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CREDIT TRANSACTIONSAtty. R. Vasquez

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I. INTRODUCTION

CREDIT It is a persons ability to borrow money by virtue of the

confidence or trust reposed in him by the lender that he will paywhat he may promise.

CREDIT TRANSACTIONS All transactions involving the purchaseor loan of goods, services, or money with a promise to pay ordeliver in the future; contracts of security

CREDIT TRANSACTIONS INCLUDE

All transactions involving loans of:1. Goods2. Services3. Money extended to another either gratuitously or onerously

with a promise to pay or deliver in the future

SECURITY Something given, deposited, or serving as a means toensure enforcement of an obligation or of protecting some interest

in property

TYPES OF CONTRACTS OF SECURITY1. SECURED TRANSACTIONS (CONTRACTS OF REAL SECURITY)

transactions supported by a collateral or an encumbranceof property

2. UNSECURED TRANSACTIONS (CONTRACTS O PERSONALSECURITY) Transactions supported only by a promise, orcommitment of another such as a guarantor or surety

KINDS OF CREDIT TRANSACTIONS

A. As to contracts of security1. CONTRACTS OF REAL SECURITY These contracts

supported by collateral/s or burdened by an encumbranceon property such as mortgage and pledge

2. CONTRACTS OF PERSONAL SECURITY These arecontracts where performance by principal debtor is notsupported by collateral/s but only a promise to pay or by

personal undertaking or commitment of another personsuch as in surety or guaranty

B. As to their existence1. PRINCIPAL CONTRACTS They can exist alone. Their

existence does not depend on the existence of anothercontract (e.g., commodatum and mutuum)

2. ACCESSORY CONTRACTS They have to depend onanother contract. These accessory contracts depend on theexistence of a principal contract of loan (e.g., guarantyproper, suretyship, pledge, mortgage, and antichresis)

C. As to their consideration1. ONEROUS This is a contract where there is a

consideration or burden imposed like interest2. GRATUITOUS This is a contract where there is no

consideration or burden imposed (e.g. commodatum)

BAILMENT The delivery of property of one person to another in

trust for a specific purpose, with a contract, express or implied,that the trust shall be faithfully executed and the property

returned or duly accounted for when the special purpose isaccomplished or kept until the bailor claims it

May be created by contract or operation of law (De Leon,2006 ed.).

To be legally enforceable, a bailment must contain all theelements of a valid contract, which are consent, object, andcause or consideration.

PARTIES IN BAILMENT1. BAILOR One who delivers the possession or custody of the

thing bailed

2. BAILEE One who receives custody or possession of the

thing thus delivered

KINDS OF CONTRACTUAL BAILMENT

1. For sole benefit of bailee bailment of goods where thebailee gratuitously undertakes to do some act with respect tothe property

a. Commodatumb. Gratuitous simple loan/mutuum

2. For sole benefit of bailora. Gratuitous depositb. Mandatum


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3. For benefit of both partiesa. Deposit for compensationb. Involuntary depositc. Pledged. Bailments for hire

NOTE: Nos. 1 and 2 are gratuitous bailments. There is noconsideration because they are considered more as a favor by one

party to the other. Bailments under no. 3 are mutual-benefitsbailments, and they usually result from business transactions

BAILMENT FOR HIRE Arises when goods are left with the baileefor some use or service by him and is always for somecompensation

KINDS OF BAILMENTS FOR HIREa. Hire of things goods are delivered for the temporary use

of the hirerb. Hire of service goods are delivered for some work orlabor upon it by the bailee

c. Hire for carriage of goods goods are delivered either to acommon carrier or to a private person for the purpose of

being carried from place to placed. Hire for custody goods are delivered for storage

II. LOAN

Art 1156. An obligation is a juridical necessity to give, to do or not to do.

OBLIGATION It is a tie of law or juridical bond by virtue of which

one is bound in favor of another to render something Manresa: A legal relation established between one party and

another, whereby the latter is bound to the fulfillment of aprestation which the former may demand of him)

Art 1156 merely stresses the duty of the debtor/obligorwhen it speaks of obligation as a juridical necessity

JURIDICAL NECESSITY Obligation is a juridical necessity becausein case of non-compliance, the courts of justice may be calledupon to enforce its fulfillment or, in default thereof, the economicvalue that it represents

NATURE OF OBLIGATIONS UNDER THE CIVIL CODE

1. CIVIL OBLIGATIONS Obligations which give the creditor orobligee the right of action in courts of justice to enforce theirperformance

2. NATURAL OBLIGATIONS Not being based on positive law,but on equity and natural law, these obligations do not granta right of action to enforce their performance although incase of voluntary fulfillment by the debtor, the latter may

not recover what has been delivered or rendered by reasonthereof (Art 1423)

ESSENTIAL REQUISITES OF AN OBLIGATION1. PASSIVE SUBJECT (debtor or obligor) The person who is

bound to the fulfillment of the obligation; he who has a duty2. ACTIVE SUBJECT (creditor or obligee) The person who is

entitled to demand the fulfillment of the obligation; he whohas a right

3. OBJECT (prestation) The conduct required to be observed

by the debtor or obligor; subject matter of the obligation4. JURIDICAL TIE (efficient cause) That which binds theparties to the obligation, which can be determined byknowing the source obligation

KINDS OF OBLIGATION ACCORDING TO SUBJECT MATTER

1. REAL OBLIGATION (Obligation to give) That in which thesubject matter is a thing which the obligor must deliver tothe obligee

2. PERSONAL OBLIGATION (Obligation to do or not to do) That in which the subject matter is an act to be done or notto be done

a. POSITIVE PERSONAL OBLIGATION Obligation to

do or to render serviceb. NEGATIVE PERSONAL OBLIGATION Obligation

not to do

Art 1305. A contract is a meeting of minds between two persons wherebyone binds himself, with respect to the other, to give something or to rendersome service.

REQUISITES OF A CONTRACT1. Consent Conformity of the parties to the terms of the

contract


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o There must a concurrence between the offer which isdefinite and intentional, and an acceptance which is

express, unqualified, and unconditional2. Object The thing or service which is the subject matter of

the obligation arising from the contract

REQUISITES:a. Lawfulb. Actual or possiblec. Transmissible Within the commerce of mand. Determinate or determinable

All things or services may be the object of contracts EXCEPT:a. Things which are outside the commerce of manb. Intransmissible rightsc. Future inheritance except in cases authorized by lawd. Impossible things or servicese. Objects which are indeterminable as to their kind, the

genus must be expressed

3. Cause It is the impelling reason for which a party assumesan obligation under a contractREQUISITES:

a. Existingb. Licit or lawfulc. True

CHARACTERISTICS OF A CONTRACT1. FREEDOM OF AUTONOMY OF CONTRACTS The parties may

establish such stipulations, clauses, terms, and conditions as

they may deem convenient provided that they are notcontrary to law, morals, good customs, public order andpublic policy

2. OBLIGATORINESS OF CONTRACTS Obligations arising fromcontracts have the force of law between the contractingparties and should be complied with in good faith

3. MUTUALITY OF CONTRACTS Contracts must bind both andnot one of the contracting parties; their validity orcompliance cannot be left to the will of one of them

4. CONSENSUALITY OF CONTRACTS Contracts are perfect, sa general rule, by mere consent, and from that moment the

parties are bound not only by the fulfillment of what hasbeen expressly stipulated but also to all the consequences

which, according to their nature, may be in keeping withgood faith, usage and law

5. RELATIVITY OF CONTRACTS Contracts take effect onlybetween the parties, their assigns and heirs, except in caseswhere the rights and obligations arising therefrom are not

transmissible by their nature, or by stipulation, or byprovision of lawEXCEPTION:a. Accion Paulianab. Accion Directac. Stipulation Pour Autrui

CLASSIFICATION OF CONTRACTSA. According to name or designation

1. Nominate That which has a specific name or designationin law (e.g. sales, commodatum, etc)

2. Innominate That which has no specific name ordesignation in law

B. According to perfection1. Consensual Perfected by mere consent or agreement of

the parties2. Real Perfected by delivery of object (e.g. commodatum,

pledge, deposit)C. According to cause

1. Onerous With valuable consideration2. Remuneratory or Remunerative Prestation is given for

service previously rendered not as obligation3. Gratuitous Founded in liberality

D. According to form1. Informal or Common2. Formal or Solemn Must conform to certain formalities to

be valid or perfectedE. According to obligatory force

1. Valid2. Rescissible3. Voidable4. Unenforceable5. Void

F. According to the person obliged1. Unilateral Only one of the parties has an obligation2. Bilateral Both parties are required to render reciprocal

obligations


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G. According to dependence to another contract1. Preparatory When it is entered into as a means to an end

(e.g. agency, partnership)2. Accessory When it is dependent upon another contract it

secures or guarantees for its existence and validity (e.g.mortgage, guaranty)

3. Principal When it does not depend for its existence andvalidity upon another contract but is an indispensable

condition for the existence of an accessory contractH. According to risks

1. Commutative When the undertaking of one party isconsidered to the equivalent of that of the other (e.g. sale,lease)

2. Aleatory When it depends upon an uncertain event orcontingency both as to benefit or loss (e.g. insurance, sale

of hope)

RESCISSIBLE CONTRACTS

Cause (Art1381,

1382)

Contracts ofguardians

When the acts ofadministration

causes LESION or

damage to the

ward they

represent by

more than 25% of

the value of the

thing

Contractsentered to

defraud

existing

debtors

Contractsreferring to

things in

litigation

Defect When the acts

of

administration

causes LESIONor damage to

the WARD

they represent

by more than

25% of the

value of the

thing

When the acts of

administration

causes LESION or

damage to theABSENTEE they

represent by

more than 25% of

the value of the

thing

When the

creditors

cannot in

anymanner

collect the

claims due

them

If entered by

the defendant

without the

knowledgeand approval

of the

litigants or

competent

judicial

authority

Effect Valid until rescinded (Art 1380)

Rescission Direct action (different from action

for rescission under Art 1191)

Accion Pauliana for

contracts in fraud of

NO Rescission if:

1. Injured party has other legalmeans to obtain reparation

(Art 1383)

2. Plaintiff cannot return his partof the obligation (Art 1385 par

1)

3. Object of the contract is in thehands of a 3

rdperson,

onerously acquired by him in

good faith (Art 1385 par 2)

4. If the court approves thecontracts under Art 1381 par

1 and 2 (Art 1386)

creditors

NO Rescission if:

1. Injured party has otherlegal means to obtain

reparation (Art 1383)

2. Plaintiff cannot returnhis part of the

obligation (Art 1385

par 1)

3. Object of the contractis in the hands of a 3

rd

person, onerously

acquired by him in

good faith (Art 1385

par 2)

Who can

rescind

In general, by

injured party

By ward or by

guardian ad

litem of ward

during

incapacity of

ward in an

action against

the original

guardian

By absentee By

creditor/s

By party

litigant

Prescriptio

n (Art

1389)

4 years from

gaining

capacity

4 years from

knowledge of

domicile ofabsentee

4 years

from

knowledgeof

fraudulent

contract

4 years from

knowledge of

fraudulentcontract

VOIDABLE CONTRACTDefect Incapacity of one party to the

contract

Vices of consent:

mistake, violence,

intimidation, undue

influence or fraud

(FIVUM)


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Effect Valid until annulled by competent court (Art 1390 last par)

How to annul 1. Directly by an action for annulment2. Indirectly by a counterclaim asking for positive action

of the court to set aside the contract

Annulment CANNOT proceed when:1. The object of the contract is lost through fraud or deceit

of the person with right t o institute proceedings (Art

1401 par 1)

2. The right of action is based upon the incapacity of anyone of the contracting parties and the thing is lost

through the fault or default of the plaintiff (Art 1401 par

2)

Who

can/cannot

annul (Art 397)

1. Parties who are obligated principally or subsidiarily2. Persons who are capable CANNOT allege the incapacity

of those with whom they contracted

3. Persons who exerted intimidation, violence or undueinfluence or employed fraud, or caused mistake,

CANNOT base their action upon these flaws of the

contract

Prescription

(Art 1391)

4 years after guardianship of

minors or incapacitated persons

ceases

4 years

a.After intimidation,violence or undue

influence

b.From the time ofdiscovery of mistake

or fraud

Effect of

Annulment

1. Mutual restitution of the things delivered, along withfruits and price paid with interest (Art 1398)

2. Damages to be paid by party who caused defect of the

contract, by virtue of Art 20 and 21 NCCHow to cure

defect (Art

1392-1396)

Express (written or oral manifestation) or tacit ratification

(acts or conduct) by injured party or guardian of

incapacitated person

NOTE: Ratification does not require the conformity of the

contracting party who has no right to bring the action for

annulment (Art 1395)

UNENFORCEABLE CONTRACTSNature (Art Contract Contracts Con tract where

1403) entered into

without

authority of, or

in excess of

authority given

by owner

covered by

Statute of Frauds

which did not

comply with the

written

memorandumrequirement (Art

1403 par 2)

both parties are

incapable of

giving consent to

contract

Effect No effect unless ratified. Cannot be enforced by a proper

action in court

How to assail Not by direct

action

As a defense, by

MTD on the

ground that the

contract is

unenforceable

Not by direction

action

1.As a defense,by MTD on the

ground that

the contract is

unenforceable

2.Objection tothe

presentation of

evidence to

prove an oral

contract (Art

1405)

Not by direct

action

As a defense, by

MTD on the

ground that the

contract is

unenforceable

Who can assail

NOTE:

Unenforceable

contracts cannot

be assailed by

3

rd

persons (Art1408)

By person

whose name the

contract was

entered into;

owner of

property

By party against

whom the

contract is being

enforced; or his

privies

By party against

whom the

contract is being

enforced or his

privies; or parents

or guardians, as itis a personal

defense

When When a party asks the court to enforce the contract

How to cure

defect (Art

1403)

Ratification by

person whose

name the

contract was

entered into

1.Ratification byparty against

whom the

contract is

being enforced

2.By failure toobject to the

By ratification of

party against

whom the

contract is being

enforced, or his

privies or parents

or guardians


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presentation of

oral evidence

to prove an

oral contract or

by the

acceptance of

benefits under

the contract

(Art 1405)

The ratification by

one party

converts the

contract into

VOIDABLE

contract (Art

1407)

VOID OR INEXISTENT CONTRACTS

Cause Contracts cause,

object of purpose

is contrary to law,

morals, good

customs, public

order public policy

(Art 1409 par 1)

Inexistent

contracts or

contracts whose

essential

elements are

absent (Art 1409

par 2, 3, 4 and 5)

Contracts

expressly

prohibited or

declared void by

law (Art 1409 par

7); Contracts

which are direct

results ofprevious illegal

contract (Art

1422)

Void ab initio

(Art 1409)

1. Those whose cause, object of purpose is contrary tolaw, morals, good customs, public order or public policy

2. Those which are absolutely simulated or fictitious3. Those whose cause or object did not exist at the time of

the transaction

4. Those whose object is outside the commerce of men5. Those which contemplate an impossible service6. Those where the intention of the parties relative to the

principal object of the contract cannot be ascertained

7. Those expressly prohibited or declared void by lawHow to assail 1. File an action for declaration of inexistence or nullity of

contract

2. As a defense during trial (Art 1409 last par). Suchdefense is not available to 3

rdparties

3. In pari delicto applies when cause or o bject of contractconstitutes a criminal offense (Art 1411)

Who can

assail

1.Innocent party(Art 1411 par 2;

1412 par 2)

2.Less-guilty party,

1.Any of theparties

2.Any personwhose

1.Any personwhose interests

are directly

affected by the

upon court

discretion

3.Incapacitatedperson who is a

party to an

illegal contract,

upon court

discretion (Art

1415)

4.Any personwhose interests

are directly

affected by the

contract (Art

1421)

interests are

directly

affected by the

contract (Art

1421)

contract (Art

1421)

2.By party forwhose

protection the

prohibition of

the law is

designed (Art

1416)

Prescription No prescription (Art 1410)

Art 130 6. The contracting parties may establish such stipulations, clauses,

terms and conditions as they may deem convenient, provided they are notcontrary to law, morals, good customs, public order, or public policy.

LIMITATIONS ON CONTRACTUAL STIPULATIONS1. LAW Law is superior to a contract. Acts executed against

the provisions of mandatory or prohibitory laws are void,

except when the law itself authorizes their validity (Art 5)2. POLICE POWER Public welfare is superior to private rights.

When there is no law in existence or the law is silent, the willof the parties prevail unless their contract contravenes thelimitation of morals, good customs, public order or publicpolicy

Art 1316. Real contracts, such as deposit, pledge and Commodatum, are notperfected until the delivery of the object of the obligation.

CLASSIFICATION OF CONTRACTS ACCORDING TO PERFECTION1. CONSENSUAL That which is perfected by mere consent

(e.g. sale, lease, agency)2. REAL That which is perfected, in addition to consent, by

the delivery of the thing subject matter of the contract (e.g.

depositum, pledge, commodatum)3. SOLEMN (Formal) That which requires compliance with

certain formalities required by law such prescribed from


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being thereby an essential element thereof (e.g. donation ofreal property)

STAGES IN THE LIFE OF A CONTRACT1. PREPARATION (Negotiation) Includes all the steps taken by

prospective parties from the time they manifest interest intoentering into a contract, leading to the perfection of thecontract. At this stage, the parties have not yet arrived atany definite agreement. Either party may stop the

negotiation or withdraw an offer made (No contract yet)2. PERFECTION (Birth) Takes place when the parties have

come to a definite agreement or meeting of minds regardingthe terms, i.e. subject matter and cause of the contract

(concurrence of the elements of the contract). Here, theoffer must be absolutely accepted

3. CONSUMMATION (Termination) Takes place when theparties have fulfilled or performed their respectiveobligations or undertakings under the contract and the

contract may be said to have been fully accomplished orexecuted, resulting in the extinguishment thereof

Art 1933. By the contract of loan, one of the parties delivers to another,either something not consumable so that the latter may use the same for acertain time and return it, in which case the contract is called acommodatum; or money or other consumable thing, upon the conditionthat the same amount of the same kind and quality shall be paid, in whichcase the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, whilein simple loan, ownership passes to the borrower.

LOAN A contract where one of the parties delivers to another,either something not consumable so that the latter may use thesame for a certain time and return it or money or other

consumable thing upon the condition that the same amount of thesame kind and quality shall be paid.

ESSENTIAL ELEMENTS OF A CONTRACT IN THE CONTEXT OF A LOAN

Consent of the parties Borrower and lender

Object Property

Cause or consideration For the lender: right to demand the

return of the thing

For the borrower: acquisition of thething

CHARACTERISTICS1. REAL CONTRACT Delivery of a thing loaned is necessary

for the perfection of the contract

REASON: Delivery is necessary in view of the purpose of thecontract which is to transfer either the use or the ownershipof the thing loaned

NOTE: An accepted promise to make a future loan is a

consensual contract, and therefore binding upon the partiesbut it is only after the delivery of the subject matter, will thereal contract of loan arise (Art 1934)

2. BILATERAL CONTRACT Both parties are mutually bond toeach other (as bailor and bailee)a. Reciprocal Those which arise from the same cause in

which each party is debtor and creditor of the other,such that the performance of one is designed to be theequivalent and the condition for the performance of theother.GENERAL RULE: Neither party incurs delay if the other

does not comply or is not ready to comply with what is

incumbent upon him (Art 1169)b. Non-reciprocal Those which do not imposesimultaneous and correlative performance on bothparties. The performance of one party is not dependentupon the simultaneous performance by the other

NOTE: Not all loans are reciprocal, but they are bilateral.

LOAN AND CREDIT DISTINGUISHEDLOAN CREDIT

Delivery by one party and the receipt of Ability of a person to borrow money or


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another of a given sum of money or

other consumable thing upon an

agreement, express or implied, to repay

the same amount of the same kind and

quality, with or without interest

things by virtue of trust or confidence

reposed by the lender that he will pay

what he promised within a specified

period

NOTE: The concession of credit necessarily involves the grantingof loans up to the limit of the amount fixed in the credit (People

v. Concepcion, G.R. no L-18535, August 15, 1922).

LOAN AND DISCOUNTING OF PAPER DISTINGUISHEDLOAN DISCOUNTING OF PAPER

Interest taken at the expiration of credit Interest is taken in advance

Always on a double name paper (one on

which 2 signatures appear with both

parties liable for payment)

Always on a single name paper (one on

which no other endorsement, other

than the signature of the maker

appears)

KINDS OF LOAN1. COMMODATUM When the bailor delivers to the bailee a

non-consumable thing so that the latter may use it for a

certain time and return the identical thing

2. SIMPLE LOAN (MUTUUM) Lender delivers to the borrowermoney or other consumable thing upon the condition thatthe latter shall return the same amount of the same kind andquality

NOTE: Consumables are those things which cannot be used in amanner appropriate to their nature without their being consumed(Art 418).

COMMODATUM AND MUTUUM DISTINGUISHEDCOMMONDATUM MUTUUM

OBJECT Non-consumable

Exception: Art 1936

Consumable

Correlate with Art 418

CAUSE Gratuitous Gratuitous or not

PURPOSE Use or temporary possession Consumption

SUBJECT MATTER Any property Personal property

OWNERSHIP OF THE

THING

Retained by bailor Passes to the debtor

THING TO BE

RETURNED

Exact thing loaned Equal amount of the

same kind and quality

WHO BEARS RISK OF

LOSS

Bailor Debtor/bailee

WHEN TO RETURN In case of urgent need and

commission of any acts of

ingratitude even before the

expiration of the term

Upon expiration of the

term only

NOTE: In case of temporary use of the bailor, the contract of

commodatum is suspended while the thing is in possession of the

bailor (Art 1946)

CONSUMABLE AND NON-CONSUMABLE DISTINGUISHEDA thing is CONSUMABLE when it cannot be used in a mannerappropriate to its nature without being consumed. (Art 418)(e.g.food, firewood, gasoline). On the other hand, a NON CONSUMABLE

THING is a movable thing which can be used in a manner

appropriate to its nature without it being consumed. (Art 418)(e.g. car, television, radio).

FUNGIBLE AND NON-FUNGIBLE DISTINGUISHEDFUNGIBLE THING is one where the parties have agreed to allowthe substitution of the thing given or delivered with an equivalentthing. NONFUNGIBLE THING is one where the parties have the

intention of having the same identical thing returned after the

intended use.

NOTES: As to whether a thing is consumable or not, it depends upon

the nature of the thing.

As to whether it is fungible or not, it depends upon theintention of the parties.

Fungibles are usually determined by number, weight ormeasure.

Q: May a non-consumable thing be the subject of a commodatum?A: As a general rule the objects of commodatum are non-consumable things. However, a consumable thing may be the

subject of a commodatum when the same is used for exhibition ordisplay. This is because the purpose of commodatum is thetemporary use of a thing.


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Q: What does consumable mean in Art 1933?A: In consumable things the use of a thing results to its

deterioration, destruction, loss or change in its nature. But sincemutuum requires the return of the equivalent thing, the lawcontemplates the object to be returned as fungible. The law should

have stated that the object of mutuum is both consumable andfungible.

Art 1934. An accepted promise to deliver something by way ofcommodatum or simple loan is binding upon parties, but the commodatumor simple loan itself shall not be perfected until the delivery of the object ofthe contract.

DELIVERY ESSENTIAL TO PERFECTION OF LOANSince commodatum and mutuum are real contracts, they areperfected by delivery of the subject matter of the contract.Delivery is necessary in view of the purpose of the contract which

is to transfer either the use or ownership of the thing loaned.

BINDING EFFECT OF ACCEPTED PROMISE TO LENDIt does not mean that a promise to lend would be without efficacyand judicial value. An accepted promise to make a future loan is aconsensual contract and therefore, binding upon the parties but itis only after delivery, will the real contract of loan arise.

Q: What is the effect of an accepted promise to delivery by way of

commodatum or mutuum?A: It is binding upon the parties but the contract of loan shall notbe perfected until delivery of the contract (Art 1934).

CONTRACT OF LOAN AND CONTRACT TO LOAN DISTINGUISHED

CONTRACT OF LOAN CONTRACT TO LOAN

Real contract, requires delivery for

perfection

Contract to loan is simply an offer to

loan which must be accepted. It is

similar to a promise to loan or promise

to deliver. There is already a perfected

consensual contract

Remedy: Specific performance with

damages (of loan itself)

Remedy: Specific performance with

damages (of promise to loan)

These are two different stages/phases that are part of a single transaction

CASES:SAURA IMPORT & EXPORT CO INC V. DEVELOPMENT BANK OF THEPHILIPPINES, 44 SCRA 445 (1972)FACTS: In July 1953, plaintiff Saura Imports applied with RehabilitationFinance Corp (RFC), now DBP, for an industrial loan of P500,000, to be

used for the construction of a factory building (manufacture of jute sacks)and payment of the jute mill machinery and equipment1. RFC passed a resolution approving the loan application for P500,000

to be secured by a first mortgage on the factory building to beconstructed and the machinery and equipment to be installed. Theresolution also provided that the proceeds of the loan shall be usedexclusively for construction of the factory and the purchase of themachinery and equipment

2. Saura requested a modification of the terms of the loan, i.e. that inlieu of having China Engineers Ltd sign as co-maker on thepromissory notes issued by Saura, Saura will put a bond forP123,500. RFC will re-examine all aspects of the loan

3. Saura notified RFC that China Engineers again agreed to sign as co-maker for the loan

4. In April 1954, the loan documents were executed and the promissorynote was signed by FR Halling as representative of China Engineers,and the corresponding deed of mortgage

5. Despite the formal execution of the loan agreement, RFC reduced theloan from P500,000 to P300,000.

6. Subsequently, China Engineers informed RFC that it no longerwished to avail of the loan and that the loan shall be considered ascancelled.

7. Saura, on the other hand, had written RFC requesting that the loan ofP500K be granted. However, RFC notified Saura that ChinaEngineers had already informed them that they are cancelling theloan

8. On Sauras assurance that China Engineers will co-sign the loan

upon the approval of the loan, RFC passed a resolution restoring theloan to the original amount of P500K on the following conditions: thatthe Department of Agriculture (DA) shall certify that the materialsneeded by Saura are available in the immediate vicinity; and there isan prospect of increased production to sufficient for the requirementsof the Sauras factory.

9. Petitioner Saura later informed RFC that the local materials are notsufficient for the operation of the factory and instead, requested that itbe allowed to import jute materials. RFC reiterated its conditions andas a result, the negotiations were deadlocked.

10. Instead of pursuing the loan, Saura requested that the loan becancelled.


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NOTE: Saura mortgaged its property to Prudential Bank in August1954, under which it had until December of the same year to pay itsobligation. Saura failed to comply with its obligation so PrudentialBank sued Saura

11. 9 years later, Saura filed the present suit for damages against RFC,alleging that it failed to comply with its obligation in releasing the

amount of the loan after it had been approved12. The trial court held in favor of Saura, citing that there was a perfected

contract between RFC and Saura and that the former was guilty ofbreach thereof

ISSUES:1. WON there was a perfected contract in this case2. WON Saura is entitled to damages

HELD:FIRST ISSUE: Yes, there is a perfected consensual contract asprovided in Art 1934 NCC: An accepted promise to deliver something,by way of Commodatum or simple loan is binding upon the parties, butthe commodatum or simple loan itself shall not be perfected until thedelivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: the application ofSaura for a loan of P500k was approved by RFC and the correspondingmortgage was executed and registered. However, this alone does notresolve the claim that RFC did not comply with its obligation.

SECOND ISSUE: No. RFC entertained the loan application on theassumption that the factory to be constructed will utilize locally grown rawmaterials. This imposition was by no means a deviation from the terms of thecontract, but a step in its implementation; the condition did not contradictRFCs resolution approving the loan.

The action taken by both parties (Sauras request to cancel themortgage) was in the nature of a mutual desistance (mutuo disenso),which is a mode of extinguishing obligations. It is derived from theprinciple that since mutual agreement can create a contract, mutualdisagreement by the parties can cause its extinguishment.

CAB: Saura did not protest any alleged breach of contract by RFC when itinsisted on using locally sourced raw materials. Its request for cancellationdid not carry any reservation of whatever rights it believed to have againstRFC for the latters non-compliance. It was only after 9 years that Saurainitiated the action for damages. All these circumstances demonstrate

beyond doubt that the said agreement had been extinguished by mutualdesistance and that on the initiate of the petitioner itself.

BONNEVIE V. COURT OF APPEALS, 125 SCRA 122 (1983)FACTS: Spouses Lozano obtained a loan from private respondent PhilippineBank of Commerce (PBCOM) for the amount of P75,000, which was

secured by a mortgage executed by the spouses.1. Spouses Lozano executed a Deed of Sale with Assumption of

Mortgage in favor of plaintiff Honesto Bonnevie for the amount ofP100,000 (P20K payable to spouses Lozano and the balance ispayable to respondent Bank)NOTE: When Lozano sold the property to Bonnevie, the loan amountwas not yet released

2. From April 1967 to July 1968, Honesto made payments to PBCOMamounting to a total of P18,944.22

3. In May 1968, Honesto assigned all his rights under the Deed of Saleto his brother Raoul (intervenor)

4. PBCOM subsequently applied for the foreclosure of the subjectproperty and a notice of sale was published in the Luzon WeeklyCourier. Respondent bank purchased on the property during theauction sale

5. Honesto tried to redeem the property but the same failed.6. As such, Honesto filed an action to annul the Deed of Mortgage as

well as the extrajudicial foreclosure. He alleged that:a. The Deed of Mortgage lacks considerationb. The mortgage was executed by one who was not the owner of

the mortgaged propertyc. The property was foreclosed without complying with the

requirements of a valid foreclosure7. The bank denied Honestos allegations and averred that:

a. The bank did not consent to the (no written consent) sale of themortgage property to plaintiff Bonnevie as well as theassumption of the loan

b. It was only informed of the alleged sale to Bonnevie after it hadforeclosed the Lozano mortgage

c. The law on contracts requires that the banks consent, being aparty to the agreement, before Lozano can be released fromhis bilateral agreement and before Bonnevie may substitute forLozano

d. The mortgage did not lack consideration because theexecution and registration of the securing mortgage, signing ofthe promissory note and disbursement of loan proceeds aremere implementation of the basic consensual contract of loan

ISSUE: WON there was a perfected contract of loan


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HELD: No, there is no perfected contract of loan since there was no deliveryof the loan proceeds. What was perfected was a contract to loan.A contractto loan being a consensual contract, the herein contract of loan wasperfected at the same time the contract of mortgage was executed. Thepromissory note is only an evidence of indebtedness and does not indicatelack of consideration.

FORECLOSURE OF THE PROPERTYPetitioners argument that the mortgage was void for being executed by onewho is not owner of the property is likewise untenable. Petitioners failed toconsider the provisions of the Deed of Mortgage which prohibits the sale,disposition or mortgage of the property without the written consent of themortgagee and in spite of said provision if the mortgaged property is sold,the vendee shall assume the mortgage in the terms and conditions underwhich it was constituted. These were expressly stipulated in the Deed ofSale with Assumption of Mortgage.

In the case at bar, petitioners did not secure the consent of the bank to the

sale with assumption of mortgage. Since the sale/assignment was notregistered, the title remained in the name of the spouses Lozano insofar asthe respondent bank was concerned.

The bank had every right to rely on the certificate of title. It was not bound togo behind the same to look for flaws in the mortgagors title, the doctrine ofinnocent purchaser for value being applicable to an innocent mortgagee forvalue. Moreover, a mortgage follows the property whoever the possessormay be and subjects the fulfillment of the obligation for whose security it wasconstituted. It can also be said that petitioners voluntarily assumed themortgage when they entered into the Deed of Sale with Assumption ofMortgage. As such, they are stopped from impugning its validity.

ROSE PACKING CO V. COURT OF APPEALS, 167 SCRA 309 (1988)FACTS: In December 1962, respondent bank PCIB approved petitionersrequest to reactivate its overdraft line of P50,000, discounting line ofP100,000 and letter of credit-trust receipt line of P550,000, as well as loan ofP300,000 on fully secured real estate and chattel mortgage

1. In November 1965, National Investment and Devt Corp (NIDC), thesubsidiary of PNB, approved petitioners loan for P2.6 million.Pursuant to such, NIDC released the amount of P100,000. Petitionersubsequently purchased 5 parcels of land in Pasig

2. In January 1966, NIDC released another P100,000 to petitioner RosePacking, the total amount was applied to the payment of preferredstock which NIDC subscribed in Rose Packing to partially implement

its investment scheme. However, NIDC refused to make furtherreleases on the loan amount

3. In August and October 1966, respondent PCIB approved thepetitioners additional accommodations consisting of: P710,000 loanfor the payment of the Pasig properties; P500,000 loan for operatingcapital; P200,000 loan to be paid directly to petitioners creditorsallamounting to P1,597,000 secured by real estate and chattelmortgages. However, of the total amount, PCIB only releasedP300,000 of the P710,000 approved loan and P300,000 for operatingcapital

4. In June 1967, DBP approved petitioners loan application for P1.84million and guarantee of $652,6882 for the purchase of canningequipment. Upon notice of the approval of the loan, petitionerinformed PCIB of the availability of P800,000 to partially payoff itsaccount and requested the release of the titles to the Pasig lots fordelivery to DBP.

5. However, PCIB advised refused, stating that all obligations should beliquidated before the release of the titles. As such, petitionerpurchased a parcel of land at Valenzuela with the P800,000 DBP loan

6. Subsequently, PCIB filed a complaint against Rose Packing and itspresident for the collection of petitioners indebtedness. PCIB gavenotice that it would cause the real estate mortgage to be foreclosed atan auction sale

7. Consequently, petitioner filed a complaint to enjoin PCIB and thesheriff from proceeding with the foreclosure sale and asked the courtto fix a new period of payment of petitioners obligation to PCIB

8. The lower court denied the application of preliminary injunction anddissolved its restraining order.

9. The properties were sold at a public auction with PCIB as thepurchaser.

ISSUE: WON there was a perfected contract of loan

HELD: No. The loan agreements between Rose Packing and PCI arereciprocal obligations, i.e. the obligation or promise of each party isthe consideration for that of the other. A contract of loan is not aunilateral contract as PCIB thinks it is. The promise of petitioner to pay is theconsideration for the obligation of PCIB to furnish the loan

PCIBs designation of its own choice of people holding key positions inpetitioner corporation tied the hands of petitioners board of directors tomake decisions for the interest of the corporation, in fact, undermined thecorporations financial stability. During the 18 months of Ledesmas


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management, Rose Packing produced only P200,000 worth of cannedgoods which is only equivalent to its normal production in 3 weeks.

A. Elements of a contract: ConsiderationIt is apparent that it is respondent bank practically managing petitionercorporation through its representatives occupying key positions

therein. Thus, if ever petitioner was in financial straits, it was becauseof the mismanagement of the PCIB through its representatives inpetitioner corporation.

B. Foreclosure of the Pasig propertiesArt 2089, however, is not applicable to the instant case as itpresupposes several heirs of the debtor or creditor which does notobtain in this case. Furthermore, granting that there was consolidationof the entire loan, the rule of indivisibility of mortgage cannot applywhere there was failure on the part of respondent bank for themismanagement of the affairs of petitioner corporation and where saidbank is in default in complying with its obligation to release theamount of P710,000. In fact, the real estate mortgage becomesunenforceable. And as already stated the exact amount of petitioners totaldebt is still unknown.

BPI INVESTMENT CORP V. COURT OF APPEALS, 377 SCRA 117 (2002)FACTS: Frank Roa obtained a loan at an interest rate of 16.25% from AyalaInvestment and Devt Corp (now BPI Investment Corp) for the construction ofhis house. To secure the loan, Roa executed a Deed of Mortgage over thehouse and lot in favor of BPIIC.

1. Sometime in 1980, Roa sold his house and lot to private respondentsALS Management and Antonio Litonjua for P850,000. Privaterespondents paid P350,000 and assumed the P500,000 balance ofRoas indebtedness with BPIIC.

2. However, BPIIC was not willing to extend the old interest rate toprivate respondents. Instead, it proposed to grant a new loan to be

applied at Roas debt and secured by the same property at the rate of20% per annum and service fee of 1% per annum on the outstandingprincipal balance payable within 10 years and penalty interest rate of21% per annum per day from the date the amortization became dueand demandable

3. Consequently, in March 1981, private respondents executed amortgage deed stipulating that the amortization shall start on May 1,1981

4. On August 13, 1982, ALS and Litonjua updated Roas loan by payingBPIIC the sum of P190,601.35; this reduced the loan to P457,204.90

5. On September 13, 1982, BPIIC released the balance of the loan afterfull payment of Roas loan

6. In June 1984, BPIIC instituted foreclosure proceedings against privaterespondents on the ground that they failed to pay the mortgageindebtedness from May 1, 1981 to June 30, 1984

7. Subsequently, ALS and Litonjua filed an action against BPIIC allegingthat:

a. They were not in arrears in their payment but in fact made an

overpayment in June 1984b. They should not be made to pay amortization before the actual

release of the P500,000 loan in August and September 1982c. Out of the P500,000 loan, only the total amount of

P464,351.71 was released to private respondents. Applyingthe effects of legal compensation, the balance of P35,648.23should be applied to the initial monthly amortization of the loan

8. The trial court ruled in favor ALS and Litonjua and held that theamount of loan was only P464,351.77

9. On appeal, CA affirmed the same. CA cited that a simple loan isperfected only upon the delivery of the object of the contract. In thepresent case, the loan contact was only perfected on September 13,1982 when BPIIC released the balance of the loan. Thus the paymentof the monthly amortization should commence only a month after thesaid date, despite the express agreement of the parties that paymentshall commence on May 1, 1981. Evidence also showed that privaterespondents had an overpayment as of June 1984; as such there isno cause for extrajudicial foreclosure

10. On the other hand, BPIIC averred that:a. A contact of loan is consensual and a loan contract is

perfected at the time the contract of mortgage is executedfollowing the ruling in Bonnevie v. CA

b. The loan was actually released on March 31, 1871 when BPIICissued a cancellation of the mortgage of Roas loan

11. Private respondents maintained that following Art 1934 NCC, a simpleloan is perfected upon the delivery of the object of the contract, hencea real contract. The ruling in Bonnevie should be construed to mean

that while the contract to extend the loan was perfected on March1981, the loan itself was only perfected upon the delivery of the fullloan on September 13, 1982.

a. Even if the loan contract was perfected on March 31, 1981,their payment did not start a month thereafter, so no defaulttook place.

b. Private respondents contended that a perfected loanagreement imposes reciprocal obligations. In reciprocalobligations, neither party incurs a delay if the other does notcomply or is not ready to comply with his obligation. Applyingthis, private respondents did not incur delay since it was only


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on September 13 that BPIIC fully complied with its obligationunder the loan contract

ISSUE: WON a contract of loan is a consensual contact in the light of therule laid down in Bonnevie v. CA

HELD: No, a loan contract is not a consensual contract but a real contract.It is perfected only but the delivery of the object of the contract.Petitioner misapplied the ruling in Bonnevie. The contract in Bonnevie fallsunder the first clause of Art 1934, it is an accepted promise to deliversomething by way of simple loan.

As held in the case of Saura Import v. DBP, a perfected consensual contractcan give rise to an action for damages. However, said contract does notconstitute the real contract of loan which requires the delivery of the object ofthe contract for its perfection, and which gives rise to obligations only on thepart of the borrower.

CAB: The loan contract between BPIIC and ALS and Litonjua, was only

perfected on September 13, 1982, the date the full loan was released. Assuch, the obligation of the private respondents to pay commenced only onOctober 13, 1982, a month after the perfection of the contract.

Moreover, a contract of loan involves a reciprocal obligation, whereinthe obligation or promise of each party is the consideration for that ofthe other. Here, the promise of BPIIC to extend and deliver the loan is uponthe consideration that ALS and Litonjua will pay the monthly amortizationbeginning May 1, 1981. It is a basic principle in reciprocal obligationsthat neither party incurs in delay, if the other does not comply or is notready to comply in a proper manner with what is incumbent upon him.Only when a party has performed his part of the contract can he demandthat the other party also fulfill his obligation. As such, BPIIC can only

demand payment after September 13, 1982 and the starting date forforeclosure is October 13, 1982.

PANTALEON V. AMERICAN EXPRESS INTL, 629 SCRA 276 (2010)FACTS: Spouses Pantaleon and their children joined an escorted tour ofWestern Europe. While visiting Amsterdam, Mrs. Pantaleon wanted topurchase a 2.5 karat diamond at Coster Diamond House. Said jewelryamounted to $13,826

1. Pantaleon used his American Express credit card to pay for hispurchase. 10 minutes later, his Amex Card had not yet beenapproved. Worried that he was already inconveniencing the tourgroup, Pantaleon asked the store clerk to cancel the transaction. The

store manager asked Pantaleon to wait a few more minutes but after15 minutes, the manager informed Pantaleon that respondent bankdemanded bank references to which Pantaleon acceded.

2. 45 Minutes after first presenting his card and 30 minutes after thegroup was supposed to leave the store, Cos ter decided to release theitems without respondents approval of the purchase

3. It appears that the approval code was transmitted to AmexAmsterdam 78 minutes after the purchases were electronicallytransmitted by the jewelry store to respondents Amsterdam office

4. The delay occurred two more times while plaintiff was in the USpurchasing golf equipment and childrens shoes

5. Upon returning in Manila, Pantaleon sent a letter to respondent bankdemanding an apology for the delay in providing credit authorizationfor the purchases he made. Amex explained that Pantaleonspurchase of $13,826 was out of the usual charge pattern established.

6. As such, Pantaleon filed an action for damages. The trial court held infavor of Pantaleon. The trial court ruled that respondent failed toexercise diligent efforts to effect the approval of the purchases

7. On appeal, CA reversed the trial court decision citing that respondent

bank did not breach its obligations to petitioner8. Petitioner argues that respondents failure to timely approve or

disapprove the purchase constituted mora solvendi on the part of therespondent in the performance of its obligation. CA erred in applyingthe principle of mora accipiendi, which relates to delay on the part ofthe obligee in accepting the performance of the obligation by theobligor.

NOTE:1. Mora solvendi delay on the part of the debtor to fulfill his

obligation by reason of a cause imputable to himRequisites:a. Obligation is demandable and liquidatedb. Debtor delays performance

c. Creditor judicially or extra-judicially requires the debtorsperformanceEffects:a. Debtor is guilty of breachb. Debtor is liable for interest in case of obligations to pay money

or damages in other obligationsc. Debtor is liable even for a fortuitous event when the obligation

is to deliver a determinate thing2. Mora accipiendi delay on the part of the creditor without justifiable

reason to accept the performance of the obligationRequisites:


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a. An offer of performance by the debtor who has the requiredcapacity

b. The offer must be to comply with the prestation as it should beperformed; and

c. The creditor refuses the performance without just cause

ISSUE: What is the nature of credit card transactions?

HELD: Every credit card transaction involves three contracts:(a) Sales contract between the card holder and the merchant or

business establishment which accepted the credit card;(b) Loan agreement between the credit card issuer and the credit card

holder; and(c) Promise to pay between the credit card issuer and the merchant or

business establishment.

Although we recognize the existence of a relationship between the creditcard issuer and the credit card holder upon the acceptance by thecardholder of the terms of the card membership agreement, we have todistinguish this contractual relationship from the creditor-debtor relationshipwhich only arises afterthe credit card issuer has approved the cardholderspurchase request. The first relates merely to an agreement providing forcredit facility to the cardholder. The latter involves the actual credit on loanagreement involving three contracts: the sales contract between thecardholder and the merchant or business establishment; the loan agreementbetween the card issuer and the cardholder; and the promise to paybetween the credit card issuer and the merchant or business establishment.

From the loan agreement perspective, the contractual relationship begins toexist only upon the meeting of the offer and the acceptance of the partiesinvolved. In other words, when the cardholders use their credit cards to payfor their purchases, they merely offer to enter into loan agreements with thecredit card issuer, Only after the latter approves the purchase requests that

the parties enter into binding loan contracts in keeping with Art 1319.

CAB: AMEX has no obligation to approve any and all charge requests madeby its cardholders pursuant to the card membership agreement.

Art 1935. The bailee in commodatum acquires the used of the thing loanedbut not its fruits; if any compensation is to be paid by him who acquires theuse, the contract ceases to be a commodatum.

COMMODATUM Loan whereby the bailor delivers to the bailee anon-consumable thing so that the latter may use it for a certaintime and return the exact same thing

CHARACTERISTICS1. CAUSE Essentially gratuitous, otherwise if there is

compensation, it might be a lease2. PURPSOSE Temporary use of the thing loaned but not to

its fruits, unless stipulated or is incidental (Art 1940).Otherwise, if the bailee is not entitled to the use of the thing,it might be a deposit. If the primary purpose is use of the

fruits, the contract is a usufruct3. SUBJECT MATTER Generally non-consumable goods but if

the consumable goods are not for consumption, such may bethe subject of the commodatum, as when merely for

exhibition or display (Art 1396)4. Bailor need not be the owner of the thing loaned (Art 1938)

It is sufficient that he has a possessory interest

o A mere lessee or usufructuary may lend but theborrower or bailee himself may not lend or lease thething loaned to him to a 3rd person (Art 1932 par 2)

5. PURELY PERSONALo Death of either party terminates the contract unless

there is a stipulation to the contrary

o Generally, bailee can neither lend nor lease the objectto a 3rd person in the absence of some agreement tothat effect

o Use of the thing loaned may extend to the baileeshousehold (who are not considered 3rd persons)EXCEPT:(a) When there is a contrary stipulation

(b) Nature of the thing forbids such use6. ENJOYMENT OF FRUITS A stipulation to make the use of

fruits is valid, but it is never presumed. The enjoyment offruits must only be incidental to the use of the thing itself,

for if it is the main cause, the contract may be one ofusufruct

NATURE OF COMMODATUMGENERAL RULE: Bailee acquires the temporary use of the thing butnot its fruits since the bailor remains the owner (Art 1935)


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EXCEPTION: A stipulation that the bailee may make use of thefruits of the thing loaned is valid (Art 1940), provided that the use

of the fruits is merely incidental; otherwise, it is usufruct (DeLeon).

If the bailee is not entitled to the use of the thing, the contract isdeposit.

CONTRACT AKIN TO DONATION

Both confer benefit to the recipient. The presumption is that thebailor loaned the thing has no need therefor (Second sentence, Art1946).

KINDS OF COMMODATUM1. ORDINARY COMMODATUM Use of the thing by the bailee is

for a certain period of time

2. PRECARIUM One whereby the bailor may demand the thingloaned at will; if any of the following exist:

a. The duration and purpose of the contract is notstipulated

b. The use of the thing is merely tolerated by the owner

CAUSEIt is essentially gratuitous but:

a. If any compensation is to be paid by the borrower therearises a lease contract

b. If the consideration is to render some service, an innominatecontract will result

Art 1936. Consumable goods may be the subject of commodatum if thepurpose of the contract is not the consumption of the object, as when it ismerely for exhibition.

Art 1937. Movable or immovable property may be the object ofcommodatum.

SUBJECT MATTERGENERAL RULE: Non-consumable goods, whether movable orimmovable property (Art 1936-1937)

EXCEPTION: Consumable goods may be the subject matter ofcommodatum if the purpose of the contract is not the consumption

of the object (Art 1936)

Art 1938. The bailor in commodatum need not be the owner of the thing

loaned.

BAILOR NEED NOT BE OWNERIt is sufficient that the bailor has

1. Possessory interest; or2. The right to use which he may assert against the bailee or

3rd persons but not the rightful owner

Q: Who can be a bailor in commodatum?A:

1. Anyone. The bailor in commodatum need not be the ownerof the thing loaned (Art 1938)

2. But the bailee himself may not lend nor lease the thing

loaned to him by a third person (Art 1939 par 2)

Art 1939. Commodatum is purely personal in character. Consequently:(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a thirdperson. However, the members of the bailee's household may make use ofthe thing loaned, unless there is a stipulation to the contrary, or unless thenature of the thing forbids such use.

PURELY PERSONAL CHARACTER OF COMMODATUMUnlike mutuum, commodatum is purely personal contract, the

lender having in view the character, credit and conduct of the

borrower. Hence, the death of either party terminates the contract,unless by stipulation, the commodatum is transmitted to heirs ofeither or both parties (Art 1306).

RIGHT OF BAILEE TO LEND THE THING LOANED TO THIRD

PERSONSGENERAL RULE: A bailee can neither lend nor lease the object ofthe contract to a third person, in the absence of someunderstanding or agreement to that effect


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EXCEPTION: Use of the thing loaned may extend to members of

the bailees household

EXCEPTION TO THE EXCEPTION: Bailees house may NOT use it

when1. There is contrary stipulation; or

2. Nature of the thing forbids such use (par 2, Art 1939)

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

CONTRARY STIPULATON AS TO FRUITSThe bailee is entitled only to the use of the thing loaned and not toits fruits as a general rule. The enjoyment of fruits must only beincidental to the use of the thing itself for if it is the main cause,

the contract may be one of usufruct (Art 562).

OBLIGATIONS OF THE BAILEE

A. PRINCIPAL OBLIGATIONS1. Take care of the thing with diligence of a good father of afamily (Art 1163, 1169, 1170 and 1173)

2. Return the IDENTICAL thing loaned upon the expiration ofthe term or upon the accomplishment of the purpose (Art1933)

B. OTHER OBLIGATIONS1. Pay for the ORDINARY EXPENSES for the use and

preservation of the thing loaned (Art 1941)

GENERAL RULE: Bailee is not liable for loss due to fortuitousevents because ownership remains with the bailor.

EXCEPTIONS: Bailee is liable for loss even if it should bethrough a fortuitous event in the following cases (KLAS-D):a. When the KEEPS it longer than the period stipulated or

after the accomplishment of its use (delay)b. When he LENDS or leases it to third persons who are not

members of his householdc. When the thing loaned has been delivered with

APPRAISAL of its value unless there is a stipulationexempting the bailee from responsibility in case offortuitous event

REASON: The law presumes that the parties intended

that the borrower shall be liable for loss of the thingeven if it is due to a fortuitous event for otherwise theywould not have appraised the thing (Republic v. Bagtas)

d. When, being able to SAVE either the thing borrowed orhis own things, he chose to save the latter

REASON: The bailee shows his ingratitude after the thingis gratuitously loaned to him

e. When the bailee DEVOTED the thing for a different usefrom that agreed uponREASON: The bailee acts in bad faith

GENERAL RULE: Bailee is not liable for deterioration due tothe use of the thing and without his faultEXCEPTIONS:

(1) If expressly stipulated(2) If guilty of fault or negligence (Art 1170); or(3) If he devotes the thing to any purpose different from

that which it has been loaned (Art 1942, par 1)

2. Pay for EXTRAORDINARY EXPENSES arising from the actualuse of the thing, which shall be borne by both the bailor and

the bailee even though the bailee acted without fault, unlessthere is a stipulation to the contrary (Art 1949 par 2)

NOTES:

o The bailee has no right to retain the thing loanedas security for claims he has against the bailoreven for extraordinary expenses (Art 1944)

EXCEPT for a claim for damages suffered by thebailee because of hidden flaws known to the bailor(Art 1951)

o Compensation shall not be proper when one of thedebts arises from a depositum or from theobligations of a depositary or a bailee incommodatum (Art 1287)

o The right of retention ceases when the bailee isreimbursed

o The bailee cannot lawfully sell the thing to satisfythe damages

o Retention or adverse claim of bailee cannot ripeninto title by ordinary acquisitive prescription


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3. Pay for the expenses OTHER than those under Art 1941 and1949 (e.g., ordinary expenses for the preservation and

expenses for ostentation)NOTE: In case there are multiple bailees, their obligationshall be solidary. This is an exception by express provision of

law to the general rule that the concurrence of two or moreparties in the same obligation gives rise only to a jointobligation (Art 1207, 1208)REASON: To effectively safeguard the rights of the bailor

4. The bailee has no right to RETAIN the thing loaned assecurity for claims he has against the bailor, even thoughthey may be by reason of extraordinary expenses (Art 1944)

5. A bailee does not answer for the DETERIORATION of thething loaned due only to the use thereof and without his fault

6. Liability when there are 2 or more bailees: The presumptionis that they are solidarily liable (Art 1945)REASON: To safeguard effectively the right of the bailor. The

law presumes that the bailor takes into account the personalintegrity and responsibility of all bailees, and that, therefore,

he would not have constituted the commodatum if therewere only one bailee

Q: What are the remedies of the bailor if the bailee refuses toreturn the thing loaned?A:

1. The bailor may file an action for specific performance tocompel the return of the object.

2. He may also file an action for replevin or for the return ofpersonal property.

3. File an action for recovery of possession either as writ of

possession4. Writ of possession if the bailor wants to recover possession

only (real property)

NOTE: A lesee can be a bailor. He can even assert his possessory

rights against the owner of the object. Ownership is not necessaryin commodatum. But in mutuum, ownership is necessary becausethe object is meant to be consumed and returned with a fungibleobject.

TYPES OF EXPENSES1. Ordinary expenses those incurred in the normal, natural

or everyday use or preservation of the thing2. Extraordinary expenses those incurred by exceptional

circumstances or those caused by the natural use of the

thing, but not necessary for its preservation3. Ornamental expenses Those incurred for ostentation and

are not necessary for the preservation of the thing

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

and preservation of the thing loaned.

LIABILITY FOR ORDINARY EXPENSESIt is logical that the borrower should defray the expenses for theuse and preservation of the thing loaned for after all, he acquires

use of the same and he is supposed to return the identical thing.

As a rule, the borrower is obliged to take good care of the thing

with the diligence of a good father of a family (Art 1163).

Art 1942. The bailee is liable for the loss of the thing, even if it should bethrough a fortuitous event:(1) If he devotes the thing to any purpose different from that for which ithas been loaned;(2) If he keeps it longer than the period stipulated, or after theaccomplishment of the use for which the commodatum has beenconstituted;(3) If the thing loaned has been delivered with appraisal of its value, unlessthere is a stipulation exemption the bailee from responsibility in case of afortuitous event;(4) If he lends or leases the thing to a third person, who is not a member of

his household;(5) If, being able to save either the thing borrowed or his own thing, hechose to save the latter.

LIABILITY FOR THE LOSS OF THING LOANED

As a general rule, the bailee is not is liable for loss or damage dueto a fortuitous event (Art 1174). The reason is that the bailorretains ownership of the thing loaned. Art 1492 specifies theinstances when the bailee is liable even for a loss due to afortuitous event. Art punishes the bailee for his improper actsalthough he may not be the proximate cause of the loss


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1. Bailee devotes the thing to any purpose different from thatfor which it was loaned Bad faith

2. He keeps it longer than the period stipulated or after theaccomplishment of the purpose for which the loan has been

constituted Delay3. If the thing loaned has been delivered with an appraisal

value unless there is a stipulation exempting the bailee fromresponsibility in case of fortuitous event Assumption of

risk. The law presumes that the parties intended that theborrower shall be liable for the loss of the thing even if dueto a fortuitous event otherwise they would not have

appraised the thing4. If he lends it to a third person who is not a member of his

household Breach of the tenor of the obligation;commodatum is purely personal

5. If, being able to save either the thing owned or his ownthing, he chose to save his own Ingratitude

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

LIABILITY FOR DETERIORATION OF THING LOANED

The parties to the contract know that the thing borrowed cannotbe used without deterioration due to ordinary wear and tear. In

the absence of a contrary stipulation, the depreciation caused bythe reasonable and natural use of the thing is borne by the bailor.

The bailee is liable if he is guilty of fault or negligence (Art 1170)or if he devotes the thing to any purpose different from that for

which it was loaned (Art 1492[1]).

GENERAL RULE: Bailee is liable for the deterioration of the thingloaned.

EXCEPTION: The deterioration of the thing is due only to the use

thereof and nto without his fault (Art 1943)

Art 1944. The bailee cannot retain the thing loaned on the ground that thebailor owes him something, even though it may be by reason of expenses.However, the bailee has a right of retention for damages mentioned inArticle 1951.

OBLIGATION TO RETURN THE THING LOANED

Except for claim for damages suffered because of the thing loaned(Art 1951), the borrower has no right to retain the thing loaned assecurity for claims he has against the lender even though they

may be by reason of extraordinary expenses1. Ownership remains in bailor The bailee acquires only

temporary use of the thing the ownership of which remainsin the lender. It would be extremely harsh if the bailor, after

benefitting the bailee, should be deprived of its enjoymenton the excuse of the expenses more or less certain or just

2. Only temporary use is given to bailee The bailee would beviolating the bailors trust in him to return the thing as soonas the period stipulated expires or the purpose has beenaccomplished

EFFECT OF RETENTION OR ADVSERSE CLAIM BY BAILEEThe mere failure of the bailee to return the subject matter of the

commodatum to the bailor does not constitute adverse possessionon the part of the bailee who holds the same in trust. Suchadverse claim cannot ripen into title by way of ordinary acquisitiveprescription because of the absence of just title.

RIGHT OF RETENTION FOR DAMAGESThe exception is of evident justice. However, the bailees right

extends no further than to the retention of the thing loaned untilhe is reimbursed for the damages suffered by him. He cannotlawfully sell the thing to satisfy said damages.

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

LIABILITY WHEN THERE ARE TWO OR MORE BAILEESThe reason for imposing solidary liability where there are 2 ormore borrowers is to safeguard effectively the rights of the lender.The law presumes that the bailor takes into account the personal

integrity and responsibility of all the bailees and therefore, hewould not have constituted the commodatum if there were only

one bailee.

NOTE: This is an exception by express provision of law to thegeneral rule that the concurrence of 2 or more parties in the sameobligation gives rise only to a joint obligation (Art 1207, 1208).


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OBLIGATIONS OF THE BAILOR1. To RESPECT THE DURATION of the loan because the bailor is

bound by the terms of the contract of commodatum which isfor a certain time

GENERAL RULE: Bailor cannot demand return before theexpiration of the period or accomplishment of the use

EXCEPTIONS:

a. In case of urgent need of the thing, bailor maydemand its return or temporary useREASON: Commodatum is essentially gratuitous (Art1946)

EFFECT: Contract of commodatum is suspendedwhile the thing is in the possession of the bailor

b. If the bailee commits any act of ingratitude specifiedin Art 765(1) If The bailee should commit an offense against

the person, the honor or the property of thebailor, or of the wife or children under his

parental authority(2) If the bailee imputes to the bailor any criminal

offense, or any act involving moral turpitude,even though he should prove it unless the crimeor act has been committed against the baileehimself, his wife or children under his parental

authority(3) If the bailee unduly refuses the bailor support

when the bailee is legally or morally bound to

give support to the bailor

REASON: Similarity of commodatum with donation(Art 1948). The person who commits any of the acts

of ingratitude makes himself unworthy of the trustreposed upon him by the bailor

c. Precarium (Art 1948)(1) If duration of the contract has not been

stipulated(2) If use or purpose of the thing has not been

stipulated

(3) If use of the thing is merely tolerated by theowner

2. REFUND to the bailee extraordinary expenses incurred forthe preservation of the thing, provided the bailee brings the

same to the knowledge of the bailor before incurring themexcept when the reply to the notification cannot be awaitedwithout danger (Art 1949, par 1)

However, if the extraordinary expenses arise on the occasionof the actual use by the bailee, even though he actedwithout fault, they shall be borne equally by both bailor and

bailee, UNLESS there is a stipulation to the contrary (Art1949, par 2)

GENERAL RULE: Bailor and bailee shall be equally liable

EXCEPTION: If there is a stipulation for a differentapportionment

NOTE: Ornamental expenses are not included because theyare deemed to be incurred by the bailee on caprice or whim.

Extraordinary expenses refer to expense are those which arenot ordinarily incurred in the course of the use of thing but

are necessary for its preservation or continued use.

RULES ON REIMBURSEMENT:GENERAL RULE: Notice should be given by the bailee to thebailor regarding such extraordinary expensesREASON: Notice is required because it is possible that the

bailor may not want to incur the extraordinary expense at all

EXCEPTION: Where extraordinary expenses are so urgent

that reply to the notification cannot be awaited withoutdanger

3. If the EXTRAORDINARY EXPENSES arise from the actual useof the thing and even though the bailee acted without fault,the expenses shall be born equally by both bailor and bailee(Art 1949, par 2)

REASONS:a. Bailee pays because the benefit derived from

the use of the thing loaned to himb. Bailor pays the other because he is the owner

and the thing will be returned to him


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EXCEPTION: Stipulation to the contrary that provide for a

different apportionment of such expenses or that they shallbe borne by the bailee or bailor alone

4. ALL OTHER EXPENSES which are not necessary for the useand preservation of the thing must be shouldered by the

borrower (bailee)

5. The DEPRECIATION caused by reasonable and natural use ofthe thing is borne by the bailor (Art 1943)REASON: The parties to the contract know that the thing

borrowed cannot be used without deteriorations due to

ordinary wear and tear

EXCEPTIONS:a. When there is a contrary stipulationb. When the bailee is guilty of fault or negligencec. If he devotes the thing to any purpose different

from that for which it has been loaned

6. To be liable to the bailee for damages for KNOWN HIDDENFLAWs (Art 1951)

REQUISITES:

a. Existence of FLAW or defectb. The flaw or defect is HIDDENc. The bailor is NOT aware thereof; andd. Bailee SUFFERS damages by reason of said flaw

or defectNOTES:

o If the above requisites concur, the bailee has the rightof retention for damages

o The bailor is made liable for his bad faitho The bailor cannot exempt himself from the payment of

expenses or damages by abandoning the thing to thebaileeREASON: The expenses or damages may exceed the

value of the thing loaned (Art 1952)

o If in making use of the thing, the bailee incurredexpenses other than ordinary and extraordinaryexpenses, he is not entitled to reimbursement

EXCEPTION: When the defect is not known to the bailor,

he is not liable because the commodatum is gratuitous

7. The bailor has no right of ABANDONMENT for expenses anddamages (Art 1952)REASON: The expenses and/or damages may exceed the

value of the thing loaned

Art 1946. The bailor cannot demand the return of the thing loaned till afterthe expiration of the period stipulated, or after the accomplishment of theuse for which the commodatum has been constituted. However, if in themeantime, he should have urgent need of the thing, he may demand itsreturn or temporary use.

In case of temporary use by the bailor, the contract of commodatum issuspended while the thing is in the possession of the bailor.

OBLIGATION TO RESPECT DURATION OF LOANThe primary obligation of the bailor is to allow the bailee the use of

the thing loaned for the duration of the period stipulated or untilaccomplishment of the purpose for which the commodatum wasconstituted. This is because the bailor is bound by the terms of the

commodatum which is for a certain time (Art 1933, 1935).However, if he should have an urgent need of the thing or if theborrower commits any act of ingratitude (Art 1948), he maydemand its return or temporary use. This is because the acommodatum is essentially gratuitous.

Under Art 1946, in case of temporary use of the thing by the

bailor, the rights and duties of the parties are likewise temporarilysuspended (Art 1946, par 2)

Art 1947. The bailor may demand the thing at will, and the contractualrelation is called a precarium, in the following cases:(1) If neither the duration of the contract nor the use to which the thingloaned should be devoted, has been stipulated; or(2) If the use of the thing is merely tolerated by the owner.

PRECARIUM a kind of commodatum where the bailor may

demand the thing at will. It has been defined as a contract bywhich the owner of the thing, at the request of another person,gives the latter the thing for use as long as the owner shall please


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

RIGHT OF BAILOR TO DEMAND RETURN OF THINGS FOR ACTS OFINGRATITUDE

Under Art 1948, the acts of ingratitude enumerated in Art 765 areapplicable because like donation, commodatum is essentiallygratuitous. The bailee who commits any of the acts of ingratitudemakes himself unworthy of the trust reposed upon him by thebailor. Hence, the bailor has the right to demand the immediate

return of the thing loaned.1. If the bailee should commit an offense against he person,

honor or property of the bailor, his wife or his children underhis parental authority

2. If the bailee imputes to the bailor any criminal offense oracts involving moral turpitude, even though he should prove

it, unless the crime or act has been committed against thebailee himself, his wife or children under his authority; and

3. If the bailee unduly refuses to provide support when thebailee legally or morally bound to give support to the bailor

NOTE: Art 1948 contemplates only ordinary commodatum since ina precarium, the bailor can always demanded the thing loaned at

will.

Art 1949. The bailor shall refund the extraordinary expenses during thecontract for the preservation of the thing loaned, provided the bailee bringsthe same to the knowledge of the bailor before incurring them, except whenthey are so urgent that the reply to the notification cannot be awaitedwithout danger.If the extraordinary expenses arise on the occasion of the actual use of the

thing by the bailee, even though he acted without fault, they shall be borneequally by both the bailor and the bailee, unless there is a stipulation to thecontrary.

OBLIGATION TO REFUND EXTRAORDINARY EXPENSES1. Extraordinary expenses for the preservation of the thing

loaned Such expenses shall be borne by the bailor. This isbecause it is the bailor who profits by said expenses. If theyare incurred by the bailee, the bailor must refund themprovided the bailee notifies the bailor before incurring the

expenses. As a rule, notice is required because it is possible

that the bailor may not want to incur the extraordinaryexpenses at all.

EXCEPTION: Where extraordinary expenses are so urgentthat the reply to the notification cannot be awaited without

danger.

2. Extraordinary expenses arising from the actual use of thething loaned Such expenses arising on the occasion of the

actual use of the thing loaned shall be borne by the bailorand bailee alike on a 50-50 basis. The parties, however may,by stipulation provide for a different apportionment of suchexpenses, or that they shall be borne by the bailee or bailor

alone.

Art 1950. If, for the purpose of making use of the thing, the bailee incursexpenses other than those referred to in Articles 1941 and 1949, he is notentitled to reimbursement.

NO OBLIGATION TO ASSUME ALL OTHER EXPENSESAll expenses other than those referred to in Art 1941 and 149 forthe purpose of making use of the thing i.e., not necessary for theuse and preservation of the thing, must be shouldered by the

borrower. This is only proper since he makes use of the thing.Expenses for ostentation are to be borne by the bailee because

they are not necessary for the preservation of the thing.

Art 1951. The bailor who, knowing the flaws of the thing loaned, does notadvise the bailee of the same, shall be liable to the latter for the damageswhich he may suffer by reason thereof.

LIABILITY TO PAY DAMAGES FOR KNOWN HIDDEN FLAWSThe following are the requisites which must concur for the

application to Art 1951:1. There is flaw or defect in the thing loaned2. The flaw or defect is hidden3. The bailor is aware thereof4. He does not advise the bailee of the same; and5. The bailee suffers damages by reason of said flaw or defect

The bailor is made liable for his bad faith. The bailee is given theright of retention until he is paid damages (Art 1944).


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WHERE FLAW IS UNKNOWN TO BAILORWhere the defect is not known to the bailor, he is not liablebecause commodatum is gratuitous.

Art 1952. The bailor cannot exempt himself from the payment of expenses

or damages by abandoning the thing to the bailee.

NO RIGHT OF ABANDONMENT FRO EXPENSES AND DAMAGES

The reason for Art 1952 is that the expenses and/or damages may

exceed the value of the thing loaned, and as such it would beunfair to allow the bailor to just abandon the thing instead ofpaying for said expenses and/or damages.

CASES:REPUBLIC V. BAGTAS, 6 SCRA 262 (1962)FACTS: In May 1948, Jose Bagtas borrowed from the Republic, through theBureau of Animal Industry, 3 bulls for a period of 1 year from May 1948 to

May 1949 for breeding purposes subject to a breeding fee of 10% of thebook value of the bulls. The three bulls were valued as:

a. Sindhi P1,176.46b. Bhagnari P1,320.56c. Sahiniwal P744.46 (died during a Huk raid)

1. Upon the expiration of the contract, Bagtas asked for a renewal ofanother 1 year. However, the Secretary of Agriculture approved therenewal thereof of only 1 bull and requested the return of the other 2.

2. As such, Bagtas notified the Director of the Animal Industry of hisintention to purchase the bulls subject to depreciation. The Director,however, advised him that the value of the 3 bulls could not bereduced and they either be returned or pay the book value not laterthan October 1950.

3. Bagtas failed to pay the book value or to return the bulls. As such, theRepublic filed an action against Bagtas for the return of the 3 bullsloaned to him or the payment of their book value amounting toP3,241.45 and unpaid breeding fee, both with interests and cost.

4. Bagtas averred that he could not return the bulls nor pay their valuebecause of the bad peace and order situation in Cagayan Valley, andpending the appeal he filed before the Secretary of Agriculture todeduct depreciation costs from the book value of the bulls

5. The trial court held in favor of the Republic and ordered Bagtas to paythe total value of the 3 bulls plus breeding fees with interests on bothsums at the legal rate from the filing of the complaint

6. As the surviving spouse of Bagtas, Felicidad filed a motion allegingthat the two bulls were returned to the Bureau of Animal Industrysometime in November 1958 and the third bull, died from a gunshotwound during a Huk raid

7. Respondent alleged that she could not be held liable for the two bullsas they had already been returned. Respondent alleged that the

contract was a commodatum and as such, the Republic retainedownership or title to the bull should it suffer loss due to force majeure

ISSUE: WON the respondent is liable for the loss of the bull even if due to afortuitous event

HELD: Yes. A contract of commodatum is essentially gratuitous. If thebreeding is considered a compensation, then the contract would be alease of the bull. Under Art 1671 NCC, the lessee would be subject to theresponsibilities of a possessor in bad faith because she had continuedpossession of the bull after the expiry of the contract.

Even if the contract is a commodatum, the respondent is still liable under Art1942 which provides that a bailee in a contract of commodatum:

1. Is liable for the loss of things, even if it should be through afortuitous event

2. If he keeps it longer than the period stipulated3. If the thing loaned has been delivered with the appraisal of its

value, unless there is a stipulation exempting the bailee fromresponsibility in case of the fortuitous event

CAB: The original period of the loan was from May 1948 to May 1949. Theloan of one bull was renewed for another one year to end on May 1950. ButBagtas kept and used the bull until November 1953 when it was killed duringa Huk raid. Furthermore, when it was delivered and loaned to Bagtas, thebulls each had an appraised value and there was no stipulation in the loanagreement that respondent is exempt from liability in case of the loss of the

bull due to fortuitous event.

Since Bagtas had already returned two bulls, the estate of the decedent isonly liable for the sum of P859.63, the value of the bull which has not beenreturned.

NOTE: This actually a lease as evidenced by the booking fee.


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REPUBLIC V. COURT OF APPEALS AND HEIRS OF DOMINGO BALOY,146 SCRA 15 (1986)FACTS: This case originated from the decision of CFI Zambales, denyingthe application for registration of private respondents Baloy.

1. On appeal, CA reversed the CFI decision and approved theregistration

2. Republic, through the Bureau of Lands, filed a motion forreconsideration alleging that the applicants possessory informationtitle can no longer be invoked and that they were not able to prove aregisterable title over the land

3. Applicants claim is

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