if
Barter Loan this is impossible—
Subject Matter Non-fungible (non- Mutuum – money or other (2) The borrower shall pay for its value at the time of the
consumable) things fungible thing perfection of the loan
Thing Returned The equivalent of the Commodatum – bailee is • Ex. D borrowed from C 2 sacks of rice of a
thing is given in return bound to return the certain kind & quality. At the time the loan was
for something received identical thing borrowed perfected, the price of each sack was P1,400.
Consideration Always onerous; Mutuum – may be If the rice is not available for some reason on
technically a mutual gratuitous due date, D should pay C P2,800 for the 2
sale Commodatum – always sacks.
gratuitous
Art. 1956. No interest shall be due unless it has been expressly
Art. 1955. The obligation of a person who borrows money shall be stipulated in writing.
governed by the provisions of Art. 1249 & 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes Requisites for Charging Interest (EWL)
another thing of the same kind, quantity & quality, even if it should (1) The payment of interest must be Expressly stipulated
change in value. In case it is impossible to deliver the same kind, its (2) The agreement must be in Writing
value at the time of the perfection of the loan shall be paid. (3) The interest must be Lawful

Form of Payment Types of Interest


Object of simple loan may be either money or consumable or fungible • Monetary interest – compensation for the use of money, as
thing agreed by the parties; must be stipulated in writing
• Loan of money – payment must be in the currency stipulated, if • Compensatory interest – imposed by law or by the courts as
it is possible to deliver such currency penalty or indemnity for damages; may be granted despite
o If not, it is payable in the currency which is legal tender absence of stipulated interest
in the Philippines
o In case of extraordinary inflation or deflation, the basis Existence of Stipulation to Pay Interest
of payment will be the value of the currency at the time • If a particular interest rate has been stipulated by the parties,
of the creation of the obligation that interest, not the legal rate of interest, shall be applied
§ Ex. D borrowed P50,000 from C, payable in 5 • If the exact rate of interest is not mentioned but the parties
years. At maturity, value of the P50,000 agreed that there would be interest, the legal rate of 6% shall
dropped to P25,000 due to deflation. be payable
In this case, the basis for payment will be the • No increase in interest shall be due unless the increase has
equivalent of the currency 5 years ago & D will also been expressly stipulated
be liable to pay C P100,000, unless there is
agreement to the contrary

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Sales invoices or slips issued by a store to customers, stating § If this is judicially demanded 6 months after D
interests & attorney’s fees, do not constitute express stipulation incurred in delay, the interest due shall earn
without the signature of the obligor legal interest (6% p.a.) from the time there is
o Obligor would only be liable for 6% interest under Art. judicial demand that time until payment is
2209 if he incurs in delay made
• It is only in contracts of loan, with or without security, that o If no int. is stipulated, then no interest is due. If D
interest may be stipulated & demanded incurs in delay, he is liable to pay at the current legal
• Extending the loan does not equate to extending the application rate of 6% p.a.
of interest on said loan past the original maturity date, unless
the parties again so stipulate Interest is Separate & Distinct from Penalty
• Choosing to buy a lot by installment necessarily entails paying • A penalty stipulation is not necessarily preclusive of interest; if
the interest, whether paying interest is disclosed in the contract there is an agreement for both penalty & interest, these may be
or not separately demanded
o But penalty may be reduced if it is unconscionable &
Liability for Interest in the Absence of Stipulation iniquitous
• Indemnity for damages – under Art. 2209, if the obligation
consists in the payment of a sum of money, & the debtor incurs Case Doctrines
in delay, the indemnity for damage shall be: Tan v. Valdehueza
o The one stipulated by the parties; in the absence • Facts: X & Y entered into a pacto de retro sale, where Y was the
thereof— vendor a retro. Y failed to redeem, so X filed a case for
o The legal interest, at 6% p.a.4 consolidation of ownership. There was no stipulation of interest
*NOTE: Interest under Art. 2209 is not limited to loans or in their contract, but the trial court adjudged that Y should pay
forbearances; it includes— interest on the prices of the lots.
o Default in the payment of price or consideration under • Held: It was wrong for the lower court to impose interest on the
a contract of sale price of the lots, as no interest was expressly stipulated
o An action for damages for injury to persons & loss of between the parties. Furthermore, X’s petition was for
property, & consolidation of ownership, not for a claim of sum of money.
o Actions for unpaid insurance claims However, SC imposed 6% int. p.a. from the finality of the
• Interest accruing from unpaid interest – interest stipulated shall decision.
earn interest from the time it is judicially demanded, although
the obligation may be silent on that point Jardenil v. Solas
o Where a court’s judgment which did not provide for • Facts: X loaned Y money. In their agreement, Y would pay
payment of interest has become final, no interest may interest & the debt would mature on Mar. 31, 1934, & there
be awarded was interest stipulated at 12% p.a. The agreement also allowed
• Ex. D loaned from C P10,000. for an extension period of 1 year. Y made use of the grace
o If 18% int. p.a. was agreed upon & D incurs in delay, D period, but X wants to be paid 12% p.a. for the grace period as
will be liable to pay the interest agreed upon (18%) as well.
damages, & not for the use of money • Held: X is not entitled to interest for the grace period, as the
contract did not expressly stipulate that the interest would also
be extended throughout the grace period if the extension of the
4 Check usury part of Reviewer for full discussion on application of interest rates.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


loan is exercised. Thus, interest can only be charged for the • Facts: Ramos made a time deposit with Overseas Bank, which
period agreed upon in the contract, that is, until Mar. 31, 1994. thereafter was suspended by the Central Bank (CB). Ramos
After that, no interest is due on the principal. wants to claim the interest on his time deposit.
• Held: Ramos cannot claim interest for the period of suspension
Soncuya v. Azarraga of the bank. What enables a bank to pay stipulated interest on
• Facts: X represented Y in a case, & the latter became indebted money deposited with it is that thru the other aspects of its
to X. To pay the debt, Y mortgaged his lands & allowed X to live operation, it is able to generate funds to cover the payment of
on it until the expiration of 5 years, after which Y should have such interest. Unless a bank can engage in banking & financing
already fully paid his debt. When the debt became due, Y asked activities from which it can derive income, it is inconceivable
for an extension & agreed, after negotiating with X, to pay how it can carry on as a depository obligated to pay stipulated
interest of 12% p.a. What kind of contract is this? interest. It should be deemed read into every contract of deposit
• Held: The contract is a contract of loan; it is only in loans that with a bank that the obligation to pay interest on the deposit
interest can be stipulated. In this case, whatever the contract ceases the moment the operation of the bank is completely
between X & Y used to be, it is now to be considered a loan, & suspended by the duly constituted authority, the Central Bank.
interest may be validly stipulated & paid.
Ramos v. CB
Royal Shirt v. Co Bon Tic • Facts: In a previous ruling (Tapia), SC held that a suspended
• Facts: X & Y entered into an agreement where Y would sell X’s bank is not liable to pay the interests of time deposits during
shoes. It was agreed that Y would own the shoes & pay for price the period of its closure or the suspension of its banking
of all of them, regardless of whether or not they were sold. In operations. CB contests.
the receipt that evidenced the transaction, it was stipulated that • Held: Tapia ruling was upheld, & thus banks, while still liable to
there would be payment of 12% int. for late payment. However, pay the principals of time deposits, are not liable for interest on
Y never signed the receipt. these deposits during the period of their suspension.
• Held: Had Y signed the receipt, he would be liable for 12% int.
for the late payment. However, since he did not, it cannot be Lirag v. SSS
said that Y had knowledge & fully consented to the imposition • Facts: SSS entered into a Purchasing Agreement with X Corp. It
of such interest. Thus, Y is only liable at the legal rate of 6% int. was stipulated there that SSS would buy P1M worth of X Corp.’s
shares, but X Corp. would buy back the shares at various
Arwood Industries v. DM Consunji stipulated periods, while paying dividends at 8% p.a. The
• Facts: X was building a condominium for Y. Y failed to make the contract also came with an acceleration clause. X Corp. failed to
payments for the condo. Their contract stipulated that in case of buy back the shares in one of the promised periods, so SSS
default there would be 2% int. per month on the unpaid demanded the full sum plus dividends. On the issue of the
balance. Y protests the imposition of this interest. dividends, X Corp. opposed, saying that a shareholder cannot
• Held: The interest is valid, as the contract is the law between demand dividends when the company has made no profits.
the parties. Y was in delay from the time that X finished • Held: The transaction was actually a loan, & the dividends
constructing the condo & Y failed to pay; thus, X is entitled to actually served as interest. The 8% p.a. was not meant to
damages, in the form of the 2% int. per month. fluctuate, & the payments were due at specified periods. Thus,
SSS had the right to demand the payments plus interest.
Overseas Bank v. Cordero

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Art. 1957. Contracts & stipulations, under any cloak or device whatever, Art. 1959. Without prejudice to the provisions of Art. 2212, interest due
intended to circumvent the laws against usury shall be void. The & unpaid shall not earn interest. However, the contracting parties may
borrower may recover in accordance with the laws on usury. by stipulation capitalize the interest due & unpaid, which as added
principal, shall earn new interest.
Usurious Contracts Declared Void
• Form of contract is not conclusive; parol evidence may be When Unpaid Interest Earns Interest
admissible to show that a written document was meant to cover General Rule: Accrued interest does not earn interest except—
usury (1) When interest is judicially demanded (Art. 2212)
• BUT in such a case, the contract would only be void as to the (2) When there is express stipulation made by the parties
interest involved, so that the loan becomes without stipulation • Compounding interest – when the interest due & unpaid
to pay interest is added to the principal & the resulting total amount
• Amount paid under usurious agreement is recoverable by the shall earn interest; allowed even under Usury Law, so
debtor, since the payment is deemed to have been made under long as there is express stipulation
restraint, rather than voluntarily
Case Doctrines
Case Doctrines Cu-Unjieng v. Mabalacat
Angel Jose v. Chelda Enterprises • Facts: X loaned money from Y. The contract between them
• Facts: X lent Y about P40,000 with 2% int. per month. The trial stated that there would be: “Interest, to be computed upon the
court ruled that the interest rates were usurious. still unpaid capital of the loan, shall be paid monthly, at the end
• Held: X can still recover the principal amount. Art. 1420 of the of each month.” Y contests that this means there was
Civil Code states that in case of a divisible contract, if the illegal compounded interest.
terms can be separated from the legal ones, the latter may be • Held: This is NOT compounded interest; it merely meant that the
enforced. Thus, the principal can still be enforced as against the computation of the interest would be based on the unpaid
borrower. HOWEVER, as to the interest, the whole amount of the balance of each month, which is not the equivalent of
interest, & not just the usurious part of it, is void & cannot be compounded interest. Thus, no compounded interest may be
recovered by X. Thus, X can recover only P40,000, with no imposed by Y.
interest.
Art. 1960. If the borrower pays interest when there has been no
Art. 1958. In the determination of the interest, if it is payable in kind, its stipulation therefor, the provisions of this Code concerning solutio
value shall be appraised at the current price of the products or goods at indebiti, or natural obligations, shall be applied, as the case may be.
the time & place of payment.
Recovery of Unstipulated Interest Paid
Illustrative Example If unstipulated interest is paid by mistake, the debtor may recover
B borrowed P10,000 from L payable in palay in 1 year which shall be • BUT where there is stipulation that is not In writing, & the debtor
appraised at the current market price at the time & place of payment. pays the interest voluntarily as he feels morally obliged to do so,
When the contract was entered into, the price of palay was P1,000. On there can be no more recovery as in the case of natural
the due date, the price is P1,500. obligations (Art. 1423)
• In this case, the value of the palay shall be appraised at P1,500
per cavan. Case Doctrines
Velez v. Balzarra

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Facts: X extended 5 loans to Y, which were secured by If the Monetary Board chooses to restore the ceiling rates, the Usury Law
mortgages to 7 parcels of land belonging to Y. During the period will apply again.
of the loan, X lived on the land. Y paid X periodically, but X • The Circular did not amend or repeal the Usury Law; it only
insisted that these should be applied as rent & interest, & not suspended the Law’s effectivity
as the principal on the loan. • The Circular is of doubtful legality because the Usury Law only
• Held: There was no express stipulation in the contract as to authorized the Monetary Board to fix the maximum rate & to
interest; thus, no interest could be charged. Furthermore, X was change the rate depending on prevailing socio-economic
allowed enjoyment of the land, The amount must therefore be conditions
applied to the principal. As such, Y had already overpaid & is
entitled to reimbursement from X. The two requisites for solutio Usury
indebiti are present: (1) there is no right to collect these excess Contract where 2 parties agree to pay or receive something in excess of
sums; and (2) the amounts have been paid through mistake by the amount allowed by law for the loan or forbearance of money, goods
defendants. or chattels
• Elements (LUUT):
Art. 1961. Usurious contracts shall be governed by the Usury Law & (1) A Loan or forbearance
other special laws, so far as they are not inconsistent with this Code. (2) An Understanding between the parties that the loan
shall or may be returned
Usury Law Now Legally Non-Existent (3) An Unlawful intent to take more than the legal rate for
• The effectivity of the Usury Law has been suspended by the the use of money or its equivalent
Central Bank (4) The Taking or agreeing to take for the use of the loan of
o SC: “The CB Circular did not repeal nor in any way something in excess of what is allowed by law
amend the Usury Law, but simply suspended the
latter’s effectivity.” Usury Law (Act No. 2566)
• Interest rate chargeable now depends on the agreement of the Involves 2 transactions only:
parties • Loan – understood as mutuum, excluding commodatum
• BUT where interest rate is excessive, even if voluntarily • Forbearance – the contractual obligation of the creditor to
assumed, the courts may declare the rate illegal & reduce the forbear during a given period to require the debtor to pay an
same as reason & equity demand existing debt then due & payable
o Giving time for the payment of a debt; in substance,
USURY LAW & RELATED CIRCULARS also a loan
Where there is no loan or forbearance, there is no usury.
CB Circular No. 905 • Rentals are not loans
The Circular, effective on Jan. 1, 1983, lifted the ceiling rates in the • Compensation for the past use of money does not count
Usury Law, & approved the ff. regulations governing interest rates in the • Discounts are not considered to be loans
absence of express stipulation in a contract:
• 12% p.a. – For loans or forbearances of any money, goods or Usury statutes are to be applied prospectively only
credit, & judgments (as earlier implemented by CB Circular No. • In the absence of stipulation.
416 as of July 29, 1974) • Contracts previously non-usurious – cannot be made usurious
• The Circular was also given retroactive effect by a law, so that a person may collect usurious rates after the

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


adoption of the Usury Law if that was what was stated in their to loans secured by other types of security as may be specified by the
contract Monetary Board.
• Contracts previously usurious – where a person is made liable
to pay 60% interest before the effectivity of the Usury Law, Sec. 3. No person or corporation shall directly or indirectly demand,
contrary to the older Usury Law, the borrower is liable only to take, receive or agree to charge in money or other property, real or
pay the legal rate of 6% p.a. both for the period prior to & after personal, a higher rate or greater sum or value for the loan or
the date the law became effective. forbearance of money, goods, or credits where such loan or forbearance
is not secured as provided in Section two hereof, than 14% p.a. or the
Sec. 1. The rate of interest for the loan or forbearance of any money maximum rate or rates prescribed by the Monetary Board and in force at
goods, or credits and the rate allowed in judgments, in the absence of the time the loan or forbearance is granted.
express contract as to such rate of interest, shall be 6% p.a. or such rate
as may be prescribed by the Monetary Board of the Central Bank of the Interest/Forbearance
Philippines for that purpose in accordance with the authority hereby Interest – the compensation allowed by law or fixed by the parties for
granted. the loan or forbearance of money, goods or credits
• Subjecting a contract to conditions is not the equivalent of
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the charging interest
maximum rate or rates of interest for the loan or renewal thereof or the Forbearance – a contractual obligation of a lender of credit to refrain,
forbearance of any money, goods or credits, and to change such rate or during a certain period of time, from requiring the borrower or debtor to
rates whenever warranted by prevailing economic and social conditions. repay a loan or debt then due or payable
• Arrangements other than loan agreements where a person
In the exercise of the authority herein granted, the Monetary Board may acquiesces to the temporary use of his money, goods or credits
prescribe higher maximum rates for loans of low priority, such as pending the happening of certain events or fulfillment of certain
consumer loans or renewals thereof as well as such loans made by conditions
pawnshops finance companies and other similar credit institutions
although the rates prescribed for these institutions need not necessarily Kinds of Interest
be uniform. The Monetary Board is also authorized to prescribe different (1) Simple interest – the interest paid for the principal at a certain
maximum rate or rates for different types of borrowings, including rate fixed or stipulated by the parties
deposits and deposit substitutes, or loans of financial intermediaries. (2) Compound interest – the interest imposed upon the interest
due & unpaid
Sec. 2. No person or corporation shall directly or indirectly take or • The accrued interest is added to the sum & the whole
receive in money or other property, real or personal, or choses in action, is treated as a new principal upon which the interest
a higher rate of interest or greater sum or value, including commissions, for the next period is calculated
premiums, fines and penalties, for the loan or renewal thereof or • New principal = (principal + unpaid accrued interest)
forbearance of money, goods, or credits, where such loan or renewal or (3) Lawful interest – the interest the law allows or does not
forbearance is secured in whole or in part by a mortgage upon real prohibit; within the maximum prescribed by law
estate the title to which is duly registered, or by any document conveying (4) Unlawful interest – an interest stipulated that is beyond the
such real estate or an interest therein, than 12% p.a. or the maximum maximum fixed by law
rate prescribed by the Monetary Board and in force at the time the loan (5) Legal interest – that which the law directs to be charged in the
or renewal thereof or forbearance is granted: Provided, That the rate of absence of any agreement as to the rate between the parties
interest under this section or the maximum rate of interest that may be
prescribed by the Monetary Board under this section may likewise apply

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Interest Stipulated For interest pertaining to damages, from the time of

• Courts can reduce equitably liquidated damages, whether judicial or extrajudicial demand; however, if the
intended as an indemnity or penalty (Art. 1229) demand cannot be ascertained with reasonable
certainty,5 then—
Penalty & Interest o From the date of the rendition of the judgment by
• Penalty is separate from interest & they may be demanded the trial court
separately when it comes to unsecured loans (3) The base amount for the computation of interest is always the
• When it comes to secured loans, penalties are already included amount adjudged by the court
in the computation of interest (4) From the time the judgment has been rendered by the trial
court until the finality of the decision, the interest shall be at
Application of Interest 6%/12% p.a. or the stipulated interest, whichever the court
(1) Interest to be applied is: adjudged.
• That which is stipulated by the parties; if none, either— (5) Whether or not interest adjudged by the trial court initially is at
o Art. 2209. If the obligation consists in the payment 6%/12% or that stipulated by the parties, 12% interest p.a. will
of a sum of money, & the debtor incurs in delay, be imposed from the finality of the decision until payment by
the indemnity for damages shall be the legal the debtor is made, as that delay in payment of the judgment is
interest of 6% p.a., awarded at the court’s considered a forbearance of credit
discretion • The 12% interest here will be applied to the amount
o CB Circular No. 416 – for forbearances & loans of adjudged by the court
money, goods or credit & judgments related to
forbearances & loans, interest is 12% p.a. effective Case Doctrines
July 29, 1974. Reformina v. Tomol
§ Has been held to apply to the payment of • Facts: In an Action for Damages where X’s boats were damaged
unliquidated cash advances to an by a fire caused by Y, the court ruled that was indebted to X, &
employee by her employer must pay the sum with legal interest. X insists that the legal
§ Also applies to the return of money paid by interest on the sum should be computed at 12%.
a buyer of a leasehold right • Held: It should only be 6% pursuant to Art. 2209 which imposes
o BSP-MB Circular No. 799 – effective July 1, 2013 that in the absence of express stipulation, a legal interest of 6%
& applied prospectively, it fixed the rate for per annum in obligations not constituting a loan or forbearance
forbearances, loans & judgments on forbearances of money. The 12% int. is imposable only on loans, forbearances
& loans at 6% p.a. & judgments on loans & forbearances, pursuant to the powers
o NOTE: This now applies to interest on granted by law to the Monetary Board.
interest, finality of judgment, & judgments
on loans & forbearances First Metro Investment v. Este del Sol
• Art. 2212. Interest stipulated shall earn legal interest
from the time it is judicially demanded, although the 5 This is to be interpreted in relation to Art. 1169: No interest shall be adjudged on
obligation may be silent on that point. unliquidated claims or damages except when or until the demand can be established with
(2) Interest begins to run from: reasonable certainty. In assigned case PNB v. CA, the plaintiff was able to show the
damages suffered—P98,691.90—representing 23 checks that were misappropriated by
• For interest for loans or forbearances, from the time of the plaintiff’s agents. Thus, as the amount could be established with reasonable certainty,
extrajudicial or judicial demand SC applied the interest on said amount starting from the date of judicial demand & not
from the date of the decision of the trial court.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Facts: X loaned Y P7.38M with 16% int. p.a. Furthermore, X • Facts: The bank extended loans to Y through 2 promissory
required that Y pay an underwriting fee, consultancy fee & notes. The notes stipulated: "Interest shall be at the rate of 9%
supervision fee, even if X did not actually provide any services per annum from the date(s) of the draft(s) to the date(s) of
that would merit such fees. All the amounts due were also set to arrival of payment therefor in New York. The Bank, however,
mature on the same date. reserves the right to raise the interest charges at any time
• Held: The fees were an attempt to circumvent the law on usury. depending on whatever policy it may follow in the future."
As such, the entire interest is void, & X can now only claim the • Held: Such stipulation of the bank is void. Y did not agree to the
principal. increase in the stipulated interest rate. The unilateral
determination and imposition of increased interest rates by a
David v. CA bank is violative of the principle of mutuality of contracts
• Facts: X defaulted on paying a loan to Y. The trial court ruled in ordained in Article 1308 of the Civil Code.
favor of X & computed legal interest, but no compound interest.
X insists there should be compound interest. Furthermore, Solangon v. Salazar
when X filed for a re-computation of interest, thus suspending • Facts: Contract imposed 72% interest rate p.a. (or 6% int. per
the execution of the judgment, CB Circular No. 416 had taken month).
effect on July 29, 1974, raising legal interest from 6% to 12%. • Held: Even an interest at 5.5% per month on a P500,000 loan
• Held: Because there was no stipulation on compounded was deemed by SC (in a previous case) to be excessive,
interest, compounded interest is not due. The interest, however, iniquitous, unconscionable & exorbitant even if it cannot be
was correctly modified by the judge, as the CB Circular is a declared usurious. SC reduced the interest rate to 12% p.a.
supervening event which affects the judgment if the case is still Despite lifting of the ceiling on interest rates by the CB Circular
pending. Thus, from the time of filing until July 28, 1974, 905, nothing in the said circular would grant lenders carte
interest was at 6%, & then at 12% from July 29, 1974 until Apr. blanch authority to raise interest rates to levels which will either
3, 1993. enslave their borrowers or lead to a hemorrhaging of their
assets.
Investors v. Autoworld
• Facts: X approached Y, asking for a loan for X’s company, Spouses Pascual v. Ramos
Autoworld. Y said he didn’t do loans, but was willing to do an • Facts: The contracts here stipulated 7% int. per month & 5% int.
“Installment Paper Purchase,” where X would execute a per month on 2 separate loans.
Contract to Sell of a parcel of land to Autoworld, & Autoworld • Held: This contract is valid because the parties freely agreed to
would give X receivables, which X would sell to Y at a discounted such stipulation. Absent any evidence of fraud, undue influence,
value. Y would then “flow back” the amount to X. or any vice of consent, the interest agreed upon is binding upon
• Held: The interest was declared void & X was only obliged to pay them. The Court is not in a position to impose upon parties
the original amount of the loan. If from a construction of the contractual stipulations different from what they have agreed
whole transaction it becomes apparent that there exists a upon.
corrupt intention to violate the Usury Law, the courts should &
will permit no scheme, however ingenious, to becloud the crime Eastern Shipping Lines Inc. v. CA as discussed by Atty. Lerma
of usury. *NOTE: The case was decided before the effectivity of BSP-MB Circular
No. 799 (July 1, 2013) which applied prospectively the rate of 6% int.
Mendoza v. CA p.a. as legal interest for loans, forbearances & judgments on loans &
forbearances.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


I. When an obligation is breached, the contravenor is liable for II. With regard particularly to an award of interest in the
damages under the Civil Code concept of actual & compensatory damages, the rate of
II. In case interest is awarded as actual or compensatory damage, interest, as well as the accrual thereof, is imposed, as
the rate of interest, as well as the accrual thereof, is imposed as follows:
follows: 1. When the obligation is breached, and it consists in the
1. When obligation breached is a loan or sum of money payment of a sum of money, i.e., a loan or forbearance
i. Stipulation of money, the interest due should be that which may
ii. No stipulation – 12%* from the time there is a have been stipulated in writing. Furthermore, the
result, which starts from extrajudicial or interest due shall itself earn legal interest from the
judicial demand due to non-payment6 time it is judicially demanded. In the absence of
iii. Interest stipulated shall earn interest when it is stipulation, the rate of interest shall be 12% per annum
judicially demanded to be computed from default, i.e., from judicial or
2. Not a loan or forbearance of money extrajudicial demand under & subject to the provisions
i. What is expressly stipulated of Art. 1169 of the Civil Code.
ii. No stipulation – 6%, & the starting period 2. When an obligation, not constituting a loan or
depends on demand forbearance of money, is breached, an interest on the
1. Reasonable certainty of demand – amount of damages awarded may be imposed at the
runs from judicial or extrajudicial discretion of the court at the rate of 6% per annum. No
demand interest, however, shall be adjudged on unliquidated
2. No reasonable certainty of demand – claims or damages except when or until the demand
runs from the time judgment is made can be established with reasonable certainty.
iii. Quantifiable damage must be established by a Accordingly, where the demand is established with
certain date, because in order for interest to reasonable certainty, the interest shall begin to run
exist, there must be a principal that the from the time the claim is made judicially or
interest can be tacked on extrajudicially (Art. 1169, Civil Code) but when such
3. Non-payment of award that is awarded by final certainty cannot be so reasonably established at the
judgment is considered a loan or forbearance which time the demand is made, the interest shall begin to
would set the interest at 12%* run only from the date the judgment of the court is
made (at which time the quantification of damages
Direct Quote from Eastern Shipping Case may be deemed to have been reasonably ascertained).
Nonetheless, it may not be unwise, by way of clarification and The actual base for the computation of legal interest
reconciliation, to suggest the following rules of shall, in any case, be on the amount finally adjudged.
thumb for future guidance. 1. When the judgment of the court awarding a sum of money
I. When an obligation, regardless of its source, i.e., law, becomes final and executory, the rate of legal interest, whether
contracts, quasi-contracts, delicts or quasi-delicts is the case falls under paragraph 1 or paragraph 2, above, shall
breached, the contravenor can be held liable for damages. be 12% per annum from such finality until its satisfaction, this
The provisions under Title XVIII on "Damages" of the Civil interim period being deemed to be by then an equivalent to a
Code govern in determining the measure of recoverable forbearance of credit.
damages.
RCBC v. Alfa RTW Calculation of Amounts Due

6 There should always be demand before default begins Facts: In the case, the parties stipulated the ff.:

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


•16% interest p.a. from date of execution of the Trust Receipt7
until paid
• 2% interest p.a. from date of execution of the Trust Receipt until
paid
• 6% interest p.a. as penalty for the amount due & unpaid
• 10% attorney’s fees
Relevant dates include: Rodszzen v. Far East Bank
• Sometime in 1981 – date of execution of the Trust Receipt • Facts: The bank claimed that 12% interest should apply, rather
• March 9, 1982 – date of demand letter than 6%, as the transaction was a loan.
• March 12, 1982 – date of filing of complaint in RTC • Held: Although the sum of money involved in this case was
• August 19, 1991 – date that RTC promulgated its decision payable to a bank, the present factual milieu clearly shows that
• December 14, 2001* –finality of SC’s judgment it was not a loan or forbearance of money. Petitioner is bound to
pay interest at 6% p.a., computed from April 7, 1983, the time
*NOTE: This was the date that the judgment was released by the SC and technically not respondent bank demanded payment from petitioner. From the
the date of finality in the case, but is used here to serve as an illustrative example
finality of the judgment until its satisfaction, the interest shall
be 12% p.a.
Breakdown Input Amount
• Lerma’s Lecture: It was actually a SALE transaction.
Total Amount Due [Principal] + [Interest] + [Service Charge] +
o Rodszzen, buyer, applied for letter of credit from Far
as of Dec. 14, [Penalty] + [Interest on Interest]
East Bank
2001
o Ekman, the seller, will deliver the products to Rodszzen
[Principal] Principal & then, they go to Far East Bank to ask for payment
[Interest] [Principal] x 16% p.a. x no. of years from o Far East Bank will pay Ekman as an advance
“sometime in 1981” to Dec. 14, 2001 o Rodszzen will pay Far East Bank the money Far East
Service Charge [Principal] x 2% p.a. x no. of years from “sometime paid Ekman for the products bought
in 1981” to Dec. 14, 2001 o This transaction is NOT A LOAN though it appears to be
Penalty [Principal] x 6% p.a. x no. of years from March 9, a loan. The reason is that based on the totality of the
1982 until Dec. 14, 2001 transaction, it is actually a SALE and NOT A LOAN.
Interest on [Interest] from March 12, 1982 until Dec. 14, o This is just a funky way by which the seller is paid.
Interest 2001 x 12% p.a. x no. of years until Dec. 14, 2001
Interest on Total [Total Amount Due as of Dec. 14, 2001] x 12% p.a. Plantilla v. Baliwag
Amount Due until until paid • Facts: The sheriff, rather than the judge, decided on which
Paid interest rate to impose.
Attorney’s fees 10% x [Total Amount Due as of Dec. 14, 2001] • Held: The judge should have decided, not the sheriff. The judge,
who has the best view of all the evidence, should decide on the
proper interest, & the sheriff should merely execute the writ of
the judge.

7A trust receipt is a security transaction intended to aid in financing importers and retail PNB v. CA
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except thru
• Facts: 23 checks were misappropriated by X’s agents. Thus, X is
utilization, as collateral, of the merchandise imported or purchased. suing them. The contract is a contract of sale.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Held: X must be paid 6% legal int. p.a.; when the judgment Scenarios Applying Interest Rules
becomes final, int. p.a. will be at 12%. X was able to show the
damages suffered—P98,691.90—representing 23 checks that
were misappropriated by the plaintiff’s agents. Thus, as the
amount could be established with reasonable certainty, SC
applied the interest on said amount starting from the date of
judicial demand & not from the date of the decision of the trial
court.

Nacar v. Gallery Frames


• Facts: The question involved the proper computation of interest,
given the New Circular during the litigation which changed the
interest rate from 12% for loans or forbearances to 6%.
• Held: 12% prior to July 13, 2013; 6% starting July 1, 2013. In
the absence of an express stipulation as to the rate of interest
that would govern the parties, the rate of legal interest for loans
or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be 12% but will now be six
percent 6% per annum effective July 1, 2013, pursuant to
Resolution No. 796. It should be noted, nonetheless, that the
new rate could only be applied prospectively and not
retroactively. Consequently, the 12% per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of 6% per annum shall be the prevailing rate of
interest when applicable.
• The proper computation as held by SC:
(1) Back wages computed from the time petitioner was
illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court became final Reasons:
and executory.
(2) Interest of 12% p.a. of the total monetary awards, (1) The P50K serves as an unliquidated claim arising from a claim other
computed from May 27, 2002 to June 30, 2013 and 6% than a loan or forbearance. As such, it is only fully ascertainable &
p.a. from July 1, 2013 until their full satisfaction. liquidated as of the rendering of the judgment of the court. Thus, legal
interest of 6% arising from the claim of damages can only begin to run
from the rendering of judgment of the court.
(2) The 18% penalty interest is stipulated in their contract to begin when
there is delay. Thus, the penalty will set in from the time X made an
extrajudicial demand on Y, resulting in the latter’s default. Interest will
only begin to run from there, as agreed upon by the parties.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


(3) The 500K is a liquidated claim that can already be established with Sec. 5. In computing the interest on any obligation, promissory note or
reasonable certainty as of the time of extrajudicial demand. According to other instrument or contract, compound interest shall not be reckoned,
Eastern Shipping Lines, when the amount of the claim can be except by agreement: Provided, That whenever compound interest is
established with reasonable certainty, interest will begun to run from agreed upon, the effective rate of interest charged by the creditor shall
either judicial or extrajudicial demand. not exceed the equivalent of the maximum rate prescribed by the
(4) The total due as of the date of final judgment will be combined, and Monetary Board, or, in default thereof, whenever the debt is judicially
the total amount will earn 6% int. p.a. as of the date of the finality of claimed, in which last case it shall draw six per centum per annum
judgment, until the amount is finally paid. interest or such rate as may be prescribed by the Monetary Board. No
person or corporation shall require interest to be paid in advance for a
Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly period of more than one year: Provided, however, That whenever interest
stipulate, charge, demand, take or receive any higher rate or greater is paid in advance, the effective rate of interest charged by the creditor
sum or value for any loan or forbearance than two and one-half per shall not exceed the equivalent of the maximum rate prescribed by the
centum per month when the sum lent is less than one hundred pesos; Monetary Board.
two per centum per month when the sum lent is one hundred pesos or
more, but not exceeding five hundred pesos; and fourteen per centum Sec. 6. Any person or corporation who, for any such loan or renewal
per annum when it is more than the amount last mentioned; or the thereof or forbearance, shall have paid or delivered a higher rate or
maximum rate or rates prescribed by the Monetary Board and in force at greater sum or value than is hereinbefore allowed to be taken or
the time the loan or forbearance is granted. A pawnbroker or received, may recover the whole interest, commissions, premiums
pawnbroker's agent shall be considered such, for the benefits of this Act, penalties and surcharges paid or delivered with costs and attorneys'
only if he be duly licensed and has an establishment open to the public. fees in such sum as may be allowed by the court in an action against the
It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the person or corporation who took or received them if such action is
pawn offered by a person into two or more fractions in order to collect brought within two years after such payment or delivery: Provided,
greater interest than the permitted by this section. however, That the creditor shall not be obliged to return the interest,
It shall also be unlawful for a pawnbroker or pawnbroker's agent to commissions and premiums for a period of not more than one year
require the pawner to pay an additional charge as insurance premium collected by him in advance when the debtor shall have paid the
for the safekeeping and conservation of the article pawned. obligation before it is due, provided such interest, and commissions and
premiums do not exceed the rates fixed in this Act.
Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend
the effectivity of, interest rate ceilings on certain types of loans or Borrower’s Right to Recover Usurious Interest
renewals thereof or forbearances of money, goods, or credit, whenever • A borrower who has paid or delivered usurious interest may
warranted by prevailing economic and social conditions. recover the entire interest he paid with costs & attorney’s fees
• The stipulation imposing interest is deemed entirely void
Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates • Ex. During the effectivity of the usury law, X loaned Y money
of interest under this Act, the Monetary Board shall be guided by the with 50% interest p.a. In court, Y will be able to recover the
following: entire 50% and not just 50% minus 12% (the lawful interest
(1) The existing economic conditions in the country and the general rate)
requirements of the national economy; • The debtor will recover not only the interest paid, but the legal
(2) The supply of and demand for credit; interest on said amount, from the date of payment
(3) The rate of increase in the price levels; & • Pari delicto does not apply in usury cases
(4) Such other relevant criteria as the Monetary Board may adopt.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• The right to recover is given only to the borrower who has agreement that the rate of interest agreed upon shall be reduced in the
already paid or delivered the usurious interest event that the applicable maximum rate of interest is reduced by law or
by the Monetary Board: Provided, further, That the adjustment in the
Sec. 7. All covenants and stipulations contained in conveyances, rate of interest agreed upon shall take effect on or after the effectivity of
mortgages, bonds, bills, notes, and other contracts or evidences of the increase or decrease in the maximum rate of interest.
debts, and all deposits of goods or other things, whereupon or whereby
there shall be stipulated, charged, demanded, reserved, secured, taken, Escalation Clauses in Loans
or received, directly or indirectly, a higher rate or greater sum or value • The unilateral determination & imposition of increased interest
for the loan or renewal or forbearance of money, goods, or credits than by the lender will be violative of the principle of mutuality of
is hereinbefore allowed, shall be void: Provided, however, That no merely contracts under Art. 1308 of the Civil Code
clerical error in the computation of interest, made without intent to • Sec. 7-a deals with stipulations providing for adjustments in the
evade any of the provisions of this Act, shall render a contract void: interest rate agreed upon in the event that there is a change in
Provided, further, That parties to a loan agreement, the proceeds of the legal rate of interest effected by law or the Monetary Board
which may be availed of partially or fully at some future time, may • Valid only if the escalation clause includes a de-escalation
stipulate that the rate of interest agreed upon at the time the loan clause—thus, if the interest rate standard agreed upon
agreement is entered into, which rate shall not exceed the maximum increases, or decreases, it will apply to the contract
allowed by law, shall prevail notwithstanding subsequent changes in the • But if the clause “authorizes the creditor to increase the rate of
maximum rates that may be made by the Monetary Board: And Provided, interest in the event of changes in the prevailing market rates,”
finally, That nothing herein contained shall be construed to prevent the it cannot be said to be dependent solely on the will of the
purchase by an innocent purchaser of a negotiable mercantile paper, creditor
usurious or otherwise, for valuable consideration before maturity, when o In this case, both an increase & decrease can be
there has been no intention on the part of said purchaser to evade the applied by the parties, making it fair and valid
provisions of this Act and said purchase was not a part of the original
usurious transaction. In any case, however, the maker of said note shall Sec. 8. All loans under which payment is to be made in agricultural
have the right to recover from said original holder the whole interest products or seed or in any other kind of commodities shall also be null
paid by him thereon and, in case of litigation, also the costs and such and void unless they provide that such products or seed or other
attorney's fees as may be allowed by the court. commodities shall be appraised at the time when the obligation falls due
at the current local market price: Provided, That unless otherwise stated
Usurious Loans Void Only with respect to Interest in a document written in a language or dialect intelligible to the debtor
The loan is to be considered without stipulation but will still be valid; only and subscribed in the presence of not less than two witnesses, any
the usurious interest will be declared void contract advancing money to be repaid later in agricultural products or
• Debtor will not have the right to recover the principal & the seed or any other kind of commodities shall be understood to be a loan,
creditor may seek action on the principal and any person or corporation having paid otherwise shall be entitled in
• Creditor will not get even legal interest, however; he will just get case action is brought within 2 years after such payment or delivery to
the principal recover all the products or seed delivered as interest, or the value
thereof, together with the costs and attorney's fees in such sum as may
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of be allowed by the court. Nothing contained in this section shall be
money, goods or credits may stipulate that the rate of interest agreed construed to prevent the lender from taking interest for the money lent,
upon may be increased in the event that the applicable maximum rate provided such interest be not in excess of the rates herein fixed.
of interest is increased by law or by the Monetary Board: Provided, That
such stipulation shall be valid only if there is also a stipulation in the

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Paying Interest in Kind Q: Was there a deposit during the 2-year period?
• Reduce the medium of payment to its equivalent in pesos at the A: NO. This is more like an agency.
time the obligation falls due at the current local market place
Deposit Mutuum
Title XII. – DEPOSIT Principal purpose Safekeeping Consumption
Can be demanded At will by depositor Only at the expiration of
CHAPTER 1. – DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS the period granted to the
debtor
Art. 1962. A deposit is constituted from the moment a person receives a Property Movable or Only money or other
thing belonging to another, with the obligation of safely keeping it and of immovable (judicial fungible things
returning the same. If the safekeeping of the thing delivered is not the deposit)
principal purpose of the contract, there is no deposit but some other
contract. Deposit Commodatum
Principal purpose Safekeeping Transfer of Use
Characteristics of Deposit Kind Could be gratuitous Essentially & always
• Real – perfected by delivery of the subject matter gratuitous
• When gratuitous – a unilateral contract because only the Property For extrajudicial Movables or immovable
depositary (depositorio) has an obligation deposit, only (primary requirement
• When for compensation – bilateral, giving rise to obligations for corporeal things being that it is non-
both depositary & depositor (depositante) (movables) consumable)

Safekeeping as Principal Purpose Case Doctrines


• Agency – where the balance of a commission remains in the Calibo v. CA
possession of the agent, the balance is converted into a deposit • Facts: X owns a tractor. X’s son used it as security for his
& the agent may not misappropriate the same or may be payment of rent to Y. Y kept the tractor at his house without
convicted of estafa using it. When X made a demand, Y refused & told X to pay his
o UNLESS the parties agree that it shall be a loan sons rentals first. Is this a deposit?
• Banking – if a depositor leaves U.S. dollars in the bank for • Held: NO. In a contract of deposit, a person receives an object
safekeeping, the bank cannot sell the dollars as this is a belonging to another with the obligation of safely keeping it and
deposit, even if the peso equivalent was supposedly credited in of returning the same. Y received the tractor not to safely keep
the depositor’s account it but as a form of security. There is no deposit where the
principal purpose for receiving the object is not safekeeping.
Requisites for Depositary/Depositor Consequently, petitioner had no right to refuse delivery of the
• Depositor need not be the owner, he just needs to have tractor to its lawful owner.
possessory right
Art. 1963. An agreement to constitute a deposit is binding, but the
Q: X went abroad but he has a debt due in 2 years. So X told Y to pay his deposit itself is not perfected until the delivery of the thing.
debt; X gave Y the money to do pay it in 2 years. Y paid it. Is this a
deposit? Q: X and Y agree that Y will deliver to X the iPad of Y and the sole reason
A: NO. This is more like an agency where X would pay off his debts. is to keep the item away from Y’s kids. Is this a deposit?

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


A: NO. There is only an agreement and no delivery yet as deposit is a real Art. 1965. A deposit is a gratuitous contract, except when there is an
contract which is constituted only upon delivery. Thus there is no deposit agreement to the contrary, or unless the depositary is engaged in the
yet. business of storing goods.
Q2: If Y gives the iPad the next day but X refuses, is this actionable?
A: YES. An agreement is a binding contract and since there was a When Deposit Not Gratuitous
promise to accept. The general rule is that deposit is gratuitous but it is not essentially
gratuitous, save for the exceptions:
Consensual Contracts 1. Contrary stipulation
• Agreement to constitute a deposit –binding on the parties 2. Depositary engaged in business of storing goods (e.g.
• Contract for future deposit warehouseman)
3. Where property saved from destruction without knowledge of
Art. 1964. A deposit may be constituted judicially or extrajudicially. owner (involuntary deposit) – the depositary is entitled to just
compensation
Creation of Deposit
• May be made: (1) by the will of the parties, (2) by court order or Art. 1966. Only movable things may be the object of a deposit.
(3) by law
• The depositary cannot be the owner of the thing deposited Objects Deposited
• Extrajudicial deposit – only movables, whether voluntary or
Kinds of Deposit necessary
1. Judicial – attachment or seizure of property in litigation o If object may not be lost or stolen, then it’s likely
2. Extrajudicial something else (e.g. the delivery of keys to a house is
a. Voluntary – the general rule; delivery is made by the an agency & not a deposit because losing the keys will
will of the depositor or by two or more persons each of not lead to loss of the house, a real property)
whom believes himself entitled to the thing deposited • Judicial deposit – may cover movables & immovables
b. Necessary – one made either: • Does not embrace incorporeal rights & actions
• In compliance with a legal obligation o Though deeds or documents evidencing these rights
• On the occasion of calamity can be the objects of deposit
• By travellers in hotels & inns
• By travellers with common carriers8 Art. 1967. An extrajudicial deposit is either voluntary or necessary.

CHAPTER 2. – VOLUNTARY DEPOSIT



8 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of SECTION 1. – General Provisions
the goods, unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; Art. 1968. A voluntary deposit is that wherein the delivery is made by the
(2) Act of the public enemy in war, whether international or civil;
(3) Act of omission of the shipper or owner of the goods; will of the depositor. A deposit may also be made by two or more
(4) The character of the goods or defects in the packing or in the containers; persons each of whom believes himself entitled to the thing deposited
(5) Order or act of competent public authority. with a third person, who shall deliver it in a proper case to the one to
Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, & 5 of the preceding whom it belongs.
article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as required in Art. 1733. Voluntary v. Necessary Deposit

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Voluntary – depositor may choose the depositary third person who acquired the thing acted in bad faith, the depositor
• Necessary – lack of free choice in the depositor may bring an action against him for its recovery.

Depositor Need Not Be Owner of Thing Q: X gives W, a kid, his iPhone for safekeeping. W sold X’s phone for
• Generally, depositor is owner of the thing P100. The kid then spent P90 and then kept the P10.
• BUT it may belong to a carrier, commission agent, lessee, etc. A: X can collect the whole P100 from the minor, because that is the total
who deposits them temporarily in a depositor’s possession, amount he sold it for & was benefited by.
since the contract does not involve the transfer of ownership Q2: What if W exchanged the thing for a lottery ticket and won P50M?
• A depositary cannot dispute the title of the depositor to the Can X claim the P50M?
thing deposited as the former is in estoppel A: Yes, because that’s the amount by which the child was enriched.

Interpleader SECTION 2. – Obligations of the Depositary


• Action to compel two or more persons, each believing
Art. 1972. The depositary is obliged to keep the thing safely & to return
themselves to be entitled to a thing, to settle their conflicting
it, when required, to the depositor, or to his heirs & successors, or to the
claims by leaving the thing with a third person who will deliver it
person who may have been designated in the contract. His
to whom it belongs
responsibility, with regard to the safekeeping & loss of the thing, shall be
• One of the depositors is not the owner; the court will decide who
governed by the provisions of Title I of this Book.
the owner really is
If the deposit is gratuitous, the fact shall be taken into account in
determining the degree of care that the depositary must observe.
Art. 1969. A contract of deposit may be entered into orally or in writing.
When Object Lost
Art. 1970. If a person having capacity to contract accepts a deposit
• The depositary cannot excuse himself from liability in the event
made by one who is incapacitated,9 the former shall be subject to all the
of loss by claiming that he exercised the same amount of care
obligations of a depositary, and may be compelled to return the thing by
toward the thing deposited as he would toward his own, IF such
the guardian, or administrator, of the person who made the deposit, or
care is less than that required by the circumstances
by the latter himself if he should acquire capacity.
Applicable Rules are the Rules on Obligations (Title I of Civil Code)
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 • Loss – he is liable is the loss occurs through his fault or
the thing deposited while it is still in the possession of the depositary, or negligence, even if the thing was insured
to compel the latter to pay him the amount by which he may have o Loss while in depositary’s possession creates
enriched or benefited himself with the thing or its price. However, if a presumption of depositary’s fault
• Required degree of care is greater when deposit is for
compensation, though even in gratuitous deposit there must be
care
9 Art. 1327. The following cannot give consent to a contract:
(1) Unemancipated minors; • The depositary must exercise over the thing deposited the same
(2) Insane or demented persons, and deaf-mutes who do not know how to write. diligence as he would exercise over his property
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a o But it must be the care necessary, depending on the
state of drunkenness or during a hypnotic spell are voidable.
Art. 1329. The incapacity declared in Art. 1327 is subject to the modifications determined
object & the circumstances that is actually deposited
by law, and is understood to be without prejudice to special disqualifications established in with the depositary
the laws.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• BUT the depositor is not responsible in case the thing is
Return of Thing lost without the negligence of the third person with
• Thing must be returned when the depositor claims it, though the whom he was allowed to deposit the thing if such
parties may have stipulated a term person is NOT manifestly careless or unfit
(3) The thing is lost through the negligence of his employees
Case Doctrines whether the latter are manifestly careless or not
Bishop of Jaro v. Dela Peña
• Facts: X kept the money that Y was holding in trust, to be used Class Scenario
for a leprosarium. X put the money in his bank account & the Q: L deposited a laptop with B for a period of 30 days. Can L get the
funds were co-mingled with his. Meanwhile, X was arrested for laptop and give it to C?
being a supposed rebel & the Americans forfeited all his money. A: Generally, no, without permission of B.
Y wants to make X’s estate liable for the amount. Q: If L & B agree that B can deposit it with a 3rd person. B deposits the
• Held: X is not liable. By placing the money in the bank & mixing laptop with C, but C is a minor. C damages the laptop & the repairs are
it with his personal funds, X did not thereby assume an worth P10,000. Who is liable for the damage?
obligation different from that under which he would have lain if A: B, because C is legally incapacitated.
such deposit had not been made, nor did he thereby make Q: Must L prove that C was unfit?
himself liable to repay the money at all hazards. If the money A: No, his being unfit will be presumed as he is a minor.
had been forcibly taken from his pocket or from his house by Q: What if C is old but has a super low IQ?
the military forces of one of the combatants during a state of A: It depends. Can he comprehend his duties as a depositary? If C is
war, it is clear that under the provisions of the Civil Code he clearly incapable of understanding the role, then definitely, B is liable.
would have been exempt from responsibility. The fact that he Q: If C leaves the laptop in the drawer, will B be liable?
placed the trust fund in the bank in his personal account does A: NO. This is normal. There is no manifest carelessness.
not add to his responsibility. Such deposit did not make him a Q: What if C was the employee of B? What if B was a lawyer? Does the
debtor who must respond at all hazards. fact that he is a lawyer matter?
• Lerma agrees with the decision, though it is debatable. A: B’s being a lawyer matters, because his business is to hold things in
trust for his client. If B were an owner of a restaurant & C is a waiter, L
Art. 1973. Unless there is a stipulation to the contrary, the depositary must prove that C was manifestly careless or unfit to be able to make B
cannot deposit the thing with a third person. If deposit with a third liable since B’s ownership of a restaurant has no bearing on the
person is allowed, the depositary is liable for the loss if he deposited the relationship between L & B.
thing with a person who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees. Art. 1974. The depositary may change the way of the deposit if under
the circumstances he may reasonably presume that the depositor would
Liability for Loss consent to the change if he knew of the facts of the situation. However,
A depositor is liable for the loss of the thing deposited if: before the depositary may make such change, he shall notify the
(1) He transfers the deposit with a third person without authority depositor thereof & wait for his decision, unless delay would cause
although there is no negligence on his part & the third person danger.
(2) He deposits the thing with a third person who is manifestly
careless or unfit although authorized, even in the absence of Obligation Not to Change the Way of the Deposit
negligence General Rule: The depositary must first notify the depositor & wait for
the latter’s decision if he plans to change the way of the deposit
• EXCEPT – if delay could cause danger

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Any stipulation exempting a bank from liability in case of fraud,
Class Scenario negligence, delay or breach, when it is performing its duties as
Q: L has the laptop of N as N deposited it with L. Can L bring the laptop a depositary, is void.
to X’s house because of some danger in L’s house?
A: YES, if N agrees. Generally, the depositary must wait for the approval Case Doctrines
of the depositor. BUT if there is an imminent danger, L can move it. CA Agro v. CA
• Facts: X & Y entered into a contract where X would sell Y land.
Art. 1975. The depositary holding certificates, bonds, securities or Prior to full payment, both parties agreed to put the TCT in a
instruments which earn interest shall be bound to collect the latter when safety deposit box in a bank. When X tried to take the TCT out
it becomes due, & to take such steps as may be necessary in order that once, it was no longer there. X sued the bank for damages. The
the securities may preserve their value & the rights corresponding to bank said it was not liable since the contract was one of lease &
them according to law. in their agreement with X & Y regarding the “lease” of the safety
The above provision shall not apply to contracts for the rent of safety deposit box, it said they would not be liable for loss.
deposit boxes. • Held: This is not a lease, but a special kind of deposit. Being a
deposit, exemptions from any & all liability in performing duties
Lerma’s Thoughts as a depositary are void. However, the bank cannot be held
This provision is now obsolete; these days all these certificates, bonds, liable, because it was not shown that the bank was aware of the
securities or instruments have the interests automatically deposited in agreement between X & Y & the fact that they had to bot be
the account of the holder of such instrument & there is no need to there to withdraw the TCT.
present the instrument to make the claim.
Art. 1976. Unless there is a stipulation to the contrary, the depositary
Collecting for Depositor may commingle grain or other articles of the same kind and quality, in
• Depositary must: which case the various depositors shall own or have a proportionate
o Collect the interest when it becomes due interest in the mass.
o Take such steps as may be necessary in order that the
securities may preserve their value & the rights Class Scenarios
corresponding to it Q: X is a depositary. 3 separate people deposited with you various
• Depositary is bound to collect not only the interest but also the amounts of sugar. X put it all in one pile & the 3 separate people
capital itself when due complained. Do the 3 people have a cause of action against you?
A: They may have a cause of action. If the sugar deposited were of
Contract for Rent of Safety Deposit Box different kind and quality. Just because one deposits sugar doesn’t
• Special kind of deposit; not an ordinary contract of lease of mean that all deposits are the same. Same with everything else.
things
• Not strictly governed by provisions of deposit Q: Assuming the sugar was fungible, do they have a cause of action?
• Relationship is generally considered as bailee & bailor A: No, they no longer have a cause of action.
• In the operation of the box, the box & contents thereof are in
the manual possession of the lessor Art. 1977. The depositary cannot make use of the thing deposited
o BUT neither the lessor nor the rentor can be given without the express permission of the depositor. Otherwise, he shall be
access to the contents of the box without the consent liable for damages. However, when the preservation of the thing
& cooperation of the other deposited requires its use, it must be used but only for that purpose.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Use of Thing for Preservation Art. 1978. When the depositary has permission to use the thing
General Rule: Unauthorized use would make a depositary liable for deposited, the contract loses the concept of a deposit and becomes a
damages. loan or commodatum, except where safekeeping is still the principal
• EXCEPT – The depositary may use the thing if it is necessary for purpose of the contract.
its preservation, even without the express permission of the The permission shall not be presumed, and its existence must be
depositor, but ONLY for that limited purpose proved.
o Ex. A depositary may use a radio received in deposit
occasionally to prevent the accumulation of moisture When Commodatum
• If the thing deposited is non-consumable & the depositary has
CLASS SCENARIOS permission to use the thing, it is not a contract of deposit, but
Q: X deposited an iPad with A for a period of 30 days. Can A use the commodatum, though was denominated as a deposit
iPad? • UNLESS safekeeping is still the principal purpose of the
A: X cannot make use of the iPad because it is a deposit & A needs the contract
permission of X to be able to use it.
Q: X deposits an iPad with A & says A can use it for 30 days. What is the When Loan
contract? • If the thing deposited is money or other consumable thing, the
A: It is commodatum. permission to use it will result in consumption & converts the
Q: What if X gives it to A and says, “use it for 30 days but please keep it contract into a simple loan or mutuum
safe”? • If safekeeping is still the primary purpose, it is an irregular
A: It is commodatum. deposit (e.g. bank deposits are in the nature of irregular
Q: Who determines the primary purpose of the contract? deposits but they are really loans governed by the law on loans)
A: Depends what was said at the time the deposit was constituted. If it
can be inferred that it was really for use, then it is not a deposit but a Irregular Deposit Mutuum
commodatum. When Demand Can May be demanded at Lender is bound by
Be Made of Thing will by the irregular the stipulations of the
Case Doctrines depositor contract & cannot
Javellana v. Lim seek restitution until
• Facts: X & Y were given P1,102 by Z, evidenced by a document time of payment
that said X & Y received the amount without interest & would Essential Cause or Only benefit is that The necessity of the
give the amount back to Z in 3 years. When the due date Benefit which accrues to the both parties; benefits
passed, X approached Z & begged for an extension, agreeing to irregular depositor them both
pay interest. X & Y failed to pay some of the amount even after Third Parties Depositor has No preference in the
the extension so Z filed a case for collection. X & Y’s defense is preference over other distribution of the
that the contract is a deposit, so they in fact already paid the creditors with respect debtor’s property
whole amount, as the amount Z is claiming includes interest. to the thing deposited
• Held: It is a contract of LOAN, because it was understood, as
between the parties, that X & Y could make use of the amount Permission to Use Money Not Presumed
& spend it. X & Y were not bound to return the same identical In deposit, the permission to use money is not presumed except when
bills of money, but just the same amount of the same kind & such use is necessary for the preservation of the thing deposited and
quality. the burden is on the depositary to prove the permission has been given.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


U.S. v. Igpuara
CLASS SCENARIO • Facts: X is the agent of Y. Y gave X money to pay Z, evidenced by
Q: X gave Y P1,000 and said “I’m going away on a trip and coming back a deposit certificate. However, when Z tried to get the money
in 30 days. Please keep my money.” Does Y have a right to use the from X a few months after the transaction between him & Y, X
money? gave the deposit certificate to Z as a negotiable instrument.
A: NO. Subsequently, an estafa case was filed against X.
• Held: X is guilty of estafa for misappropriating funds held in
Q: X gave Y the keys to his car, the manuals, insurance, etc. and the car deposit for his principal. The fact that X did not surrender the
itself and said, “I’m going abroad for 3 years. Please keep my car safe.” money showed that he had used it, which is not allowed in a
Can Y use it? deposit. Also, the failure to claim at once or delay for sometime
A: Only for the sake of preserving the car, but otherwise, he cannot make in demanding restitution of the things deposited, which was
use of the car as that would alter the principal purpose of the deposit immediately due, does not imply such permission to use the
and turn it into a commodatum. thing deposited as would convert the deposit into a loan.

Case Doctrines Art. 1979. The depositary is liable for the loss of the thing through a
Gavieres v. Taverra fortuitous event:
• Facts: The contract reads: "Received of X, P3,000, as a deposit (1) If it is so stipulated;
payable on two months' notice in advance, with 6% int. p.a. with (2) If he uses the thing without the depositor's permission;
an hypothecation of the goods now owned by me or which may (3) If he delays its return;
be owned hereafter, as security of the payment. "In witness (4) If he allows others to use it, even though he himself may have
whereof I sign in Binondo, January 31, 1859.” been authorized to use the same.
• Held: This is a contract of loan, as it stipulates an interest.
Furthermore, the fact that it was collective after 2 months’ General Rule
notice showed that X intended to give the other party the • The depositary is not liable for loss through a fortuitous event
opportunity to ensure availability of funds. without his fault; exceptions are provided above

Baron v. David Case Doctrines


• Facts: Y left 1,000 cavans of palay in X’s mill for selling. A fire Palacio v. Sudario
broke out in X’s mill. Now, X refuses to pay Y for the palay, • Facts: X took 81 cattles of Y on deposit. Upon demand, X was
claiming that the palay was left in his mill as a deposit & he only able to return 40. X claimed fortuitous event, saying that
could not be liable for force majeure. the missing animals had drowned in a flood.
• Held: The contract was NOT a deposit & X is liable to pay Y for • Held: X failed to sufficiently establish the flood & that the flood
the palay. Evidence showed that X had only 300 cavans left in was what killed the cattle. As a depositary, any loss of the thing
his mill when the fire broke out, showing that he had sold the deposited is presumed to be his fault & he has the burden of
rest. Even assuming arguendo that X kept the palay for future proving the fortuitous event, which in this case, he failed to do.
sale & thus it was, at first, a deposit, nevertheless if it was Thus, X is liable for the loss of the cattle on deposit.
understood that the defendant might mill the palay and he has • Lerma’s lecture: If thing is lost while in the hands of the
in fact appropriated it to his own use, he is of course bound to depositary, it is assumed to be the depositary’s fault. But if it’s
account for its value. due to fortuitous event, then the depositary will be exempt. BUT
if you are going to raise fortuitous event as a means of denying

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


liability, you must be able to prove it in court. You cannot simple (1) That each one of the obligors be bound principally, & that he be
say “I lost it by fortuitous event and therefore I am not liable.” at the same time a principal creditor of the other;
You must prove that the fortuitous event did in fact occur. (2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, & also of the same
Art. 1980. Fixed, savings, & current deposits of money in banks & quality if the latter has been stated;
similar institutions shall be governed by the provisions concerning (3) That the two debts be due;
simple loan. (4) That they be liquidated & demandable;
(5) That over neither of them there be any retention or controversy,
Contract of Loan commenced by 3rd persons & communicated in due time to the
• Bank deposits are really contracts of loan, where the depositor debtor.
loans money to the bank so that the bank can use the same for
its ordinary transactions and banking business Case Doctrines
• They are “irregular deposits” because they earn interest Gullas v. PNB
o Governed by rules on simple loan or mutuum & rules • Facts: Gullas deposited a U.S. Treasury Warrant with PNB which
on imposition of legal interest turned out to be defective. PNB offset the amount under Gullas
• Bank need not return the exact same money that was account & sent him a notice that they had already offset his
deposited; money is naturally commingled with other people’s account. However, Gullas didn’t receive the notice, as he was
money, creating a single fund from which depositors are paid out of town, & Gullas had issued checks on the account that
PNB offset. Gullas’ checks were dishonored, to his
Relation of Creditor and Debtor embarrassment, & he now wants PNB to be liable.
• Bank is the debtor & agrees to pay the creditor-depositor upon • Held: PNB is liable. As a general rule, the Civil Code states that
demand PNB would have had a right to set off the deposits in its hands
• A bank’s failure to pay its obligation is not a breach of trust and for the payment of any indebtedness to it, on the part of a
cannot constitution estafa through misappropriation depositor. However, the Negotiable Instruments Law contains
• The payment of a bank extinguishes so much of the obligation certain provisions which clearly define and establish the liability
of the bank as is represented by the check paid or honored by of a general indorser in good faith. The general indorser of a
the bank out of the latter’s deposit negotiable instrument engages that if he were dishonored, and
• A bank can compensate or set off the deposit in its hands for the necessary proceedings of dishonor are duly undertaken,
the payment of any indebtedness to it on the part of the then he will pay the amount thereof, to the holder. This is clearly
depositor seen in Sec. 66 of the Negotiable Instruments Law. The notice
is dishonor is vital in order to charge all indorsers, & the right of
• Bank can be held liable to depositor for fraud, negligence or
action against the indorser does not accrue against him until
delay based on internal banking rules
notice is given.
• When a bank is suspended, it still owes an obligation to its
• Lerma’s Lecture: The bank’s primary purpose in keeping your
depositors, but it may not be made liable to pay interest on the
money is actually to use it. Offset cannot occur in a traditional
deposit during the period of suspension
type of deposit, as in a normal deposit, you are not mutual
creditors and debtors, but depositors and depositaries. The fact
Q: In order for a valid offset to occur under the Civil Code, what needs to
that the bank’s deposits are irregular is what allows the bank to
exist?
offset amounts deposited to them by depositors.
A: Art. 1279. In order that compensation may be proper, it is necessary:
Serrano v. CB

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Facts: X wants to get his money back from Overseas Bank, A: Y must keep the secret of the deposit, so Y cannot tell others about
which had its operations suspended. To make the claim, X the multiple families.
stated that Overseas Bank held the funds in trust for its Q: X gave Y a locked bag filled with documents. X tells Y, “Please wipe
depositors, such as himself. my laptop so that no moisture and no dust will go in. Keep it safe.” The
• Held: NO, bank deposits are not in the form of trusts & create bag is locked, but X tells Y to please keep the laptop clean every 3 days.
no fiduciary relationship. Bank deposits are in the nature of Can Y open the bag?
irregular deposits. They are loans because they earn interest. All A: YES, to follow X’s instructions.
kinds of bank deposits, whether fixed, savings, or current are to Q: What if X did not give Y a key?
be treated as loans and are to be covered by the law on loans. A: Y is presumed to have the authority provided that Y cannot fulfill the
Current and savings deposit are loans to a bank because it can obligations X requested of Y without Y opening the locked bag.
use the same. X is a creditor of the bank, & not its trustor-
beneficiary. Art. 1982. When it becomes necessary to open a locked box or
• Lerma’s Lecture: There is no constructive trust between a bank receptacle, the depositary is presumed authorized to do so, if the key
and its depositors, because the relationship is debtor and has been delivered to him; or when the instructions of the depositor as
creditor and not really a contract of deposit. regards the deposit cannot be executed without opening the box or
receptacle.
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 Obligations of Depositary
damages should the seal or lock be broken through his fault. (1) Return the thing deposited when delivered closed & sealed, in
Fault on the part of the depositary is presumed, unless there is proof to the same condition
the contrary. (2) Pay for damages should the seal or lock be broken through his
As regards the value of the thing deposited, the statement of the fault; his fault is presumed unless proven otherwise
depositor shall be accepted, when the forcible opening is imputable to (3) Keep the secret of the deposit when the seal or lock is broken,
the depositary, should there be no proof to the contrary. However, the with or without his fault
courts may pass upon the credibility of the depositor with respect to the
value claimed by him. Credibility of Depositor’s Statement of Value
When the seal or lock is broken, with or without the depositary's fault, he Serves only as prima facie evidence which may be rebutted
shall keep the secret of the deposit.
When Opening is Justified
CLASS SCENARIO (1) Presumed authority; or
Q: X deposited a locked bag with Y without giving Y the key. At 9PM in (2) Necessity
the night, a strange odor so foul started to emanate from the bank,
giving Y a difficult time to study. Can Y open it? Art. 1983. The thing deposited shall be returned with all its products,
A: NO. If Y does not have the key, X cannot do it. accessories and accessions.
Q: If Y returns the bag to X and the bag is unsealed, and X sues Y, will Should the deposit consist of money, the provisions relative to agents in
the court grant X damages? Art. 1896 shall be applied to the depositary.
A: YES, given Art. 1981.
Q: What if through no fault of Y, the bag magically opens, but there is no Obligation to Pay Interest on Money Converted to Personal Use
damage. Inside are documents showing that X has multiple families. Generally, when what is deposited is money, the depositary has no right
What is Y’s obligation under the Civil Code? to make use thereof & thus is not liable to pay interest, EXCEPT—
• When depositary is in delay

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Has used money without permission – from the day on which he • If the thing is returned to the depositor after 1 month, the true
applies the money to his own use, & those which he still owes owner of the thing may still recover the thing through other legal
after the extinguishment of the deposit. processes

Products, Accessories, Accessions CLASS SCENARIO


• Products – fruits Q: X gives Y a car by way of deposit for a period of 30 days. Y says he will
• Accessory – things for embellishment (e.g. adding decorations not accept the deposit unless Y shows X a certificate of title. Can Y do
or hydraulics to a car) this?
• Accession – something that is attached or incorporated into the A: NO as ownership need not be proved by the depositor.
thing given that is not necessarily a product (e.g. in a car, the Q: What if Y accepts the deposit & finds out in the news that the car was
side mirror is the accession) stolen or has reason to believe that the stolen car on the TV was the
same car that is now in his possession, but Y cannot contact the real
Art. 1984. The depositary cannot demand that the depositor prove his owner as Y does not know that person. What will Y do?
ownership of the thing deposited. A: Y may return the car to X.
Nevertheless, should he discover that the thing has been stolen and
who its true owner is, he must advise the latter of the deposit. Art. 1985. When there are 2 or more depositors, if they are not solidary,
If the owner, in spite of such information, does not claim it within the & the thing admits of division, each one cannot demand more than his
period of one month, the depositary shall be relieved of all responsibility share.
by returning the thing deposited to the depositor. When there is solidarity or the thing does not admit of division, the
If the depositary has reasonable grounds to believe that the thing has provisions of Art. 1212 & 1214 shall govern. However, if there is a
not been lawfully acquired by the depositor, the former may return the stipulation that the thing should be returned to one of the depositors,
same. the depositary shall return it only to the person designated.

Proof of Ownership Not Necessary Thing Divisible & Depositors Not Solidary
To constitute a deposit, it is not essential that the depositor is the owner Each depositor can demand only his share proportionate to the deposit.
of the thing deposited. • Ex. If A & B deposited 150 & 300 cavans of rice, respectively, A
can only demand 150 cavans
For Paragraph 2 to Apply
(1) The thing deposited must have been stolen; & Obligation is Solidary or Thing Deposited is Not Divisible
(2) The depositary must know who the true owner is • Art. 1212 – Each of the solidary depositors may do whatever
may be useful to the others but not anything which may be
Effect of Failure to Claim within 1 Month prejudicial to the latter
• The 1 month period is meant to protect the depositary • Art. 1214 – The depositary may return the thing to any of the
o Depositary could unjustly be made liable for refusing to solidary depositors unless a demand, judicial or extrajudicial, is
return to the depositor made by one of them, in which case delivery should be made to
o The law, however, does not provide an answer for a him
situation where the depositor demands the thing
before the expiry of 1 month but the depositary has CLASS SCENARIO
already discovered that the depositor is not the owner

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


Q: X & Y tell Z to please keep the SCRAs they have for them until they Lerma’s Lecture
can enroll. X & Y are able to enroll. X goes back to Z & asks for the return There should be no malice with respect to the depositary in terms of him
of the SCRAs. Should Z give it back? choosing to move from one place to another.
A: A set of books are divisible so
Q: If X & Y deposit a bike with Z without telling Z what kind of deposit it Art. 1988. The thing deposited must be returned to the depositor upon
is, what rules apply? demand, even though a specified period or time for such return may
A: Art. 1212 & 1214 will apply because the thing that is the subject of have been fixed.
the deposit does not admit of division. Thus, if X shows up to get the This provision shall not apply when the thing is judicially attached while
bike, that is valid and Z can give the bike to X even if Y is not there, in the depositary's possession, or should he have been notified of the
because the thing is not divisible. opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the
Lerma’s Lecture depositor of the attachment or opposition.
If there are 2 or more depositors are joint & the thing is divisible each
one can get the share that the person is entitled to have. Time of Return
If the thing belongs 2 or more depositors and it is solidary or it does not Generally dependent on the will of the depositor, who may even waive a
admit of division, then one person can come to collect the entire period set by him. However, the period is generally binding upon the
indivisible object or solidary obligation. depositary.
If the parties stipulate that the obligation is joint & the thing is • If deposit is for a compensation, the depositary is entitled to
indivisible, then the depositary must wait for all the owners to come compensation corresponding to the entire period.
forward and give the thing to them together.
When Depositary Not Obliged to Return the Thing Deposited
Art. 1986. If the depositor should lose his capacity to contract after (1) When to do so would mean disobeying the judicial order of
having made the deposit, the thing cannot be returned except to the attachment
persons who may have the administration of his property and rights. (2) When there is a conflicting claim coming from a 3rd person, in
which case the thing should be consigned with the court
CLASS SCENARIO through an action of interpleader
Q: What happens if X deposits a bike with Y and goes to jail because X
has a final judgment against him for murder. The time to return the Case Doctrines
bicycle has fallen due. Who should you return it to? Aboitiz v. Orquina
A: X would be incapacitated, so the bike would go to the administrator of • Facts: X died. Y was his administrator. Y made a claim on X’s life
his estate. insurance & deposited the amount with Company W, which
issued a receipt, referring to the amount as a deposit. Later, Y
Art. 1987. If at the time the deposit was made a place was designated committed suicide, so Z replaced Y as X’s administrator. Z
for the return of the thing, the depositary must take the thing deposited demanded the amount from Company W, which refused to
to such place; but the expenses for transportation shall be borne by the release it, claiming that, since no time was given for the release
depositor. of the amount in the agreement between Y & W, Z must resort
If no place has been designated for the return, it shall be made where to a judicial order to get the money out.
the thing deposited may be, even if it should not be the same place • Held: The amount is a deposit, & is therefore demandable at
where the deposit was made, provided that there was no malice on the any time the depositor makes such demand, whether or not
part of the depositary. there is a stipulated period. W must give the deposited amount
to Z.

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Note: This deposit had accruing interest, but SC still ruled it was CLASS SCENARIO
a deposit. Q: X dies. Y, his heir, sells X’s iPad for P2,000 which he finds in X’s
things. Later on he finds out it is actually owned by Z and Z gave it to X
Art. 1989. Unless the deposit is for a valuable consideration, the by virtue of deposit.
depositary who may have justifiable reasons for not keeping the thing A: Right to collect or the amount earned should be returned to Z.
deposited may, even before the time designated, return it to the
depositor; and if the latter should refuse to receive it, the depositary may SECTION 3. - Obligations of the Depositor
secure its consignation from the court.
Art. 1992. If the deposit is gratuitous, the depositor is obliged to
Depositary May Return the Thing Deposited Notwithstanding Period reimburse the depositary for the expenses he may have incurred for the
Fixed for the Deposit When— preservation of the thing deposited.
(1) The deposit is gratuitous &
(2) For justifiable reasons (e.g. depositary is going abroad) Obligation to Pay Expenses for Preservation
• Gratuitous – Depositor must pay all expenses for preservation,
Deposit for Valuable Consideration whether ordinary or extraordinary so long as they are necessary
If so, depositary has no right to return the thing deposited before the expenses
expiration of the time designated. o Useful expenses or those for pure luxury or pleasure
are not covered
1988 v. 1989 • Compensated – Expenses of preservation should be borne by
1988 governs the rules with respect to the depositor, whereas 1989 depositary absent contrary stipulation
deals with the rules with respect to the depositary. o Stems from onerous nature of a deposit for valuable
consideration
Art. 1990. If the depositary by force majeure or government order loses
the thing & receives money or another thing in its place, he shall deliver CLASS SCENARIO
the sum or other thing to the depositor. Q: A vehicle was deposited. The ashtray of the car broke. Who pays?
A: The depositor.
Art. 1991. The depositor's10 heir who in good faith may have sold the
thing which he did not know was deposited, shall only be bound to Art. 1993. The depositor shall reimburse the depositary for any loss
return the price he may have received or to assign his right of action arising from the character of the thing deposited, unless at the time of
against the buyer in case the price has not been paid him. 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
Good Faith of Depositary’s Heir notified the depositary of the same, or the latter was aware of it without
Provision contemplates a situation where the depositary dies & the heir, advice from the depositor.
in good faith, sells the thing deposited.
• Heir must return the price received or assign the right to collect General Rule on Loss & Exceptions
the same to the depositor Depositary must be reimbursed for any loss suffered because of the
• BUT if heir is in bad faith, depositor can sue heir for damages & character of the thing deposited, EXCEPT IF—
heir can be liable for estafa (1) At the time of the constitution of the deposit, the depositor was
not aware of the dangerous character of the thing
(2) At the time of the constitution of the deposit, the depositor was
10 Should be depositary’s not expected to know the dangerous character of the thing

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


(3) The depositor notified the depositary of the same List is not exclusive & other causes can exist, such as novation, merger,
(4) The depositary was aware of the fact without advice from the fulfillment of the resolutory condition, etc.
depositor • The return of the thing also extinguishes the deposit

CLASS SCENARIO Effect of Death of Depositor


Q: If X deposits with Y 10 liters of kerosene, & Y’s house burns down, is (1) Gratuitous – since a deposit that is gratuitous is personal in
X liable to Y? nature, the depositary is not obliged to continue with the
A: NO, because in this case, Y should have been aware that since it was contract of deposit
kerosene, it had a dangerous nature. • Lerma: There is a certain trust committed and the heirs
Q: Would it be the same if X gave Y an unlabeled bottle, but told Y it was have to hold it and keep it safely until it is claimed by
kerosene? the depositary
A: YES, X would still not be liable because X informed Y of the character (2) Compensated – An onerous deposit is not personal, so the
of the thing deposited. rights & obligations arising therefrom will be transmitted to the
respective heirs.
Art. 1994. The depositary may retain the thing in pledge until the full • BUT the heirs of either party have a right to terminate
payment of what may be due him by reason of the deposit. the deposit even before the expiration of the term

Depositary’s Right of Retention CHAPTER 3. – NECESSARY DEPOSIT


A pledge can be created by operation of law & the deposited thing will
serve as security for the payment of what is due to the depositary by Art. 1996. A deposit is necessary:
reason of the deposit, similar to the right granted to an agent. (1) When it is made in compliance with a legal obligation;
• Distinguish from commodatum, where retention is only possible (2) When it takes place on the occasion of any calamity, such as
if there are hidden defects that injure the bailee fire, storm, flood, pillage, shipwreck, or other similar events.

CLASS SCENARIO Art. 1997. The deposit referred to in No. 1 of the preceding article shall
Q: X owes Y P1,000 2 weeks ago. Last week, Y deposited his iPad with X. be governed by the provisions of the law establishing it, & in case of its
Today is the due date of the return of Y’s iPad. When Y made the deficiency, by the rules on voluntary deposit.
demand for P1,000, X refused to return the iPad of Y because Y still The deposit mentioned in No. 2 of the preceding article shall be
owed X P1,000. If X & Y go to court, who would win? regulated by the provisions concerning voluntary deposit and by Art.
A: Y would win, because the right of retention has to be by virtue of the 2168.
deposit (i.e., the retention should be because of expenses for the
preservation of the iPad), and has nothing to do with other obligations Four Kinds of Necessary Deposit (LOCTP)
due from the depositor to the depositary even if said obligation still As opposed to a voluntary deposit, a necessary deposit does not involve
exists at the time the deposit is demanded by the depositor. freedom of choice.
(1) When it is made in compliance with a Legal Obligation
Art. 1995. A deposit is extinguished: • Judicial deposit of a thing which is being disputed in a
(1) Upon the loss or destruction of the thing deposited; litigation by 2 or more persons
(2) In case of a gratuitous deposit, upon the death of either the • Deposit of a thing pledged when the creditor uses the
depositor or the depositary. same without authority of the owner or misuses it in
any other way
Causes of Extinguishment of Deposit

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


• Required in suits by the Rules of Court woke up the next day, his pants, bag, the contents of the bag, &
• Deposit with a bank or public institution of bonds or his revolver were gone. X sought to make Y liable.
instruments of credit payable to order or bearer given • Held: Y is liable for the pants, the bag & the revolver, because
in usufruct when the usufructuary does not give proper for these 3, Y had notice that X had them with him, as X
security for their conversion deposited the revolver & bag with Y’s staff & X was walking
• Those constituted to guarantee contracts with the around in that pair of pants the whole day. However, Y is not
government liable for the things he is not aware of—the contents of the bag,
(2) When it takes place on occasion of any Calamity which neither Y nor his staff ever saw. It is not necessary in
(3) When made by Travelers in hotels or inns order to hold an innkeeper liable that the effects of the guest
(4) When made by Passengers with common carriers are actually delivered to him; it is enough that they were in the
inn. Also, though the notices of the hotel said that valuables
Necessary Deposit on Occasion of Calamity such as revolvers, money, jewelry, etc. should be deposited with
• Depositary gains the obligations of a bailee & the immediate staff, otherwise the management would not be liable for loss, Y
object would be to save the property rather than its could not escape liability in the situation, because X had
safekeeping. exercised due diligence with his things & even locked the room,
o Ex. If X saves Y’s TV set in a fire, X is supposed to be whereas Y failed to provide adequate security for his guests.
the depositary
• There must be a causal relation between the calamity & the Art. 1999. The hotel-keeper is liable for the vehicles, animals & articles
constitution of the deposit which have been introduced or placed in the annexes of the hotel.
o Such a deposit is a quasi-bailment, otherwise known as
involuntary bailment or involuntary deposit, or deposito Requisites for Keepers of Hotels or Inns to be Responsible
miserable (1) The keepers have been previously informed or has notice about
• Quasi-contract (Art. 2168) – The depositary must be paid by the the effects brought by the guests; &
depositor a just compensation for saving the property from (2) The guests have taken the precautions prescribed regarding
destruction their safekeeping.

Art. 1998. The deposit of effects made by the travellers in hotels or inns Extent of Liability of Keepers of Hotels & Inns
shall also be regarded as necessary. The keepers of hotels or inns shall • Liability is not limited to baggage or articles of clothing, but
be responsible for them as depositaries, provided that notice was given include those lost or damaged in hotel annexes, such as
to them, or to their employees, of the effects brought by the guests and vehicles in the hotel’s garage.
that, on the part of the latter, they take the precautions which said hotel- o Contract of deposit is perfected when the hotel guest
keepers or their substitutes advised relative to the care and vigilance of hands over his keys to his vehicle, & the latter received
their effects. the obligation to safely keep & return it
• Hotel-keepers cannot waive this because they are tasked with
Case Doctrines taking extraordinary care with the safety & well-being of their
Tan Khey v. De los Santos guests & their guests’ things
• Facts: X stayed at a hotel owned by Y. X left his stuff with the • Responsibility extends to all those who offer lodging for
staff of Y in the afternoon, consisting of his bag & revolver, & compensation, whatever may be their character.
then came back in the evening & retired to his room. When X • Innkeepers are also subsidiarily liable for restitution of goods
taken by theft or robbery within their houses from guests

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


lodging therein & for the payment of the values thereof (Revised • Provided that notice has been given & proper
Penal Code) precautions taken by the guest
(2) The loss is caused by the act of a thief or robber done without
Travellers or Guests Defined use of arms or irresistible force
• Transients who enter hotels or inns to seek temporary lodging
• Must be accepted without discrimination; accommodation may When Hotel-Keeper Not Liable (FTAC)
be refused without liability only for justifiable reasons (1) Loss or injury is via Force majeure
• NOT the same as boarders in dorms who are there for an (2) Theft or robbery is by a stranger (not a hotel employee or
extended or contracted period servant) & there is use of arms or irresistible force
• UNLESS the hotel-keeper is guilty of fault or negligence
CLASS SCENARIO in failing to provide against the loss or injury from his
Q: X lives in a dorm. X took precautions told by the dorm-keeper, yet X’s cause (Art. 1170-74)
items were lost. Is the dorm-keeper liable? (3) Loss is due to the Acts of the guest, his family, servants or
A: NO. The provision refers to transients, or travelers who are only visitors
temporarily in a certain lodging or hotel. (4) Loss arises from the Character of the things brought to the
hotel
CLASS SCENARIO
Q: What if the loss occurred in the tennis court of a hotel. Is the hotel Supervision or Control
liable? For innkeepers or hotel-keepers to be liable for the effects of the guests,
A: YES, as the annexes of the hotel are included. it is not necessary that these are delivered to him or his employees; it is
enough that they are WITHIN the inn.
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 CLASS SCENARIO
caused by the servants or employees of the keepers of hotels or inns as Q1: X is a guest in Y’s hotel. Z is the culprit. X loses his things, including
well as strangers; but not that which may proceed from any force his pants. If Z is a waiter, who is ultimately liable to X?
majeure. The fact that travellers are constrained to rely on the vigilance A: Y will be liable because it is the staff who did it.
of the keeper of the hotels or inns shall be considered in determining Q2: Z is a pedestrian walking by the hotel. He looks up and sees through
the degree of care required of him. the window X’s pants, & says “I like those pants and says he will steal
them. Is Y liable to the guest?
Art. 2001. The act of a thief or robber, who has entered the hotel is not A: Y is liable because it was committed with theft without use of arms or
deemed force majeure, unless it is done with the use of arms or through force.
an irresistible force. Q3: What if the pants were hanging from the premises, would Y be
liable?
Art. 2002. The hotel-keeper is not liable for compensation if the loss is A: Yes because it was still hanging on the premises of the hotel and was
due to the acts of the guest, his family, servants or visitors, or if the loss still within the vicinity of the hotel.
arises from the character of the things brought into the hotel. Q4: Z is a well-known thief, sneaks in, takes the pants & other valuables.
Is Y liable?
When Hotel-Keeper is Liable Regardless of Amount of Care A: Y would still be liable. The only instance where thieves would be liable
(1) The loss or injury to the personal property of the guest is caused is when they employ force.
by his servants, employees or strangers Q5: What if Z is a guest of X? Is X liable?

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


A: It depends. Y must prove that the relative was a GUEST of X. Absent Notice of Lis Pendens
that, Y would be liable. Serves as notice to the whole world that a particular real property is in
Q6: What would happen if Z was not aware that the goods he was litigation & warns those who may acquire an interest over the property to
stealing belonged to his cousin? do so at his own risk.
A: Y would not be liable because the mere fact of the relationship
between X & Z exempts Z. Custodia Legis
Q7: What if what was damaged were plants brought in by the guest? Will A thing is in custodia legis when it is shown that it has been & is
Y be liable? subjected to the official custody of a judicial or executive officer
A: NO, because the damage is due to the character of the thing brought pursuant to the execution of a legal writ
in. • To effect proper custodia legis, property must be lawfully taken by
virtue of legal process.
Art. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought Escrow Order
by the guest. Any stipulation between the hotel-keeper and the guest A written instrument which by its terms imports a legal obligation &
whereby the responsibility of the former as set forth in Art. 1998 to which is deposited by the grantor, promisor or obligor, or his agent with a
2001 is suppressed or diminished shall be void. stranger or third party, to be kept by the depositary UNTIL the
performance of a condition or the happening of a certain event, & then
Art. 2004. The hotel-keeper has a right to retain the things brought into to be delivered over to the grantee, promisee or obligee
the hotel by the guest, as a security for credits on account of lodging, & • Involves any written instrument with a third person (can involve
supplies usually furnished to hotel guests. land, money representing rentals or otherwise, etc.)
• May be issued by a court in the exercise of its intrinsic powers to
Not Paying for Food or Accommodation issue orders
The act of obtaining food or accommodation in a hotel or inn without
paying therefor constitutes estafa. Judicial Deposit or Sequestration
• Properties may be attached by the sheriff upon filing of a
CHAPTER 4. – SEQUESTRATION OR JUDICIAL DEPOSIT complaint
• Receiver (a disinterested party) may be appointed by the court to
Art. 2005. A judicial deposit or sequestration takes place when an administer & preserve the property in litigation
attachment or seizure of property in litigation is ordered.
• Personal property may be seized by the sheriff in suits of replevin
or manual delivery of personal property
Art. 2006. Movable as well as immovable property may be the object of
sequestration.
Description Judicial Extrajudicial
Cause or Origin By will of the court By will of the parties;
Art. 2007. The depositary of property or objects sequestrated cannot be
there is a contract
relieved of his responsibility until the controversy which gave rise thereto
has come to an end, unless the court so orders. Purpose Secures the right of a Custody & safekeeping
party to recover in case of of the thing
Art. 2008. The depositary of property sequestrated is bound to comply, a favorable judgment
with respect to the same, with all the obligations of a good father of a Subject Matter Movable or immovable, Only movable property
family. but generally immovable
Remuneration Remunerated (onerous) May be compensated or

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma


not, but generally
gratuitous
In whose behalf Person who, by the Depositor or third person
it is held judgment, has a right designated

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


sequestration shall be governed by the Rules of Court.

Rules of Court Involved in Deposit


• Rule 57 – Preliminary Attachment
• Rule 59 – Receivership
• Rule 60 – Replevin
• Rule 127 of Criminal Rules of Court – Attachment in Criminal
Proceedings

Katrina C. Gaw | Credit Transactions | Block C 2018 | Atty. Lerma