CREDIT TRANSACTIONS

before the expiration lapse of the term

Loan (1933- 1961) of the term agreed upon
Characteristics Loss of the thing is Borrower suffers the
incurred by the bailee loss of the thing
• Real Contract
• Unilateral
• Nominal COMMODATUM
Kinds of Commodatum
• Principal
• Informal 1. Ordinary Commodatum (Article 1933)
• Gratuitous 2. Precarium
-The bailor may demand the return of the thing
Objects:
loaned at will
• Immovable Property -the kind of commodatum where the bailor may
• Movable Property demand the thing at will whether or not the use
for which the thing has been loaned has been
Cause or consideration accomplished
-Contract by which the owner of a thing, at the
As to the borrower, the acquisition of the thing request of another person gives the latter the
As to the lender, the right to demand its return or its thing for use as long as the owner shall please
equivalent Purpose:
Kinds of Loan To use the property or the object
1. Commodatum Ex. A lends B his vehicle to bring patients to Manila, free
In commodatum, one of the parties deliver to another, of charge
something not consumable so that the latter may use the Note: If the bailor transfers the property to the bailee for
same for a certain time and return it the purpose of hiding the property, it is not a contract of
2. Simple Loan/ Mutuum Commodatum but a contract of Deposit.

In Mutuum, one of the parties deliver to another money Perfection of the Contract of Commodatum and
or other consumable thing upon the condition that the Mutuum (Article 1934): requires the delivery of the
same amount of the same kind and quality shall be paid. subject matter for they are Real Contracts

Delivery of the thing contemplates the transfer of either

Commodatum Mutuum
the use (for commodatum) or the ownership (loan) of the
The object is The object is a
something non consumable thing.
consumable The accepted promise to lend the thing or to make a
Ownership is retained Ownership of the future loan is merely a consensual contract, and is
by the lender thing is transferred to
the borrower
The contract is The contract may be
gratuitous gratuitous or onerous
The borrower must The borrower need
return the same thing only to pay the same
loaned amount of the same
kind and quality
The kind of property Only personal
may be a real or property
personal property
The loan is only for a The loan is for
temporary consumption of the
possession thing
The bailor may The lender may not
demand the return of demand the return of
the thing loaned the thing before the
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therefore binding upon the parties. The contract will only
become a real contract after the delivery of the thing.
Nature of Commodatum
1. Essentially gratuitous (Art. 1935)
No compensation for the use of the thing, otherwise it is
a lease contract. Similar to donation, it confers benefit to
the recipient.
2. Non consumable goods are generally the
subject of commodatum, but consumable goods
for the purpose of exhibition can be the subject
matter (Art. 1936)
3. Movable or immovable properties can be the
object of commodatum (Art. 1937)
4. It is sufficient that the bailor has possessory
interest in the subject matter or right to its use (
Art. 1938)
5. Commodatum is a personal between the parties
(Art. 1939)
GR: Death of either the bailor or the bailee
extinguishes the contract.
EXPN: the parties stipulated that commodatum is
transmitted to the heirs.
In multiple parties, death of one does not extinguish
the contract.
6. Bailee can neither lease not loan the thing to
third persons, but the use can be extended to
the members of the bailee’s immediate family
members (Art. 1939)
EXPN (use of the thing by the family members):
a. There is a stipulation to the contrary; or
b. Nature of the thing forbids such use
7. Bailee may make use of the fruits of the thing
loaned if stipulated in the contract (Art. 1940)
Obligations of Bailee
1. Pay for ordinary expenses for use and
preservation of the thing loaned (Art. 1941)
- Borrower must take good care of the thing
with the diligence of a good father of a family
2.
Liable for the loss even through fortuitous event
or in the following instances:
a. Devotes the thing to any purpose other
than that intended (acts in bad faith)
b. Keeps it more than the period stipulated
(in delay)
c. Thing is delivered with appraisal of value
, except when there is a stipulation that
he is exempt from paying (presumption:
parties intended that the borrower shall
be liable for the loss of the thing even
through fortuitous event, otherwise they
will not have appraised the thing)
d. Lends the thing to persons not a
member of his household (
commodatum is purely personal)
e. Chose to save his own thing over the
thing in commodatum (shows ingratitude
after the thing is loaned to him
gratuitously) (Art. 1942)
Rationale: punish the bailee for his improper
acts although they may not be the proximate
cause of the loss
3. Solidarily liable for the thing in case of two or
more bailees (Art. 1943)
4. Must return the thing upon the demand of the
bailor or upon the expiration of the period
- He cannot retain the thing used on the
ground that the bailor owes him, even by
reason of his expenses, except when the
Bailee is liable for damages (1944)
- The ownership is retained to the bailor and
the bailee is only given temporary use
Obligations of the Bailor
1. Respect the stipulated period (Art. 1946)
EXPN: when there is an urgent need of the thing, he
may demand its return or temporary use (Art. 1946)
Effect: contract of commodatum is suspended while
the thing is in possession of the bailor (Art. 1946)
2.
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Be liable for damages if, despite knowledge of
the flaw of the thing, he did not inform the bailor
of the flaw (Art. 1951)
Requisites:
a. There is a flaw or defect in the thing
loaned;
b. Flaw or defect is hidden;
c. Bailor is aware thereof;
d. He does not advise the bailee of the
same; and
e. Bailee suffers damages by reason of
said flaw or defect
3. Payment of expenses or damages for
abandoning the thing to the bailee (Art. 1952)
- May exceed the thing loaned, and it would
be unfair to allow the bailor to just abandon
the thing instead of paying for said expenses
and damages
4. Refund extraordinary expenses during the
contract for the preservation of the thing,
provided the bailee brings the same to the
knowledge of the bailor (1949)
- Bailor profits by the expenses
- Notice is required for the bailor might not
want to incur expenses at all
Rights of Bailee
1. Bailee does not answer for the deterioration of
the thing loaned due only to the use without his
fault (Art. 1943)
- Parties know that the thing borrowed cannot
be used without deterioration due to ordinary
wear and tear
- Depreciation caused by the reasonable and
natural use of the thing is borne by the bailor
2. Right of retention
a. In case of extraordinary expenses, and
those expenses not provided for in the
law which the bailee is responsible, and
bailor failed to reimburse the bailee
b. For hidden flaws or those which the
bailee was not informed, with the
deliberate intention of the part of the
bailor to hide the defect.
Right to demand the return of the thing by the Bailor
at will (Precarium)
1.
Neither the duration of the contract nor the use
to which the thing should be devoted has been
stipulated;
2. Use of the thing is merely tolerated by the owner
Right to demand the immediate return by the Bailor
When the bailee commits any act of ingratitude specified
in Art. 795 of the Civil Code (Art. 1948)
The bailee who commits any acts of ingratitude makes
himself unworthy of the trust reposed upon him by the
bailor
Acts of ingratitude:
f. Bailee should commit an offense against
the person, honor or the property of the
bailor, or of his wife or children under his
parental authority;
g. Bailee imputes to the bailor any criminal
offense, or any act involving moral
turpitude even though he should prove it
, unless the crime or the act has been
committed against the bailee himself, his
wife and children under his authority;
and
h. Bailee unduly refuses to the bailor
support when the bailee is legally or
morally bound to give support to the
bailor
SIMPLE LOAN OR MUTUUM
- Involves the return of the equivalent only
and not the identical thing because the
borrower acquires ownership
- A loan of money may be payable in kind
Obligation of the borrower: to pay, and not to return.
This includes the accessory contract of paying interest.
Consumption of the thing loaned is the distinguishing
character of the contract of mutuum from commodatum.
Cause/ consideration: promise of the borrower to pay
for the obligation of the lender to furnish the loan (Note:
a mutuum is a bilateral contract)
 CREDIT TRANSACTIONS

No criminal liability if the person refuses to pay or Obligation of a person who borrows money shall be
denies the existence of the contract governed by the provisions of Articles 1246-1250 (Art.
1955)
- Ownership is transferred to the borrower,
and as such he can dispose of the thing Form of payment (Article 1955)
borrowed and his act will not be considered
as misappropriation a. If a fungible thing was loaned other than money-
debtor owes another thing of the same kind,
Loan Rent quantity, and quality even if it should change in
Delivery of money or One of the parties value
some other consumable delivers to another some - If it is impossible to deliver the same kind, its
thing to another with a non-consumable thing in value at the time of the perfection of the loan
promise to repay the order that the latter may shall be paid
equivalent amount use it during a certain b. Loan of money
period and return it to the
GR: Legal tender in the Philippines
former
EXPN: Currency stipulated must be paid if it is
Ownership is transferred Ownership is not
transferred possible to deliver such currency
Relationship of the Relationship: landlord- For extraordinary inflation or deflation, the basis
parties: Obligee-obligor tenant of payment shall be the value of the currency at
Creditor receives Owner of the property the time of the creation of the obligation
payment for his loan receives compensation or
Interest (Article 1956)
price from the occupant
for its use Requisites for recovery of interest:
a. Payment must be expressly stipulated;
Fungible things- those which are usually dealt with by b. Must be in writing; and
number, weight, or measure so that any given unit or
c. Interest must be lawful
portion is treated as the equivalent of any other unit or
portion Rules for interest:
Whether a thing is consumable or not depends upon the 1. Stipulation of interest by the parties- that interest
nature of the thing, and whether a thing is fungible or not and not the legal interest shall be applied.
depends on the intention of the parties. Note: the Usury Law was suspended by the
Barter (Art. 1954)- contract whereby one person Bangko Central, and as such, there is no more
transfers the ownership of non-fungible things to another ceiling rate for the parties. They can agree upon
with the obligation on the latter to give things of the same whatever rate subject to the court’s control.
kind, quantity, and quality. If the court finds the interest rate unconscionable
or usurious, it shall determine when the borrower
Barter Mutuum and is in default and impose a legal interest rate of
Commodatum 12% or 6% respectively.
The subject matter is The subject matter is The court may also award compensatory
nonconsumable things money and other fungible damages.
things for mutuum
An equivalent thing is In commodatum, the
given in return for what bailee is bound to return
has been received the identical thing
borrowed when the time
expired or the purpose
has been served
An onerous contract Mutuum- may be
gratuitous
Commodatum- always
gratuitous
 CREDIT TRANSACTIONS
Ex. In a promissory note, the maker promised to
pay P10,000 on or before January 1, 2019 with
interest.
- Since there is no mention of interest rate,
the lender can ask for the imposition of the
6% per annum legal interest after the due
date.
- If no period to determine when default, it is
due on demand.
2. If the exact rate of interest is not mentioned, the
legal interest rate of 12% is payable
3. No increase in interest shall be due unless such
increase has also been expressly stipulated
Note: In credit cards, there is a stipulation that
the bank can raise the interest rates depending
on the value of peso. The SC held that the
increase of the rates is not valid. What is valid is
the escalation clause of the contract.
4. In the absence of stipulation, interest is allowed
when:
a. Indemnity for damages when the debtor
is obliged to pay legal interest (6% or
12%) in delay. Payment of 6% per
annum interest for obligations not
constituting a loan or forbearance of
money at the discretion of the court.
Payment of 12% per annum
b. Interest recovered upon unliquidated
claims or damages when the demand is
established with reasonable certainty
c. Central Bank Circular No. 416 that fixes
12% interest rates per annum dealing
with loans, forbearance, and judgments
involving such loans or forbearance
5. Interest is separate and distinct from surcharges
and penalties.
- Penalty stipulation is not necessarily
preclusive of interest
Usurious contracts declared void (Article 1957)
Contracts and stipulations under cloak or device
whatever intended to circumvent the laws against usury
shall be void. The borrower may recover in accordance
with the laws on usury.
The form of contract is not conclusive. Parole evidence
is admissible to show that a written document though
legal in form was in fact a cloak or device to cover usury
if from construction of the whole transaction it becomes
apparent there exists a corrupt intention to violate the
laws on usury.
The contact should not be considered as void in its
entirety. The provisions as to the interest is considered
void so the loan becomes without stipulation to pay
interest.
Right of Debtor: amount paid as interest under a
usurious agreement is recoverable by him since the
payment is deemed to have been made under restraint
rather than voluntarily.
Instances of contracts disguised to cover usurious
loans
• Credit sale of property at exorbitant price to loan
applicant
• Purchase of lender’s property at an exorbitant
price to be taken from loan
• Price of sale with right to repurchase clearly
inadequate
• Pretended lease by borrower at usurious rental
• Rent free by lender of borrower’s property in
addition to interest on loans
• Date for repayment of loan with interest ante-
dates actual transaction
• Payment by borrower for lender’s services as
additional compensation for loan.
Determination of interest payable in kind (Art.
1958)
- Value shall be appraised at the current price
of products or goods at the time and place of
payment
- Purpose: to make usury harder to perpetrate
Accrued interest shall not earn interest except in two
instances (Art. 1959):
1. When judicially demanded as provided in Article
2212; and
2. Compounding interest but there should be an
express stipulation (in writing) made by the
parties
-
 CREDIT TRANSACTIONS

interest due an unpaid shall be added to the Cause

principal obligation and the resulting total
amount shall earn interest
3. Compensatory interest is also allowed if parties
so stipulate in case of default of borrower.
Borrower may be liable for: interest in the total amount
of principal, monetary interest and penalty.
When there is no stipulation but the borrower paid
interest: solution indebiti, or provisions on natural
obligations shall be applied (Art. 1960)
Definition of Deposit: Deposit is constituted from the
moment a person received a thing belonging to another,
with the obligation of safely keeping it and of returning
the same.
- Whether for the purpose of civil or
commercial, all deposits are regulated by the
law on Deposits under the Civil Code
Principal Purpose of the Contract: Safekeeping

But if there is a stipulation but not reduced to writing, and If safekeeping is only an accessory obligation, deposit is
the debtor paid voluntarily because the latter feels he is not constituted but some other contract like lease,
morally obliged to do so, there can be no recovery. commodatum, or agency.

DEPOSIT Ex. Balance of a commission account remains in the

possession of the agent at the principal’s disposal.
Deposit in General and its Different Kinds
Deposit Mutuum
Characteristics: Safekeeping or mere Consumption of the
custody subject matter
• Real Contract- object must be delivered Depositor can demand Lender must wait until the
• Unilateral- depositor makes delivery to the the return of the subject expiration of the period
depositary matter at will granted to the debtor
• Nominal Both movable and Money and other fungible
• Principal immovable property are thing
• Informal- no form is required the object
• Gratuitous- for depositary to safely keep the
object unless the depositor is engaged in Deposit Commodatum
business of deposit Purpose is safekeeping Purpose is the transfer of
the use
Parties: May be gratuitous Essentially and always
• Depositor gratuitous
Only movable things may Both movable and
• Depositary
be the object (case of immovable property
Q: is depositing a soft drink bottle in stores considered a extrajudicial deposits)
contract of deposit?

No, for there is a condition to return the bottle. Perfection of the Contract of Deposit: Delivery of the
object of the contract. If there is no delivery, there is
Q: Before going to abroad, a pianist deposits his piano to merely an agreement to deposit which is binding and
a friend for safekeeping. Is there a contract of deposit? enforceable upon the parties.

If there is a condition for the friend to use the thing, then Consensual Contract: Future deposits
the contract is commodatum.
Kinds of Deposits:
Requisites:
1. Judicial
1. Consent -
2. Object
3.
 CREDIT TRANSACTIONS
Takes place when an attachment or seizure
of property in litigation is ordered
2. Extrajudicial
a. Voluntary
- One wherein the delivery is made by the will
of the depositor or by two or more persons
each of whom believes himself to be entitled
to the thing deposited
- Party can freely choose a depositor
b. Necessary
- Made in compliance with the legal obligation,
or on occasion of any calamity or by
travelers in hotels, inns, or common carriers.
- Lack of free choice in the depositor
General Rule: A contract of deposit is generally
gratuitous
Exception:
1. Parties agreed to the contrary, as long as not
contrary to morals, good customs, public order,
or public policy
2. Depositary is engaged in business of storing
goods for compensation and not out of pure
generosity
3. Involuntary deposits or where property is saved
from destruction during a calamity by another
person without the knowledge of the owner. The
owner is bound to pay the person who saved his
property.
Subject matter of deposits are movables
- Possibility of being lost or stolen is not
present in real property. If immovable are
the subject matter, it is juridically a contract
of agency.
- Judicial deposits may cover both movable
and immovable property for the purpose is to
protect the rights of the parties in a suit
VOLUNTARY DEPOSITS
- Delivery is made by the will of the depositor
- The depositor need not be the owner of the
thing for there is no transfer of ownership.
- The depositary cannot dispute the title of the
depositor to the thing deposited.
Contract of Deposit has no form
- Can be done orally or in writing as long as
the three essential elements for its validity is
present, and the delivery of the thing
Effects if depositary accepted a thing from an
incapacitated depositor
- Subject to the obligations of a depositary
- Must return the property to the legal
representative of the incapacitated person or
to the depositor himself should he acquire
capacity.
- Persons who are capable cannot allege
incapacity of those with whom they contract
If the depositary is incapacitated
- Depositary who is incapacitated does not
incur the responsibility of the depositary but
he is liable:
1. To return the thing deposited while still
in his possession; and
2. Pay the depositor the amount by which
he may have benefited himself with the
thing or its price subject to the right of
any third person who acquired the thing
in good faith
Obligations of a Depositary
1. Keep the thing safe and return it when required
to the depositor or to his heirs and successors or
to the person who may have been designated in
the contract.
Degree of care the depositary must exercise is the
same diligence he would exercise over his property,
thus he cannot excuse himself from liability.
Rationale:
a. Essential requisite of judicial relation
which involves the depositor’s
confidence in his good faith and
trustworthiness.
b. The depositor, in choosing the
depositary, took into account the
 CREDIT TRANSACTIONS
diligence which the depositary is
accustomed with respect to his own
property.
The depositary must return the thing deposited even
before the specified term or time whenever the depositor
claims it.
2. Depositary cannot deposit the thing with a third
person unless there is a stipulation to the
contract. If such is allowed, the depositary is
liable for the loss if he deposited the thing with a
person who is manifestly careless or unfit.
Depositary is liable for the negligence of his
employees
Rationale: Deposit is founded on trust and confidence
and it can be supposed that the depositor, in choosing
the depositary, has taken into consideration the
qualification of the depositary.
Depositor is liable for the loss of the thing deposited if:
a. He transfers the deposit with a third
person without authority although there
is no negligence on his part and the third
person
b. He deposits the thing with a third person
who is manifestly careless or unfit
although authorized, even in the
absence of negligence; or
c. The thing is lost through negligence of
his employees whether the latter are
manifestly careless of not.
Exemption: Depositor is not responsible in case the thing
is lost without negligence of the third person, if the third
person with whom he was allowed to deposit the thing if
such third person is not manifestly careless or unfit.
3. Notify the depositor and wait for the decision of
the depositor unless delay would cause danger.
In such case, the depositary may change the
way of the deposit if under the circumstances he
may reasonable presume that the depositor
would consent to the change if he knew of the
facts of the situation.
4. Collect interests if the instrument he holds are
certificates, bonds, securities, or
instruments that earns the same when it became
due in order that the securities may preserve
their value and the rights corresponding to them.
Depositary is bound to collect not only the interest
but also the capital itself when due.
This provision does not apply to contracts for rent of
safety deposit boxes.
5. May commingle grains and other articles of the
same kind and quality unless otherwise
stipulated
If there commingling, the various depositors of the
mingled goods shall own the entire mass in common and
each depositor shall be entitled to such portion of the
entire mass as the amount deposited by him bears to the
whole.
If the articles deposited are not of the same kind and
quality, it is the duty of the depositary to keep them
separate or at least identifiable as he must return to each
depositor the identical article delivered.
6. Cannot use the thing deposited
Unauthorized use of the thing deposited would make him
liable for damages.
Depositary may make use of the thing even without the
express permission of the depositor where such use is
necessary for its preservation but in such case the use is
limited for that purpose only.
7. If he has permission to use the thing, the
contract loses the concept of deposit unless the
purpose of safekeeping is still the principal
purpose
Permission is not presumed and its existence must be
proved.
Effect if permission to use is given:
a. Thing is non-consumable- contract loses
the character of a deposit and acquires
that of a commodatum.
b. Money or other consumable thing-
converts the contract into simple loan or
mutuum, or becomes an irregular
deposit.
Irregular Deposit Mutuum
Consumable thing Lender is bound by the
deposited may be provisions of the contract
demanded at will by the and cannot seek
irregular depositor restitution until the time
 CREDIT TRANSACTIONS
for payment
Benefit accrues to the Essential cause of the
depositor transaction is the
necessity of the borrower
Depositor in an irregular Common creditors enjoy
deposit has preference no preference in the
over other creditors distribution of the debtor’s
property.
8. Liable for the loss of the thing through fortuitous
event if:
a. It is stipulated
b. He uses the thing without the permission
of the depositor
c. He delays its return
d. Allows others to use it even though he
himself may have been authorized to
use the same
9. Liable for damages should the seal or lock be
broken through his fault, when the thing
deposited is delivered closed and sealed.
Obligations of the Depositary:
a. Return the thing deposited when
delivered closed and sealed in the same
condition
b. Pay for damages should the seal or lock
be broken through his fault which is
presumed unless proved otherwise
c. Keep the secret of the deposit when the
seal or lock is broken with or without his
fault.
Rationale: irresponsible depositary may violate their
trusts with impunity.
When justified to open: presumed authority; or necessity
10. Thing deposited shall be returned with all its
products, accessories, and accessions.
- If thing deposited is money- depositary has
no right to make use and is not liable to pay
interest. But if returned in delay or
has used the money without permission, he
shall be liable for interest as indemnity.
11. Depositary cannot demand that the depositor
prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing
has been stolen and who its true owner is, he
must advise the latter of the deposit.
If the owner does not claim it within the period of
one month, the depositary shall be relieved of all
responsibility by returning the thing deposited to
the depositor.
If the depositary has reasonable grounds to
believe that the thing has not been lawfully
acquired by the depositor, the former may return
the same.
Apply paragraph 2-4 only when a third person claims
deposit.
For paragraph 2, the following conditions must exist:
a. Things deposited must have been stolen
;
b. Depositary knows who its true owner is.
12. When there are two or more depositors and they
are not solidary, the thing admits of division,
each one cannot demand more than his share.
Return to one of depositors is stipulated, then the
depositary is bound to return only to the person
designated although he has not made any demand for its
return.
13. If the depositor lose his capacity to contract after
having made the deposit, the thing cannot be
returned except to the persons who may have
the administration of his property rights
Persons to whom return must be made:
a. Depositor or his heirs and successors or
to the person designated
b. Guardian or administrator or person who
made the deposit or to the depositor
himself should he acquire capacity
c. Legal representative
14.
 CREDIT TRANSACTIONS
Place of return must be at the place agreed
upon by the parties, or in the absence of the
stipulation, at the place where the thing
deposited might be even if it should not be the
same place where the original deposit was made
provided that the transfer was accomplished
without malice on the part of the depositary.
15. Return the thing to the depositor upon demand
even though a specified period has been fixed.
When depositary is not obliged to return the thing
deposited:
a. When he would be disobeying a judicial
order of attachment
b. A third person notified him of the
opposition to return or removal of the
thing deposited.
In both cases the depositary must immediately inform
the depositor of the attachment or opposition.
But the depositary may return the thing deposited even
before the time designated for justifiable reasons, unless
the deposit is for valuable consideration.
16. If the depositary , by force majeure or
government order, loses the thing and receives
money or another thing it its place, he shall
deliver the sum or other thing to the depositor
If, in place of the thing he receives money or another
thing, he has the duty to deliver to the depositor what he
has received otherwise, he would enrich himself at the
expense of the depositor
17. Alienation in good faith by the Depositary’s Heir,
he shall be bound to return only the price he
may have received or to assign his right of
action against the buyer in case the price has
not been paid him.
- The Depositary dies and the object is left to
the heir who sells the thing in good faith
- If the heir acts in bad faith, then he is liable
for damages.
- either depositor of the depositary
Sale or appropriation of the thing deposited
constitutes estafa.
Obligations of the Depositor
1. Reimburse the expenses the depositary may
have incurred for the preservation of the thing
deposited.
- The depositor would have incurred them just
the same had the thing remained with him
- If there is no such provision, the depositor
would enrich himself at the expense of the
depositary
- Covers all expenses for preservation,
whether ordinary or extraordinary.
- Refers to necessary expenses but not useful
expense and luxury expense.
2. Reimburse the depositary for any loss arising
from the character of the thing deposited. The
depositor is freed from the responsibility under
the following circumstances:
a. at the time of the constitution of the
deposit the former was not aware of, or
b. was not expected to know the
dangerous character of the thing,
c. or unless he notified the depositary of
the same, or
d. the latter was aware of it without advice
from the depositor.
The depositary may retain the thing in pledge
until full payment of what may be due him by reason
of the deposit.
- thing retained serves as security for
payment of what may be due to the
depositary by reason of the deposit
Instances when a deposit is extinguished:
1. upon the loss or destruction of the thing
deposited;
2. in case of gratuitous deposit, upon the death of
- the depositary is not obliged to continue with
the contract of deposit
- however, a deposit for compensation is not
extinguished by the death of either party
because an onerous deposit is not
 CREDIT TRANSACTIONS
personal in nature, hence the rights are
transmissible.
Necessary Deposit
A deposit is necessary when:
1. it is made in compliance with a legal
obligation
- governed by the provisions of the law
establishing it, and in case of its deficiency,
by the rules on voluntary deposit
- example: judicial deposit of a thing; deposit
with a bank or public institution
2. takes place on occasion of any calamity such
as fire, storm, flood, pillage, shipwreck, or
other similar events
- governed by the rules on voluntary deposit
and Article 2168 of the Civil Code
- in such events, the possession of movable
property passes from one person to another
by accident or fortuitously through force of
circumstances and which the law imposes
on the recipient the obligations of a bailee
- there must be a casual relation between the
calamity and the constitution of the deposit.
3. made by travelers in hotels or inns
Hotel- building of many rooms chiefly for overnight
accommodation of transients and several floors served
by elevators usually with a large open street-level lobby
containing easy chairs, with variety of compartments for
eating, drinking, dancing, exhibitions, and group
meetings, with shops having both inside and street-side
entrances and offering for sale items of interest for
particular travelers, or personal services and with
telephone booths, writing table and wash rooms freely
available
Inns- public house for the lodging of travelers for
compensation and until capacity is reached; a place of
public entertainment that does not provide lodging
Motel- an establishment which provides lodging and
parking and in which the rooms are usually accessible
from an outdoor parking area
Elements for keepers or hotels or inns may be held
responsible as depositaries with regard to the effects of
their guests:
a. guests have previously informed about
the effects brought by the guests; and
b. guests have taken precautions
prescribed regarding their safekeeping
Extent of Liability of keepers of hotels and inns
- not limited to effects lost or damaged in the
hotel rooms which come under the term
baggage or articles ordinarily used by
travelers by include those lost or damaged in
hotel annexes such as vehicles in the hotel’s
garage
- extends to all those who offer lodging for a
compensation
The hotel-keeper is liable regardless of the amount of
care exercised in the following instances:
a. loss or injury caused by his servant or
employees as well as by strangers
provided that notice has been given and
proper precautions taken; and
b. loss is caused by the act of a thief or
robber done without the use of arms and
irresistible force, for clearly the hotel-
keeper is apparently negligent
The hotel-keeper is not liable when:
a. loss or injury is caused by force majeure, like
flood, fire, theft, or robbery by a person not a
hotel-keeper’s servant or employee with the use
of arms or irresistible force unless he is guilty of
fault or negligence in failing to provide against
the loss or injury from his cause
b. loss is due to the acts of the guests, his family,
servants, or visitors
c. loss arises from the character of the things
brought into the hotel
Exemption or diminution of liability
-
 CREDIT TRANSACTIONS

hotel-keeper cannot free himself from he may not be relieved until the litigation is
responsibility by posting notices to the effect ended or the court so orders
that he is not liable for the articles brought
by the guest. Any notice posted diminishing Judicial Deposits Extrajudicial Deposits
the responsibility of the hotel-keeper shall be Created by will of the Created by contract or by
void. court the will of the parties
Purpose is to secure the For the custody and
- This rule is similar to common carriers
right of the party to safekeeping of the thing
- Rationale: recover in case of
o Hotel-keepers and inn-keepers favorable judgment
practically volunteer as depositaries Subject matter is either Only movable properties
and as such, they should be subject movable or immovable
to an extraordinary degree of property
responsibility for the protection and Always remunerated ( May be compensated or
safety of travelers who have no onerous) not, but generally
alternative but rely on the good faith gratuitous
and care of those with whom they Constituted on behalf of Constituted on behalf of
take lodging the person who, by the depositor or third
o By the nature of their business, they judgment, has a right person designated.
have supervision and control of their
inns and the premises Warehouse Receipts Law
Right to Retain of Hotel-keepers Warehouse
- In the nature of pledge created by operation - the building or place where goods are
of law deposited and stored for profit
- To compensate them for the liabilities
imposed upon them by law Document of Title

- a document of title is a document issued by a carrier or

4. made by passengers with common carriers warehouseman reciting the receipt of goods for carriage
Sequestration or Judicial Deposit or keeping and the terms and condition thereof.

- Takes place when an attachment or seizure Warehouseman

of property in litigation is ordered - a person lawfully engaged in the business of
- Rules of Court also applies storing goods for profit
Nature: auxiliary to a case pending in court - only a warehouseman may issue warehouse
receipts but a duly authorized officer or
Purpose: agent of a warehouseman may validly issue
a warehouse receipt
a. maintain the status quo during the pendency of
the litigation; or Warehouse receipt
b. insure the right of the parties to the property in
- a written acknowledgment by a
case of favorable judgment
warehouseman that he has received and
Obligation of Depositary of sequestered property holds certain goods therein described in
store for the person to whom it is issued
*Note that the depositary in this case is the person - not negotiable within the meaning of the
appointed by the court Negotiable Instruments Law but may be
1. take care of the property with the diligence of a negotiable or at least assignable
good father of a family
2.
 CREDIT TRANSACTIONS
As a rule, a person who deposits goods with a
warehouseman for storage is entitled to a receipt and the
goods for which the receipt is issued shall be in the
warehouseman’s possession. A warehouse receipt is a
nullity as to goods described therein which are not in
existence or not in the warehouse when the receipt was
given.
Contents of the Receipt
- Location of warehouse
- Date of issue of receipt
- Consecutive number of receipt
- Person to whom goods are deliverable
- Rate of storage charges
- Description of goods or packages
- Signature of warehouseman
- Warehouseman’s ownership of or interest in
goods
- Statement of advances made and liabilities
incurred
The omission of any of the requirements will not affect
the validity of the warehouse receipt but will only render
the warehouseman liable for damages caused by the
omission.
A warehouseman may insert additional terms or
conditions in receipts issued by him EXCEPT: a)
exemption from liability for misdelivery and b) exemption
from liablity for negligence.
Obligations of the Warehouseman
Principal obligations
1. To take care of the goods entrusted to his
safekeeping
2. To deliver them to the holder of the receipt or the
depositor provided the conditions under Section
8 are fulfilled
Other obligations
1. To stamp “duplicate” on copies of negotiable
receipt;
2. To place “non-negotiable” or “not negotiable” on
a non-negotiable receipt;
3. To cancel negotiable receipts upon delivery or
part delivery
4. To honor altered receipts in appropriate cases;
5. To not issue receipt if goods are not existent;
6. To properly describe the goods covered by the
receipt;
7.
To keep the goods separate and to not comingle
the goods;
8. Obligation with respect to the goods in case of
attachment or levy upon goods for which a
negotiable receipt has been issued
A demand should be made on the warehouseman in
order that the duty to deliver the goods will arise. The
warehouseman must deliver the goods at the time
specified in the contract.
Offer to satisfy warehouseman’s lien (Section 8 [a])
A warehouse having a lien valid against the person
demanding the goods may refuse to deliver the goods to
him until the lien is satisfied. The offer to satisfy the
warehouseman’s lien is thus required before the
warehouseman is bound to deliver or return the goods.
Offer to surrender and sign negotiable receipt (Section 8
[b])
If the receipt is negotiable, the demand for the delivery of
the goods must be accompanied by an offer to surrender
the receipt properly indorsed.
If the receipt is not negotiable, any person lawfully
entitled to the possession of the goods may be entiteld to
delivery without surrender of the receipt.
Note: Even if the demand is accompanied by all the
three conditions provided in Section 8, a warehouseman
may still refuse delviery of goods covered by a
warehouse receipt on some lawful excuses provided in
the Act.
Persons to whom the goods must be delivered (
Section 9)
- the person lawfully entitled to the possession
of the goods or his agent
- a person who is entitled to delivery by the
terms of a non-negotiable receipt or who has
written authority from the person so entitled
either indorsed upon the receipt or written
upon another paper;
- a person in possession of a negotiable
receipt
 CREDIT TRANSACTIONS
Liability of the warehouseman in case of misdelivery
(Section 10)
- the warehouseman is laible if prior to such delivery he
had either:
a) been requested by or on
behalf of the person lawfully
entitled to a right of property
or possession in the goods,
not to make such delivery;
b) had information that the
delivery about to be made
was to one not lawfully
entitled to the possession of
the goods;
The liability of the warehouseman for misdelivery is for
conversion. Conversion is unauthorized assumption and
exercise of the right of ownership over goods belonging
to another through the alteration of their condiiton or the
exclusion of the owner’s right.
Cancellation of receipts on delivery of goods (
Section 11 and Section 12)
- negotiable receipts must be cancelled: a)
when goods are delivered or b) when part of
the goods are delivered
- in case of a negotiable receipt, the
warehouseman is liable to any one who
purchases for value in good faith such
receipt whether such purchaser acquired
title to the receipt before or after the delivery
of the goods by the warehouseman, if he
fails to cancel the receipt
Effects of alteration on liability of warehouseman (
Section 13)
1) Immaterial alteration where the tenor of the
receipt is not changed – the warehouseman is
liable on the altered receipt according to its
original tenor;
2) Material alteration but authorized – the
warehouseman is liable according to the terms
of the receipt as altered;
3) Material alteration but innocently made though
unauthorized – the warehouseman is
liable on the altered receipt according to its
original tenor;
4) Material alteration and fraudulently made – the
warehouseman is liable according to the original
tenor of the receipt to a purchaser of the receipt
for value without notice and even to the alterer
and subsequent purchasers with notice except
that as regards to the last two, the
warehouseman’s liability is limited only to
delivery as he is excused from any liability
Liability of the warehouseman in case of lost or
destroyed receipts (Section 14)
- the court shall still make sure that the receipt
is really lost or destroyed even if the receipt
is claimed to have been lost or destroyed
before the goods are delivered or a new
receipt is issued
- a competent court may order the delivery of
the goods only:
a) upon proof of the loss or
destruction of the receipt; and
b) upon the giving of a bond with
sufficient sureties to be
approved by the court.
Note: The warehouseman is still liable to a holder of the
receipt for value without notice.
Liability of warehouseman as to duplicates (Section
15)
- when more than one negotiable receipt is
issued for the same goods the word
“duplicate” must be plainly placed by the
warehouseman upon the face of every such
receipt
- in such a case the warehouseman warrants:
a) that the duplicate is an accurate copy of
the original receipt; and b) such original
receipt is uncancelled at the date of the
issue of the duplicate
The duplicate imposes no other liability upon the
warehouseman except for breach of this warranty.
 CREDIT TRANSACTIONS
Ownership is not a defense for refusal to deliver (
Section 16)
The warehouseman cannot refuse to deliver the goods
on the ground that he has acquired title or right to the
possession of the same unless such title or right is
derived: a) directly or indirectly from a transfer made by
the depositor at the time of the deposit for storage or
subsequent thereto or b) from the warehouseman’s lien.
Duty of warehouseman where there are several
claimants (Section 17)
If there are several claimants to the goods, the
warehouseman must determine within a reasonable time
the validity of the conflicting claims and deliver to the
person whome he finds is entitled to the possession of
the goods. He is, however, not excused from liability in
case he makes a mistake.
Liability of the warehouseman for care of goods (
Section 21)
The warehouseman is not liabie for loss of or injury to
the goods resulting from a force majeure showing that he
acted with due care under the circumstances and that
the force majeure was the sole cause of the damage.
Commingling of deposited goods (Sections 22 to 24)
General rule: a warehouseman may not mingle goods
belonging to depositors.
Exception:
In the case of fungible goods the warehouseman may
mingle them with the goods of the same kind and grade
provided he is authorized by agreement or custom.
- the different owners become co-owners of
the whole mass
Attachment or levy of negotiable receipt (Section 25)
While in possession of such warehouseman, the goods
cannot be attached or levied upon under an execution
UNLESS:
a) the document be first surrendered;
b)
its negotiation is enjoined; or
c) the document is impounded by the court
- the warehouseman cannot be compelled to
deliver up to the possession of the goods
until the receipt is surrendered to him or
impounded by the court
Against what property the lien of the warehouseman
may be enforced (Section 28)
The warehouseman may enforce his lien against:
a) the goods of the depositor who is liable to the
warehouseman as debtor whenever such goods
are deposited;
b) the goods of other persons stored by the
depositor who is liable to the warehouseman as
debtor with authority to make a valid pledge
How a warehouseman loses his lien upon the goods
(Section 29)
A warehouseman loses his lien upon goods by:
a) voluntarily surrendering the
possession thereof without
requiring payment of his lien;
b) refusing to deliver the goods
where the holder of the receipt
offers to comply with the
requirements of Section 8
Valid reasons for refusing to deliver goods
1) that the holder of the receipt does not satisfy the
conditions prescribed in Section 8;
2) that the warehouseman has legal title in himself
on the goods
3) that the warehouseman has legally set up the
title or right of third persons as lawful defense for
nondelivery of the goods:
a) the warehouseman has been
requested by the person
lawfully entitled to possession
in the goods, not to make
such delivery;
b) the warehouseman had
information that the delivery
about to be made
 CREDIT TRANSACTIONS

was to one not lawfully failure to give notice in case of sale of goods
entitled to the possession of to satisfy his lien or because the goods are
the goods; perishable or hazardous
c) the goods have already been
lawfully sold to third persons
Negotiation of a negotiable receipt
to satisfy a warehouseman’s The manner of transferring negotiable warehouse receipt
lien or have been lawfully sold by negotiation is the same as in the negotiation of
or disposed of because of promissory notes and bills of exchange under the
their perishable or hazardous Negotiable Instruments Law.
nature;
4) until the lien is satisfied by a person against Advantages of a negotiable warehouse receipt
whom the warehouseman has a lien;
- protects a purchaser for value and in good
5) the failure was not due to any fault on the part of
faith
the warehouseman
- goods covered by such receipt cannot be
Remedies of a warehouseman for enforcing his lien ( garnished or levied upon under execution
Sections 31 to 36) unless it is surrendered or impounded or its
negotiation enjoined
1) by refusing to deliver the goods until the lien is - in case of negotiation, the holder acquires
satisfied (Section 31); the direct obligation of the warehouseman to
2) by causing the extrajudicial sale of the property hold possession of the goods for him without
and applying the proceeds to the value of the notice to such warehouseman
lien (Sections 33, 34); and - goods it covers are not subject to seller’s
3) by filing a civil action for collection of the unpaid lien or stoppage in transitu
charges or by way of counterclaim in an action
to recover the property from him Rights of a person to whom receipt has been
4) Such other remedies allowed by law for the negotiated (Section 41)
enforcement of a lien against personal property (
1) the title of the person negotiating the receipt
Section 35) or to a creditor against his debtor (
over the goods covered by the receipt;
Section 32).
2) the title of the person (depositor or owner)
Effect of sale of goods whose order by the terms of the receipt the
goods were to be delivered over such goods;
- the warehouseman is not liable for and
nondelivery even if the receipt is negotiated, 3) the direct obligation of the warehouseman to
in case of sale of goods hold possession of the goods for him as if the
warehouseman directly contracted with him
Acts for which the warehouseman is liable in sum:
- failure to stamp “duplicate” on copies of a
negotiable receipt;
- failure to place “non-negotiable” on a non-
negotiable receipt;
- misdelivery of the goods;
- failure to effect cancellation of a negotiable
receipt upon delivery of the goods;
- issuing receipt for non-existing goods or
misdescribed goods
- failure to take care of the goods
-
 CREDIT TRANSACTIONS
Guaranty
By guaranty, a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so (
Article 2047 [a]).
Characteristics of a guaranty
- consensual
- unilateral
- nominate
- accessory
- formal
- gratuitous
Essential requisites of the contract
1) Consent
2) Object – the obligation guaranteed by it
3) Cause – a guaranty is gratuitous unless there is
a stipulation to the contrary
Scope of the guarantee
- Principal obligations of the debtor;
- Accessory obligations pertaining to the
principlal obligation
- The obligations that arise as a matter of law
from the guaranteed obligations such as the
payment of interest in case of delay
- The obligation to pay judicial costs incurred
after the guarantor has been judicially
required to pay
Time of payment
The guarantor must pay as soon as the creditor was
unsuccessful in exhausting the properties of the debtor.
Qualifications of a guarantor (Articles 2056-2057)
a. he possesses integrity;
b. he has capacity to bind himself; and
c. he has sufficient property to answer for the
obligation which he guarantees
The qualifications need only be present at the time of the
perfection of the contract.
Suretyship
Suretyship is a contractual relation resulting from an
agreement whereby one person (surety), engages
to be answerable to a third person (obligee/creditor) for
the debt, default or miscarriage of another (principal or
obligor/debtor).
It involves two relationships: the principal relationship
between the obligee and the obligor, and the accessory
relationship betwee the principal (obligor) and the surety.
NOTE: In a contract of suretyship, unless otherwise
expressly provided, the surety makes no covenant or
agreement with the principal that it will fulfill the
obligation guaranteed for the benefit of the principal.
Distinctions between guaranty and suretyship
A surety and a guarantor are alike in that each promises
to answer for the debt, default or miscarriage of another.
However, there are distinctions:
1) A guarantor is the insurer of the solvency of the debtor
and thus binds himself to pay if the principal is unable to
pay.
A surety is the insurer of the debt, and he obligates
himself to pay if the principal does not pay.
2) A guaranty is an undertaking that the debtor shall pay.
A suretyship is an undertaking that the debt shall be paid
.
3) A guarantor assumes liability depending on an
independent agreement to pay the obligation if the
primary debtor fails to do so.
A surety assumes liability as a regular party to the
undertaking.
4) A guarantor is engaged in a collateral undertaking.
A surety is charged as an original promisor and debtor
from the beginning.
5) The guarantor is secondarily and subsidiarily liable.
A surety undertakes directly the payment without
reference to the solvency of the principal.
6) A guarantor is not bound to take notice of the non-
performance of his principal.
 CREDIT TRANSACTIONS
A surety is ordinarily held to know every default of his
principal.
7) A guarantor is often discharged by the mere
indulgence of the creditor of the principal and is usually
not liable unless notified of the default of the principal.
A surety will not be discharged either by the mere
indulgence of the creditor of the principal or by want of
notice of the default of the principal.
8) Unlike a guarantor, a surety cannot claim release from
his obligation.
Rights of a third person who pays
The rights of a third person who pays or performs the
obligation of the debtor and one who gurantees the
obligation of the debtor are similar.
1) A person who pays WITHOUT THE KNOWLEDGE or
AGAINST THE WILL of the debtor can recover only
insofar as the payment has been beneficial to the debtor.
2) If he became a guarantor WITH THE KNOWLEDGE
or CONSENT of the debtor, he is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
Guaranty in writing
Guaranty must not only be expressed but must also be
in writing. A contract of guaranty, NOT suretyship, falls
under the Statute of Frauds since it is a special promise
to answer for the debt, default or miscarriage of another.
When acceptance of guaranty by creditor and notice
thereof to guarantor is necessary
Where there is merely an offer of a guaranty, it does not
become a binding obligation until it is accepted and until
notice of such acceptance by the creditor is given to or
acquired by the guarantor or until he has notice or
knowledge that the creditor has performed the condition
and intends to act upon the guaranty.
Extent of guarantor’s liability
a) where guaranty is DEFINITE – the obligation of the
guarantor under the terms of the contract is limited in
whole or in part to the principal debt thus the
obligation of the guarantor extends no further than the
sum or services so speficied
b) where guaranty is INDEFINITE – the guarantor is not
limited to the principal obligation in whole or in part but
also to all its accessories
Right of guarantor to benefit of excussion or
exhaustion (Article 2058)
- creditor must first exhaust all the property wtihin the
Phlippines of the principal debtor and resort to all legal
remedies against the debtor including the bringing of
actions for the rescission of fraudulent alienations of
property made by the debtor to warrant recourse against
the guarantor for payment
When right of excussion SHALL NOT take place (
Article 2059)
a. if the guarantor has expressly renounced it;
b. if he has bound himself solidarily with the debtor;
c. in case of insolvency of the debtor;
d. when he has absconeded or cannot be sued
within the Philippines unless he has left a
manager or representative;
e. if may be presumed that an execution on the
property of the principal debtor would not result
in the satisfaction of the obligation
Benefit of division (Article 2065)
If only one debtor has several guarantors and for the
same debt, said guarantors may enjoy the benefit of
division. Their liability is only joint hence they are not
liable to the creditor beyond the shares which they are
respectively bound to pay.
REQUISITES
a. there are several guarantors of only one debtor
and for the same debt;
b. the benefit of division is claimed in a timely
manner
c. solidarity has not been expressly stipulated
EXCEPTIONS TO THE BENEFIT OF DIVISION
a. if there are two or more debtors of one debt
even if they are bound solidarily each with
different guarantors;
b.
 CREDIT TRANSACTIONS

if there be two or more guarantors of the same EXCEPTION (when guarantor may still claim
debtor but not only for the same debt reimbursement from the debtor)

Indemnity of the guarantor (Article 2066) a. the creditor becomes insolvent;

b. the guarantor was prevented by fortuitous event
The guarantor who makes payment must be indemnified
to advise the debtor of the payment; and
by the debtor which comprises of:
c. the guaranty is gratuitous
a. total amount of the debt;
Extinguishment of guaranty
b. the legal interests thereon from the time the
payment was made known to the debtor even a. payment or performance
though it did not earn interest for the creditor; b. dacion en pago – creditor voluntarily accepts
c. the exprenses incurred by the guarantor after immovable or other property in payment of the
having notified the debtor that payment had debt
been demanded of him; c. loss of the thing due
d. damages if they are due d. service becomes impossible
e. consignation
EXCEPTIONS TO THE RIGHT OF INDEMNITY OR
REIMBURSEMENT f. condonation
g. merger or confusion – when the characters of
a. where the guaranty is constituted without the the creditor and the debtor are merged in the
knowledge or against the will of the principal same person
debtor h. compensation
b. payment by a third person who does not intend i. novation – the guaranty may subsist only insofar
to be reimbursed by the debtor is deemed to be as it benefits third persons who did not give their
a donation consent
c. the right to deman reimbursement is subject to j. failure of subrogation – because of some act of
waiver the creditor
k. release – the creditor may release the guarantor
Effect of payment by the guarantor WITHOUT
from the guarantee
NOTICE to the debtor
l. other causes such as rescission, annulment,
- the debtor may interpose against the guarantor those fulfillment of a resolutory condition, and
defenses which he could have set up against the creditor prescription
at the time the payment was made
Defenses available to the guarantor against the
Effect of payment by guarantor before or after creditor
maturity
a. Defenses derived from the principal obligation –
- the guarantor who pays before maturity is not entitled those pertaining to the principal debtor and are
to reimbursement since there is no necessity for inherent in the debt
accelerating payment b. Defenses derived from the contract of guarantee
– those relating to the creation of the guarantee
Effect of repeat payment by debtor because the
such as lack of consent, mistake, etc.
debtor was not notified of the guarantor’s payment
c. Defenses derived from the conduct of the
- the guarantor’s only remedy is to collect from the creditor such as negligence, extension, and
creditor subrogation
 CREDIT TRANSACTIONS
Pledge and Mortgage
Pledge – a contract by virtue of which the debtor delivers
to the creditor or to a third person by common
agreement a movable property susceptible of
appropriation or a document evidencing incorporeal
rights for the purpose of securing the fulfillment of a
principal obligation, with the understanding that when the
obligation is fulfilled, the thing delivered shall be returned
with all its fruits and accessions in appropriate cases.
The property given in pledge or mortgage stands as
security for the fulfillment of the principal obligation.
JUS DISTRAHENDI – the pledgee and
mortgagee may sell the thing received in pledge
or mortgage in the event the principal obligation
is not fulfilled
BUT! The pledgor’s or mortgagor’s default does
not operate to vest in the pledgee or mortgagee
automatic ownership of the property for any such
effect is against public policy
→ pactum commissorium
REQUISITES OF A PACTUM COMMISSORIUM
a. there should be a pledge, mortgage or
antichresis of property by way of security for
the payment of the principal obligation; and
b. there should be a stipulation for an
automatic appropriation by the creditor of the
property in the event of non-payment of the
obligation within the stipulated period
Essential requisites of pledge and mortgage (Article
2085)
a. that they be constituted to secure the fulfillment
of a principal obligation;
b. that the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
c. that the persons constituting the pledge or
mortgage have the free disposal of their property
and in the absence thereof, that they be legally
authorized for the purpose
***d. the thing pledged be delivered to the creditor or
to a third person by common agreement
In a contract of mortgage, the mortgagor as a general
rule, retains the possession of the property mortgaged.
NOTE: The contract must be constituted only by the
absolute owner of the thing pledged or mortgaged.
Capacity or authority to dispose of the property
The act of pledging or mortgaging is an act of strict
ownership involving as it does an alienation or
transmission of real rights in property hence the pledgor
or mortgagor must have the capacity or authority to
dispose of the property.
Distinctions between pledge and real estate
mortgage
The following are the distinctions:
a. Pledge is constituted on movables.
A real estate mortgage is constituted on
immovables.
b. In pledge, the property is delivered to the
pledgee or by common consent to a third person
.
In mortgage, delivery is not necessary.
c. Pledge is not valid against third persons unless
a description of the thing pledged and the date
of pledge appear in a public instrument.
Mortgage is not valid against third persons if not
registered.
d. The pledgor can sell the thing pledged with the
consent of the pledgee.
The mortgagor can sell the property mortgaged
even without the consent of the mortgagee.
Kinds of Pledge
a. Voluntary or conventional – created by
agreement of the parties;
b. Legal – created by operation of law
 CREDIT TRANSACTIONS

Characteristics of a contract of pledge Fundamental rights of the pledgee over the thing
pledged
a. real
b. unilateral a. the right to retain the thing (jus retinendi); and
c. nominate b. the right to proceed before a notary public to the
d. accessory sale of the thing pledged (jus distrahendi)
e. formal
Obligations of a creditor or pledgee
f. may be onerous or gratuitous
a. obligation to take care of the thing pledged with
Parties to a contract of pledge the diligence of a good father of a family (Article
a. pledgor 2098);
b. pledgee b. obligation not to deposit the thing pledged with a
third person, unless there is a stipulation to the
The pledgor may be the debtor or a third person but contrary (Article 2100);
the pledgor must be the absolute owner of the thing c. obligation not to use the thing pledged (Article
pledged. 2104);
d. obligation to return the thing pledged upon
Essential requisites of a contract in a pledge
payment of the debt (Articles 2098 and 2105);
a. consent and
e. obligation to advise the pledgor of any danger to
b. object – movable things which are within the the thing pledged.
commerce of men provided they are susceptible of
appropriation Rights of a pledgor
c. cause – if the pledgor is not the debtor, the cause is a. right to require the deposit of the thing pledged
the compensation stipulated for the pledge or the mere with a third person if the thing pledged is in
liberality of the pledgor danger of being lost or impaired (Article 2106);
and
Rights of the creditor or pledgee b. subject to the right of the pledgee, the right to
a. jus retentionis – right to retain the thing pledged demand the substitution of the thing if there are
(Article 2098); reasonable grounds to fear the destruction or
b. right to bring actions which pertain to the owner impairment of the thing pledged (Article 2107)
of the thing pledged (Article 2103); Obligation of a pledgor
c. the right to compensate fruits and interest
received with those which are owing to him ( The pledgor has the obligation to indemnify the pledgee
Article 2102); for damages in case of known hidden flaws in the thing
d. right to reimbursement of the expenses incurred pledged.
for the preservation of the thing (Article 2099);
Transfer of possession by delivery is essential in
e. right to cause the public sale of the thing
pledge
pledged if there is danger of destruction,
impairement or diminution (Article 2108); An agreement to constitute a pledge only gives rise to a
f. right to demand substitution of the thing peldged personal action between the contracting parties (Article
(Article 2109); 2092). Unless the movable given as a security by way of
g. jus distrahendi – right to proceed before a notary pledge is delivered to and placed in the possession of
public for the sale of thing (Article 2112). the creditor or of a third person designated by common
agreement, the creditor acquires no right to the property
because pledge is merely a lien, and possession is
indispensable to the right of a lien.
 CREDIT TRANSACTIONS
Types of delivery of a pledge
a. actual
b. constructive
Alienation by the pledgor of the thing pledged (
Article 2097)
The pledgor retains his ownership of the thing pledged.
He may, therefore, sell the same, provided the pledgee
consents to the sale. As soon as the pledgee gives his
consent, the ownership of the thing pledged is
transferred to the vendee subject to the rights of the
pledgee, namely, that the thing sold may be alienated to
satisfy the obligation and that the pledgee must continue
in possession during the existence of the pledge.
Risk of loss of property pledged or mortgaged
RES PERIT DOMINO SUO
- the debtor-owner bears the loss of the
property because the ownership of the
property pledged or mortgaged remains with
the debtor
Assignments as a security device
In financing transactions, the lender may require that the
borrower assign certain properties as a security for the
fulfillment of the principal obligation. The Supreme Court
has viewed such an assignment as either a pledge or a
mortgage. Consequently, such assignment must comply
with the formal and substantive requirements of a pledge
or mortgage.
Right of creditor where debtor fails to comply with
his obligation (Article 2088)
a. If the debtor fails to comply with the obligation at
the time it falls due – the creditor is merely
entitled to move for the sale of the thing pledged
or mortgaged with the formalities required by law
in order to collect the amount of his claim from
the proceeds.
b. If the mortgagor fails to pay his obligation within
the required period – the mortgagee
may foreclose the mortgage and if he wishes to
secure a title to the mortgaged proeprty, he can
buy it in the foreclosure sale.
Effect of a Pactum Commissorium stipulation in
relation to Article 2088
A stipulation whereby the thing pledged or mortgaged or
under anthichresis shall automatically become the
property of the creditor in the event of nonpayment of the
debt within the term fixed is forbidden by law and
declared null and void.
EXCEPTION (Article 2112): The pledgee may
appropriate the thing pledged if after the first and second
auctions, the thing is not sold.
Extinguishment of pledge
a. if the object is returned by the pledgee;
b. payment of the debt (Article 2105);
c. sale of the thing pledged at public auction (
Article 2115);
d. prescription;
e. loss of the thing;
f. merger;
g. compensation;
h. novation
Effect of sale of thing pledged
1) No right of debtor to excess – the debtor is NOT
entitled to the excess unless there is an
agreement to the contrary;
2) No right of creditor to recover deficiency – the
creditor is NOT entitled to recover the deficiency
in all cases;
3) No right of redemption – there is no law vesting
the right of redemption over personal property
Right of a third person to satisfy an obligation
A third person who has any right in or to the thing
pledged may pay the debt as soon as it becomes due
and demandable and the creditor cannot refuse to
accept the payment – exception to the general rule in
Article 1236 that creditor is not bound to accept payment
or performance by a third person.
 CREDIT TRANSACTIONS

Right of pledgee to choose which of several things

pledged shall be sold (Article 2119)
The right of choice given to the pledgee as to which of
the things pledged he shall cause to be sold is limited
only by stipulation.

Right of a third person who pledged his own

property
A third person who is not a party to the principal
obligation may secure the latter by pledging his own
property.