Credit Transactions – First Exam Coverage 2016-2017

Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

ESTILLORE Obligation To return the same To pay the same

November 15, 2016
Part 1 of 3 thing that was borrowed amount, of the same
amount and quality
LOAN Property Real or Personal Personal
I. Concept Purpose Use or temporary Consumption
possession of the
subject matter
Title XI. - LOAN Demand of Return may be Bailor may not demand
GENERAL PROVISIONS the return demanded before its return before the
of the expiration of the term, lapse of the term
Art. 1933. subject in case of urgent need agreed upon
By the contract of loan, one of the parties delivers to another, either matter
something not consumable so that the latter may use the same for a certain Loss of the Loss of the subject Borrower suffers the
time and return it, in which case the contract is called a commodatum; or subject matter is suffered loss even if caused
money or other consumable thing, upon the condition that the same amount matter by the bailor since he is exclusively
the owner by a fortuitous event
of the same kind and quality shall be paid, in which case the contract is simply and he is not,
called a loan or mutuum. therefore, discharged
from his
Commodatum is essentially gratuitous. duty to pay
Nature Purely personal Not purely personal
Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower. (1740a)
KINDS OF LOAN
(1) Commodatum
(2) Mutuum (Simple Loan)
Do not confuse Contracts of Loan from other concepts. In a Contract of Loan,
what matters is delivery by one party to another person, and the other person
receives the object, to which if it is a mutuum, the recipient becomes the owner
of what is being delivered, with an obligation to repay the same amount, of the
same kind and quality.
CREDIT
Credit refers to ability to borrow money or things by virtue of the confidence or
trust reposed by a lender that he will pay what he may promise within a
specified period.
It can also be referred to, yung sa accounting books noh, debit and credit.
Credit refers to the sum credited on the books of the company to a person who
appears entitled to that sum. So yun ang credit that must be differentiated
from the term loan.
Art. 1934.
An accepted promise to deliver something by way of commodatum or
simple loan is binding upon parties, but the commodatum or simple loan
itself shall not be perfected until the delivery of the object of the contract.
(n)
This emphasizes that a Contract of Loan, whether it is a commodatum or
mutuum, is a real contract perfected by delivery. If the thing subject of
commodatum or mutuum is not yet delivered, no contract of loan is yet
perfected.
What about if there is an agreement they will enter into a Contract of Loan?
That I will let you borrow this thing, that I will loan you money? But the money
or thing has not yet been delivered. Do you have a perfected contract? Yes, an
ordinary consensual contract. But it will not give rise to either commodatum or
mutuum unless the very thing as agreed upon is already been delivered.
Again, commodatum or mutuum will only be perfected upon delivery of the
subject matter. Any agreement to enter into a contact of loan will be
considered as a perfected contract, consensual in nature. But it will not yet be
considered as a loan agreement until the subject matter has been delivered.

DISCOUNTING
Ang discounting, hindi ‘yan siya loan. Although, when we say discounting, it is
more or less a mode of loaning money.
What are the characteristics of a Commodatum?
What happens in discounting? May check in-issue sa’yo. Sabihin natin P10,000
and it is a post-dated check. You will find a person who would discount a check,
wherein, instead of going to the bank, you now immediately discount the check
but the cash equivalent you will receive is lesser than the value of the check.
Doon magka-pera ‘yung nag-discount.
Essentially, in discounting, an interest is deducted. So what is deducted from
the amount you are supposed to receive refers to the interest.
Ang common dito is ‘yung post-dated checks that is negotiated to one person to
another, or ‘yung malayo pa tapos kailangan na niya ang cash ngayon and hindi
na sila makapunta sa bangko, so maghanap sila nang mag-discount sa check.
That discounting is different from the loan as defined in 1933.
II. Commodatum
PAJUYO vs. CA
FACTS:
Petitioner Pajuyo paid P400 to a certain Pedro Perez for the rights over a 250-square
meter lot. Pajuyo then constructed a house on the lot where he and his family lived
for 6 years.
Later on, Pajuyo and PR Guevarra executed a Kasunduan. It voluntarily agreed that
Pajuyo, as owner of the house, will allow Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate the premises on Pajuyo’s
demand.
After some time, Pajuyo informed Guevarra of his need of the house and demanded
that Guevarra vacate the house. However, Guevarra refused causing Pajuyo to file
an ejectment case against Guevarra.

Again, 1933 emphasizes commodatum to be distinguished from simple loan. Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
because like him, Pajuyo is a mere squatter on the lot. He also contended that the
COMMODATUM MUTUUM property was reserved by the government for socialized housing.
Object Ordinary involves Involves money or
something which is not other consumable thing The RTC ruled that the Kasunduan entered into between the parties was akin to a
consumable. landlord-tenant contract.
Ownership Ownership is retained Ownership is
by the lender transferred to the The CA reversed the decision and held that Kasunduan is not a lease contract but a
borrower commodatum because the agreement is not for a price certain.
Cause Essentially gratuitous Maybe gratuitous or
onerous (with ISSUE: W/N the Kasunduan entered into between Pajuyo and Guevarra was a
stipulation to pay commodatum.
interest)

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RULING: NO
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it.
An essential feature of commodatum is that it is gratuitous. Another is that the use
of the thing belonging to another is for a certain period. Thus, the bailor cannot
demand the return of the thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which the commodatum is constituted.
If the bailor should have urgent need of the thing, he may demand its return for
temporary use. If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the contractual relation is
called a precarium, a kind of commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra
was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay
rent, it obligated him to maintain the property in good condition. The imposition of
this obligation makes the Kasunduan a contract different from a commodatum.
The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to a
landlord-tenant relationship where the withdrawal of permission would result in the
termination of the lease. The tenant’s withholding of the property would then be
unlawful.
Even assuming that the relationship between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would still have the duty to turn over possession
of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing
received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum. These contracts certainly involve the obligation to
deliver or return the thing received.
Having freely entered into the Kasunduan, Guevarra cannot now impugn the
Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.
CHARACTERISTICS OF COMMODATUM
(1) Real
− Perfected by delivery
(2) Unilateral
− You must have read on the subsequent provisions that
there would be obligations imposed. Nevertheless, those
obligations don’t necessarily mean that it gives rise to a
bilateral contract. But rather, the obligations mentioned
in the subsequent articles on the part of the bailor, are
just necessary consequences of commodatum.
(3) Nominate
(4) Principal
− Not dependent to another contract
(5) Informal in nature
− It is not required to be in writing or in any particular form
in order to be valid
(6) Essentially gratuitous
− Once it stops to be gratuitous, it is not a commodatum
anymore.
CHAPTER 1. COMMODATUM
SECTION 1. NATURE OF COMMODATUM
Art. 1935.
The bailee in commodatum acquires the used of the thing loaned but not its
fruits; if any compensation is to be paid by him who acquires the use, the
contract ceases to be a commodatum. (1941a)
This is what happened in Pajuyo vs. CA. It turned out that it was not essentially
gratuitous because there was an obligation on the part of the bailee. Not really
monetary in nature, but still it made the contract not gratuitous in nature. And
therefore it could not be considered as a contract of commodatum.
Again, it ceases to be a commodatum if any compensation is to be paid by the
borrower to acquire the use. As mentioned in the case Pajuyo, it can be
considered as a landlord-tenant relationship, where there is contract of lease,
use is granted to the lessee in exchange for compensation.
PARTIES IN COMMODATUM
(1) Bailor
− The one who lends the subject matter
(2) Bailee
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
− Recipient
It is not required that the bailor in a commodatum is the owner of the thing.
Why? Because there is no transfer of ownership. As long as he has possessory
rights, such as that of a usufructuary or a lessee who is not prohibited to
sublease the property or let other people use it, then he could still have a valid
contract of commodatum.
As we have mentioned, a commodatum is an informal contract as it is not
required to be in writing to be valid. But do remember the provisions under the
Statute of Frauds (Article 1403). If it would be performed after one year from
the execution of the contract, then it has to be in writing but for purposes of
being enforceable and not for validity.
It is also obvious that since this is a gratuitous contract, it is therefore similar to
a donation as it confers benefit to a recipient.
1935 emphasizes the purpose of a commodatum, the use of the thing loaned.
However, it doesn’t extend to the fruits of the thing, unless stipulated by the
parties. The purpose here is the use but it has to be emphasized, it is only a
temporary use of the subject matter excluding the fruits unless otherwise
agreed upon by the parties.
Art. 1936.
Consumable goods may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is merely for
exhibition. (n)
Art. 1937.
Movable or immovable property may be the object of commodatum. (n)
What do we mean by consumable goods? In 1936, it is mentioned that
consumable goods maybe the subject of commodatum. But isn’t it that we
mentioned earlier that the subject matter in a commodatum refers only to non-
consumable goods?
PRODUCERS BANK vs. CA
FACTS:
Sanchez asked PR Franklin Vives to deposit in a bank a certain amount of money in the
bank account of Sterela Marketing and Services for purposes of its incorporation. Relying
on the assurances and representations of Sanchez and Doronilla, PR Vives deposited
P200k in the Producers Bank in favor of Sterela.
Later on, Vives found out that Sterela was no longer holding office in the address
previously given to him. They went to the bank to verify if their money was still intact.
They were informed that part of the money was already withdrawn by Doronilla and only
P900k was left in the account. They could not however withdraw the money because
they had to answer for the postdated checks issued by Doronilla. They further found out
that Doronilla was able to obtain a loan worth P175k.
PR Vives demanded the return of his money from Doronilla. When Doronilla failed to do
so, PR Vives instituted an action for recovery of sum of money.
Petitioner Producers Bank contended the transaction between Vives and Doronilla was a
simple loan or mutuum since all the elements of a mutuum are present:
1. What was delivered by Vives to Doronilla was money, a consumable thing;
and
2. The transaction was onerous as Doronilla was obliged to pay interest.
PR Vives countered that the transaction between him and Doronilla was not a mutuum
but an accommodation since he did not actually part with the ownership of his money. In
fact, he asked his wife to deposit said amount in the account of Sterela so that a
certification can be issued to the effect that Sterela had sufficient funds for purposes of
its incorporation.
ISSUE: W/N the transaction between Vives and Doronilla was a commodatum.
RULING: YES
Article 1993 of the CC seems to imply that if the subject of the contract is a consumable
thing, such as money, the contract would be a mutuum. However, there are some
instances where a commodatum may have for its object a consumable thing as provided
under Article 1936.
If consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the
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end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. In case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such
determination.
In this case, Vives merely accommodated Doronilla by lending his money, without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties
that the money would not be removed from Sterela’s savings account and would be
returned to Vives after the lapse of 30 days.
The fact that Doronilla’s attempts to return to Vives the amount of P200k which the latter
deposited in Sterela’s account together with an additional P12k, allegedly representing
interest on the mutuum, did not convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties. Furthermore, the additional
P12k corresponds to the fruits of the lending of the P200k. Article 1935 of the CC
expressly states that the bailee acquires only the use of the thing loaned but not its fruits.
Hence, it was only proper for Doronilla to remit to private respondent the interest
accruing to the latter’s money deposited with petitioner.
Why would it matter if it is a commodatum or a mutuum? Remember one of
the distinctions between these 2 contracts is that in commodatum, there is no
transfer of ownership while in mutuum there is a transfer of ownership. It was
alleged that if the agreement or transaction here was a mutuum, Producer’s
Bank cannot be held liable to return the P200,000. However, the SC held that
looking at the intention of the parties, the transaction was deemed to be a
commodatum as the money deposited in the account was specifically for the
purpose of making it appear that the firm had sufficient capitalization to form a
corporation.
Article 1936 was mentioned to which it emphasized pwede consumable goods
be subject of a commodatum as long as the purpose is not for consumption but
for exhibition. However do take note that this case is very unique in nature.
Why? Again, distinction between mutuum and commodatum – in
commodatum, the obligation of the bailee is to return the exact same thing that
was borrowed. If you put money in the bank, let’s say for purposes of
commodatum, what would be the expectation if we say it’s a commodatum?
That the exact money you deposited, with the specific serial number will be
returned to you since that is the exact same thing that you deposited and that is
the obligation in commodatum. But of course in the transaction here, that
would not be expected because once you put money in the bank, that is
actually a contract of loan. Iba yung obligation ng bank to the depositor and the
transaction between the depositor and from whom the money was transferred.
Be careful with this case. If ever this would be asked for the purposes of the bar
exam, you can cite this case but be very specific that the facts of this case is
same with that of the Producer’s Bank case looking at the intention of the
parties. Otherwise, you could make the contract a mutuum. That is the better
view in lieu of the obligation of the bailee to return the equivalent, not the
exact thing that was borrowed. Take note of the uniqueness of this case as it
took primordially the intention of the parties.
In mentioning Article 1936, a contract of commodatum generally involves a
non-consumable thing. But pwede ring consumable as long as it is not
consumed. Example, a bottle of wine or money which will be used for purposes
of exhibition.
Article 1937.
Movable or immovable property may be the object of commodatum. (n)
Now Article 1937 emphasizes that you could have, even a real property a
subject matter in a commodatum as what happened in the case of Mina vs.
Pascual. What happened in this case?
TITO
November 15, 2016
Part 2 of 3
MINA vs. PASCUAL
FACTS:
Francisco Fontanilla acquired a lot. Later on, with his consent, his brother Andres
Fontanilla erected a warehouse on a portion of the lot. When Francisco died, Mina
inherited the lot while Ruperta Pascual acquired the building as the successor of Andres.
Later on, Ruperta, as the guardian of her minor children, sought for court authorization to
sell a portion of the warehouse. Mina opposed alleging that the lot where the warehouse
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
stood belongs to them.
The trial court granted the sale at public auction of the warehouse and the lot where it
stood. Mina then presented an agreement the 9th paragraph thereof provides that there
existed and still exists a commodatum by virtue of which the guardianship had and has
the use, and the plaintiffs the ownership of the property.
ISSUE: W/N there exist a commodatum between the parties.
RULING: NO
The phrase implies that while finding the Minas to be the owners of the lot, the Pascuals
only have the use of the lot. Furthermore, the SC found that:
(1) Andres Fontanilla, Pascual’s predecessor, erected the warehouse on the lot
some thirty years ago with the explicit consent of his brother Francisco,
Mina’s predecessor;
(2) The plaintiffs and the defendants are the co-owners of the warehouse;
(3) Neither Andres Fontanilla nor his successors paid any consideration or price
whatever for the use of the lot occupied by the warehouse causing both
parties to denominate Pascual’s use of the property as a commodatum.
Although both litigating parties may have agreed in their idea of the commodatum,
contracts are not to be interpreted in conformity with the name that the parties thereto
agree to give them, but must be construed, duly considering their constitutive elements,
as they are defined and denominated by law.
It is an essential feature of the commodatum that the use of the thing belonging to
another shall be for a certain period. Francisco did not fix any definite period or time
during which Andres could have the use of the lot whereon the latter was to erect a
stone warehouse of considerable value. Also it is for the past thirty years that the lot has
been used by both Andres and his successors in interest.
It never entered Francisco's mind to limit the period during which his brother Andres was
to have the use of the lot, because he expected that the warehouse would eventually fall
into the hands of his son, Fructuoso, called the adopted son of Andres, which did not
come to pass for the reason that Fructuoso died before his uncle Andres. With that
expectation in view, it appears more likely that Francisco intended to allow his brother
Andres a surface right; but this right supposes the payment of an annual rent, and Andres
had the gratuitous use of the lot.
The present contention of the Minas that Cu Joco, now in possession of the lot, should
pay rent for the use of the lot at the rate of P5 a month would destroy the theory of the
commodatum sustained by them since a commodatum is essentially gratuitous.
What’s the subject matter here? The land here is at issue but it must be
distinguished from the warehouse. I want to emphasize it since here we have 2
different immovable properties.
Do we have a contract of commodatum? No.
Is it necessary for parties in a commodatum to agree that the commodatum or
the contract or the bailee would be allowed to use for a specific period of time?
What is required here for it to be considered a commodatum? For it to be a
commodatum, what must be agreed upon as to the period? That it is only for
temporary. We have the concept of procarium. They do not need to stipulate
for a specific period for a procarium to exist. What must be clearly agreed upon
by the parties is that the use is only temporary in nature for a certain period but
it is not necessary that they have to specifically indicate until when the bailee is
allowed to use.
So you mentioned here that it cannot be a commodatum. If it’s not a
commodatum, what is the nature of the commodatum here? Contract of lease.
What was the intention of the parties to determine that they intended to a
contract of lease and not a commodatum? The SC emphasized that the parties
considered it as a commodatum however the essential feature of commodatum
is that the use of the thing belonging to another shall be for a certain period but
the original parties to the contract, Francisco, did not fix for a definite period
which Andres could have used the lot.
It turns out that the present contention that the present possessor should pay
rent. If there’s rent, it should not be considered as a commodatum because
again, commodatum is essentially gratuitous.
The SC held that vis-à-vis with the evidence presented, it turns out that it never
entered Francisco’s mind to limit the period. Why? Because he expected that
the warehouse will eventually fall into the hands of his son which however did
not come to pass. Why? Because patay na an son, si Fructoso.
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So again, go back to the intention of the parties. They never intended that
Andres would use the property for a specific period or temporarily. It appears
more likely that Francisco intended to allow Andres merely a surface right
supposing the payment of an annual rent. Therefore, with that intention very
clear, they could not have entered into a commodatum but rather a contract of
lease. So again, we have here an immovable property an object of a
commodatum also emphasizing the gratuitous nature of such contract.
Article 1938. The bailor in commodatum need not be the owner of the thing
loaned. (n)
Now Article 1938, the bailor in commodatum need not be the owner of the
thing loaned. We have emphasized this before because again in commodatum,
ownership does not pass to the bailee. As long as you have a possessory
interest, like either as a lessee or a usufructuary, you can be a bailee in a
commodatum. However, the bailee himself may not lend or lease to a third
person. This is clear under Article 1939.
Article 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 third person. However, the members of the bailee's household
may make use of the thing loaned, unless there is a stipulation to
the contrary, or unless the nature of the thing forbids such use. (n)
Ok. Look at your seatmate, whether the one on your left or the one on your
right. Look at the stuff that you have – libro, cellphone, ipad. Pahiramin mo ba
sa seatmate mo? (awkward silence) Alam na natin. Alangin kayong lahat
magsagot. (haha!)What do you think is the consideration before you enter in a
contract of commodatum? You take into consideration the character, the credit,
the conduct of that person/bailee before you allow him to make use of the
property. That makes commodatum a purely personal contract, unlike in a
mutuum. The difference here, in commodatum you do not expect anything in
return, gratuitous yan.
Now in relation to the purely personal nature of a contract of commodatum,
one of its effects is that the death of either the bailor or the bailee extinguishes
the contract. This would be an exception to Article 1178 under your obligations
and contract. Subject to the laws or rights acquired in virtue of an obligation are
transmissible if there’s no stipulation to the contrary. However it may be
transmissible by a stipulation of the parties.
Now do take not that if there are 2 or more bailees, death of 1 does not
extinguish the contract. Exception, unless there is a stipulation.
Very important to consider in Article 1939 is the second effect. The bailee
cannot lend nor lease the object of the contract to a third person. Di mo pwede
ipahiram yung pinahiram sa iyo. There are only 2 exceptions. First, members of
the bailee’s household. Exception to the exception is if there is a stipulation to
the contrary. In the absence of a stipulation, the nature of the thing forbids
such use. Example, damit. Siguro pinahiram sa iyo ang damit kasi kasya sa iyo.
Wag ipilit na ipahiram sa kapatid, pinsan or kasama sa bahay kasi kasya din.
Anong mangyari niyan? There will be liabilities on your part. Ang mali mo lang is
pinahiram mo na di ka nagpaalam.
So again, take note, general rule, bailee cannot lend nor lease the object of the
contract to a third person. Exception, stipulation of the parties. Another
exception, with regard to the members of the bailee in the same household.
Exception to the exception, stipulation prohibiting members of the same
household to use the same or the nature of the thing forbids such.
Article 1940. A stipulation that the bailee may make use of the fruits of the
thing loaned is valid. (n)
Article 1940 is with regard to the fruits. This is a stipulation that the bailee may
make use of the fruits of the thing loaned is valid. So this is the exception we
have mentioned before. General rule, the use of the thing refers to the thing
itself, it does not extend to the fruits. Exception, it may extend to the fruits
provided there is a stipulation as provided in Article 1940.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
The right to use is distinct from the right to enjoy the fruits of the thing. Parties
can stipulate the use of the fruits incidental to the use of the thing. Otherwise, if
the use is the main cause of the contract, that is not commodatum but rather a
usufruct, the right to use the fruits thereof.
OBLIGATIONS OF THE BAILEE
What are the primary obligations of the bailee? You can still apply here the
obligations of the debtor that you have already learned in your obligations and
contracts. First, to take care of the thing with the diligence of a good father of
the family unless the law requires another standard of care or unless otherwise
stipulated by the parties. What else? Since this is a commodatum, the parties
have entered into for the purpose of the temporary use, the bailee has the
obligation to use it for the purpose as agreed by them. Also we have learned
that the bailee has the obligation to pay for ordinary expenses and its primary
obligation is to return the thing that he has borrowed.
Now we have the case of Delos Santos vs. Jarra. What happened in this case?
DE LOS SANTOS vs. JARRA
FACTS:
Delos Santos alleged that Jimenea borrowed and obtained from him ten first-class
carabaos. It will be used at the animal-power mill of Jimenea’s hacienda without
recompense or remuneration whatsoever but under the sole condition that they should
be returned to the owner as soon as the work at the mill was terminated. However,
Jimenea did not return the carabaos despite the demands of Delos Santos.
Since Jimenea was already, Delos Santos brought the action against Agustina Jarra, the
administratrix of the estate of Jimenea.
Jarra admitted that Jimenea asked Delos Santos to loan him ten carabaos, but he only
obtained three second-class animals, which were later on sold to Jimenea.
The trial court ordered Agustina Jarra, as administratrix of the estate of Jimenea, to
return to Delos Santos the remaining six-second and third class carabaos, or the value
thereof at the rate of P120 each, or a total of P720 with the costs.
ISSUE: W/N the transaction between Delos Santos and Jimenea was a commodatum.
RULING: YES
The carabaos loaned or given on commodatum to Jimenea were not returned to Delos
Santos, and that it is not true that the carabaos were subsequently sold to Jimenea. Since
the carabaos were not the property of the deceased nor of any of his descendants, it is
the duty of the administratrix of the estate to return them or indemnify the owner for
their value.
The obligation of the bailee or of his successors to return either the thing loaned or its
value is sustained by the Supreme tribunal of Spain. In its decision of March 21, 1895, it
sets out with precision the legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the
ownership of the thing loaned, and at the expiration of the period, or after
the use for which it was loaned has been accomplished, it is the imperative
duty of the bailee to return the thing itself to its owner, or to pay him
damages if through the fault of the bailee the thing should have been lost
or injured, it is clear that where public securities are involved, the trial
court, in deferring to the claim of the bailor that the amount loaned be
returned him by the bailee in bonds of the same class as those which
constituted the contract, thereby properly applies law 9 of title 11 of
partida 5.
When Delos Santos demanded for the return of the carabaos to him, Jimenea or Jarra
had the obligation to do so. However, since the object of the commodatum itself cannot
be returned because only six carabaos were left, Jarra is under obligation to indemnify
the owner thereof by paying him their value.
We have here a commodatum and it is emphasized that the carabaos delivered
here, not being returned, there is an obligation to indemnify the owner by
paying its value. It is imperative in commodatum that the bailee has the duty to
return the thing itself to its owner or to pay damages if through his fault, the
thing has been lost or injured. So the primary obligation of the bailee is
emphasized here.
In relation to the intransmissibility of a contract of commodatum, do not
confuse it with the liability of the estate. The commodatum here was not
extinguished by the mere death of Magdaleno. The liability extends to the
estate. Whatever the heirs of Magdaleno may receive can be used to pay of the
liability of Magdaleno in relation to the damages which he should be held liable
to the bailor Delos Santos.
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SECTION 2. - OBLIGATIONS OF THE BAILEE
Article 1941. The bailee is obliged to pay for the ordinary expenses for the use
and preservation of the thing loaned. (1743a)
With that, Article 1941 also emphasizes another obligation of the bailee which
is to pay for the ordinary expenses for the use and preservation of the thing
loaned.
Why is it that the bailee is liable for the ordinary expenses? Because he acquires
the use of the thing and these ordinary expenses are in relation to the use of
the thing. For example, if the subject matter of the commodatum is the use of
the car. So that would include fuel or magpa-carwash. So these are ordinary
expenses which should be shouldered by the bailee.
Article 1942. The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
(1) If he devotes the thing to any purpose different from that for
which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted;
(3) If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a
member of his household;
(5) If, being able to save either the thing borrowed or his own thing,
he chose to save the latter. (1744a and 1745)
Now please take note of Article 1942. The general rule is that the bailee is not
liable for the loss of the thing. Why? Because owner bears the loss of the thing
through a fortuitous event. Ownership is not transferred to the bailee. Owner
bears the loss. 1942 provides for the exceptions wherein the bailee can be held
liable even if the thing is lost due to a fortuitous event. What are these
instances? Essentially, if you look at 1, 2, 4 and 5, these are due to the bailee’s
improper acts:
(1) If he devotes the thing to any purpose different from that for which it has
been loaned;
This would show bad faith on the part of the bailee.
(2) If he keeps it longer than the period stipulated, or after the accomplishment
of the use for which the commodatum has been constituted;
That would show dealy on the part of the bailee.
(4) If he lends or leases the thing to a third person, who is not a member of his
household;
Because again, a commodatum is purely personal in nature.
(5) If, being able to save either the thing borrowed or his own thing, he chose to
save the latter.
Because this shows gratitude.
(3) If the thing loaned has been delivered with appraisal of its value, unless there
is a stipulation exempting the bailee from responsibility in case of a fortuitous
event;
Number 3, however, shows that the bailee would still be liable even if there is
no bad faith on his part or no improper act on his part. As long as when the
thing was delivered, there was an appraisal as to how much was the value of
the thing. Why? Because having that appraisal, there is an intention that the
borrower shall be held liable unless of course, when there is a stipulation that
would exempt him from the liability in case of a fortuitous event.
What happened in the case of Republic vs. Bagtas?
REPUBLIC OF THE PHILIPPINES vs. BAGTAS
FACTS:
Jose Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal
Industry three bulls for a period of one year for breeding purposes subject to a
government charge of breeding fee of 10% of the book value of the bulls.
Upon the expiration of the term, Bagtas asked for a renewal thereof for another year.
However, the Secretary of Agriculture only approved the renewal for one bull and
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
requested the return of the other two.
Bagtas wrote to the Director of Animal Industry of his desire to purchase the three bulls.
The Director denied the request and reiterated the demand for the return of the bulls or
the payment of their book value.
When Bagtas failed to do so, the Republic filed a case against him praying that Bagtas be
ordered to return the three bulls loaned to him or to pay their book value in the total
sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests.
While the case was pending, Bagtas died and was substituted by her wife as the
administratrix of the estate. The wife alleged that the two bulls were already returned.
Hence, she could no longer be held liable thereof. She further contended that the third
bull was accidentally killed from a gunshot wound inflicted during a Huk raid. According
to her, such death was due to force majeure thereby she is relieved from the duty of
returning the bull or paying its value.
ISSUES:
(1) W/N there was a contract of commodatum.
(2) W/N the death of the third bull was a fortuitous event which would relieve
Bagtas from returning or paying the value of the bull.
RULING: BOTH NO
A contract of commodatum is essentially gratuitous. If the breeding fee will be
considered as a compensation, the contract cannot be considered as a commodatum.
However, the contract would be a lease of the bull. Under Article 1671 of the CC, the
lessee would be subject to the responsibilities of a possessor in bad faith, because she
had continued possession of the bull after the expiry of the contract.
Even assuming that the contract was a commodatum, Bagtas would still be liable based
on Article 1942 paragraph 2 and 3 of the CC.
The original period of the loan was one year which was later on renewed for another
year. However, Bagtas kept and used the bull despite the expiration of the period
granted to him and until it was killed by stray bullets. Furthermore, Bagtas was appraised
of the book value of the bulls and it was not stipulated that in case of loss of the bull due
to fortuitous event, Bagtas would be exempt from liability.
Since Bagtas already returned the two bulls to the Republic, the estate is only liable for
the sum of P859.63, or the value of the bull which has not been returned because it was
killed while in the custody of the administratrix.
First thing that you should to consider here is that there is no contract of
commodatum. Why? Because the contract was not gratuitous in nature. There
was a compensation, the breeding fee. And therefore, you apply the laws of a
contract of lease wherein the lessee would still be liable.
Nevertheless, even if it is considered a commodatum, you apply, 1942. The
bailee would still be liable for the loss of the thing through a fortuitous event, as
alleged by the wife, when one of the bulls was eventually killed. Nevertheless,
Bagtas kept the bulls longer than the period agreed upon and it has been
delivered with the appraisal of its value. Therefore, the estate should be held
liable for the value of the bull that was not returned to the Republic.
Article 1943.
The bailee does not answer for the deterioration of the thing loaned due only
to the use thereof and without his fault. (1746)
Now, Article 1943 refers to deterioration. This refers to the ordinary wear and
tear or depreciation. This must be borne by the bailor. The bailee would only
be held liable if he is at fault or negligent, example if he holds the thing for a
purpose different from that agreed upon by the parties.
AYALA
November 15, 2016
Part 3 of 3
Art. 1944.
The bailee cannot retain the thing loaned on the ground that the bailor owes
him something, even though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in Article 1951. (1747a)
So the Bailee as a general rule has no right to retain or hold on to the thing
loaned or to the subject matter of the commodatum as security for claims he
has against the bailor. Later on would say that extra ordinary expenses that the
bailor would be held liable kung si bailee na nagbayad sa extra-ordinary
expenses and then he would now seek reimbursement from the bailor and the
bailor refuses to reimburse the bailee can the bailee hold on, refuse to return
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the pay on the ground na wala pa siya na reimburse ni bailor? 1944 is clear, he
has no right to retain it. He has the obligation to return it to the bailor but of
course he can still demand for reimbursement as to the expenses that should
be shouldered by the bailor. The only exception is the clause that is provided in
Article 1951.
Now we have here the case of Catholic v Court of Appeals
CATHOLIC VICAR vs. CA
FACTS:
Petitioner Catholic Vicar filed an application for registration of Lots 1, 2, 3 and 4. The
heirs of Juan Valdez and the heirs of Egmidio Octaviano opposed the registration of Lots
2 and 3 respectively, claiming ownership thereof. Subsequently, they filed an action for
recovery of possession of the two lots.
Petitioner Catholic Vicar alleged that they acquired the two lots by purchase. The trial
court granted the registration. However, the CA reversed the decision and ruled that
there was absolutely no documentary evidence to support the allege purchase of the
property.
The CA further ruled that the that the predecessors of the heirs of Valdez and heirs of
Octaviano were possessors of Lots 2 and 3, with claim of ownership in good faith from
1906 to 1951. Moreover, the Catholic Vicar was in possession as borrower in
commodatum up to 1951, when it repudiated the trust by declaring the properties in its
name for taxation purposes. When it applied for registration of Lots 2 and 3 in 1962, it
had been in possession in concept of owner only for 11 years. Ordinary acquisitive
prescription requires possession for 10 years, but always with just title. Extraordinary
acquisitive prescription requires 30 years.
ISSUES:
(1) W/N the Catholic Vicar held Lots 2 and 3 in commodatum.
(2) W/N the Catholic Vicar successfully repudiated the ownership of the two
lots.
RULING: YES and NO
First issue
The heirs of Valdez and Octaviano were able to prove that their predecessors' house was
merely borrowed by Catholic Vicar after the church and the convent were destroyed.
They never asked for the return of the house, but when they allowed its free use, they
became bailors in commodatum and the Catholic Vicar as the bailee.
Second issue
The bailee's failure to return the subject matter of commodatum to the bailor did not
mean adverse possession on the part of the borrower. The bailee held in trust the
property subject matter of commodatum. The adverse claim of petitioner came only in
1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by
such adverse claim could not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.
The Catholic Vicar is in bad faith. By its the very admission, Lots 2 and 3 were owned by
Valdez and Octaviano since 1906. When petitioner Vicar was notified of the oppositor's
claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were
surveyed by request of petitioner Vicar only in 1962 which is a clear sign of bad faith.
Hence, they must acquire ownership thereof for a period of at least 30 years.
Hence, the predecessors-in-interest and PR heirs were possessors under claim of
ownership in good faith from 1906 while that of petitioner Vicar was only a bailee in
commodatum; and that the adverse claim and repudiation of trust came only in 1951.
So it repudiated its title as a bailee of a property it now alleged ownership over
the property so it is only from 1951 from adverse possession from acquisitive
prescription began to ran. Because before 1951 Catholic was only allowed the
Free Use of the property. They are only considered as a bailee in a contract of
commodatum. Their failure to return the subject matter did not mean adverse
possession on their part and adverse possession only began in 1951 when it
repudiated the trust and declared the properties in its name.
You do not become an owner of a property even how long you possess it in the
concept of a bailee.
Art. 1945.
When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily. (1748a)
Now why do we have this provision? It’s to safeguard effectively the rights of
the lender.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Because remember you take into account the personal integrity and
responsibility of all the bailees and not just one. Its impossible na hindi ipahiram
sa iyo kung wala yung isang bailee. Now that’s why the liabilities or obligations
of the bailees would be solidary in nature. Now take note this is an exception to
the general rule wherein the presumption is that debtors are presumed to be
jointly liable. The exceptions for joint obligation is when expressly stipulated
and when provided by law. Here it is very clear that article 1945 provides for
the solidary liability for 2 or more bailees.
So in these provisions what are the obligations of bailees?
(1) The bailee is liable for ordinary expenses the borrower should defray
the expenses for the use and preservation of the thing loaned for
after all, he acquires the use of the same and he is supposed to
return the identical thing
(2) The borrower must take good care of the thing with the diligence of
a good father of a family (due diligence)
(3) Generally, the borrower would not be liable for the loss of a thing
due to a fortuitous event but he would be liable in case of the
following circumstances:
(a) If he devotes the thing to any purpose different from that
for which it has been loaned;
(b) If he keeps it longer than the period stipulated, or after
the accomplishment of the use for which
the commodatum has been constituted;
(c) If the thing loaned has been delivered with appraisal
of its value, unless there is a stipulation exemption the
bailee from responsibility in case of a fortuitous event;
(d) If he lends or leases the thing to a third person, who is
not a member of his household;
(e) If, being able to save either the thing borrowed or his
own thing, he chose to save the latter.
(JPSP: should be considered as an exemption. This is
actually based on ingratitude. Nonetheless, this provision
tends to control one’s instinct for self preservation)
(4) The bailee is not liable for the deterioration of the thing loaned due
only to the use thereof and without his fault
(5) He cannot retain the thing loaned on the ground that the bailor
owes him something, even though it may be for the
reason of expenses. He can have the right to retain though for
damages as mentioned in Article 1951—“The bailor who, knowing
the flaws of the thing loaned, does not
advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof”.
(6) When there are two or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily to the bailor
(a) To safeguard effectively the rights of the lender b. Law
presumes that the bailor takes into account the personal
integrity and responsibility of all the bailees and that,
therefore, he would not have constituted the
commodatum is there were only one liable
The only obligation of a bailor is a consequence of the nature of the
commodatum when in fact some of these emphasize not only obligation but
rather rights.
SECTION 3. OBLIGATIONS OF THE BAILOR
Art. 1946.
The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of the use
for which the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he may demand its
return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is
suspended while the thing is in the possession of the bailor. (1749a)
So the primary Obligation of the bailor due to the nature of the commodatum is
to allow the bailee to use the thing loaned for the duration of the period
stipulated or accomplishment of its purpose. What is clear here is that the use is
only for a certain period or for a certain time. When can the bailor demand for
the return, temporary use of the thing, for urgent need such as a sick family
member pinaghiram ng sasakyan? Sa kanyang kapitbahay ngayong kailangan
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niya kasi he will have to bring a family member to the hospital. Now that would
fall under urgent need.
Now what is the effect if the use by the bailor as in the instance is only
temporary in nature? The effect is that the commodatum is suspended, while
the thing is in the possession of the bailor and then it would be lifted once he
returns it back to the bailee wherein tapos na yung urgent need niya.
With regard to commodatum take note that there are 2 kinds of commodatum,
we have the ordinary commodatum and we have precarium. What is a
precarium?
Art. 1947. The bailor may demand the thing at will, and the contractual
relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the
thing loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner. (1750a)
QUINTOS vs. BECK
FACTS:
Beck occupied the house of Quintos as tenant. Upon the novation of the contract of
lease, Quintos gratuitously granted Beck the use of the furniture subject to the condition
that Beck would return them to Quintos upon her demand.
Later on, Quintos sold the house and demanded from Beck the return of the furniture.
However, Beck wrote a letter to Quintos saying that he could not give up the three gas
heaters and the four electric lamps because he would still use them until the expiration
of contract of lease.
Later on, before vacating the house, Beck deposited with the Sheriff all the furniture
belonging to Quintos. The furniture was then placed in a warehouse in the custody of the
sheriff.
The trial court ruled that Quintos failed to comply with her obligation to get the furniture
when they were offered to her. Hence, she must bear the consequence and the expenses
thereof.
ISSUES:
(1) W/N the contract between the parties was a commodatum.
(2) W/N Beck complied with his obligation to return the furniture to Quintos.
RULING: YES and NO
First issue
The contract entered into between the parties is one of commodatum. Under the
contract, Quintos gratuitously granted the use of the furniture to Beck, reserving for
herself the ownership thereof, while Beck bound himself to return the furniture to
Quintos upon demand.
Second issue
The obligation voluntarily assumed by Beck to return the furniture upon the Quintos’s
demand means that he should return all of them to Quintos at the her residence or
house. Beck did not comply with this obligation when he merely placed them at the
disposal of Quintos, retaining for his benefit the three gas heaters and the four eletric
lamps.
Since Beck had voluntarily undertaken to return all the furniture to Quintos, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned
by the deposit of the furniture at Beck’s behest. Beck, as bailee, was not entitled to place
the furniture on deposit; nor was Quintos under a duty to accept the offer to return the
furniture, because Beck wanted to retain the three gas heaters and the four electric
lamps.
As to the value of the furniture, we do not believe that Quintos is entitled to the payment
thereof by Beck in case of his inability to return some of the furniture because under
paragraph 6 of the stipulation of facts, Beck has neither agreed to nor admitted the
correctness of the said value. Should Beck fail to deliver some of the furniture, the value
thereof should be later determined by the trial court through the evidence which the
parties may desire to present.
The costs in both instances should be borne by Beck because Quintos is the prevailing
party. Beck was the one who breached the contract of commodatum, and without any
reason he refused to return and deliver all the furniture upon Quintos’s demand. In these
circumstances, it is just and equitable that he pay the legal expenses and other judicial
costs which Quintos would not have otherwise defrayed.
There is a precarium where the bailor may demand the thing at will, the
contract by which 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. So the bailor may
demand the return in time.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
If there is no duration of the contract or no purpose to which it is devoted or
when the use is merely tolerated by the bailor we have a precarium. In the case
of Quintos v Beck there was a gratuitous grant of the furnature to the
defendant so that would be commodatum but specifically it is a precarium
because the furniture would be returned only upon the demand of the bailor
now the refusal to return everything would be violation of the obligation of the
bailee.
What would be the effect? Even if he were ready to return the furniture other
than the gas lamps, the refusal of quintos to accept the delivery of the furniture
subsequently deposited to the sheriff was valid because the agreement was to
return everything. Applying the general rules on Obligations and Contracts you
cannot compel the creditor to accept partial delivery. With that you will be
liable for the expenses incurred of the deposit of the furniture. It will not be the
bailor. The bailee is liable when demanded by the bailor.
In Ordinary commodatum the possession of the bailee is secured, he has the
right to retain the thing loaned until the expiration of the period agreed
between them or upon the accomplishment of the use for which the
commodatum has been constituted,
Do take note however in 1947 (2) merely tolerated by the owner, be careful of
that word owner because again we have emphasized it is not required that the
bailor be the owner of the thing. The bailor has suppository interest over the
property.
Art. 1948.
The bailor may demand the immediate return of the thing if the bailee
commits any act of ingratitude specified in Article 765. (n)
There is similarity between commodatum and donation, we are gratuitous in
nature to which we can apply 765 in relation to acts of ingratitude. Because in
the case of commodatum similar to that of donation the bailee is still unworthy
of the trust imposed upon him by the bailor.
Art. 765. The donation may also be revoked at the instance of the donor, by
reason of ingratitude in the following cases:
1. If the donee should commit some offense against the person, the
honor or the property of the donor, or of his wife or children under
his parental authority;
2. If the donee imputes to the donor any criminal offense, or any act
involving moral turpitude, even though he should prove it, unless the
crime or the act has been committed against the donee himself, his
wife or children under his authority;
3. If he unduly refuses him support when the donee is legally or morally
bound to give support to the donor. (648a)
Art. 1949.
The bailor shall refund the extraordinary expenses during the contract for the
preservation of the thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except when they are so
urgent that the reply to the notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of the
thing by the bailee, even though he acted without fault, they shall be borne
equally by both the bailor and the bailee, unless there is a stipulation to the
contrary. (1751a)
So we are already clear that when it comes to ordinary expenses it is the bailee
who should shoulder it. 1949 covers extraordinary expenses. There are 2 kinds.
If it refers to extraordinary expenses for the preservation of the thing loaned
like for example the roof of a house subject of commodatum that was damaged
by a typhoon. Who will bear the expenses? It will be the bailor as it will be the
bailor who will profit from the said expenses. If the bailee who has incurred
these extraordinary expenses the bailor must refund the bailee provided that
the bailee inform the bailor before incurring them. It is possible that the bailor
did not want to have it repaired baka masabi niya “its not worth it anymore
(hugot)” however as an exception to the notice, notice to the bailor is not
required if it is urgent in nature. Again extraordinary expenses for preservation
borne against the bailor.
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There are also extraordinary expenses which arise from ordinary use of the
thing for example sasakyan, nabangga who will bear the loss? 50-50 Equally by
both the bailor and bailee unless there is a stipulation to the contraty. Take
note of these extraordinary expenses.
For other types of expenses you have article 1950.
Art. 1950.
If, for the purpose of making use of the thing, the bailee incurs expenses
other than those referred to in Articles 1941 and 1949, he is not entitled to
reimbursement. (n)
Example mga ostentatious expenses like in a car, the tires or for example a
spare tire. Di man yan mahulog sa ordinary or extraordinary expenses so it will
be shouldered by the bailee. He is not entitled to reimbursement.
We mentioned in 1944 that an exception to the right to retain is article 1951.
Art. 1951.
The bailor who, knowing the flaws of the thing loaned, does not advise the
bailee of the same, shall be liable to the latter for the damages which he may
suffer by reason thereof. (1752)
This is the instance, the only instance wherein the bailee may hold the thing or
subject of commodatum. What are the requisites of 1951.
(1) There is a flaw or defect;
(2) It is hidden or latent;
(3) The bailor must be aware of such defect,
(4) Despite such knowledge the bailor does not advice the bailee of the
said flaw or defect; and
(5) Because of that defect the bailee suffers damages.
If all of these are present the bailee has the right to hold on and retain the thing
until damages are paid. Because here the bailor is in bad faith. The right given
here is only to retain the thing but not to sell the thing to recover expenses for
the damages.
For example the brake is not working, or may defect sa engine. The bailee
would suffer damages, apply 1951.
However if the bailee could have known of the defect after inspection the bailor
cannot be held liable and article 1951 cannot be applied.
If the bailor is not aware of the hidden defect he will not also be liable and there
is no right to retain the thing.
Art. 1952.
The bailor cannot exempt himself from the payment of expenses or damages
by abandoning the thing to the bailee. (n)
Whats the reason behind this provision? The expenses or damages may exceed
the value of the thing loaned, and it would be unfair if the bailor would just
choose “Sige dili na nako bayaran imoha na na” because it would turn out in the
absence of 1952 the bailor would just abandon the thing instead of paying
kawawa naman yung bailee. He cannot abandon the thing to exempt himself for
the damages for example the extraordinary expenses in 1949 or the damages
that would arise from the incidents mentioned in article 1951.
(1) The primary obligation of the bailor is to allow the bailee the use of
the thing loaned for the duration of the period stipulated or until the
accomplishment of the purpose for which the commodatum was
constituted
(a) However, the lender may demand its return or temporary
use if he has the urgent need of the thing or if the
borrower commits an act of ingratitude
(2) PRECARIUM: a kind of commodatum where the bailor may demand
the thing at will. In this kind of commodatum, the lender may
demand at will the return of thing under the following
circumstances:
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
(a) If neither the duration of the contract nor the use to
which the thing loaned should be devoted, has been
stipulated; or
(b) If the use of the thing is merely tolerated by the owner.
(c) the law recognizes the urgency as well as it is gratuitous.
(d) Take note that in precarium, there is no stipulated period
or the use is merely tolerated
(3) He may demand the immediate return of the thing if the bailee
commits any act of ingratitude
(a) If the bailee should commit some offenses against the
person, honor or the property of the bailor, or of his
wife, and children under his parental authority
(b) If the bailee imputes to the bailor any criminal offense or
any act involving moral turpitude, even though he should
prove it, unless the crime or act has been committed
against himself, his wife and children under his authority
(c) If the bailee unduly refuses the bailor support when the
bailee is legally or morally bound to give support
(4) He has the obligation to refund extraordinary expenses for the
preservation of the thing loaned—it is him who profits from the said
expenses anyway.
(a) As a rule, notice is required because it is possible that the
bailor may not want to incur the extraordinary
expenses at all
(b) An exception of course is where there is urgency that the
reply to the notification cannot be awaited without
danger
(c) you have to determine if its ordinary or extraordinary
(d) why would you advance for the extraordinary
expenses when you can return the thing and make the
lender pay for the expenses?
(5) Regarding, extraordinary expenses arising from the actual use of the
thing, the division of liability between the bailor and bailee is 50-50.
This is the default rule but the parties may stipulate for a different
apportionment.
(6) For expenses other than ordinary expenses and expenses for the
preservation and use of the thing, the bailor is not liable for the
same.
(7) He is liable to the bailee for damages in case he has knowledge of
flaws of the thing loaned, and he didn't advise the bailee of the
same
(a) There is flaw or defect in the thing loaned
(b) The flaw or defect is hidden
(c) The bailor is aware thereof
(d) He doesn't advise the bailee of the same
(e) The bailee suffers damages by reason of the said flaw or
defect
(8) He cannot excuse himself from liability for any expense or damages
by abandoning the thing to the bailee
III. Mutuum and Usury Law
Q: What is a Mutuum?
A: Mutuum is a contract where one party delivers to another money or other
consumable thing with the understanding that the same amount will be paid to
the creditor.
Q: In the case of Yong Chan we have a Commodatum or a Mutuuum?
A: Mutuum ma’am.
Q: What happened in this case?
YONG CHAN KIM vs. PEOPLE
FACTS:
Petitioner Yong Chan Kim was employed as a researcher at the SEAFDEC, which requires
him to travel to various selected provinces in the country. Yong Chan was issued a first
Page | 8

travel order where he received P6,438.00 as cash advance to defray his travel expenses.
Another travel order was issued to him where he received another cash advance of
P495.00.
The dispute arose when Yong Chan allegedly failed to return P1,230.00 out of the cash
advance which he received under the first travel order. Yong Chan argued that he has no
obligation to return the excess of the cash advanced to him for the same was intended as
loan.
Nevertheless, for the alleged failure of Yong Chan to return the amount, he was charged
with the crime of estafa under Article 315, paragraph 1(b) of the RPC. In order to be
convicted of the crime, it must be proven that Yong Chan had the obligation to deliver or
return the same money, good or personal property that he had received from respondent
SEAFDEC.
ISSUES:
(1) W/N Yong Chan is under obligation to return the cash advance he had
received from SEAFDEC. NO
(2) W/N there was transfer of ownership of the cash advance to Yong Chan. YES
(3) W/N Yong Chan could be held liable for estafa. NO
RULING:
First issue
Yong Chan merely has the obligation to liquidate his expenses but not to return the cash
advanced to him by SEAFDEC.
Liquidation simply means the settling of an indebtedness. An employee who liquidates a
cash advance is in fact paying back his debt in the form of a loan of money advanced to
him by his employer, as per diems and allowances.
If the amount of the cash advance he received is less than the amount he spent for actual
travel, he has the right to demand reimbursement from his employer the amount he
spent coming from his personal funds. In other words, the money advanced by either
party is actually a loan to the other. Hence, Yong Chan was under no legal obligation to
return the same cash or money, i.e., the bills or coins, which he received from SEAFDEC.
Second issue
The ownership of the money was transferred to Yong Chan. Based on the cross
examination of the witness, it was found that the transfer of ownership was subject to a
suspensive condition that Yong Chan liquidates the amount of cash advance upon return
to station and completion of the travel.
Third issue
Since ownership of the money (cash advance) was transferred to Yong Chan, no fiduciary
relationship was created. Absent this fiduciary relationship between Yong Chan and
SEAFDEC, which is an essential element of the crime of estafa by misappropriation or
conversion, Yong Chan could not have committed estafa.
Q: What do you mean by liquidation here?
A: Liquidation means the settling of an indebtedness. An employee, such as
herein petitioner, liquidates a cash advance is in fact paying back his debt in the
form of a loan of money advanced to him by his employer.
Q: What would be the nature of a contract, whether it is a commodatum or
mutuum, that is relevant in determining the liability for estafa?
A: It is relevant maam because if it is a contract of mutuum, then the ownership
was already transferred to Kim.
Q: In this case, is Kim liable for estafa?
A: No ma’am.
Q: Why not?
A: Because it is a contract of mutuum, the ownership is transferred to Kim.
Q: So? What if it is transferred? What is its relation to the case of estafa?
A: There is no fiduciary relationship ma’am.
Q: What is the nature of the criminal liability?
A: ahhm
Q: Essentially what happens in estafa? Why is it in a contract of mutuum, the
borrower cannot be held liable for estafa as in this case?
A: In this case maam, fiduciary relationship is an essential element of estafa,
where there is a misappropriation or conversion with that Kim cannot be held
liable for estafa.
Ma’am: Alright. Thank you. So here, again recall your Criminal law. What
happens in estafa? In this case, estafa is by means of misappropriation or
conversion wherein a sum of money or property is entrusted to the person
liable for estafa. In this case, it was determined that there can be no liability for
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
estafa because the liability of the petitioner arose from a contract of mutuum.
Again, take note of the features of a mutuum. One of which is that there is no
obligation to return the exact same thing but only the value thereof. Moreover
and more importantly, in mutuum there is a transfer of ownership. Being the
owner thereof he can do whatever he want with the money. His obligation is
only to liquidate and report. Kung kulang, what would be the effect? Kung
kulang ang binnigay sa kanya nap era, he could seek reimbursement. Kung
sobra naman his obligation would be to return the excess not in the form of
commudatum but base on his obligation to repay as that of the contract of
mutuum. The liquidation or the obligation of the petitioner here to liquidate is
simply means settling of the indebtedness. An employee, such as herein
petitioner, who liquidates a cash advance is in fact paying back his debt in the
form of a loan of money advanced to him by his employer. So if the amount of
the cash advance he received is less than what he has travelled, he has the right
to demand for reimbursement from his employer to which the amount advance
is actually a loan. Therefore there has no obligation to return the exact same
cash which he received from his employer. So with that, there was transfer of
ownership and there was no fiduciary relationship transferred to the petitioner
by virtue of the cash advances, he cannot be held liable for the crime of estafa
by misappropriation or conversion. So again take note of that feature of loan.
CHAPTER 2. SIMPLE LOAN OR MUTUUM
Art. 1953.
A person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality. (1753a)
So, again when we talk of simple loan or mutuum, it is a contract whereby one
of the parties delivers to another money or other consumable thing with the
understanding that the same amount of the same kind or quality shall be paid.
So again, ang nasa Art. 1953 is “to pay” hindi “to return”. It involves the return
of the equivalent only and not the identical thing because again ownership has
already been transferred to the borrower to which he can dispose of the thing
borrowed and his act will not be considered misappropriation as to constitute
estafa.
So with that, we should also take into consideration what are the characteristics
of a simple loan or mutuum. Similar to commodatum, it is unilateral, it is also
nominate. It is also a principal contract as it can stand on its own. It is informal
because it does not require a particular form for its perfection. However, unlike
commodatum which is essentially gratuitous, in mutuum it may be gratuitous or
onerous. But of course we all know both of them are real contracts perfected by
delivery. So we have the case of BPI.
BPI INVESTMENT CORPORATION vs. CA
FACTS:
Frank Roa obtained a loan from AIDC, the predecessor of petitioner BPIIC, for the
construction of a house. The house and lot were mortgaged to AIDC to secure the loan.
Later on, Roa sold the house and lot to ALS and Antonio Litonjua causing them to assume
the loan obligations of Roa.
In March 1981, ALS and Litonjua executed a mortgage deed payment of the monthly
amortization shall commence on May 1, 1981. On August 13, 1982, ALS and Litonjua
updated Roa’s arrearages by paying BPIIC which reduced Roa’s principal balance of loan
and which in turn was liquidated by BPIIC.
On September 13, 1982, BPIIC released to ALS and Litonjua P7,146.87, purporting to be
what was left of their loan after full payment of Roa’s loan.
However, BPIIC instituted foreclosure proceedings against ALS and Litonjua on the
ground that they failed to pay the mortgage indebtedness from May 1, 1981 to June 30,
1984.
ALS and Litonjua argued that they were not in arrears in their payment, but in fact made
an overpayment as of June 30, 1984. They maintained that they should not be made to
pay amortization before the actual release of the P500k loan in August and September
1982.
The CA ruled that a simple loan existed between the parties which was perfected only
upon the delivery of the object of the contract which was on September 13, 1982.
Evidence further showed that there was overpayment on the part of ALS and Litonjua.
Hence, there was no basis for BPIIC to extra-judicially foreclose the mortgage by reason
of the ALS and Litonjua’s alleged delinquency in payment of their loan.
BPIIC appealed the decision arguing that a contract of loan is a consensual contract, and a
loan contract is perfected at the time the contract of mortgage is executed on March 31,
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1981. Hence, the amortization and interests on the loan should be computed from said already a consensual contract to enter into a contract of loan. Remember we
date. already discussed Article 1934. So what happened in 1981 was merely a
consensual contract but the contract of loan was only perfected on September
ISSUES:
13, 1982.
(1) W/N a simple loan is a consensual contract which is perfected by mere
consent. NO
(2) W/N there was delay on the part of ALS and Litonjua. NO Remember that a contract of loan is different from contract of rent/lease. As we
have mentioned in loan, it signifies the delivery of money or some consumable
RULING: thing to another with the promise to repay at equivalent amount of the same
First issue kind or quality. On the other hand, rent signifies delivery to another some non-
A loan contract is not a consensual contract but a real contract. It is perfected only upon comsumable thing so that the latter (renter) may use it at a certain period and
the delivery of the object of the contract.
return it to the landlord/lessor for a consideration. In contract of loan we have
In this case, the contract of loan between BPIIC and ALS and Litonjua was perfected only the Creditor-Debtor. In Rent we have Landlord-Tenant. In Loan the creditor
on September 13, 1982, the date when BPIIC released the purported balance of the receives payment. In Rent the owner receives compensation or price.
P500k loan after deducting therefrom the value of Roa’s indebtedness. Following the
intentions of the parties, the payment of the monthly amortization should commence Now, another thing that we need to consider is to distinguish loan from a trust
only on October 13, 1982, a month after the perfection of the contract, despite their receipt. If you take a look at the course outline, we will discuss later the trust
express agreement that payment shall commence on May 1, 1981. receipt law. And do remember that a trust receipt is a written or printed
document signed by the entrustee in favor of the entruster containing terms
Second issue
A contract of loan involves a reciprocal obligation, wherein the obligation or promise of and conditions substantially complying the provisions of the trust receipt law
each party is the consideration for that of the other. essentially possession of goods covered by those indicated by trust receipt law.
It is different from a contract of loan because later on if you take a look at the
In this case, the consideration for BPIIC in entering into the loan contract is the promise trust receipt law it does not say ___(17:55) of the loan but rather the trust
of ALS and Litonjua to pay the monthly amortization. For the latter, it is the promise of receipts law punishes the dishonesty and abuse of confidence in the handling of
BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if the the money or goods subject of the trust receipt. So again when we go to the
other does not comply or is not ready to comply in a proper manner with what is
trust receipt law, we will see more of the distinctions between loan and
incumbent upon him. Only when a party has performed his part of the contract can he
demand that the other party also fulfills his own obligation and if the latter fails, default issuance of the trust receipt. Do not confuse one from the other.
sets in.
Now, also notice in Article 1953, it refers to the subject matter money or any
Therefore, ALS and Litonjua did not incur in delay when they did not commence paying other fungible things. When we talk about fungible things, these are things
the monthly amortization on May 1, 1981, as it was only on September 13, 1982 when which usually dealt with number, weight or measure. Such as those refer to oil,
BPIIC fully complied with its obligation under the loan contract. Therefore, in computing rice or gas. So that any given unit or portion is rated as the equivalent of any
the amount due as of the date when BPIIC extra-judicially caused the foreclosure of the
other unit or portion or to those which belong to the same genus, which
mortgage, the starting date is October 13, 1982 and not May 1, 1981.
includes several species of the same kind.
Q: why is it necessary to determine when the contract of loan is perfected?
Now, under the New Civil Code, the terms fungible and cosumable goods are
A: it is necessary maam for the foreclosure by the bank to be justified.
used interchangeably to which fungible things refer also same to definition ng
consumable thing those cannot be used without being consumed.
Q: When was it perfected?
A: September 13, 1982
With regard to extinguishment of the contract of loan we apply what we
already learned, the different modes of extinguishment of obligations under
Q: Why not in 1981?
obligations and contracts. We have payment or performance, condonation,
A: Because the actual release of the loan maam was on 1982.
confusion, compensation and novation. But you can’t apply the loss of the thing
Q: So, there was no perfected contract yet on 1981?
due, why? Because the obligation here in loan refers to the generic thing and as
A: Yes maam.
we know, genus never perishes.
Q: Are you sure? Was there a perfected contract on 1981? What kind of
Do also familiarize yourselves with common loan terminologies. When we say
contract?
Principal it refers to the amount of the loan. Maturity Date is the date on which
A: Consensual contract only maam
the amounts due under the loan agreement must be fully paid. Bullet payment
or Balloon payment when the principal is due and payable on the maturity date.
So, Consensual Contract only, to enter into a contract of loan but the loan itself
The most common type are those loans subject to amortization which the
is not perfected until the money is released to respondents on September 1982.
portions of the principal are payable over the life of the loan. Fixed interest rate
is the interest rate that does not change during the term of the loan. Floating
Take note, Simple Loan or Mutuum is a real contract, perfected upon delivery of
interest rate is the interest rate that changes based on the market rates.
the object of the contract. So even if the parties had already executed the loan
Interest payment dates are the dates on which interest is due and payable.
contract on March 1, 1981, there was no obligation on the part of respondents
Covenant refers to the obligation of the borrower to do or not to do something.
to pay any amortization or interest beginning 1981 because the money was not
It is also important to know whether you will be allowed to prepay your loan,
yet released. It was only on September 13, 1982 that the full loan was released
pay the amortizations of the loan in advance, there will be a voluntary
to them. So it is only from that time that his obligation to pay amortization or
prepayment clause wherein you will be allowed to prepay the loan probably on
interest should begin to run. Actually he was obligated to pay the loan a month
specified date or there will be instances that you will be allowed to pay in
after that as per their agreement.
advance but you have to pay fees and charges. Why would there be such an
agreement with regard to loans or mutuum? Because remember the creditor
A perfected loan agreement imposes reciprocal obligations, where the
would earn income through interest and if you pay earlier than what was
obligation or promise of each party is the consideration of the other party. In
agreed upon so that would change, they will take that into consideration. So to
this case, the consideration for BPIIC in entering into the loan contract is the
be fair to the creditor, it is possible that if you decide to pay in advance, you will
promise of private respondents to pay the monthly amortization. For the latter,
also pay fees and charges. We also have this mandatory prepayment clause it is
it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither
a stipulation that gives the lender the right to require prepayment of the loan
party incurs in delay if the other does not comply or is not ready to comply in a
upon occurrence of certain events. Breakage costs refers to costs incurred by
proper manner with what is incumbent upon him. Therefore, private
the lender as a result of the borrower’s failure to pre-pay under the conditions
respondents conclude, they did not incur in delay when they did not commence
agreed upon. Prepayment premium refers to the fee collected by the lender
paying the monthly amortization on May 1, 1981, as it was only on September
from the borrower for prepaying the loan. Cure period or grace period is the
13, 1982 when petitioner fully complied with its obligation under the loan
period of time given to the borrower to remedy a default under the loan
contract. A loan contract is not a consensual contract but a real contract. It is
agreement. Default refers to the breach by the borrower of the loan
perfected only upon the delivery of the object of the contract. But in March
agreement. And then acceleration clause gives the lender the right to declare
1981while it is true that there was no perfected contract of loan there was

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the loan immediately due and payable upon the occurrence of an event of
default.
Art. 1954.
A contract whereby one person transfers the ownership of non-fungible
things to another with the obligation on the part of the latter to give things of
the same kind, quantity, and quality shall be considered a barter. (n)
Barter is defined in Article 1638. By the contract of barter or exchange, one of
the parties binds himself to give one thing in consideration of the other’s
promise to give another thing.
Be able to distinguish barter from mutuum. In mutuum the subject matter is
money or any fungible thing. While in barter it is non-fungible thing.
In commodatum, the bailee is bound to return the identical thing borrowed
when the time has expired or the purpose has been served.in mutuum as we
have discussed to return the equivalent thereof of same kind or quality. In
barter the equivalent thing is given in return for what has been received.
Lastly, with regard to consideration, in mutuum it may be gratuitous. In
commodatum it is always gratuitous. While in barter, is always onerous contract
similar to a contract of sale.
Art. 1955.
The obligation of a person who borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes
another thing of the same kind, quantity and quality, even if it should change
in value. In case it is impossible to deliver the same kind, its value at the time
of the perfection of the loan shall be paid. (1754a)
Article 1249.
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance.
Article 1250.
In case an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the
time of the establishment of the obligation shall be the basis
of payment, unless there is an agreement to the contrary.
So here, if it is a loan of money we apply Articles 1249 and 1250. Recall the
Article 1249 of the civil code, it is in relation to payment diba? payment or
performance, payment must be in the currency stipulated, in the absence of a
specific currency, it must be that of the legal tender of the Philippines. What is
the legal tender in the Philippines? If I owe you 1M can I pay you 20 peso bills?
When it comes to bills or notes there is no limitation. But what about coins? If I
owe you 1,000.00? can I compel you to accept my 1.00 coins amounting to
1,000.00? Yes. What if I owe you 5,000.00 can I compel you to accept my 1.00
coins amounting to 5,000.00? NO. Why not? Because again what is considered
legal tender in the Philippines? There’s a circular 2006 issued by the Monetary
Board. When it comes to coins (1.00, 5.00 and 10.00) it is up to 1,000.00 only.
When it comes to centavos (.25, .10 and .05) up to 100.00 only. So that’s what
we refer to as legal tender. That would also mean that in the payment of the
loan, you cannot force your creditor to accept your check, even if it is manager’s
check, because that document is not a legal tender. What is the effect if the
creditor accepts your check as your payment, would that extinguish your
obligation? Not yet unless napa encash na or was impaired through the fault of
the creditor. When we talk about loan of money we also take into consideration
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Article 1250 in relation to extraordinary inflation or deflation. The following
requisites must be proven:
(1) There was an official declaration of extraordinary inflation or
deflation from BSP
(2) The obligation was contractual in nature
(3) The parties expressly agreed to consider the effects of the
extraordinary inflation or deflation.
In the absence of express declaration we cannot apply Article 1250.
If what was loaned is a fungible thing pay the lender thing of the same kind,
quantity and quality. What if it is impossible to do so? Pay its value at the time
of perfection of the loan.
Art. 1956.
No interest shall be due unless it has been expressly stipulated in writing.
(1755a)
The article is very short but the rest of the cases we have under mutuum falls
under that article revolving around interest. So very INTERESTING!
First thing you should take note is that the requirement here to impose interest
must be expressly stipulated in writing. Take note also that this article is only
applicable in simple loan or mutuum. We cannot apply it to interests arising
from damages because we have a separate provision governing torts or
damages.
Interest may be paid either as compensation for the use of money (monetary
interest) referred to in Article 1956 or imposed by law or by courts as penalty or
indemnity for damages (compensatory interest) under Articles 2209 and 2212
for breach of contractual obligations.
What are the kinds of interest:
(1) Simple interest – that which is paid for the principal at a certain rate
fixed or stipulated by the parties.
(2) Compound interest – that which is imposed upon interest due and
unpaid. The accrued interest is added to the principal sum and the
whole (principal and accrued interest) is treated as new principal
upon which the interest for the next period is calculated. GENERAL
RULE : compound interest cannot be collected unless agreed upon
by the parties.
(3) Legal interest- that which the law directs to be charged in the
absence of any agreement as to the rate between the parties.
(4) Lawful Interest - Interest, which the law allows or does not prohibit;
that which is the maximum interest allowed by law.
(5) Unlawful Interest or Usurious – Interest rate stipulated that is
beyond the maximum rate allowed by law.
CAUBANG
November 22, 2016
Part 1 of 2
We stopped in Article 1956.
Article 1956 - No interest shall be due unless it has been expressly stipulated
in writing.
As I have emphasized before, this requirement, that the interest must be
expressly stipulated in writing is required only in relation to contracts of loan.
You relate this to the provisions under the chapter of Loan in the Civil Code.
So with that, we have to make a distinction between a monetary interest, which
is what is referred to in Article 1956. So its interest paid as compensation for
the use of money. And to distinguish it from compensatory interest, which will
be discussed under Torts and Damages, as penalty or indemnity.
Last meeting we have also mentioned the kinds of interest.
(1) Simple interest - paid for the principal as stipulated by the parties
(2) Compound interest - an interest imposed upon interest due and
unpaid
(3) Accrued interest - interest which is already earned but not yet
received, added to the principal. So the principal plus the accrued
interest shall be treated as the new principal from which the new
interest shall be calculated.
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Take note in the later provisions, compound interest can only be
imposed upon agreement of both parties
(4) Legal interest - it's in the case of Eastern Shipping. The Ruling in
Eastern Shipping serves as a guideline in the imposition of what is
deemed as legal interest.
EASTERN SHIPPING LINES vs. CA
FACTS:
A vessel owned by petitioner Eastern Shipping Lines delivered for shipment two fiber
drums of riboflavin from Japan. The shipment was insured by Mercantile Insurance
Company.
Later on, the shipment was discharged unto arrastre operator’s custody Metro Port
Service, Inc. which observed that one drum was in bad order. When Allied Brokerage
withdrew the shipment from Metro Port, one drum was found opened without seal but
the contents thereof was intact. Finally, when the drums reached the consignee, one drum
was found with adulterated/faked contents.
MIC contended that due to the losses/damage sustained by the drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of Eastern Shipping,
Metro Port and Allied Brokerage. As a consequence, MIC was compelled to pay the
consignee so that it became subrogated to all the rights of action of the consignee against
them.
Eastern Shipping, Metro Port and Allied Brokerage denied liability.
The lower court ruled Eastern Shipping (carrier), Metro Port (arrastre operator), and Allied
(broker) solidarily liable and ordered them to pay MIC for the losses it suffered with the
present legal interest of 12% per annum from the date of filing of this complaints.
Eastern appealed the decision arguing that they should be held liable of the interest only
from the date of the decision of the trial court and only at the rate of 6 percent per annum
because MIC’s claim is indisputably unliquidated.
ISSUE:
(1) W/N Eastern, Metro Port and Allied are solidarily liable. YES
(2) W/N Eastern, Metro Port and Allied may be held to pay the 12% interest per
annum from the date of filing of this complaints. NO
RULING:
First issue
The losses/damages were sustained while in the respective and/or successive custody and
possession of Eastern, Metro Port and Allied Brokerage and therefore they are liable to
MIC as subrogee for the amount it paid to the consignee.
Second issue
In the "first group of cases", the basic issue focuses on the application of either the 6%
(under the Civil Code) or 12% (under the Central Bank Circular) interest per annum.
In these cases, there has been a consistent holding that the Central Bank Circular imposing
the 12% interest per annum applies only to loans or forbearance of money, goods or
credits, as well as to judgments involving such loan or forbearance of money, goods or
credits.
On the other hand, the 6% interest under the Civil Code governs when the transaction
involves the payment of indemnities in the concept of damage arising from the breach or a
delay in the performance of obligations in general. A common time frame in the
computation of the 6% interest per annum has been applied which is from the time the
complaint is filed until fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum. However, varied on the commencement of the running of the legal
interest.
Hence, the SC laid down the following rules of thumb for future guidance by way of
clarification and reconciliation.
I. When an obligation, regardless of its source: law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. The absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the CC
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Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim
is made judicially or extra-judicially (Article 1169, CC) but when
such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
So please take note of the guidelines in this case of Eastern Shipping. Eastern
Shipping is reiterated in the succeeding cases.
So what are the rules here? Pls. Take note.
(1) Obligations, regardless of its source, can be held liable for damages,
you apply the provisions on damages as provided in the Civil Code.
While the award of interest in the concept of actual and
compensatory damages, are as follows:
- If there's a breach in an obligation, and it consists in a payment
of a sum of money, loan, or forbearance of money, interest is
stipulated in writing, and interest due shall earn legal interest
from the time it is judicially demanded.
- In the absence of stipulation, 12% per annum from default,
from judicial of extrajudicial demand.
(2) Obligations not constitution loan or forbearance of money is
breached. An interest in the amount of damages may be imposed at
6% per annum. No interest, however, shall be adjudged in
unliquidated claims or damages, except where the demand can be
ascertained with reasonable certainty.
Where the demand is established with reasonable certainty, interest
shall begin to rum from the time the claim is made judicially or
extrajudicially. But when such certainty cannot be so reasonably
established at the time the demand is made, interest begins to run
from the date of judgement is made. Actual base of the computation
of interest shall be from the amount adjudged.
(3) When the judgement awarding a sum of money becomes final and
executory, the interest shall be 12% from finality until satisfaction.
So in this case, 6% from decision, and 12% upon finality and until satisfaction.
I am emphasizing this because this has been asked in the bar. Yan talaga ang
answer na ine-expect ng SC.
However, you should take note that the legal interest rate has already been
changed to 6%, effective July 1, 2013.
Any decision or obligation prior to July 1, 2013, we apply the guidelines and
ruling in Eastern Shipping- 12% if what you have is a loan or forbearance of
money, goods, or credit. 6% - otherwise.
M: What do we mean by forbearance?
S: A forbearance is a contractual obligation of a creditor to refrain from, during
a period of time, from requiring the debtor to repay the amount that was lent.
What happened in Crismina Garments vs. CA?
CRISMINA GARMENTS vs. CA
FACTS:
Crismina was engaged in the export of girls' denim pants. It contracted the services of
Norma Siapno for the sewing of 20,762 pieces of assorted girls’ denims. By virtue of which,
Crismina was obliged to pay Norma an amount of P76,410.00 for her services. However,
despite the delivery of the sewed materials, Crismina failed to pay Norma.
Page | 12

Norma demanded payment from Crismina. However, Crismina alleged that 6,164 pairs of
the sewed jeans were defective and demanded a refund of P49,925.51 or the value of the
damaged pairs of denim pants from Norma.
Norma filed for the collection of the principal amount of P76,410.00 against Crismina. The
trial court ordered Crismina to pay Norma the amount with interest at 12% per annum, to
be counted from the filing of the complaint until fully paid.
Crismina appealed the decision arguing that the complaint was an action for the
enforcement of an obligation for payment of money arising from a contract for a piece of
work. Hence, the interest rate should be 6% pursuant to Article 2209 of the CC.
Norma countered that the 12% per annum interest rate based on CBC should apply since
the money sought to be recovered by her is in the form of forbearance.
ISSUES:
1. W/N the obligation was a forbearance of money.
2. W/N the 12% per annum interest rate should be imposed.
RULING: BOTH NO
First issue
Forbearance, in the context of the usury law, is a contractual obligation of lender or
creditor to refrain, during a given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable. Using this standard, the obligation in this case
was obviously not a forbearance of money, goods or credit.
Second issue
The amount due arose from a contract for a piece of work, not from a loan or forbearance
of money. Hence, the legal interest of 6% per annum should be applied.
Furthermore, since the amount of the demand could be established with certainty when
the complaint was filed, 6% interest should be computed from the filing of the complaint
until the finality of the judgment. But after the judgment becomes final and executory until
the obligation is satisfied, the interest should be reckoned at 12% per year.
Again, when an obligation not constituting a loan or forbearance of money is
breached, the interest rate imposed at the discretion of the court, is at the rate
of 6% per annum. However, in this case, it does not involve a loan or
forbearance of money or judgement, as it arose from a contract of sale, so the
applicable rate is 6% and 12% from the time the judgement becomes final and
executory until fully satisfied.
PNB vs. IBARROLA
FACTS:
The Province of Isabela issued several checks drawn against its account with petitioner
PNB for the payment of the medicines it purchased from Lyndon Pharmaceuticals
Laboratories, a business operated by respondent Ibarrola. However, 23 checks amounting
to P98,691.90 were not delivered to Ibarrola. For her failure to receive the full payment for
the medicines, Ibarrola filed an action for collection of sum of money against the Province
of Isabela, its Treasurer, the two agents and PNB.
The trial court ordered that the Province of Isable, the two agents and the PNB are
solidarily liable to pay Ibarrola the amount of P98,691.90 with interest at the legal rate
from the date of the filing of the complaint until the entire amount is fully paid.
However, the decision did not specify whether the legal rate of interest referred to in the
judgment is 6% or 12%. When the decision became final and executory, the sheriff
computed the interest at 12%. PNB opposed arguing that the 6% legal interest should be
applied.
ISSUES:
1. W/N the transaction among the parties involves a loan or forbearance of
money. NO
2. W/N the legal interest should be 12%. NO
RULING:
First issue
The transaction does not involve a loan, forbearance of money or judgment involving a
loan or forbearance of money as it arose from a contract of sale whereby Ibarrola did not
receive full payment for her merchandise.
Second issue
When an obligation arises from a contract of purchase and sale and not from a contract of
loan or mutuum, the applicable rate is 6% per annum as provided in Article 2209 of the
NCC and not the rate of 12% per annum as provided in CBC No. 416.
Furthermore, the 6% interest rate shall be computed from the time of the filing of the
complaint considering that the amount adjudged can be established with reasonable
certainty. However, once the judgment becomes final and executory, the interim period
from the finality of judgment awarding a monetary claim and until payment thereof, is
deemed to be equivalent to a forbearance of credit. Thus, the rate of 12% per annum
should be imposed, and to be computed from the time the judgment became final and
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
executory on November 26, 1993 until fully satisfied. The actual base for the computation
of this 12% interest after the judgment in this damage suit became final shall be the
amount adjudged (P98,691.90).
PILIPINAS BANK vs. COURT OF APPEALS
FACTS:
Greatland Realty executed a Dacion en Pago covering several parcels of land in favor of
petitioner Pilipinas Bank. Greatland assigned P2.3M out of the total consideration of the
dacion en pago to respondent Lilia Echaus. However, despite her repeated demands for
payment, petitioner failed to pay the assigned amount.
The trial court ordered petitioner to pay the respondent the amount due with interest plus
damages. Upon payment, petitioner applied the 6% interest rate. Respondent Echaus
opposed alleging that the interest rate imposed should be 12% per annum pursuant to CBC
416. Upon respondent’s motion for clarification, the CA ruled that the legal interest rate
should be 12% per annum in accordance with the CBC 416 since the transaction between
the parties involves forbearance of money.
Petitioner appealed the decision arguing that Article 2209 of the CC should apply. It further
contended that the CA should have ordered respondent to pay interest at the rate of 12%
on the overpayment collected by her pursuant to the advance execution of the judgment.
ISSUE: W/N the 12% interest rate should be imposed.
RULING: NO
The P2.3M is a portion of the amount which petitioner is obligated to pay Greatland Realty
for the sale of several parcels of land. The said obligation therefore arose from a contract
of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable
is the rate of 6% per annum as provided in Article 2209 of the CC and not the rate of 12%
per annum as provided in Circular 416.
Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the
order for the execution pending appeal of the judgment of the trial court. On appeal, the
CA reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be
refunded by private respondent to petitioner. In an execution pending appeal, funds are
advanced by the losing party to the prevailing party with the implied obligation of the
latter to repay former, in case the appellate court cancels or reduces the monetary award.
In the case at bar, the excess amount ordered to be refunded by private respondent falls
within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is
transferred from one person to another and the obligation to return the same or a portion
thereof is subsequently adjudged.
In conclusion, the amount of P2.3M adjudged to be paid by petitioner to private
respondent shall earn interest of 6% per annum and the amount of P1,898,623.67 to be
refunded by private respondent to petitioner shall earn interest of 12% per annum.
So again, 12% if the obligation arises from a loan or forbearance of money,
goods or credit. However, in this case, the P2.3M obligation arose from a
contract of purchase and sale, and not from a contract of loan or mutuum. So
what was applied was the 6% interest rate per annum. Also take note that there
was a judgement here regarding the alleged excess amount. The SC here
ordered that the alleged excess amount now falls within the Central Bank
Circular. Where money is transferred from one person to another, and the
obligation to return the same subsequently adjudged. So with that, the SC held
that the amount of P2.3M to be paid by petitioner shall earn 6% per annum.
Then the excess amount to be refunded by respondent shall earn 12% per
annum, because such falls within the term of forbearance.
ESTORES vs. SPOUSES SUPANGAN
FACTS:
Petitioner Estores and respondent spouses Supangan entered into a Conditional Deed of
Sale involving a parcel of land in the sum of P4.7M. However, despite the lapse of seven
years from the execution of the contract and notwithstanding payment of P3.5M on the
part of spouses Supangan, Estores still failed to comply with her obligations. As a result,
the spouses Supangan demanded with the return of their money plus 12% interest rate
compounded annually.
Estores is willing to return the principal amount of P3.5M but she insists that she is not
bound to pay the 12% interest rate because it was not agreed upon. According to her, the
Conditional Deed of Sale only provided for the return of the downpayment in case of her
failure to comply with her obligations.
The spouses Supangan countered that it is only fair that an interest be imposed to Estores
considering that she failed to return the principal amount upon demand and that she had
been using the money for her benefit.
The trial court ruled that spouse Supangan are entitled to legal interest but only at the rate
of 6% per annum from the date of the transaction (October 1993) until fully paid.
The CA modified the decision and ruled that the 6% interest rate is proper but it will be
Page | 13

computed from the date when spouses Supangan formally demanded the return of their
money (September 2000) until full payment thereof.
ISSUES:
1. W/N it is proper to impose an interest in the absence of stipulation of the
parties. YES
2. W/N the 12% interest rate should be imposed. YES
RULING: BOTH YES
First issue
Interest may be imposed even in the absence of stipulation in the contract as provided
under Article 2210 of the CC.
Petitioner Estores is legally obligated to return the P3.5M because of her failure to fulfill
the obligation under the Conditional Deed of Sale, despite demand. Petitioner enjoyed the
use of the money from the time it was given to her hence she is already in default of her
obligation from the date of demand (September 2000).
Second issue
The interest at the rate of 12% is applicable in the instant case. The general rule is that the
applicable rate of interest "shall be computed in accordance with the stipulation of the
parties."
Absent any stipulation, the applicable rate of interest shall be 12% per annum "when the
obligation arises out of a loan or a forbearance of money, goods or credits. In other cases,
it shall be 6%." In this case, the parties did not stipulate as to the applicable rate of
interest.
The contract involved in this case is not a loan but a Conditional Deed of Sale. However,
the contract provides that the seller (petitioner) must return the payment made by the
buyer (respondent-spouses) if the conditions are not fulfilled.
In the case at bar, petitioner Estores failed to comply with her obligations and is
considered in default from the time the demand to return the money was made on
September 2000. Hence, even if the transaction involved a Conditional Deed of Sale, the
stipulation governing the return of the money can be considered as a forbearance of
money which required payment of interest at the rate of 12%.
The phrase "forbearance of money, goods or credits" is meant to have a separate meaning
from a loan, otherwise there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code.
Forbearance of money, goods or credits should therefore refer to arrangements other than
loan agreements, where a person acquiesces to the temporary use of his money, goods or
credits pending happening of certain events or fulfillment of certain conditions.
In this case, the respondent-spouses parted with their money even before the conditions
were fulfilled. They have therefore allowed or granted forbearance to the seller
(petitioner) to use their money pending fulfillment of the conditions. They were deprived
of the use of their money for the period pending fulfillment of the conditions and when
those conditions were breached, they are entitled not only to the return of the principal
amount paid, but also to compensation for the use of their money. And the compensation
for the use of their money, absent any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is similar to a loan.
Petitioner’s unwarranted withholding of the money which rightfully pertains to
respondent-spouses amounts to forbearance of money which can be considered as an
involuntary loan. Thus, the applicable rate of interest is 12% per annum.
Since the date of demand which is September 27, 2000 was satisfactorily established
during trial, then the interest rate of 12% should be reckoned from said date of demand
until the principal amount and the interest thereon is fully satisfied.
Alright, so here, the SC emphasized that it is proper to impose interest
notwithstanding the absence of stipulation in the contract.
Take note in this case, the contract involved was not a loan, but a conditional
deed of sale. The contract, however, provides that the seller must return the
payment made by the buyer if the conditions are not fulfilled. It has not been
fulfilled, and notwithstanding demand from the buyer, the seller has failed to
return the money, and should be considered in default. Even if the transaction
involved here is a conditional deed of sale, the SC imposed 12%. Why? Again,
take note of the definition of forbearance. It is not limited to a contract of loan
or mutuum.
A forbearance is a contractual obligation of a creditor to refrain from, during a
period of time, from requiring the debtor to repay the amount due and
demandable.
The SC says that forbearance of money, goods, or credit is different from a loan.
Forbearance of money, goods, or credit refer to arrangements other than loans.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
So take into consideration from what kind of contract the obligation arose from.
Also consider the nature of the obligation, because in this case, it was a
conditional deed of sale, but the obligation was to return the money because
the condition was not fulfilled. The respondents parted with their money before
the condition was fulfilled. They have therefore allowed the forbearance of
money, and to use their money. They were deprived the use of their money
pending fulfilment of the conditions. When those conditions were breached,
they were entitled not only to the return of the principal amount paid, but also
for the compensation for allowing the use of their money. So that would be
interest. And the compensation for the use of their money, absent any
stipulation, should be the same rate of legal interest applicable to a loan.
Petitioner's unwarranted withholding of the money, which rightfully pertains to
the respondents amounts to a forbearance of money, which can be considered
as an involuntary loan.
So the applicable interest rate is 12% per annum from the date of demand, until
the principal amount and the interest thereof is fully paid.
You have to take note when would the 12% interest be applied, as held in the
case of Eastern Shipping. -- loan or forbearance of money, or from finality of
judgement.
So with that, you memorize the guidelines in Eastern Shipping.
You should know forbearance of money so you can apply the correct interest
rate. Memorize the definitions, memorize the distinctions, memorize the
elements and requisites so you can apply it in a given set of facts.
So take note as of July 1, 2013, the applicable interest rate is already 6%.
However, take note that there were old cases that were decided before. So you
have to distinguish what is considered as legal interest, as distinguished from
lawful interest or unlawful interest, because this is in relation to the Usury Law.
Maam: What is this Usury Law?
The Usury Law imposed a ceiling in the interest.
Banuelos
November 22, 2016
Part 2 of 2
MEDEL vs. COURT OF APPEALS
FACTS:
Servando Franco and Leticia Medel obtained four loans from Veronica Gonzales in the
total amount of P500k. As security for payment of the loan, Servando and Leticia
executed a promissory notes where they stipulated that they will pay 5.5% interest per
month plus 2% service charge per annum from date of its execution until fully paid, and
additional penalty charge of 1% per month of the amount due and demandable and the
further sum of 25% as Attorney's Fee whether actually incurred or not.
Servando and Medel failed to pay causing Veronica to file a case for collection of money
against them.
The lower court declared that the due execution and genuineness of the four promissory
notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by Veronica son the loans was unconscionable and revolting to the
conscience. Hence, the trial court applied the provision of the NCC that the legal rate of
interest for loan or forbearance of money, goods or credit is 12% per annum.
Veronica argued that the promissory note, which consolidated all the unpaid loans of
Sevando and Leticia, is the law that governs the parties. They further argued that the CBC
No. 416 prescribing the rate of interest for loans or forbearance of money, goods or
credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but
not when the parties agreed thereon.
ISSUE: W/N the interest rate stipulated by the parties is valid.
RULING: NO
The stipulated rate of interest at 5.5% per month on the P500k loan is excessive,
iniquitous, unconscionable and exorbitant. However, the rate cannot be considered
"usurious" because the CBC adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law and that the Usury Law is now legally
inexistent.
Nevertheless, the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note is iniquitous or unconscionable, and, hence, contrary to
morals ("contra bonos mores"), if not against the law. Being such, the stipulation is void.
The courts shall reduce equitably liquidated damages, whether intended as an indemnity
Page | 14

or a penalty if they are iniquitous or unconscionable.
Consequently, the CA erred in upholding the stipulation of the parties. Rather, we agree
with the trial court that, under the circumstances, interest at 12% per annum, and an
additional 1% a month penalty charge as liquidated damages until the entire amount is
paid in full may be more reasonable.
Q: So with that the 5.5% per month is valid and legally binding?
A: No ma’am since such interest rate was still considered iniquitous,
unconscionable, excessive and exorbitant. Such interest rate ma’am was
considered contrary to law ma’am.
Q: Is it contrary to law? There’s no more Usury Law!
A: Contrary to morals (?), ma’am.
Q: So what rate was imposed? Or was there any interest rate imposed?
A: The court agreed with the trial court ma’am that the legal interest of 12% per
annum and additional 1% month penalty charge as liquidated damages was
more reasonable.
Usury – Contracting form to receive something in excess of the amount allowed
by law for loan and forbearance of money. The taking of more interest for the
use of money more than the law allow. There can be no Usury, if there is no
loan or forbearance of money to speak of.
Forbearance in the context of Usury law – a contractual obligation of the
creditor to refrain, for a given period of time, from requiring the borrower to
pay the amount that is due and demandable.
Usurious Interest – it is the interest that is unlawful and illegal.
However, we have the Usury law before, Act. No. 2655 enacted on February
1916 and took effect on May 1, 1916.
What was the purpose of the Usury Law? For the protection of borrowers from
the imposition of the unscrupulous lenders from taking undue advantage of the
necessities of others. Under the Usury Law, the monetary board was authorized
to prescribe the maximum rate of interest for the loan or the renewal thereof or
the forbearance of money, goods or credits. However, by virtue of authority
granted therein, the Usury Law prescribed in 1974 the interest at 12%.
This, do take note, as mentioned in the case of Medel, in its CB resolution which
took effect January 1, 1983, it was resolved that the rate of interest that maybe
charged or collected by any person will not be subject to any ceiling under the
Usury Law.
So while, it was stated that we have 12%, that is the legal interest rate, but it is
not the maximum or the ceiling interest rate, because of the suspension of the
Usury Law. So even if the legal interest rate continued to be 12% per annum at
that time, the effectivity of the Usury Law was suspended. Take note, it is
suspended, it cannot be repealed because the Usury Law is a law and it cannot
be repealed by a resolution of the monetary board.
It was merely suspended. And as such, no ceiling was imposed on the interest
rates that are agreed upon by the parties. According to the Supreme Court, the
Circular that was issued by the Central Bank, did not repeal or amend the Usury
Law but simply suspended the latter’s effectivity. As a Central Bank Circular
cannot repeal a law, as only a law can repeal another law.
So, that is still the relevance why we still have to discuss the Usury law because
it is only suspended. Suspension can be lifted anytime. Although since 1982,
nothing has been done to lift.
On the case of Medel, the SC deemed that the 5.5% interest per month was not
deemed usurious because of the suspension of the Usury Law, which is now
legally nonexistent. Nevertheless, the SC held that such 5.5% interest per month
or 66% interest per annum which is stipulated by the parties, in other words, it
complies with the requirement under Article 1956.
Being contrary to morals, if not against the law, the stipulation is void. But it
does not mean that the borrower will not pay interest anymore, but the Court
will just reduce equitably the said interest rate. As in this case, the rate was
reduced to 12% per annum plus 1% penalty charge per month as stipulated
damages. This is based on what is reasonable under the circumstances.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
So what happen in the case of Chua vs. Timan?
CHUA vs. TIMAN
FACTS:
Petitioners Chua granted respondents Timan several loans evidenced by promissory
notes with interest rates of 7% per month, which was later reduced to 5% per month.
Later on, respondents filed a complaint questioning the validity of the agreed interest
rates. They invoked the case of Medel arguing that the stipulated interest rates of 7% and
5% per month are iniquitous, unconscionable and exorbitant. Thus, they are entitled to
the return of the excessive interest paid.
Petitioners countered that the stipulated interest of 5% monthly and higher cannot be
considered unconscionable because these rates are not usurious by virtue of CBC No.
905-82 which had expressly removed the interest ceilings prescribed by the Usury Law.
Petitioners add that respondents were in pari delicto since they agreed on the stipulated
interest rates of 7% and 5% per month.
ISSUE: W/N the stipulated interest rates by the parties are iniquitous, unconscionable
and exorbitant.
RULING: YES
The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans
must be equitably reduced to 1% per month or 12% per annum.
We need not unsettle the principle we had affirmed in a plethora of cases that stipulated
interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being contrary to morals, if not against the law.
While CBC No. 905-82 effectively removed the ceiling on interest rates for both secured
and unsecured loans, regardless of maturity, nothing in the said circular could possibly be
read as granting carte blanche authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a hemorrhaging of their assets.
Hence, the stipulated interest rates of 7% and 5% per month are void for being excessive,
iniquitous, unconscionable and exorbitant and should be reduced to 12% per annum.
Petitioners are also ordered to refund the respondents all interest payments in excess of
12% per annum.
Q: What do you mean by Carte Blanche Authority?
A: It is at will ma’am. They can just readily imposed interest rates at whatever
the creditors want.
So here, do take note, that the CB Circular suspending the Usury law. It may
seem that the contracting parties may establish such stipulations, clauses, terms
and conditions as they may deemed convenient. Provided that they are not
again contrary to law, morals, customs, public order and public policy. But as
emphasized in this case of Chua vs. Timan, nothing in the said circular can
possibly be read as grant carte blanche authority to lenders to raise interest
rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets.
So, they do not have a free hand or blanket authority to say just as high of the
said interest rate to be imposed. As the SC can still reduce interest rates that are
deemed excessive, iniquitous or exorbitant. Again, such interest rates as
mentioned in the case of Medel and Chua, the stipulated interest was not
deemed usurious. Nevertheless, the SC equitably reduced the interest rates
stipulated by the parties. In this case, it was reduced to 1% per month or 12%
per annum.
So what happened in the case of Pan Pacific?
PAN PACIFIC vs. EQUITABLE
FACTS:
Petitioner Pan Pacific and respondent Equitable Bank entered into a contract of
mechanical works. The parties stipulated that in case of increase in labor costs and prices
of materials, Pan Pacific shall be entitled to a price adjustment.
Later on Pan Pacific claimed price adjustment in accordance with the contract. Instead of
granting petitioner’s request, respondent offered Pan Pacific a loan of P1.8M. Pan Pacific
reluctantly agreed to the loan and was constrained to execute a promissory note as
security for the loaned amount. Upon maturity of the loan, respondents demanded
payment plus interest and penalty. However, petitioner refused to pay the loan.
The CA ruled that although the contract provides for an interest at the current bank
lending rate in case of delay in payment and the promissory note charged an interest of
18%, such provision does not authorize petitioner to unilaterally raise the interest rate
without the other party’s consent. Petitioner never informed nor sought the approval of
the respondent for the imposition of 18% interest on the adjusted price. To unilaterally
Page | 15

increase the interest rate of the adjusted price would be violative of the principle of
mutuality of contracts.
ISSUE: W/N the 18% bank lending rate should be applied.
RULING: YES
A review of the contract shows that the consent of the respondent is not needed for the
imposition of the 18% current bank lending rate, which occurs upon any delay in
payment. When the terms of a contract are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations governs. In these cases,
courts have no authority to alter a contract by construction or to make a new contract for
the parties.
Under Article 2209 of the CC, the appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of a sum of money is the payment of
penalty interest at the rate agreed upon in the contract of the parties. In the absence of a
stipulation of a particular rate of penalty interest, payment of additional interest at a rate
equal to the regular monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the damages payable will
consist of payment of legal interest which is 6%, or in the case of loans or forbearances of
money, 12% per annum. It is only when the parties to a contract have failed to fix the rate
of interest or when such amount is unwarranted that the Court will apply the 12%
interest per annum on a loan or forbearance of money.
The written agreement entered into between the parties clearly provides for an interest
at the current bank lending rate in case of delay in payment and the promissory note
charged an interest of 18%. In other words, in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate in
accordance with the contract.
The promissory note, although declared void by the lower courts because it did not
express the real intention of the parties, is substantial proof that the bank lending rate at
the time of default was 18% per annum. Absent any evidence of fraud, undue influence
or any vice of consent exercised by petitioners against the respondent, the interest rate
agreed upon is binding on them.
Q: Was there any agreement as to the adjustment of the price of the parties?
A: Yes. It is stated in their contract that as may deemed applicable, it may
unilaterally raise such interest rate. So, Pan Pacific allowed Equitable to do so.
Q: What do you call that? What kind of clause?
A: It is an escalation clause.
Q: Was the basis here a contract of loan? Because it appears there’s a
promissory note?
A: It is a breach of contract ma’am.
Q: What about the promissory note? What is the ruling of the Supreme Court as
regards as to the promissory note? Was there a real contract of loan as
evidenced by the promissory note? What was the reason why it was issued?
A: It was issued so that Pan Pacific can continue with the project. However, it
was treated as advance payment of what was Pan Pacific was supposed to
collect from Equitable.
Atty. Jazzie: In Other words, there was no consideration of the contract of loan.
But rather than an advance payment.
We have here, the SC pointed out that in their agreement, with regard to the
escalation clause: price adjustment in case of increase of the labor cost and
prices of materials. Furthermore, as stated in the agreement it was also
stipulated that in the delay of payment, consent of the responded was not
needed for the imposition of the interest at the current bank lending rate.
Do remember, as the parties have agreed, even if it was not a true contract of
loan but rather a contract of mechanical works and air conditioning system. The
parties have stipulated as to what interest rate should be imposed: current bank
lending rate. The promissory note was taken into consideration as an evidence
as to what is considered as to what lending rate. And based on that promissory
note, it was 18% per annum. So here, the SC ordered the respondent paid the
interest at the bank lending rate of 18% until the amount it fully paid.
So what happened on the case of Solid Bank vs. Permanent Homes?
SOLIDBANK vs. PERMANENT HOMES
FACTS:
Solidbank granted Permanent Homes a loan worth P60M covered by three promissory
notes. In the promissory notes, Permanent Homes stipulated that it authorizes Solidbank
to increase or decrease at any time the interest rate agreed upon on the basis of, among
others, prevailing rates in the local or international capital markets. The interest rates
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
shall be effective from the date indicated in the written notice to be sent by the bank, or
if no date is indicated, from the time the notice was sent. Furthermore, if Permanent
Homes failed to pay the amount with the interest rate within 30 days from the receipt by
anyone of us of the written notice, they shall be deemed to have given their consent to
the interest rate adjustment.
Contrary, however, to the specific provisions of the promissory note, there was a
standing agreement between the parties that any increase or decrease in interest rates
shall be subject to their mutual agreement.
Later on, Permanent Homes filed a complaint for the annulment of the increase in
interest rates on the loans it obtained alleging that Solidbank unilaterally and arbitrarily
accelerated the interest rates without any notice to Permanent Homes in violation of the
principle of mutuality of agreement of the parties. It also prayed for the fixing of the
interest rates at the applicable interest rate.
Solidbank countered that by virtue of the promissory notes, it was authorized to
periodically adjust the interest rates upon due notice to Permanent Homes. Hence,
Permanent Homes should not be allowed to renege on its contractual obligations, it
freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and the
promissory notes.
ISSUES: W/N the increases in the interest rates are void for having been unilaterally
imposed without basis.
RULING: NO
Upon the suspension of the Usury Law the parties are allowed to agree on any interest
that may be charged on a loan. However, although interest rates are no longer subject to
a ceiling, the lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such imposed
rate should be in writing. The stipulations on interest rate repricing are valid because:
1. The parties mutually agreed on said stipulations;
2. Repricing takes effect only upon Solidbank’s written notice to Permanent of
the new interest rate; and
3. Permanent has the option to prepay its loan if Permanent and Solidbank do
not agree on the new interest rate.
The phrases "irrevocably authorize," "at any time" and "adjustment of the interest rate
shall be effective from the date indicated in the written notice sent to us by the bank, or
if no date is indicated, from the time the notice was sent," emphasize that Permanent
should receive a written notice from Solidbank as a condition for the adjustment of the
interest rates.
A contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties is void. However, in the case at bar,
there was no showing that either Solidbank or Permanent coerced each other to enter
into the loan agreements. The terms of the Omnibus Line Agreement and the promissory
notes were mutually and freely agreed upon by the parties.
Moreover, Solidbank’s range of lending rates were consistent with "prevailing rates in the
local or international capital markets." The repriced interest rates were not
unconscionably out of line with the upper range of lending rates to other borrowers. The
interest rate repricing happened at the height of the Asian financial crises in late 1997,
when banks clamped down on lendings because of higher credit risks across industries,
particularly the real estate industry.
Solidbank admitted that it did not promptly send Permanent written repriced rates, but
rather verbally advised Permanent’s officers over the phone at the start of the period.
Therefore, the interest due from Permanent Homes should be adjusted to take effect
only upon Permanent Homes’ receipt of the written notice from Solidbank.
Q: Is the Escalation Clause: Increase or Decrease based prevailing rates in the
local or international capital markets on the Promissory Note considered valid?
A: Yes.
Q: What makes the revising of the interest rate valid?
A: It was valid since it is consistent to the prevailing rates in the local or
international capital markets. As what have stipulated by the parties.
Q: Can we not say that the increasing the interest rate is dependent on the will
of Solidbank?
A: No. Because the court did not find that there was a coercion and both parties
mutually agreed to increase the interest rate.
So again, the SC emphasized that the Usury Law deem ineffective. So the parties
may now again, agree on any interest that may be charged on the loan. The
limitation is that it should not be iniquitous, excessive, exorbitant or
unconscionable. It appears to this case that Permanent Homes irrevocably
authorize Solidbank to increase or decrease the interest rate.
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The SC said that this, remember in ObliCon in relation to escalation clause, a
contract subject to a condition which makes it fulfillment depended upon the
sole will of one of the contracting parties is void. What do you call that
condition? Potestative. So we all already know, that potestative condition
dependent on the sole will of the debtor is considered void that was the basis
here. But the SC held here that the interest rate here, was not purely dependent
on the part of Solidbank. For the imposition of interest rates, please take note of
the requisites: if there is an escalation clause, there should also be a descalation
clause, which appears on their agreement: which is the “increase or to
decrease”.
Second, that it must be peg in the prevailing market rates. Third, there is an
agreement between the parties as what happened in this case.
So here the stipulation of the interest rate or pricing was valid:
The stipulations on interest rate repricing are valid because:
(1) The parties mutually agreed on said stipulations;
(2) Repricing takes effect only upon Solidbanks written notice to
Permanent of the new interest rate; and
(3) Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate.
It appears that you need the consent of the debtor or Permanent. The phrases
irrevocably authorize, at any time and adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by the bank, or
if no date is indicated, from the time the notice was sent, emphasize that
Permanent should receive a written notice from Solidbank as a condition for the
adjustment of the interest rates.
So what was the reason of repricing here? Again it was not deemed
unconscionable as it was during the hype of the Asian Financial Crisis of 1997.
Considering there was an agreement that the new interest rate will be effective
upon receipt of the written notice from Solidbank that was deemed the ruling of
the court. Again take note of the requisites of a valid escalation clause and
change of interest rates imposed by the creditor in a contract of loan.
So what happened in the case of Toledo?
TOLEDO vs. HYDEN
FACTS:
Petitioner Jocelyn Toledo obtained several loans from respondent Marilou Hyden in the
total amount of P290k with an interest rate of 6% to 7% per month.
Later on, they executed a document entitled Acknowledgment of Debt representing the
principal consolidated amount of P290k. However, after honoring several checks, Jocelyn
filed for the annulment of the document contending that Marilou forced, threatened and
intimidated her into signing the document and the application of her total payment of
P528,550.00 to interest alone is illegal, unfounded, unjust, oppressive and contrary to law
because there was no written agreement to pay interest.
Marilou countered that Jocelyn voluntarily obtained the loans knowing fully well that the
interest rate was at 6% to 7% per month. In fact, a 6% to 7% advance interest was already
deducted from the loan amount given to Jocelyn.
The trial court ruled that the Acknowledgment of Debt is valid and ordered Jocelyn to pay
Marilou in the amount of P271k with a 12% interest per annum or 1% interest per month
until such time that the said amount shall have been fully paid.
Jocelyn appealed arguing that even assuming that the execution of the document was
not attended with vices of consent, it must nevertheless be declared null and void for
being contrary to law and public policy by the fact that the payments in the total amount
of P778k was applied to interest payment alone. This only proves that the transaction
was iniquitous, excessive, oppressive and unconscionable.
ISSUE: W/N the interest rate of 6% to 7% per month is contrary to law, morals, good
customs, public order or public policy.
RULING: NO
Upon the suspension of the Usury Law ceiling on interests, parties to a loan agreement
have wide latitude to stipulate interest rates. Nevertheless, such stipulated interest rates
may be declared as illegal if the same is unconscionable.
In this case, the disputed 6% to 7% monthly interest rate cannot be considered to be
iniquitous or unconscionable.
There was no urgency of the need for money on the part of Jocelyn, the debtor, which
compelled her to enter into said loan transactions. She used the money from the loans to
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
make advance payments for prospective clients of educational plans offered by her
employer. In this way, her sales production would increase, thereby entitling her to 50%
rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this nature between Jocelyn and Marilou
continued for more than five years. Jocelyn religiously paid the agreed amount of interest
until she ordered for stop payment on some of the checks issued to Marilou. The checks
were in fact sufficiently funded when she ordered the stop payment and then filed a case
questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or
unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the
same carried with it an interest rate of 6% to 7% per month, yet she did not complain. In
fact, when she availed of said loans, an advance interest of 6% to 7% was already
deducted from the loan amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to
7% per month and paying for the same, Jocelyn cannot now go to court to have the said
interest rate annulled on the ground that it is excessive, iniquitous, unconscionable,
exorbitant, and absolutely revolting to the conscience of man. In other words, Jocelyn is
now estopped to assail the validity of the interest rates.
Q: How do you reconcile this case with the other case which the imposition of
6% to 7% interest deemed valid?
A: The SC made a distinction regarding the circumstances of the case. In the
case of Medel, the spouses never paid their indebtedness from the very
beginning and because of their unpaid obligation it ballooned to a staggering
sum and the creditors action should fail. However in this case, there is no really
urgency of the need for money on Jocelyn, the debtor, because, it has to be
noted that the money here that was used by Jocelyn was for the reason of her
sale production to increase. If such increase, it will entitled her to 50% of her
sales. This is the reason why she didn’t mind the 6% to 7% interest until it
continued to more than 5 years. So it has to be noted that there was initial
payment and Jocelyn has religiously paid the amount of interest until she
ordered for the stop for payment. It was clearly shown that Jocelyn availed for
the said loan with knowing fully well that such was the imposition of the
interest. Yet she did not complain.
Q: How about to the issue of the acknowledgement of debt signed by Jocelyn?
Why such issue raised?
A: Such acknowledgement was made through force, threat or intimidation for
being contrary to law and public policy. The SC held that the 6% to 7% was not
contrary to law and public policy because of the specific circumstances that was
present in the case at bar.
Notice here, in the previous cases, we have seen: 5.5% per month deemed
excessive, the other case 7% per month and 5 % per month, deemed also
excessive. But this time, in the case of Toledo, the 6% to 7% per month interest
was NOT deemed excessive. So here now, the SC take into consideration the
circumstances of each case. The Medel case was clearly not applied on the case
of Toledo, as pointed out in Medel, the spouses never able to pay their
indebtedness. As in this case of Toledo there was no urgency to need the money
as this was used to make advance payment for prospective clients of
educational plans to increasing her sales production entitling her to 50% rebate
on her sales and this continued for 5 years. Jocelyn religiously paid the agreed
amount of interest until she ordered for stop payment on some of the checks
issued to Marilou.
Further, Jocelyn know fully well that the same carried 6% to 7% monthly
interest. Yet she did not complain. In fact, when she availed of such loans, the
said interest was already deducted from the said amount. After years of availing
the proceeds, Jocelyn cannot go to court and question the validity of the interest
rates. Here the SC emphasized the maxims of equity (1) he who seeks equity
must do equity, and (2) he who comes into equity must come with clean hands.
Also, the SC emphasized the principle of estoppel in relation to that the SC also
upheld the issuance of the acknowledgement of debt. There was no evidence
that she was coerced and witnesses are presented to testify its due execution
wherein Jocelyn know fully well the nature of the contract she entered into. And
she’s not forced from impugning the validity of such debt.
So what happened in the case of Prisma?
PRISMA vs. MENCHAVEZ
FACTS:
PRISMA, thru Pantaleon, obtained a loan with a monthly interest of P40k payable for six
months from respondent Menchavez. PRISMA executed a r note as security for the loan.
PRISMA made several payments but it still has remaining unpaid balance. When PRISMA
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Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

failed to pay, Menchavez filed a case to enforce payment to the unpaid balance plus 4%
monthly interest. So what happen in the case of Dio?
The CA ruled that the parties agreed to a 4% monthly interest pursuant to a board
DIO vs. SPOUSES JAPOR
resolution. Nevertheless, it reduced the interest rate at 12% per annum computed from
FACTS:
the filing of the complaint until finality of judgment should be applied.
Respondents spouses Japor obtained a loan amounting to P128k from the Quezon
Development Bank (QDB) as evidenced by a duly executed Deed of Real Estate Mortgage.
The petitioners admitted the loan but denied the 4% monthly interest arguing that the
The spouses failed to pay their loan obligations. However, before the foreclosure of the
same was not provided nor stipulated in the promissory note. Even assuming that the
property, the spouses Japor offered to mortgage their properties to petitioner Teresita
loan is subject to 4% monthly interest, it covers the period of 6 months only and cannot
Dio after obtaining from her a loan worth P350k. A new Deed of Real Estate Mortgage
be interpreted to apply beyond it.
was executed in favor of petitioner Dio.
The respondent countered that the petitioners are estopped from assailing the 4%
Under the terms of the deed, the respondents agreed to pay petitioner a 5% interest rate
monthly interest, since they agreed to pay the 4% monthly interest on the principal
per month for a period of two months with an additional 5% penalty rate for every month
amount under the promissory note and the board resolution.
in case of default or delay.
ISSUES:
However, despite repeated demands, respondents failed to pay causing petitioner to
1. W/N the parties agreed to the 4% monthly interest on the loan. NO
foreclose the mortgage.
2. W/N the P40k monthly interest rate applies only to the period of 6 months.
YES
The respondents filed a petition for the fixing of their contractual obligation. They alleged
that the Deed of Real Estate Mortgage was null and void since it did not state the true
RULING:
intent of the parties, which limited the 5% interest rate to only two months from the date
First issue
of the loan and which did not provide for penalties and other charges in the event of
The parties agreed that loan shall earn an interest of P40k per month for the six-month
default or delay. Respondents vehemently contend that they never consented to the said
period. Although the P40k can be computed at 4% interest per month, no rate of interest
stipulations and hence, should not be bound by them.
was stipulated in the promissory note; rather a fixed sum equivalent to this rate was
agreed upon. The facts show that the parties agreed to the payment of a specific sum of
Petitioner countered that the upon the suspension of the Usury Law, interest rates may
money of P40k per month for six months, not to a 4% rate of interest payable within a 6-
accordingly be pegged at such levels or rates as the lender and the borrower may agree
month period.
upon. Petitioner further points out that the 5% interest rate was proposed by the
respondents and have only themselves to blame if the interests and penalties ballooned
Second issue
to its present amount due to their willful delay and default in payment.
The case of Medel finds no application in the present case where no other stipulation
exists for the payment of any extra amount except a specific sum of P40k per month on
The CA fixed the respondents’ liability at 12% per annum and an additional 1% penalty
the principal of a loan payable within six months. Additionally, no issue on the
charge per month.
excessiveness of the stipulated amount of P40k per month was ever put in issue by the
petitioners; they only assailed the application of a 4% interest rate, since it was not
ISSUES:
agreed upon.
1. W/N the 5% interest rate is iniquitous, unconscionable, and exorbitant. YES
2. W/N the 5% interest rate for two months should be applied. YES
Article 1956 of the CC specifically mandates that no interest shall be due unless it has
3. W/N the spouses Japor are entitled to the surplus. NO
been expressly stipulated in writing. Under this provision, the payment of interest in
loans or forbearance of money is allowed only if: (1) there was an express stipulation for
RULING:
the payment of interest; and (2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is required for the payment of interest
First issue
at a stipulated rate.
Although the parties to a contract of loan may agree upon the interest rates, the court
may, nevertheless, reduce the same if it finds it to be iniquitous, unconscionable, and
Applying Article 1956, the interest of P40k per month corresponds only to the 6-month
exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law.
period of the loan as agreed upon by the parties in the promissory note. Thereafter, the
What is iniquitous, unconscionable, and exorbitant shall depend upon the factual
interest on the loan should be at the legal interest rate of 12% per annum.
circumstances of each case. In the case at bar, the interest and penalty rates in the Deed
are excessive, hence legally impermissible and should therefore be reduced.
Therefore, as agreed by the parties, the loan shall earn P40k per month for a period of six
months. Thereafter, interest at the rate of 12% per annum shall apply.
Second issue
Even if the agreed interest rate is deemed excessive, the respondents are now estopped
Q: Why 12%? What is the basis of imposition of the legal interest? What have from claiming otherwise because evidence shows that it was them who proposed the 5%
we learned? interest rate per month for two months. However, for the succeeding period after the
A: It is because in the absence of the stipulation of the parties, it is deemed at two months, the interest rate should be reduced to 12% per annum and the penalty rate
12% being a forbearance of goods, money or credit. to 1% per month, in accordance with Article 2227 of the CC.

So here, there was an issue, whether the 4% monthly interest loan should be
applied. What was the basis? It appears that they agree that the loan shall be
subject to an interest of 40,000 per month for the 6 month period. The SC, there
was no agreement or stipulation of the parties that the legal interest rate is to
be imposed is 4% interest until fully paid by the debtor. What was clearly agreed
upon was the 40,000 interest per month for the 6 month period.
Notice, even if it is really computed on the 4% per month, the SC upheld such
validity for the 6 months period. It is a fixed sum agreed upon by the parties
which was only imposed for only such period. Remember the imposition of the
loans or forbearance of money. First requirement under 1956, express
stipulation for the payment of interest and such same provision require that
such agreement will be reduced into writing. These two must exist. What only
exist in the case at bar is the 40,000 interest per month for the 6 months.
Beyond that, wala ng stipulation between parties. So after the 6 months after
due date, the interest rate to be imposed to the loan is the legal interest rate of
12% per annum. Again what we have here is a loan. Why is Medel not
applicable? Medel finds no application to the present case where no other
stipulation exists for the payment of the extra amount except for the 40,000 per
month on the loan in the period of 6 months. Additionally, it’s excessiveness was
not raise or put into issue. They only assail the 4% interest until payment. Since
it was not agreed upon.
Third issue
There is no "surplus" to speak of. In adjusting the interest and penalty rates to equitable
and conscionable levels, what the Court did was merely to reflect the true price of the
land in the foreclosure sale. No surplus in the purchase price was thus created to which
the respondents as the mortgagors have a vested right.
In conclusion, the interest rate for the subject loan owing to QDB, or whoever is now the
party mortgagee, is hereby fixed at 5% for the first two months following the date of
execution of the Deed of Real Estate Mortgage, and 12% for the succeeding period. The
penalty rate is fixed at 1% per month. Petitioner Dio is free of any obligation to return to
the respondents Spouses Japor any surplus in the foreclosure sale price.
Q: Was the agreement really of 5% interest until fully paid?
A: In this case, what the respondents admit, that they maintain that the REM is
null and void since it does not really intend the true agreement of the parties.
According to them, they only agreed for the 5% interest rate for 2 months.
However, they did not provide penalties or other charges in case of default or
delay?
Q: So what was the ruling of the court? was the 5% interest really upheld?
A: In this case mam, the SC only applied 5% for the first 2 months. With regard
to the penalty, it was pegged at 12% per annum.
Q: Why 12%?

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A: Since in this case one what we have is loan or forbearance of money.
Q: Aside from the 12%, was there any other interest imposed?
A: There was also a penalty rate imposed at 1% per month.
So here, what was agreed upon by the parties, respondents agreed to pay
interest of 5% per month in the period of 2 months. In the event of default,
additional interest of the amount due will be charged by them. The SC upheld
the 5% interest per month for 2 months. Repondents proposed the 5% for the 2
month period. Having agreed they are now estopped from claiming otherwise.
For the succeeding period, the CA correctly reduced it 12% per annum and a
penalty rate of 1% per month.
So, again take not here, what did you notice with regard to interest rate of 7%,
6% or 5% per month that was upheld by the court that were not deemed
excessive or unconscionable? STIPULATED ON A FIXED PERIOD. Okay, that is
one of the things that you would notice. Second, there was a case where the
excessiveness was never put into issue. Okay, on the other case, it was upheld
due to the circumstances wherein applying the principle of estoppel how the
money borrowed was used by debtor.
With that, it is clear, that THERE IS NO FIXED RATE. All of this cases, it is true
that there is a number of cases that the SC applying the ruling in Medel wherein
the 5% per month was deemed iniquitous or unconscionable. It is not a fixed
rate. That in all instances when the creditor imposes a 5% interest per month it
is already deemed iniquitous or unconscionable. Why? Because the SC will
always take into consideration the factual circumstances of each case.
There is no law, since there is no more Usury law, that being suspended. Which
states what is deemed lawful interest. Furthermore there is no ruling by the SC
which again state what is deemed iniquitous, unconscionable, or excessive.
Again always based on the circumstances of each case. In exercising the power
to determine what is iniquitous or unconscionable courts must consider the
circumstances of each case. Since what could be iniquitous in one case may be
totally just and equitable on the other.
Dulay
November 24, 2016
Part 1 of 1
Review
Last time we discussed the different kinds of interest, so you have simple and
compound. At present, with the suspension of the usury law, we do not refer to
interest whether they are lawful or unlawful because there is no more
maximum or ceiling rates for interest rates to be imposed. As to guidelines as to
what interest rates are to be imposed we take into consideration the ruling in
Eastern Shipping. But again, it is only effective until June 30, 2013. Moreover,
we have also discussed that even if the parties have expressly stipulated in
writing the imposition of an interest, if it is iniquitous, excessive, exorbitant or
unconscionable, the courts may reduce the same as we have mentioned in the
case of Medal and the succeeding cases.
Now, we mentioned that the Eastern Shipping is only effective until June 30,
2013; the reason for this is the Resolution No. 796 dated May 16, 2013 of the
Monetary Board which approved the revisions governing the rate of interests in
the absence of stipulation in loan contracts thereby amending the Section 2 of
Circular No. 905 series of 1982 wherein now it states that the rates of interest
for the loan or forbearance of any money, goods or credits and the rate allowed
in judgements in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum. So this was applied in the case f Nacar vs.
Gallery Frames. What happened in this case?
NACAR vs. GALLERY FRAMES
FACTS:
Petitioner Dario Nacar filed a complaint for constructive dismissal against respondents
Gallery Frames. On October 15, 1998, the LA ruled that petitioner was illegally dismissed
thereby awarding him backwages and separation pay in the amount of P158,919.92
computed only up to promulgation of the decision.
Petitioner filed a motion for the re-computation of the monetary award (backwages) from
the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the SC
on May 27, 2002 and to include the appropriate interests.
Respondent opposed alleging that re-computation is no longer allowed since the decision
was already final and executory. Respondent insists that since the decision clearly stated
that the separation pay and backwages are "computed only up to the promulgation of this
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
decision," and considering that petitioner no longer appealed the decision, petitioner is
only entitled to the award as computed by the LA in the total amount of P158,919.92.
The LA granted the motion for re-computation but held that it is the October 15, 1998
Decision that should be enforced considering that it was the one that became final and
executory. Since petitioner already received P147,560.19, he is only entitled to the balance
of P11,459.73.
ISSUE:
1. W/N a re-computation of the LA’s original computation of the awards is
proper. YES
2. W/N legal interest should be paid. YES
RULING:
First issue
The backwages should be computed from the time petitioner was illegally dismissed on
January 24, 1997 up to the time when the SC resolution became final and executory on
May 27, 2002. The re-computation of the consequences of illegal dismissal upon execution
of the decision does not constitute an alteration or amendment of the final decision being
implemented. The illegal dismissal ruling stands; only the computation of monetary
consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.
Second issue
In the landmark case of Eastern Shipping vs. CA, the Court laid down the guidelines
regarding the manner of computing legal interest. However, the BSP Monetary Board
amended Section 2 of Circular No. 905 and the issued Circular No. 799 which took effect on
July 1, 2013. The Circular provides that the rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be 6% per annum.
By virtue of such amendment, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in judgments shall no longer be 12% per
annum but will now be 6% per annum effective July 1, 2013.
It should be noted, nonetheless, that the new rate could only be applied prospectively and
not retroactively. Consequently, 12% per annum legal interest shall apply only until June
30, 2013. Come July 1, 2013 the new rate of 6% per annum shall be the prevailing rate of
interest when applicable.
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damage.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of
a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extra-judicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a
forbearance of credit.
The judgments that have become final and executory prior to July 1, 2013 shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
In conclusion, the SC ruled that since the original case was decided in 2002, the applicable
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interest rate is 12% per annum of the total monetary awards, computed from May 27, 2002
to June 30, 2013 but the 6% per annum interest rate shall accrue from July 1, 2013 until
payment thereof is fully satisfied.
Ma’am: So what is the issue with regard to the amount?
Student: The issue here is what interest should be applied. From 2002, when
the decision became final up to only June 31
M: Walang 31 ang June. Be careful of that. Why? In fairness di ka nag-iisa. I
already had exam notebooks checked that says up to June 31, 2013. Kahit leap
year, walang 31 and June. Continue.
S: Until June 30, 2013, the basis should be the ruling and guidelines in Eastern
Shipping.
M: What’s the difference between the guidelines in Eastern Shipping and here
in the case of Nacar?
S: The difference is that in Eastern Shipping, if it is a forbearance on credit, the
interest applied should be 12%, and if not, it would be 6%. And upon finality of
judgment it should be 12%. However, the said Central Bank Circular passed on
July 1, 2013 . . .
M: It was passed on May but took effect on July 1, 2013
S: . . . made no distinction. So whether or not it is a forbearance on credit or any
other liability under the Civil Code. So since this was decided in August 13, 2013,
the 12% interest on monetary award for damages should only be applicable up
until June 30, 2013.
M: What interest rate should that be?
S: 12% interest rate. Subsequently up to its finality it would be 6%.
Discussion
So notice no how did the new circular changing the legal interest rate to 6%,
effective July 1, 2013, affect or modify the ruling in Eastern Shipping. Again, the
difference is just that with regard to loans or forbearance of money, instead of
12%, it should now be 6% per annum and with regard to judgment which has
become final and executory, instead of 12% per annum, it is now deemed to be
6% per annum. Again, effective July 1, 2013.
So, do not totally disregard the items provided in Eastern Shipping because
again that is in effect until June 30, 2013. While Eastern Shipping is, of course,
very easy to remember because only one fixed rate per annum, 6% per annum,
no need to distinguish whether it is a loan or forbearance of money or
otherwise, again we have to take note of the case in Eastern Shipping or the
guidelines in Eastern Shipping because again that’s the same guideline or that’s
the same basis for the imposition of interest rate until June 30, 2013. So take
note of that. We also have the case of ECE Realty. What happened in this case?
ECE REALTY vs. HERNANDEZ
FACTS:
Respondent Hernandez and Petitioner ECE entered into a Contact to Sell involving a
condominium unit. However, despite paying the required downpayment, petitioner failed
to deliver the unit. Respondent found out that petitioner already sold the unit to another.
This caused respondent to file a complaint praying that petitioner be ordered to accept the
payment of the balance without interest and that he be awarded damages. In case the unit
is no longer available, respondent prayed that petitioner reimburse him the total amount
he paid plus legal interest.
The CA ordered petitioner to reimburse the amount paid by respondent with 6% interest
citing Eastern Shipping vs. CA since the transaction is neither a loan nor a forbearance of
money, goods or credit. However, from the finality of the decision until full payment, the
interest rate shall be 12%.
ISSUE: W/N the reimbursement is proper with 6% interest rate.
RULING: YES
The SC modified the CA’s decision by reducing the interest imposable after finality from
12% to 6%.
There is no doubt that petitioner ECE incurred in delay in delivering the subject
condominium unit, for which reason the award of interest to the respondent from the filing
of his complaint is proper. There being no stipulation as to interest, under Article 2209 of
the NCC, the imposable rate is 6% by way of damages as laid down in the landmark case of
Eastern Shipping vs. CA.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper,
and the applicable rate, as follows:
1. The 12% per annum rate under CBC No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as to judgments involving
Credit Transactions – First Exam Coverage 2016-2017
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such loan or forbearance of money, goods, or credit;
2. The 6% per annum under Article 2209 of the CC applies when the transaction
involves the payment of indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in general;
3. The application of both rates is reckoned from the time the complaint was filed
until the adjudged amount is fully paid.
4. In either instance, the reckoning period for the commencement of the running
of the legal interest shall be subject to the condition that the courts are vested
with discretion, depending on the equities of each case, on the award of
interest.
But since July 1, 2013, the rate of 12% per annum from finality of the judgment until
satisfaction has been brought back to 6% pursuant to Resolution No. 796 of the BSP
Monetary Board. Thus, the rate of interest to be imposed from finality of judgments is now
back at 6%, the rate provided in Article 2209 of the CC.
Petitioner ECE Realty is ordered to pay the total amount paid by respondent Hernandez
plus 6% interest per annum from the filing of the complaint (September 2007) until finality
of the decision, and an interest rate of 6% per annum shall likewise be imposed from
finality of the decision until fully paid.
S: The issue in this case is Whether or not there should be reimbursements
done by . . .
M: In relation to our topic, what is the issue that we should take into
consideration?
S: Regarding the reimbursement . . .
M: Whether or not there is entitlement to reimbursement?
S: Yes
M: Are you sure?
S: With the interest
M: What interest rate should be imposed?
S: It should be 6% per annum.
M: Why 6%?
S: 6% per annum since although in their contract there was no stipulation as to
how much interest should be paid but we are referring here on the indemnity of
damages due to the delay that has been incurred by the respondent because
they were so . . .
M: When is that 6% interest rate to be imposed?
S: It should be imposed as to the . . .
M: When? From what time until when?
S: Well since we are talking about breach of . . .
M: It’s in the dispositive portion
S: It should be
M: From when?
S: When the delay is incurred
M: Until?
S: The final judgment of the court.
M: Now, this case is promulgated in 2014, if this was promulgated prior to July
1, 2013, what would be the difference in the decision of the Supreme Court?
S: If it was promulgated prior to July 1, 2013, the imposed interest should have
been 12%
M: From what time?
S: From the incurrence of the delay
M: Are you sure? Do you have a loan or forbearance of money here?
S: So from still the incurrence of the delay.
M: Are you sure? Take your seat.
Discussion
Make sure you understand how to apply the ruling in Eastern Shipping and
Nacar. In this case, it is true that this was a case for damages so there is no loan
or forbearance of money so the interest to be imposed is 6% p.a. Now, notice in
the dispositive portion the Supreme Court did not outrightly say since this was
promulgated in 2014, the imposed rate is 6% from September 7, 2006 until fully
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paid which it could have done so because of the change in the legal interest
rate. Nevertheless, the SC made a distinction 6% from September 7, 2006 until
hereof because it is already a 2014 case. From finality until full satisfaction,
likewise earn 6% per annum until fully paid. I ask what would be the difference
if this was promulgated prior to July 1, 2013. Where could the difference lie?
The 6% percent would still be the same, Sept. 7, until finality. But, until finality
until full satisfaction, it could have been 12%. That’s the relevance here why the
Supreme Court did not outrightly say 6% from this period until fully paid
because again it applied, although it did not outrightly say that it applied the
case of Nacar, but of course, it mentioned that since July 1, 2013, the 12% p.a.
from finality of judgment has already been brought back to 6%. So please of
how to apply guidelines in Eastern Shipping as well as with the modifications
thereof as provided in the case of Nacar.
Now, let’s proceed to the next article although this is in relation to usury.
Art. 1957.
Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in
accordance with the laws on usury. (n)
As we have discussed, the usury law has already been suspended and therefore
1957 is not that relevant anymore.
Art. 1958.
In the determination of the interest, if it is payable in kind, its value shall be
appraised at the current price of the products or goods at the time and place
of payment. (n)
Alright, distinguish this from Article 1955.
Art. 1955. The obligation of a person who borrows money
shall be governed by the provisions of Articles 1249 and 1250
of this Code.
If what was loaned is a fungible thing other than money, the
debtor owes another thing of the same kind, quantity and
quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time of
the perfection of the loan shall be paid. (1754a)
In 1955, we refer to the principal thing, whether it is a loan of money or loan of
fungible thing. Article 1958 is specific as to interest. Interest which is payable in
kind and not in money. Instead of paying money, and interest is for example,
yung harvest sa farm. How would value it? At the time and place of payment. So
take note of that and again distinguish it from Article 1955.
Now, also last meeting we have emphasized the distinction between simple and
compound interest. And compound interest is what is referred to under 1959.
Please read Article 1959.
Art. 1959.
Without prejudice to the provisions of Article 2212, interest due and unpaid
shall not earn interest. However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added principal, shall earn
new interest. (n)
Alright, so we already know the general rule: Accrued interest or interest due
and unpaid shall not earn interest.
In other words, shall not be compounded. Again that’s the general rule but
there are two exception:
(1) Mentioned in 1959, express stipulation by parties; and
(2) Referring to Article 2212
Art. 2212.
Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point.
So we have the case of Tan vs. Court of Appeals. What happened in this case?
Credit Transactions – First Exam Coverage 2016-2017
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TAN vs. COURT OF APPEALS
FACTS:
Petitioner Antonio Tan obtained two loans from respondent Cultural Center of the
Philippines evidenced by two promissory notes with maturity dates on May 14, 1979 and
July 6, 1979, respectively. The promissory notes provides that petitioner will pay the
principal amount loaned with an interest rate of 14% per annum from the date of the
execution of the promissory note until paid plus 3% service charge. It further provides that
in case of non-payment or default in payment upon demand, a penalty charge of 2% per
month on the total amount due until paid, payable and computed monthly shall be
imposed.
Petitioner defaulted in payment but after a few partial payments, the loans were
restructured by respondent CCP to payable in five installments. However, petitioner still
failed to pay any installment. This caused respondent CCP to file a complaint against
petitioner for the collection of sum of money. Pending litigation, petitioner offered to
tender partial payments to respondent.
The trial court ordered petitioner to pay the respondent with the corresponding stipulated
interest and charges thereof, until fully paid, plus damages and 25% attorney’s fees. The CA
further ruled that petitioner’s offer or tender of payment cannot be deemed as a partial or
irregular performance of the contract. Nevertheless, the CA reduced the award of
attorney’s fees to 5%.
Petitioner appealed the decision arguing that the compounding of interest on surcharges is
not provided in the promissory note. Furthermore, he claims that there is no legal basis for
the imposition of interest on the penalty charge since the NCC only allows imposition of
interest on monetary interest but not the charging of interest on penalty. Hence, since
there is no law that allows imposition of interest on penalties, the penalties should not
earn interest. He further invoked equity.
ISSUES:
1. W/N the imposition of interest on surcharges is provided in the promissory
note. YES
2. W/N an interest may be imposed on penalty charges. YES
3. W/N interest may accrue on the penalty or compensatory interest without
violating the provisions of Article 1959 of the NCC. YES
4. W/N the principle of equity will apply. NO
5. W/N reduction of the partial payments is applicable. YES
RULING:
First issue
The promissory note expressly provides for the imposition of both interest and penalties in
case of default on the part of the petitioner in the payment of the subject restructured
loan.
The stipulated14% per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the NCC. On the other
hand, the stipulated 2% per month penalty is in the form of penalty charge which is
separate and distinct from the monetary interest on the principal of the loan.
Second issue
Penalty on delinquent loans may take different forms. In GSIS vs. CA, the SC ruled that the
NCC permits an agreement upon a penalty apart from the monetary interest. If the parties
stipulate this kind of agreement, the penalty does not include the monetary interest, and as
such the two are different and distinct from each other and may be demanded separately.
Furthermore, in Equitable Banking vs. Liwanag, it was ruled that a stipulation about
payment of an additional interest rate partakes of the nature of a penalty clause which is
sanctioned by law, more particularly under Article 2209 of the NCC.
In this case, the penalty charge of 2% per month began to accrue from the time of default
by the petitioner. There is no doubt that the petitioner is liable for both the stipulated
monetary interest and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest.
Third issue
Penalty clauses can be in the form of penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory interest is sanctioned by and allowed
pursuant to Article 1959 of the NCC considering that:
1. There is an express stipulation in the promissory note permitting the
compounding of interest. The fifth paragraph of the said promissory note
provides that: "Any interest which may be due if not paid shall be added to the
total amount when due and shall become part thereof, the whole amount to
bear interest at the maximum rate allowed by law." Therefore, any penalty
interest not paid, when due, shall earn the legal interest of 12% per annum in
the absence of express stipulation on the specific rate of interest, as in the
case at bar.
2. Article 2212 of the NCC provides that "interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began to run on the
penalty interest upon the filing of the complaint in court by respondent CCP on
August 29, 1984. Hence, the courts a quo did not err in ruling that the
petitioner is bound to pay the interest on the total amount of the principal, the
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monetary interest and the penalty interest.
Fourth issue
Equity cannot be considered inasmuch as there is a contractual stipulation in the
promissory note whereby the petitioner expressly agreed to the compounding of interest in
case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on
the compounding of interest has the force of law between the parties and does not appear
to be inequitable or unjust, the said written stipulation should be respected.
Fifth issue
There appears to be a justification for a reduction of the penalty charge. Inasmuch as
petitioner has made partial payments which showed his good faith, a reduction of the
penalty charge from 2% per month on the total amount due, compounded monthly, until
paid can be justified under Article 1229 of the NCC. The continued monthly accrual of the
2% penalty charge on the total amount due is unconscionable inasmuch as the same
appeared to have been compounded monthly.
In conclusion, considering petitioner’s several partial payments and the fact he is liable
under the note for the 2% penalty charge per month on the total amount due,
compounded monthly, for 21 years since his default in 1980, it is fair and equitable to
reduce the penalty charge to a straight 12% per annum on the total amount due starting
August 28, 1986, the date of the last Statement of Account.
M: So what is the issue here?
S: So the issue in this case is whether the interest here may accrue on the
penalty or compensatory interest without violating the provisions in 1959 of the
Civil Code and the court ruled yes! Under Article 1959 without prejudice to the
provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due
and unpaid, which as added principal, shall earn new interest. And in this case
the court ruled that penalty clauses. . .
M: No. in this case was there the express stipulation of the compounding of
interest?
S: In the promissory note it expressly provided for the imposition of both
interest and penalties in case of default on the part of the petitioner in the
payment of the restructures loan and
M: Now how about the allegation here of the petitioner that the compounding
of interest is deemed eliminated applying the ruling in the case of NAPOCOR?
How did the SC rule as to the said allegation of the petitioner that the ruling in
NAPOCOR must be applied to the instant case? What happened in NAPOCOR?
Why was it cited by petitioner? And why should it not be applied here? Take
your seat.
M: What happened in the case of NAPOCOR that was cited by petitioner here
and whether the same is applicable or not? Remember this is one of the
contention of the petitioner. Why was the case of National Power Corporation
vs. National Merchandising Corporation shall not applicable? Did you read the
case or did you read the digest which did not include the citation. Take your
seat.
Discussion
Alright, what happened in this case? So whether the compounding interest on
the surcharges is proper. There are two issues: imposition of the compounding
interest as well as to the penalties. Now, do remember that the Civil Code
permits an agreement upon a penalty apart from the monetary interest. So the
agreement with regard to whether it is simple or compound interest refers to
monetary interest. We have discussed this before. With regard to penalty, as in
this case, the parties agreed to a penalty charge of 2% per month, the same is
also valid and such penalty charge is considered as a compensatory interest.
Penalty clauses in the form of penalty or compensatory interest and the
compounding of the penalty or the compensatory interest is sanctioned and
allowed as provided in Article 1959 provided it has been expressly stipulated,
also, in writing by the parties. Again you have to connect Article 1959 with the
requirement in 1956 by stipulation, of course, it must also be in writing because
we are still referring to interest here, although compounded.
In this case, there is an express stipulation in the promissory note for making
the compounding of interest. Any interest which may be due, if not paid, shall
be added to the total amount when due and shall become part thereof. The
whole amount of bear interest at the maximum rate allowed by law. Therefore,
any penalty interest not paid when due, shall earn the interest of 12% per
annum in the absence of an express stipulation of a specific rate of interest as in
the case at bar. So interest likewise began to run on the penalty interest upon
the filing of the complaint in court citing Article 2212.
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With regard to the allegation as to the applicability of the NAPOCOR case
wherein the compounded interest was eliminated the SC said the same is not
applicable. The elimination of the compounded interest rate in the case of
NAPOCOR was based on equitable considerations and on the fact that the said
case lasted for 25 years through no fault of the defendant. In this case, equity
cannot be considered in as much as there is a contractual stipulation in the
promissory note whereby the petitioner expressly agreed to the compounding
of interest in case of failure on his part to pay the loan at maturity. In as much
as the said stipulation on the compounding interest has the force of law
between the parties and does not appear to be inequitable and unjust, the said
written stipulation should be respected. Do take note, however, while the
agreement as to the penalty charge is 2% per month, notice that the SC reduced
it 12% p.a. starting Aug. 28, 1996. So that would be 1% penalty charge per
month. What was the reason? Because of the good faith on the part of the
debtor, there were partial payments made.
What happened in the case of Spouses Albos?
SPOUSES ALBOS vs. EMBISAN
FACTS:
Petitioner spouses Albos entered into a contract of Loan with Real Estate Mortgage with
respondent spouses Embisan in the amount of P84k payable within 90 days with a monthly
interest rate of 5%.
Petitioner requested three times for the extension of the period for the payment of the
loan. When they still failed to pay, respondents foreclosed the property. When the
petitioners failed to redeem the property, the title thereof was transferred to the
respondents.
Later on, petitioners filed a complaint for the annulment of the Loan with Real Estate
Mortgage. They allege that the foreclosure sale is void. They also contend that the
imposition of a 5% compounded interest on the loan without their consent or knowledge is
fraudulent and contrary to public morals.
Respondents, on the other hand, insisted that the compounding of the interest was agreed
upon as a condition for the third and final extension of time given for the petitioners to
make good their promise to pay.
The CA ruled that the agreement to compound the interest was just and reasonable. It
added that it was precisely the petitioners’ repeated non-compliance which prompted the
imposition of a compounded interest rate and, therefore, petitioners could no longer feign
ignorance of its imposition.
ISSUE: W/N the compounding of the loan’s interest is erroneous.
RULING: YES
It is undisputed that the parties have agreed and stipulated in writing for the loan to earn
5% monthly interest. The same stipulation was carried over when the period for payment
was extended. However, by the third extension of the loan, respondent spouses decided to
alter the agreement by changing the manner of earning interest rate by compounding it.
As a result, the first requisite that there be an express stipulation for the payment of
interest under Article 1956 is not sufficiently complied with, for purposes of imposing
compounded interest on the loan. The requirement does not only entail reducing in writing
the interest rate to be earned but also the manner of earning the same, if it is to be
compounded. Nevertheless, the failure to specify the manner of earning interest does not
automatically render the stipulation imposing the interest rate void since it is readily
apparent from the contract itself that the parties herein agreed for the loan to bear
interest. Instead, in default of any stipulation on the manner of earning interest, simple
interest shall accrue.
Respondents, having imposed unilaterally the compounded interest rate, had the
correlative duty of clarifying and reducing in writing how the said interest shall be earned.
Having failed to do so, the silence of the agreement on the manner of earning interest is a
valid argument for prohibiting them from charging interest at a compounded rate.
Therefore, in default of any unequivocal wording in the contract, the legal interest
stipulated by the parties should be understood to be simple, not compounded.
Nevertheless, even if there was such an agreement that interest will be compounded, the
5% monthly rate, be it simple or compounded, written or verbal, is void for being too
exorbitant, thus running afoul of Article 1306 of the NCC. The imposition of an
unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust.
In conclusion, the 5% interest rate imposed is nullified for being unconscionable. In lieu
thereof, a simple interest of 12% per annum should be imposed. In view of the nullity of
the interest imposed on the loan which affected the total arrearages upon which
foreclosure was based, the foreclosure of mortgage is rendered void.
M: With that, what is the issue in relation to our topic?
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S: In relation to our topic, the issue here is that whether or not the imposition of
a 5% monthly interest, whether compounded or simple, is valid. And the ruling
here is No, it is unconscionable . . .
M: Before it was rules by the SC as to unconscionable, again before we deem on
whether it is in excess (excessive) or unconscionable, what is the first thing that
you would look at? What is required under the law?
S: According to the law, what is required is a written consent
M: You call that written consent. Express stipulation by the parties in writing. Is
that present here?
S: No. It was not . . .
M: So there was no express stipulation of the parties with regard to payment of
any interest rate?
S: Yes.
M: Are you sure? Was there express stipulation that there be payment of
compounding of interest?
S: Yes, there was express stipulation. However, it was not reduced into writing.
M: Are you sure? There was no express stipulation for the payment of interest .
. . of compounding the interest. It was not sufficiently complied with for the
imposing of compounded interest because what happened here? There was an
express stipulation in writing but what does it contain? Isn’t it that the SC that
there is an ambiguity whether such compounded interest is readily agreed upon
by the parties. And that’s why the SC ruled here that having unilaterally
imposed a compounded interest rate and having failed to clarify the same, they
cannot charge interest at a compounded rate. So what is the effect of that if the
stipulation is ambiguous with regard to the imposition of compounding of
interest? What did the SC say? Take your seat.
Pre-Discussion
How long was your day today? Got an exam? Got other requirements? Hundred
cases? Everybody has four hours, di man siguro five hours ang klase niyo ngayon
no?
Discussion Proper
Alright, in this case, there was no express stipulation in writing or the imposition
of the compounding of interest. The requirement does not only entail reducing
in writing the interest rate to be earned but also the manner of earning the
same, if it is to be compounded. In default of any stipulation on the manner of
earning interest, simple interest shall accrue provided it is in writing. It appears
here that there was ambiguity in the contract. Any ambiguity in a contract
whose terms are susceptible of different interpretations must be read against
the party who drafted it. Here, respondent spouses, having imposed,
unilaterally at that, the compounded interest rate, had the correlative duty of
clarifying and reducing in writing how the said interest shall be earned. Having
failed to do so, the silence of the agreement on the manner of earning interest
is a valid argument for prohibiting them from charging interest at a
compounded rate. Therefore, in default of any unequivocal wording in the
contract, the legal interest stipulated by the parties should be understood to be
simple, not compounded.
So, tingnan niyo muna bago kayo, whether you determine the interest rate is
excessive or unconscionable know first if it has complied with the requirement
that it is expressly stipulated in writing. Wag kayo mag-diretso doon, excited,
excessive, and exorbitant. Bago niyo yan I-address, tingnan niyo muna if the
same is in writing. Nevertheless, as in this case, even if there was such an
agreement that it will be compounded, the 5% monthly rate, would be
considered void for being too exorbitant. The imposition of an unconscionable
rate of interest on a money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It has no support in law. So with that, the interest rate to
be imposed here is nullified for being unconscionable, and in fact, could not be
compounded because it was not expressly stipulated in writing. So what was
imposed is only a simple interest of 12% interest p.a.
Now, what is the effect of the reduction of the interest rate here, very
important, the nullity or it nullified the foreclosure proceedings. The SC
emphasized here that a judgment ordering a foreclosure sale is conditioned
upon a finding on the correct amount of the unpaid obligation and the failure of
the debtor to pay the said amount citing the Espiritu case. Why? Because if the
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
computation of the creditor when it collected from the debtor an amount, if it
was compounded when it’s not have been compounded or the interest rate is
deemed unconscionable, it could have been reduced; the debtor could have
paid the same and therefore, the foreclosure would not have taken place. So as
in this case, the extra-judicial foreclosure is declared null and void and of no
legal effect.
Art. 1960.
If the borrower pays interest when there has been no stipulation therefor,
the provisions of this Code concerning solutio indebiti, or natural obligations,
shall be applied, as the case may be. (n)
M: What is solutio indebiti?
S: Solutio indebiti is a . . . it applies when there is a payment . . . when payment
is made then there is no binding . . . (INAUDIBLE codal definition is Art. 2154. If
something is received when there is no right to demand it, and it was unduly
delivered through mistake)
M: Or as we have learned in obligations and contracts, solutio indebiti is
payment by?
Chorus: Mistake.
M: Alright, what happened in the case of Sigaan?
SIGA-AN vs. VILLANUEVA
FACTS:
Respondent Villanueva filed a complaint for sum of money against petitioner Sebastian
Siga-an. According to her, petitioner offered to loan her the amount of P540k as capital for
her business transactions with the PNO. However, the loan agreement was not reduced in
writing and there was no stipulation as to the payment of interest for the loan.
Respondent paid a total of P1.2M without any receipt issued to her. Petitioner told her that
the excess thereof will be applied as payment for the interest. After consulting a lawyer,
respondent filed a complaint against petitioner for the reimbursement of the excess
payment she made.
Petitioner insisted that there was no overpayment because respondent admitted in the
promissory note that her obligation amounted to P1.2M inclusive of interest. He
maintained that to rule in favor of respondent is tantamount to concluding that the loan
was given interest-free.
The trial court ruled that respondent’s obligation was only to pay the loaned amount and
that the alleged interests due should not be included in the computation of respondent’s
total monetary debt because there was no agreement between them regarding payment of
interest. Since respondent made an excess payment through mistake, petitioner should
return the amount to respondent pursuant to the principle of solutio indebiti.
Petitioner appealed the decision arguing that the application of Article 1956 should not be
absolute and an exception to this is when the borrower admits that a specific rate of
interest was agreed upon such as when respondent admitted in the BP 22 cases that there
was an agreed 7% rate of interest on the loan. He further contended that the principle of
solutio indebiti does not apply. Thus, he cannot be compelled to return the alleged excess
amount paid by respondent as interest.
ISSUE: W/N reimbursement is proper pursuant to the principle of solution indebiti.
RULING: YES
Monetary interest is the interest fixed by the parties as a compensation for the use or
forbearance of money. On the other hand, compensatory interest is the interest imposed
by law or by courts as penalty or indemnity for damages. The right to interest arises only by
virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on
which interest is demanded. Hence, the collection of interest without any stipulation in
writing is prohibited by law pursuant to Article 1956 of the CC.
In this case, although petitioner and respondent entered into a valid oral contract of loan,
they did not agree nor intended the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two regarding the payment of interest.
It is evident that respondent did not really consent to the payment of interest for the loan
and that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot
be gainfully said that such promissory note pertains to an express stipulation of interest or
written agreement of interest on the loan between petitioner and respondent.
In the BP 22 cases, the respondent merely testified that petitioner ordered her to pay
interest. She did not categorically declare that she and petitioner made an express
stipulation in writing as regards payment of interest at the rate of 7%.
An interest may be imposed even in the absence of express stipulation, verbal or written,
regarding payment of interest pursuant to Article 2209 of the CC. Likewise, Article 2212 of
the CC provides that interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point.
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Nevertheless, the interest under these two instances may be imposed only as a penalty or
damages for breach of contractual obligations. It cannot be charged as a compensation for
the use or forbearance of money. In other words, the two instances apply only to
compensatory interest and not to monetary interest. The case at bar involves petitioner’s
claim for monetary interest.
Further, the compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan. Also, no interest was due on the
loan because there was no written agreement as regards payment of interest. The principle
of solutio indebiti applies where
1. A payment is made when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the payment; and
2. The payment is made through mistake, and not through liberality or some
other cause.
It was duly established that respondent paid interest to petitioner without the duty to do
so because there was no express stipulation in writing to that effect. The payment was
clearly a mistake. Since petitioner received something when there was no right to demand
it, he has an obligation to return it.
In conclusion, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not
from a loan or forbearance of money. Thus, an interest of 6% per annum should be
imposed on the amount to be refunded as well as on the damages awarded and on the
attorney’s fees, to be computed from the time of the extra-judicial demand up to the
finality of the decision. In addition, the interest shall become 12% per annum from the
finality of this decision up to its satisfaction.
M: So what is the effect of payment of interest wherein there was no express
stipulation in writing?
S: When there was no express stipulation in writing, under the concept of
solutio indebiti, the petitioner must return he excess amount to the
respondent.
M: Now, would the return or with the obligation of the creditor to return the
excess payment is subject to interest? Based on what we have learned.
S: Yes.
M: What rate?
S: monetary interest rate of 6%.
M: Are you sure?
S: Yes.
M: 6% from what? Depending if it is?
S: 6% depending if it is. . .
M: Again, only stick into consideration the ruling in the case of Eastern Shipping
and Nacar. The obligation to return excess payments. So we have discussed that
in one case already. It was subject to interest rate. How much was the interest
rate imposed? 6 or 12? 6 if when?
S: June 30, 2013
M: Effective July 1, 2013 but prior to that, that is considered as a forbearance of
money. So it is subject to 12% interest. Okay, thank you.
Discussion
So in the case of Sigaan, take note what is the effect if interest is collected by
the creditor even if there was no express stipulation in writing. We apply Article
1960. If the borrower pays interest when there has been no stipulation
therefor, the provisions of The Civil Code concerning solutio indebiti shall be
applied. The principle of solutio indebiti is based on the principle no one shall
unjustly enrich himself at the expense of another. It applies where a payment is
made when (1) there is no binding relation between the payor, has no duty to
pay, and the person who received the payment and (2) the payment was made
through mistake and not through the liberality or some other cause.
Let’s just finish this with the last case - Dela Paz. What happened in this case?
DELA PAZ vs. L&J DEVELOPMENT
FACTS:
Rolando lent P350k without any security to L&J Development. The loan, with no specified
maturity date, carried a 6% monthly interest.
When L&J failed to pay despite repeated demands, Rolando filed a complaint alleging that
Atty. Salonga tricked him into parting with his money without the loan transaction being
reduced into writing. He insisted that the 6% monthly interest rate could not be
unconscionable as in the first place, the interest was not imposed by the creditor but was in
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
fact offered by the borrower, who also dictated all the terms of the loan. He stressed that
in cases where interest rates were declared unconscionable, those meant to be protected
by such declaration are helpless borrowers which is not the case here.
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the
12% per annum legal interest should have been applied from the time of the constitution of
the obligation. At 12% per annum interest rate, it asserted that the amount of interest paid
over and above what is due should be applied or set off to the principal loan resulting to its
complete payment.
The CA ruled that the parties failed to stipulate in writing the imposition of interest on the
loan. Hence, no interest shall be due pursuant to Article 1956 of the CC. And even if
payment of interest has been stipulated in writing, the 6% monthly interest is still
outrightly illegal and unconscionable because it is contrary to morals, if not against the law.
Being void, this cannot be ratified and may be set up by the debtor as defense. For these
reasons, Rolando cannot collect any interest even if L&J offered to pay interest.
Consequently, he has to return all the interest payments to L&J.
ISSUE:
1. W/N the 6% interest rate cannot be applied for failure of the parties to
stipulate it in writing. YES
2. W/N L&J is guilty of fraud. NO
3. W/N the 6% interest rate if stipulated in writing is unconscionable or excessive.
YES
RULING:
First issue
The lack of a written stipulation to pay interest on the loaned amount disallows a creditor
from charging monetary interest pursuant to Article 1956. It is undisputed that the parties
did not put down in writing their agreement. Thus, no interest is due. The collection of
interest without any stipulation in writing is prohibited by law.
The fact that L&J continued paying the 6% monthly interest does not mean that they are
estopped from assailing its validity. Estoppel cannot give validity to an act that is prohibited
by law or one that is against public policy.
Second issue
There was no deception on the part of L&J and Atty. Salonga. For one, despite the lack of a
document stipulating the payment of interest, L&J nevertheless devotedly paid interests on
the loan. It only stopped when it suffered from financial difficulties that prevented it from
continuously paying the 6% monthly rate. For another, regardless of Atty. Salonga’s
profession, Rolando who is an architect and an educated man himself could have been a
more reasonably prudent person under the circumstances. To top it all, he admitted that
he had no prior communication with Atty. Salonga. Despite Atty. Salonga being a complete
stranger, he immediately trusted him and lent his company a significant amount.
Moreover, as the creditor, he could have requested or required that all the terms and
conditions of the loan agreement, which include the payment of interest, be put down in
writing to ensure that he and L&J are on the same page. Rolando had a choice of not
acceding and to insist that their contract be put in written form as this will favor and
safeguard him as a lender. Unfortunately, he did not.
Third issue
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on
a loan is unconscionable, regardless of who between the parties proposed the rate.
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3%
per month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against the law. The Court,
however, stresses that these rates shall be invalidated and shall be reduced only in cases
where the terms of the loans are open-ended, and where the interest rates are applied for
an indefinite period.
In this case, there is no specified period as to the payment of the loan. Hence, levying 6%
monthly or 72% interest per annum is definitely outrageous and inordinate. The situation
that it was the debtor who insisted on the interest rate will not exempt Rolando from a
ruling that the rate is void.
M: Who should pay the Php 226,000?
S: Rolando, the creditor.
M: Can we not apply the principle of estoppel that he is now estopped or it is
now L&J Development is now estopped to question the interest rate
considering that it has already paid the interest of 6% per month before?
S: the SC cited the case of Ching v. Nicdao that the daily payments of the
debtor to the lender were considered as payment and that the interest
payments . . .
M: So my question is whether the principle of estoppel is applicable or not.
S: The SC said that the estoppel cannot give validity to an act that is prohibited
by law or one that is against public policy.
Page | 24

M: Alright because here, clearly, the collection of interest not in writing is
prohibited by law. Now with regard to the . . . Assuming that it is expressly
stipulated in writing, would the 6% interest be considered excessive and
unconscionable?
S: The SC held that just as ruled in a plethora of cases that stipulated interest
rates of 3% per month or higher are excessive, iniquitous, unconscionable and
exorbitant.
M: Now, how would you reconcile that with the previous cases we have
discussed before that interest rates of 5 to 7 percent per month were actually
upheld by the SC? What was the guideline or ruling that was stressed here by
the court? And we have actually discussed this before. Did the SC stipulate a fix
rate to be deemed as excessive or unconscionable? Alright, so what’s the
guideline? It’s there. Such rate shall be invalidated and reduced only in cases
(diba sabi natin before based on factual circumstances of each case) in this case,
where the terms of loans are open-ended and where the interest rates are
applied for an indefinite period. That’s why we have emphasized before, recall
the case, it was also mentioned here, yung 40,000 for 6 months, yung 5% per
month for 2 months, were upheld by the courts.
Now, with regard to the Php 226,000 to be returned by the creditor, would it be
subject to interest rate?
S: Yes.
M: How much?
S: 6% per annum when the . . .
M: From what time until what time?
S: From the finality of the decision until fully paid.
M: Why 6% and not 12?
S: Because this case was decided after June 30, 2013 it was decided on
September 8, 2014.
Discussion
So here, it is undisputed that the parties did not put down in writing their
agreement, so therefore, no interest is due. The collection of interest without
any stipulation in writing is prohibited by law. Moreover, estoppel is not
applicable as it cannot give validity to an act that is prohibited by law. What is
prohibited? Collection of interest which is not expressly stipulated in writing or
one that is against public policy. Even so, the interest rate of 6% per month here
was deemed iniquitous, unconscionable and exorbitant. Even if the SC noted
that time and again, in a plethora of cases that stipulated interest rates of 3%
per month and higher, are excessive, iniquitous, unconscionable, again, such
statement does not mean that that is the fixed rate that once 3% per month,
excessive na. Because again the Court stresses that these rates shall be
invalidated and shall be reduced only in cases where the terms of the loans are
open-ended, and where the interest rates are applied for an indefinite period.
Moreover, the obligation of Rolando to return the excess payment s of Php
226,000 is based on solutio indebiti under Article 1960 and subject to an
interest of 6% p.a. from the finality of this decision. Why? Because this was
promulgated on September 8, 2014, so we apply the ruling in Nacar. If it was
prior to the effectivity of the new legal interest rate, it would have been? What
interest rate? Eastern Shipping 12% yung finality of judgments. So take note of
this cases.
And the last Article 1961, a usurious contract, again as we have mentioned
before, usury is now legally non-existent because of its suspension.
Balgoa
November 29, 2016
Part 1 of 3
DEPOSIT
I. Deposit in General & Its Different Kinds
Title XII. – DEPOSIT.
CHAPTER 1. - DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
Art. 1962.
A deposit is constituted from the moment a person receives a thing belonging
to another, with the obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract. (1758a)
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
The characteristics of a contract of deposit are the following:
(1) It is a real contract (like commodatum and mutuum) because it is
perfected by the delivery of the subject matter.
(2) It may be unilateral contract because only the depositary
(depositorio) has an obligation.
(3) But when the deposit is for compensation, the juridical relation
created becomes bilateral because it gives rise to obligations on the
part of both the depositary and depositor (depositante).
(4) It is a nominate contract because it is given a name under the law.
(5) It is principal in nature.
Two parties in a contract of deposit:
(1) The Depositary or the depositorio who is the recipient, or the one
who receives the subject of the contract of deposit belonging to
another; and
(2) the Depositor or the depositante or the giver.
Under 1962, it is not required that the depositor be the owner of the thing and
there is no transfer of ownership from the depositor to the depositary upon the
delivery of the thing.
Remember that the principal purpose of a contract of deposit is merely for
safekeeping. If safekeeping is only an accessory obligation of the contract, that
would not be considered a contract of deposit or depositum, but some other
contract. For example, a lawyer who keeps a title of land for his client,
safekeeping is merely an accessory obligation in a contract of agency, since the
lawyer represents the client in that case.
DISTINCTIONS OF A CONTRACT OF DEPOSIT AND MUTUUM
DEPOSIT MUTUUM
Principal Purpose is For consumption
safekeeping
Depositor can demand for Must wait for the
the return of the thing at expiration of period
will granted to the Debtor
Subject matter can be Money or consumable
movable or immovable things
Parties are depositor and Lender and borrower
depositary
Generally gratuitous Subject to compensation
No transfer of ownership There is transfer of
ownership
BPI vs. IAC
FACTS:
Respondent Zshornack maintained in COMTRUST a dollar savings account and a peso
current account. Respondent entrusted to COMTRUST $3000 cash for safekeeping. The
agreement was embodied in a document where COMTRUST, thru its Assistant Manager
Garcia, acknowledged the receipt of the amount. However, despite demands, the bank
refused to return the money. This caused the respondent to file a complaint against the
bank.
COMTRUST did not deny the authenticity and due execution of the instrument. However,
it alleged that the $3000 was properly credited to the respondent’s peso current account
at prevailing conversion rates. It explained that the sum was disposed of in this manner:
1. $2000 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920 were deposited to respondent’s current account per deposit slip
accomplished by Garcia; and
2. The remaining $1000 was sold on February 3, 1976 and the peso proceeds
amounting to P8,350 were deposited to his current account per deposit slip
also accomplished by Garcia.
The bank further argued that the contract embodied in the document is the contract of
depositum under Article 1962 which banks do not enter into. The bank alleges that Garcia
exceeded his powers when he entered into the transaction. Hence, the bank cannot be
liable under the contract, and the obligation is purely personal to Garcia.
ISSUE: W/N the parties entered into a contract of deposit.
RULING: YES
he cause of action was based on an actionable document. It was therefore incumbent
upon the bank to specifically deny under oath the due execution of the document.
However, no sworn answer denying the due execution of the document, or questioning
the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the
contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's
authority, but also the bank's power, to enter into the contract in question.
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 Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

The object of the contract between the respondent and COMTRUST was foreign DISTINCTIONS BETWEEN DEPOSIT AND COMMODATUM
exchange. Hence, the transaction was covered by CBC No. 20, which provides that within
one business day upon taking ownership or receiving payment of foreign exchange the DEPOSIT COMMODATUM
aforementioned persons and entities shall sell such foreign exchange to the authorized Principal Purpose is
agents of the Central Bank. Transfer of the use
safekeeping
In the case at bar, the document which embodies the contract states that the $3000 was May be gratuitous Essentially and always gratuitous
received by the bank for safekeeping. The subsequent acts of the parties also show that (Extrajudicial Deposit) Only
the intent of the parties was really for the bank to safely keep the dollars and to return it movable or corporeal things Both movable and immovable
to respondent at a later time upon demand. However, the parties did not intended to sell
may be the object
the US dollars to the Central Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a prohibited transaction which is not authorized
by CBC No. 20, it must be considered as one which falls under the general class of
prohibited transactions. Hence, pursuant to Article 5 of the CC, it is void, having been
executed against the provisions of a mandatory/prohibitory law. More importantly, it
affords neither of the parties a cause of action against the other. When the nullity
proceeds from the illegality of the cause or object of the contract, and the act constitutes
a criminal offense, both parties being in pari delicto, they shall have no cause of action
against each other pursuant to Article 1411of the NCC. The only remedy is one on behalf
of the State to prosecute the parties for violating the law.
Art. 1963.
An agreement to constitute a deposit is binding, but the deposit itself is not
perfected until the delivery of the thing.
Why? A contract of deposit is a real contract perfected by delivery. If there is
already an agreement that the parties may enter into a contract of deposit and
that the property will be delivered tomorrow for safekeeping, that is still a
binding consensual contract BUT for the rules of deposit to apply, there must be
delivery.

Q: Do we have a deposit or a mutuum?

A: Deposit. Art. 1964.
A deposit may be constituted judicially or extrajudicially.
Q: Who is the depositor?
A: Zshornack, ma’am.
Kinds of deposit:
(1) judicial or one which takes place when an attachment or seizure of
Q: Who is the depositary?
property in litigation is ordered (Arts. 2005-2008.); or
A: The bank, ma’am.
(2) extrajudicial (Art. 1967.) which may be—
(a) voluntary or one wherein the delivery is made by the will
Q: Why was it considered a deposit?
of the depositor or by two or more persons each of whom
A: The document which embodies the contract states that the US$3,000.00 was
believes himself entitled to the thing deposited (Arts.
received by the bank for safekeeping. The subsequent acts of the parties also
1968-1995.); or
show that the intent of the parties was really for the bank to safely keep the
(b) necessary or one made in compliance with a legal
dollars and to return it to Zshornack at a later time
obligation, or on the occasion of any calamity, or by
travelers in hotels and inns (Arts. 1996-2004.) or by
Q: What is the effect now that the contract is determined to be a contract of
travelers with common carriers. (Arts. 1734-1735.)
deposit?
A: Since the mere safekeeping of the greenbacks, without selling them to the
DISTINCTIONS BETWEEN JUDICIAL AND EXTRAJUDICIAL DEPOSIT
Central Bank within one business day from receipt, is a transaction which is not
authorized by CB Circular No. 20, it must be considered as one which falls under JUDICIAL EXTRAJUDICIAL
the general class of prohibited transactions. Hence, pursuant to Article 5 of the Through the will of the Court Through the will of the parties
Civil Code, it is void.
Ensures the right of the party to a
Q: What is the effect of a void contract? property or to recovery for a For custody and safekeeping
A: It produces no effect and there is no corresponding obligation. favourable judgment
Generally involves immovable
Movable property only
Q: Can Zhornack demand for damages from the bank? property
A: No, ma’am. When the nullity proceeds from the illegality of the cause or Always onerous Generally gratuitous, possibly onerous
object of the contract, and the act constitutes a criminal offense, both parties Thing returned upon order of the Returned upon demand on the
being in pari delicto, they shall have no cause of action against each other. . ." Court or when obligation has ended depositor
[Art. 1411, New Civil Code.] Safekeeping is made on behalf of the
On behalf of the depositor, or --
persons who has the right
It was clearly agreed upon by the parties that these US dollars shall be received
by the bank for safekeeping. With that purpose, it is clear that they entered into
a contract of deposit. The subsequent acts of the parties also showed that the
Art. 1965.
intent was the safekeeping of the dollars and to return it to Zshornack at a later
A deposit is a gratuitous contract, except when there is an agreement to the
time. With the intention to safekeep the foreign exchange and return it later to
contrary, or unless the depositary is engaged in the business of storing goods.
Zshornack, the SC emphasized that the mere safekeeping of the greenbacks or
dollars by the bank without selling them to the Central Bank is a transaction
A contract of deposit is generally gratuitous, except--
which is not authorized. It is considered as a void transaction. There was no
(1) Where there is contrary stipulation. — The first exception is
intention by the parties to sell the dollars to the Central bank. Otherwise, it will
recognized in the general rule in contracts that the parties may
not be anymore considered as a contract of deposit.
establish any stipulation they may deem convenient provided it is
not contrary to law, morals, good customs, public order, or public
Take note of the effect here. Since such contract of deposit is not allowed by
policy.
law—what we have here is a bank with the obligation to sell the dollars to the
(2) Where depositary engaged in business of storing goods. — The
central bank—the contract is void and the parties are deemed in pari delicto.
second exception is based on the fact that the depositary is engaged
Therefore, Zshornack is not allowed to recover even if he entered into a contract
in the business of storing goods (as in the case of a warehouseman)
of deposit because such arrangement between the depositor and the bank is not
for compensation and not out of pure generosity.
allowed by law.
(3) Where property saved from destruction without knowledge of the
owner. — In involuntary deposit, where property is saved from
Take note also of the distinctions between deposit and mutuum.
destruction during a calamity by another person without the

Page | 26

knowledge of the owner, the latter is bound to pay the former just
compensation.
Art. 1966.
Only movable things may be the object of a deposit.
This means that if what we have is extrajudicial deposit, the subject property
refers to movable things. Only movables or personal property may be the object
of extrajudicial deposit, whether it is voluntary or necessary, for the purpose of
safekeeping. The possibility that the subject property may disappear, or may be
lost or stolen, is not present in a real property.
However, in judicial deposits, it may cover not only movables, but also
immovable properties.
Take note that since what is covered under extrajudicial deposits is a movable
property, they are referring to corporeal things. It does not embrace incorporeal
property since it follows the person or the owner wherever he goes.
Art. 1967.
An extrajudicial deposit is either voluntary or necessary.
Deposit is generally voluntary. It becomes necessary in the three cases
mentioned in Articles 1996 and 1998, i.e., when made in compliance with a
legal obligation, on the occasion of any calamity, or by travelers in hotels and
inns.
The deposit of goods made by travelers or passengers with common carriers
may also be regarded as necessary.
II. Voluntary Deposit
CHAPTER 2. - VOLUNTARY DEPOSIT
SECTION 1. - GENERAL PROVISIONS
Art.1968.
A voluntary deposit is that wherein the delivery is made by the will of the
depositor. A deposit may also be made by two or more persons each of
whom believes himself entitled to the thing deposited with a third person,
who shall deliver it in a proper case to the one to whom it belongs.
DISTINCTIONS BETWEEN VOLUNTARY AND NECESSARY DEPOSITS
VOLUNTARY NECESSARY
Depositor has complete freedom in Lack of free choice in the depositary
choosing the depositary in the part of the depositor
Article 1968 defines what a voluntary deposit is. Delivery is made by the will of
the depositor. He gets to choose who will be the depositary. That choice is not
present in a necessary deposit.
Under a voluntary deposit, two persons are ordinarily involved. However, it is
possible that three people may be involved in a voluntary deposit under the 2 nd
sentence of 1968.Here, 2 persons are alleging that they have a right over the
movable property. Pending the settlement of their dispute, they can agree to
deposit the thing to a third person.
There may also be a case where one of the depositors is not the owner. The
action to compel the depositors to settle their conflicting claims among
themselves would be in the nature of an interpleader Whenever conflicting
claims upon the same subject matter are or may be made against a person who
claims no interest whatever in the subject matter, or an interest which in whole
or in part is not disputed by the claimants, he may bring an action against the
conflicting claimants to compel them to interplead and litigate their several
claims among themselves.
Do take note of the main distinction between a voluntary and necessary deposit.
Again, in voluntary deposit the depositor gets to choose who will be the
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
depositary. BUT in necessary deposits there is no choice as to who will be the
depositary.
With regard to contractual deposits, it is possible that the depositor is not the
owner thereof. For example, we can have a carrier, the agent, or the lessee,
where they may temporarily deposit goods in their possession, even if they are
not the owner thereof.
Art. 1969.
A contract of deposit may be entered into orally or in writing.
Of course, for its perfection, as mentioned in 1963, there must be delivery. With
that, we apply the general rule under article 1356, that contracts shall be
obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. Except for the delivery of the
thing, there are no other formalities required for the existence of a valid
contract of deposit.
Art. 1970.
If a person having capacity to contract accepts a deposit made by one who is
incapacitated, the former shall be subject to all the obligations of a
depositary, and may be compelled to return the thing by the guardian, or
administrator, of the person who made the deposit, or by the latter himself if
he should acquire capacity.
Under 1970, the depositary, the one who [pays] it, is capacitated. The depositor
is incapacitated. If there is mistake or he is a minor, what is the status of the
contract? Voidable. We apply 1970. The depositary is capacitated, so therefore
he is subject to the obligation of a depositary, regardless of the incapacity of the
depositor. Even if the depositor is incapacitated the depositary must return the
property to the legal representative or to the depositor himself if he should
acquire capacity.
Again, what is the effect if the depositary returns the thing to the depositor who
is still incapacitated? It will not extinguish his obligation because capacity must
be present for payment or performance to extinguish the obligation.
Here, the legal representative of the incapacitated, or the incapacitated who has
now regained his capacity can demand the return. Do take note, however, of
what you have learned under Contracts. Persons who are capable cannot allege
the incapacity of those who executed the contract. Here, the depositary who is
capacitated cannot be allowed to go to court and allege that he cannot be
subject to the obligations agreed upon saying that the contract is voidable due
to the incapacity of the depositor.
The scenario is different under 1971.
Art. 1971.
If the deposit has been made by a capacitated person with another who is
not, the depositor shall only have an action to recover the thing deposited
while it is still in the possession of the depositary, or to compel the latter to
pay him the amount by which he may have enriched or benefited himself
with the thing or its price. However, if a third person who acquired the thing
acted in bad faith, the depositor may bring an action against him for its
recovery.
This time the depositary is incapacitated. Remember, if the depositor is
capacitated he will be obliged to the obligations of the depository, regardless of
the incapacity of the depositary. If the depositary is incapacitated, we apply
article 1971. He does not incur the obligation of a depositary, but (1) he shall be
liable for the return of the thing deposited while still in his possession, or (2) to
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.
What if the thing deposited was delivered to a third person by the incapacitated
depositary and the third person is in bad faith (in the sense that he has
knowledge of the incapacity of the depositary or he has knowledge that the
thing was in the possession of the depositary only for the purpose of
Page | 27

safekeeping)? The depositor may recover the thing from the third person in bad
faith.
If the third person is in good faith (he has no knowledge of the incapacity of the
depositary or he has no knowledge that the thing was in the possession of the
depositary only for safekeeping), the depositor’s action is only against the
depositary. In this case, the depositor may compel depositary to return the thing
or the amount by which he may have been benefited.
What if the incapacitated depositary destroyed the thing and he may have been
benefited? No liability. Under Obligations and Contracts, the incapacitated
depositary acquires no liability in case of loss or destruction of the thing.
CHIU
November 29, 2016
Part 2 of 3
Article 1972 states the obligation of a depositary. The primary obligation of the
depositary is to:
1.) Keep the thing safe
2.) Return it when required by the depositor
3.) With regards to safekeeping, he should not use the thing.
Article 1972.
The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who
may have been designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by the provisions
of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining
the degree of care that the depositary must observe.
The degree of care required here would be the same diligence he would
exercise over his own property. In a contract of deposit, it involves the
depositor’s confidence in the good faith and trustworthiness of the depositary.
In a contract of deposit, even if it subject for compensation, the purpose should
still be for safekeeping as agreed upon. The depositary cannot excuse himself
from liability in case of loss by claiming that he exercised the same amount of
care towards the thing deposited as towards his own property. In relation to
Oblicon, the default standard of care is the diligence of a good father of a
family, unless stipulated by the parties or a different degree of diligence
required by law (Ex. Common Carriers). Take note that whether the deposit is
gratuitous or onerous, the depositary is liable if the latter did not exercise the
diligence required. However, the liability will be lesser if the contract of deposit
is gratuitous compared to an onerous one.
CHAN vs. MACEDA
FACTS:
Respondent Maceda entered into a building construction contract with Moreman Builders.
Later on, respondent purchased various construction materials and equipment. Moreman,
in turn, deposited them in the warehouse of petitioners Wilson and Lily Chan. The deposit
was free of charge.
However, Moreman failed to finish the construction as agreed upon causing respondent to
file an action for rescission and damages against Moreman. Pending litigation, respondent
ordered petitioners to return to him the construction materials and equipment which
Moreman deposited in their warehouse. Petitioners, however, told them that Moreman
already withdrew those construction materials.
The trial court ruled in favor of responding reasoning that the inventory of other materials,
aside from the steel bars and cement is found highly reliable based on first, the affidavit of
Moreman’s personnel officer that he was assigned with others to guard the warehouse;
secondly, the inventory shows deposit of assorted materials; thirdly, that there were items
in the warehouse as shown in the balance sheet of Moreman's stock clerk.
ISSUE:
1. W/N respondent was able to prove that the construction materials and
equipment were actually in petitioners' warehouse when the demand for turn
over was made. NO
2. W/N respondent have the right to demand the release of the materials and
equipment or claim for damages. NO
RULING: BOTH NO
First issue
Under Article 1311 of the CC, contracts are binding upon the parties (and their assigns and
heirs) who execute them. When there is no privity of contract, there is likewise no
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
obligation or liability to speak about and thus no cause of action arises.
In an action against the depositary, the burden is on the plaintiff to prove the bailment or
deposit and the performance of conditions precedent to the right of action. A depositary is
obliged to return the thing to the depositor, or to his heirs or successors, or to the person
who may have been designated in the contract.
In the present case, the record is bereft of any contract of deposit, oral or written,
between petitioners and respondent. If at all, it was only between petitioners and
Moreman.
Granting arguendo that there was indeed a contract of deposit between petitioners and
Moreman, it is still incumbent upon respondent to prove its existence and that it was
executed in his favor. However, respondent miserably failed to do so. The only pieces of
evidence respondent presented to prove the contract of deposit were the delivery
receipts. However, they are unsigned and not duly received or authenticated by either
Moreman, petitioners or respondent or any of their authorized representatives. Hence,
those delivery receipts have no probative value at all.
Moreover, respondent also failed to prove that there were construction materials and
equipment in petitioners' warehouse at the time he made a demand for their return.
Second issue
Considering that respondent failed to prove (1) the existence of any contract of deposit
between him and petitioners, nor between the petitioners and Moreman in his favor, and
(2) that there were construction materials in petitioners' warehouse at the time of
respondent's demand to return the same, petitioners have no corresponding obligation or
liability to respondent with respect to those construction materials. As a consequence,
respondent has no right whatsoever to claim for damages.
Discussion: In this case, Moreman deposited the construction materials in the
warehouse of Chan. During the pendency of the case between Moreman and
Maceda, Maceda ordered the petitioners to return the things that Moreman
deposited. The obligation of a depositary is to safekeep the thing deposited and
to return it to depositor. However, there was no obligation in the part of
petitioners to Maceda. When there is no privity of contract, there is likewise no
obligation to speak about and thus no cause of action arises. The records are
bereft of any contract of deposit between Chan and Maceda. Respondent is not
even an heir, successor or a person who was designated in the contract.
Granting that there was a contract between Petitioners and Moreman, it was
still incumbent for respondent to prove its existence and was executed in favor
of respondent. Actually, there was no more construction materials in
petitioner’s warehouse when respondent demanded for it.
Article 1973.
Unless there is a stipulation to the contrary, the depositary cannot deposit
the thing with a third person. If deposit with a third person is allowed, the
depositary is liable for the loss if he deposited the thing with a person who is
manifestly careless or unfit. The depositary is responsible for the negligence
of his employees.
General Rule: Depositary is not allowed to deposit the thing to a 3rd person
because the basis of a contract of deposit is trust and confidence.
Exception – Unless authorized by express stipulation.
The effect when the depositary allows the thing to be deposited to a 3rd person
is that the depositary will be liable for the loss under the following
circumstances:
(1) He transfers the thing deposited to a 3rd person without authority
although there is no fault or negligence of the 3rd party;
(2) Deposits the thing to a 3rd person who is manifestly careless or unfit
even though authorized;
(3) The thing lost was due to the negligence of the employee whether or
not the employee was careless
The depositary will be exempted from liability when the thing is lost without the
negligence of the 3rd person whom he has allowed to deposit the thing if such
3rd person is not manifestly careless or unfit.
Article 1974.
The depositary may change the way of the deposit if under the circumstances
he may reasonably presume that the depositor would consent to the change if
he knew of the facts of the situation. However, before the depositary may
make such change, he shall notify the depositor thereof and wait for his
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decision, unless delay would cause danger.
As a rule here, the depositary may change the manner of deposit if there are
circumstances indicating that the depositor would consent to the change.
Depositary therefore, should first notify the depositor in his decision except
such delay would cause danger.
Article 1975.
The depositary holding certificates, bonds, securities or instruments which
earn interest shall be bound to collect the latter when it becomes due, and to
take such steps as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit
boxes.
If the thing deposited should earn interest, the additional obligation of the
depositary is to collect the interest as it becomes due as well as to take steps to
preserve the value corresponding to them.
This shall not apply for the rent of safety deposit boxes.
CA AGRO-INDUSTRIAL vs. CA
FACTS:
Petitioner CA Agro and the spouses Pugaos entered into an agreement for the purchase of
two parcels of land. They further agreed that the TCTS of the two lots shall be deposited in
a safety deposit box of any bank, which could be withdrawn only upon the joint signatures
of a representative of the petitioner and the Pugaos upon full payment of the purchase
price.
The parties rented a safety deposit box of respondent Security Bank. For this purpose,
both signed a contract of lease with the conditions that:
1. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
2. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith.
After the execution of the contract, two renter's keys were given to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the
respondent Bank. The safety deposit box has two keyholes, one for the guard key and the
other for the renter's key, and can be opened only with the use of both keys. Petitioner
claims that the certificates of title were placed inside the said box.
Later on, Aguirre (petitioner), accompanied by the Pugaos went to the respondent to open
the safety deposit box and get the certificates of title in order to effect a sale to another
buyer. However, when it was opened, the box did not contain the certificates.
As a result, the petitioner filed a case against the respondent bank alleging that regardless
of nomenclature, the contract for the rent of the safety deposit box is actually a contract
of deposit and that the respondent Bank is liable for the loss of the certificates. It further
argues that the two conditions in the contract are contrary to law and public policy and
should be declared null and void under Article 1306.
The CA ruled that the contract between the petitioner and respondent Bank is in the
nature of a contract of lease by virtue of which the petitioner and its co-renter were given
control over the safety deposit box and its contents while the Bank retained no right to
open the said box because it had neither the possession nor control over it and its
contents. As such, the contract is governed by Article 1643 of the CC.
ISSUE: W/N the contract between CA Agro and the bank is a contract of deposit.
RULING: YES but a special kind of deposit
The contract in the case at bar is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and absolute possession and
control of the safety deposit box was not given to the joint renters who are the petitioner
and the Pugaos. The guard key of the box remained with the respondent Bank; without
this key, neither of the renters could open the box. On the other hand, the respondent
Bank could not likewise open the box without the renter's key. In this case, the said key
had a duplicate which was made so that both renters could have access to the box.
Neither could Article 1975 be invoked. The first paragraph thereof cannot apply to a
depositary of certificates, bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear that the depositary cannot
open the box without the renter being present.
The prevailing rule is that the relation between a bank renting out safe-deposit boxes and
its customer with respect to the contents of the box is that of a bailor and bailee, the
bailment being for hire and mutual benefit.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Note that the primary function is still found within the parameters of a contract of deposit,
the receiving in custody of funds, documents and other valuable objects for safekeeping.
The renting out of the safety deposit boxes is not independent from, but related to or in
conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing and, pursuant to Article 1306,
the parties thereto may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy. Accordingly, the depositary would be liable if, in performing
its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of
the agreement. In the absence of any stipulation prescribing the degree of diligence
required, that of a good father of a family is to be observed. Hence, any stipulation
exempting the depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to law and public
policy.
The two provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72(a) of the General Banking Act. Both exempt the latter from
any liability except as contemplated in condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be admitted to any rented safe.
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual
practice of the Bank. It is not correct to assert that the Bank has neither the possession nor
control of the contents of the box since in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover, the respondent Bank keeps the
guard key to the said box. As stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this guard key. Clearly then, the
conditions in the contract are void and ineffective.
In the instant case, the respondent Bank's exoneration cannot be based on or proceed
from a characterization of the impugned contract as a contract of lease, but rather on the
fact that no competent proof was presented to show that respondent Bank was aware of
the agreement between the petitioner and the Pugaos to the effect that the certificates of
title were withdrawable from the safety deposit box only upon both parties' joint
signatures, and that no evidence was submitted to reveal that the loss of the certificates of
title was due to the fraud or negligence of the respondent Bank. This in turn flows from
this Court's determination that the contract involved was one of deposit. Since both the
petitioner and the Pugaos agreed that each should have one renter's key, it was obvious
that either of them could ask the Bank for access to the safety deposit box and, with the
use of such key and the Bank's own guard key, could open the said box, without the other
renter being present.
SIA vs. COURT OF APPEALS
FACTS:
Petitioner Sia rented the safety deposit box of respondent Security Bank where he placed
his collection of stamps. However, his stamp collection were damaged due to floods in
1985 and 1986. Petitioner claimed damages against the bank.
The bank denied liability for the damaged stamps collection on the bases of paragraphs 9
and 13 of their Contract of Lease.
1. The bank alleged that by reason of the lease under paragraph 9, its liability is
limited to the exercise of the diligence to prevent the opening of the safe by
any person other than the Renter, his authorized agent or legal
representative; and
2. Under paragraph 13, the Bank is not a depository of the contents of the safe
and it has neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith.
The bank also contended that its contract with the plaintiff was one of lease and not of
deposit and, therefore, governed by the lease agreement which should be the applicable
law. It further claimed that the destruction of the petitioner’s stamps collection was due to
a fortuitous event which is beyond its obligation to notify the petitioner since there was no
showing of respondent’s participation in the aggravation of the loss or injury.
ISSUE:
W/N a contract of deposit exists between the parties to hold the bank liable for the
damaged stamp collections.
RULING: YES
The SC cited the case of CA Agro. It observed that the two provisions in the contract of
lease are strikingly familiar as well as the limitation on the scope of the exercise of due
diligence by the banks which would seem that the bank is not bound to exercise diligence
of any kind at all. Hence, as held in the case of CA Agro, such provisions must be stricken
down for being contrary to law and public policy as they are meant to exempt the
respondent from any liability for damage, loss or destruction of the contents of the safety
deposit box which may arise from its own or its agents' fraud, negligence or delay.
Accordingly, respondent cannot take refuge under the said conditions.
It is true that the damage to the stamp collection was due to a fortuitous event. However,
the respondent failed to consider that it was guilty of negligence. The bank was aware of
the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where
Page | 29

the safe deposit box was located. In view thereof, it should have notified the petitioner in
order that the box could have been opened to retrieve the stamps, thus saving the same
from further deterioration and loss. In this respect, it failed to exercise the reasonable care
and prudence expected of a good father of a family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly, the fourth characteristic of a fortuitous event
is absent pursuant to Article 1170 of the CC which provides that those who in the
performance of their obligation are guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable for damages.
The destruction or loss of the stamp collection which was the product of 27 years of
patience and diligence caused the petitioner pecuniary loss; hence, he must be
compensated therefor.
Discussion: (In comparing the cases of Sia and Agro): A safety deposit box in a
bank is a special kind of deposit and not an ordinary one. It is not an ordinary
contract because the full control and the possession of the safety box is within
the premises of the bank and the renters cannot open it at will. This can be seen
when the bank has records on who can access it and the bank is in possession of
a guard key for which without it, the renter cannot open the safety deposit box.
Going back to Art 1975 paragraph 2, this sentence would mean that the safety
deposit boxes is not governed by the rules on deposit and even in the rules on
lease. The SC adopted from an American jurisprudence which essentially states
that the relationship between a bank, with regards to a safety deposit box and
its customer concerning the former’s contents is that of a bailor-bailee.
In the case of Agro, there was no showing that the bank was made aware of any
agreement between Agro and the spouses. As to the bank, it only had
knowledge as to who is allowed to access the safety deposit box, which was an
authorized representatives of Agro or the spouses. The bank here, was not held
liable since it did not know that both the representative and one of the spouses
should be present in opening the box. Take note that there is no change of
relation even if the bank is not aware of the content. Even if the stipulation
absolving the bank’s liability is void, it does not automatically mean that the
bank is the one liable. The seeking for relief should prove that the bank
committed fraud, negligent or was made aware of the agreement between Agro
and the spouses.
In the case of Sia, the bank was held liable because the safety deposit box which
kept the stamps was in the lower portion of the premises. There was a flood
because at the first instance that it had happened, it should have informed Sia
of the said flood since the bank cannot open the safety deposit box without the
presence of the depositor. The bank here was clearly guilty of negligence. So,
any stipulation exempting the bank from liability is not binding. The bank was
aware of the flood, knew that the flood waters affected the room where the
safety deposit boxes were located, it should have notified Sia about the flood
and could have saved it from further deterioration or loss. The bank failed to
exercise the reasonable care and prudence expected of a good father of a
family hence it is liable for the deterioration or loss. The obligor must be free
from any participation in the aggravation or the injury resulting to the creditor.
DEIPARINE
Novemver 29,2016
Part 3 of 3
Art. 1976.
Unless there is a stipulation to the contrary, the depositary may commingle
grain or other articles of the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in the mass. (n)
Alright, remember the general rule in a contract of deposit. What’s the
obligation of the depositary? To return the exact same thing deposited.
Article 1976 is an exception wherein the thing deposited can now be
commingled with the same kind and quality.
Now, GENERAL RULE, the depositary may commingle grain or other articles of
the same kind and quality. Various depositors of the commingled goods shall
own the entire mass in common in proportionate shares.
For example, you have a warehouse, there are 100 sacks of rice. You deposited
there 10. If there is a fortuitous event, there is a loss, each depositor shall be
entitled to such portion of the entire mass. (The depositors will suffer the loss
proportionately.) However, if the parties stipulate otherwise, commingling is
not allowed.
Again, this is another exception. If subject of the deposit is grain or other
articles of the same kind and quality, pwede ihalo, unless otherwise stipulated.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
If it is allowed to be commingled, in the absence of stipulation, what will be
returned by the depositary is ‘the same kind and quality’ na. That is allowed in a
contract of deposit.
If it is not of the same kind and quality, the duty of the depositary is to keep
them separate or at least identifiable. He must return to the depositor the
identical article delivered.
Art. 1977.
The depositary cannot make use of the thing deposited without the express
permission of the depositor. Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires its use, it
must be used but only for that purpose. (1767a)
Deposit is for safekeeping and not for use. Unauthorized use may make the
depositary liable for damages. BUT, the depositary may use the thing even
without the express permission of the depositor? When? If such use is
necessary for the preservation of the thing. Of course, it is limited for that
purpose only.
What property requires use for its preservation? Dba, sasakayan. Paandarin mo
yan. Wag mo lang i-drive from Davao to Panabo.
What else? Appliances. Paandarin mo yan para hindi madali masira.
Now, what happened in the case of Baron vs David.
BARON vs. DAVID
FACTS:
Respondent David is engaged in running a rice mill where petitioners Silvestra Baron and
Guillermo Baron placed a quantity of their palay. Silvestra deposited 1000 cavans and 24
kilos while Guillermo placed 1,800 cavans and 43 kilos.
On January 17, 1921, a fire occurred that destroyed the mill and its contents. As a result,
petitioner sought the recovery of the value of the palay. Petitioner alleged that the palay
which they delivered was sold to respondent.
Respondent countered that the palay was merely deposited to him subject to future
withdrawal by the depositors or subject to some future sale which was never effected by
virtue of the fire in January 1921. As a consequence of the fire, he is relieved from all
responsibility.
ISSUE: W/N a contract of deposit exists between the parties.
RULING: NO (the SC said that it could be commodatum or mutuum under Article 1768
but actually it is a contract of sale since the plaintiffs are seeking the proceeds of their
palay)
Under article 1768 of the Civil Code, when the depository has permission to make use of
the thing deposited, the contract loses the character of mere deposit and becomes a loan
or a commodatum; and of course by appropriating the thing, the bailee becomes
responsible for its value.
In this case, petitioner placed the palay in question in the respondent’s mill with the
understanding that the respondent was at liberty to convert it into rice and dispose of it
at his pleasure. The mill was actively running during the entire season thus it was
impossible to keep the petitioner’s palay segregated. In fact the respondent admits that
the petitioner’s palay was mixed with that of others.
Considering the fact that the defendant milled and thereafter sold the plaintiffs' palay
prior to the date of the fire, he should be bound to account for its value, and his liability
was not extinguished by the occurrence of the fire.
As to the argument of the defendant’s lawyer that in order for the plaintiffs to recover, it
is necessary that they should be able to establish that the plaintiffs' palay was delivered
in the character of a sale, and prove that the delivery to the defendant was made in the
character of deposit, the Supreme Court held that for even supposing that the palay may
have been delivered in the character of deposit, subject to future sale or withdrawal at
plaintiffs' election, nevertheless if it was understood that the defendant might mill the
palay and he has in fact appropriated it to his own use, he is of course bound to account
for its value under article 1768 of the Civil Code.
What is the agreement of the parties to make it ‘not’ a contract of deposit? You
have to determine what is the obligation here of the petitioner.
The agreement was that it can be converted. So, to convert the palay into rice.
What will be the obligation of the defendant? It would be the payment of the
palay.
Page | 30

Was there a conversion of contract of deposit to sale? Or was there really a
contract of sale? Was the purpose really for safekeeping in the first place?
DISCUSSION:
So here, the understanding between the parties is that the defendant was at
liberty to convert the palay that was delivered, into rice, and dispose of it at his
pleasure. It was not really for safekeeping.
Moreover it was impossible to keep the plaintiff’s palay segregated, and it was
quite certain that the plaintiff’s palay had already been milled and disposed
prior to the fire. Considering that the defendant had milled and sold the palay
prior to the fire, he is bound to account for its value and his liability was not
extinguished by the occurrence of the fire. Value---money. Genus never
perishes.
Even supposing that the palay had been delivered in the character of a deposit
subject to future sale, nevertheless, it was understood that the defendant might
mill the palay and he has in fact appropriated it to his own use, he is bound to
account for its value.
Art. 1978.
When the depositary has permission to use the thing deposited, the contract
loses the concept of a deposit and becomes a loan or commodatum, except
where safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its existence must be proved.
(1768a)
So here, there was no intention for safekeeping, even if it was a deposit. xxx
inaudible xxx
So here (referring to Baron case), the obligation is not extinguished by the
happening of a fortuitous event, because AGAIN, MONEY is the subject matter.
It is a generic thing. Genus never perishes.
Now, do take note, if the things deposited is not consumable, and the
depositary is allowed to use, it will now lose its character as a deposit and
become commodatum despite being denominated as a deposit.
Unless if safekeeping was the principal purpose of the contract.
If what was deposited is a money or consumable thing, and the depositary is
allowed to use, it will result into consumption. It will convert the contract to a
simple loan or mutuum.
However, if the safekeeping is still the principal purpose, it will now be
considered as an irregular deposit, which will be discussed under Article 1980.
But before that, we have the case of Javellana vs Lim.
JAVELLANA vs. LIM
FACTS:
Defendants Lim and plaintiff Javellana entered into a contract of deposit whereby the
latter deposited, without interest, the sum of P2686 to the former.
When the obligation became due, the defendants went to the plaintiff’s office begged
the plaintiff for an extension of time for the payment thereof but this time, the ‘deposit’
was subject interest.
Later on, the plaintiff sued the defendants to collect the amount deposited together with
its interest.
ISSUE: W/N there was a contract of deposit.
RULING: NO
Article 1768 provides that “When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and becomes a loan or bailment.
In this case, when defendant Lim went to the office of the plaintiff asking for an extension
of one year neither himself nor the other defendant were able to return the amount
deposited, for which reason he agreed to pay interest at the rate of 15 per cent per
annum, it was because, as a matter of fact, he did not have in his possession the amount
deposited, he having made use of the same in his business and for his own profit; and the
plaintiff, by granting them the extension, evidently confirmed the express permission
previously given to use and dispose of the amount stated as having been deposited.
Credit Transactions – First Exam Coverage 2016-2017
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For this reason it must be understood that the debtors were lawfully authorized to make
use of the amount deposited, which they have done, as subsequent shown when asking
for an extension of the time for the return thereof, inasmuch as, acknowledging that they
have subjected the letter, their creditor, to losses and damages for not complying with
what had been stipulated, and being conscious that they had used, for their own profit
and gain, the money that they received apparently as a deposit, they engaged to pay
interest to the creditor from the date named until the time when the refund should be
made. Such conduct on the part of the debtors is unquestionable evidence that the
transaction entered into between the interested parties was not a deposit, but a real
contract of loan.
Why is it a loan and not a deposit? Isn’t it that the contract referred to a
contract of deposit?
Can we say that at the renewal of the contract there was conversion to loan?
No, ma’am. The SC said there was no renewal of the contract. In this case
ma’am, the petitioner received the money by virtue of the loan and they were
authorized to dispose it.
Why is it the SC considered it as a loan? What was the obligation of Lim here?
The obligation of Lim here is to return the same amount ma’am, and not the
exact thing that was given. Alright!
DISCUSSION:
So here, remember, the parties initially referred to the agreement as a deposit
and even the obligation referred to as the obligation to return.
But actually, the subsequent contract entered into show that the true intention
from the very beginning was a real loan of money with interest.
Notwithstanding that they referred to it as a contract of deposit.
There was no obligation to return the exact same thing of which the amount
deposited consisted. And they could have accomplished the return, agreed
upon by the delivery of a sum equal to the one received by them.
So take note of the distinction of a deposit and a loan.
Debtors are lawfully authorized to make use of the amount deposited, which
they have done. The creditor, by granting them the extension, confirmed the
express permission previously given them to use and dispose of the amount
stated as having been deposited.
There was no renewal of the deposit converted into loan because again the
defendants from the very beginning received the said amount by virtue of a
loan under the name of a deposit. But again it is actually a contract of loan.
Always look at the intention of the parties and not at the nomenclature that are
used.
Art. 1979.
The depositary is liable for the loss of the thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may have
been authorized to use the same. (n)
So, general rule, the depositary is not liable for loss during a fortuitous event,
without his fault. We have 4 exceptions under 1979: so stipulated, he uses the
thing without permission, he delays its return and he allows others to use it,
even though he himself may have been authorized to use the same.
Relate that to Article 1973.
Art. 1973.
Unless there is a stipulation to the contrary, the depositary
cannot deposit the thing with a third person. If deposit with a
third person is allowed, the depositary is liable for the loss if
he deposited the thing with a person who is manifestly
careless or unfit. The depositary is responsible for the
negligence of his employees. (n)
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Art. 1980.
Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan. (n)
Do you have money in the bank? Let’s say that you have money in the bank.
Fixed, savings, and current deposits. For your part, your purpose is for
safekeeping. But for the bank, the bank can use the money you have deposited
for their ordinary transactions.
Remember, how does the bank earn profit from the money you deposited? diba
magpahiram sila ng pera. Loan.
In that transaction, we call that an ‘irregular deposit’. It is irregular in the sense
that the bank is allowed to use YOUR money.
In other words, the money you have in the bank, sino ang creditor? Ikaw. Ang
Bangko ang debtor.
Alright, we have the case of Rogers vs Smith.
ROGERS vs. SMITH
FACTS:
Petitioner Rogers and respondent Smith entered into a contract. In consideration for the
execution of the contract, petitioner delivered 12k pesos in gold to respondent. During
this time, the silver was worth more than 2k pesos in gold. They further stipulated that it
shall bear an interest rate of 8% per annum. In turn, petitioner executed a document
acknowledging receipt of the said amount.
The respondent remitted the interest to petitioner every three months in silver.
Petitioner received these payments in silver without any protest until in February 1904
when, by virtue of an American law, the gold standard had been introduced in the
Philippines thereby increasing the value of gold.
According to petitioner, by reason of the new law, he was entitled to receive his interest
in gold since when he delivered the money to the respondent it was delivered in gold
coin. He claims that the contract between them is a deposit and not a loan. As such, the
ownership over the gold coins remained to him and was never transferred to respondent.
As a result, respondent was bound to return to him the identical coin which they had
received. He further argued that, while the contract is not a deposit in the strict sense of
the word, the document evidences an "irregular deposit."
ISSUE: W/N a contract of loan exists between the parties.
RULING: YES
Although petitioner repeatedly calls it a deposit, the contract between him and
respondent is a contract of loan. Furthermore, he cannot maintain his claim of deposit in
view of the fact that the instrument provides for the payment of interest.
There are three points of difference between a loan and an irregular deposit according to
Manresa.
1. In an irregular deposit the only benefit is that which accrues to the
depositor, while in loan the essential cause for the transaction is the
necessity of the borrower. The contract in question does not fulfill this
requirement. It is very apparent that the contract was not for the sole
benefit of petitioner but it was for the benefit of both parties. The benefit
which respondent received was the use of the money while the benefit
which petitioner received was the interest of his money.
2. In an irregular deposit the depositor has a preference over other creditors in
the distribution of the debtor's property
3. In an irregular deposit, the depositor can demand the return of the article at
any time, while a lender is bound by the provisions of the contract and
cannot seek restitution until the time for payment, as provided in the
contract, has arisen. It is apparent from the terms of the document that the
petitioner could not demand his money at any time. He was bound to give
notice of his desire for its return and then to wait for six months before he
could insist upon payment.
In conclusion, the document in question is evidence of an ordinary loan and created
between the plaintiff and defendants the relation of debtor and creditor.
DISCUSSION:
So here, the SC held that the contract was a contract of loan even if the parties
constantly refer to it as a contract of deposit.
Now, take note the subject of the loan was $12,000 payable on the last day of
the six months after presentation; and subsequently payment of interest. There
was no obligation to return the exact identical thing.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
It could not have been an irregular deposit. Take note of the distinctions that
were emphasized here.
(1) In an irregular deposit, the only benefit is that which accrues to the
depositor; while in a loan, the essential cause is the necessity of the
borrower.
The contract here does not fulfill this requirement of an irregular
deposit. It is very apparent that is was not for the sole benefit of
Rogers. Like any other loan of money, it was for the benefit of both
parties. Smith here benefited through the use of the money; while
Rogers received the interest of his money.
(2) In irregular deposit, the depositor can demand the return of the
article at any time, while a lender is bound by the provisions of the
contract and cannot seek restitution until the time for payment.
So plaintiff cannot demand his money at any time.
(3) in an irregular deposit the depositor has a preference over other
creditors in the distribution of the debtor's property.
So here the document in question would show that the intention of
the parties is really that of an ordinary loan and the relationship of
the parties is that of a debtor and creditor.
SABRIDO
December 1, 2016
Part 1 of 1
COMPAÑIA AGRICOLA vs. NEPOMUCENO
FACTS:
Mariano Velasco & Co. was a registered partnership which the court declared insolvent.
As a result, the Compañia Agricola filed a petition asking the court to declare it as a
preferred creditor. Petitioner alleged that it delivered P10k to Mariano Velasco & Co.
They agreed that the amount will earn an interest at the rate of 6% per annum until its
full payment for the term of three months. According to petitioner, the said transaction
was at least a contract of irregular deposit. As proof thereof, petitioner presented a
receipt in writing and the testimony of the manager of the respondent partnership.
ISSUE: W/N the claim of petitioner should be considered a deposit.
RULING: NO but it was a contract of loan
The claim of the petitioner should not be considered a deposit and a preferred claim. The
P10k delivered by petitioner to Mariano Velasco and Co. cannot de regarded as a
technical deposit. As ruled in the case of Javellana, the receipt in writing is actually a real
contract of loan of money with interest notwithstanding the fact that in the original
document executed by the debtors it is called a deposit. Not only this, they engaged to
pay interest to the creditor from the date named until the time when the refund should
be made.
In the case of Rogers vs. Smith, Manresa made three distinctions between an irregular
deposit and a loan which are not present in the present case. For one, the transaction in
question was clearly not for the sole benefit of the Compania Agricola but it was
evidently for the benefit of both parties. Neither could the alleged depositor demand
payment until the expiration of the term of three months.
Why is this a contract of loan and not an irregular deposit? That is exactly the
point of this case. Using the distinction mentioned in the case, why is this not
deposit? First, in an irregular deposit, the only benefit is that which accrues to
the depositor, while in a loan the essential cause for the transaction is the
necessity of the borrower. What else? In an irregular deposit, the depositor can
demand the return of the thing at any time while the lender is bound by the
provisions of the contract and cannot seek restitution until the time of payment
as provided in the contract has arisen. In this case, the purpose is not for the
sole benefit of Compania Agricola. It was for the benefit of both parties. Neither
can the alleged depositor demand the return of the thing until the expiration of
the term of three months. So here, we have a contract of loan without
preference, which is one of the distinctions which was also mentioned in the
case of Rogers v. Smith. So an irregular deposit enjoys preference while a simple
loan does not.
What about in the case of BPI v. Court of Appeals, Roel?
BPI vs. COURT OF APPEALS
FACTS:
Respondents Eastern Plywood Corporation and Lim hold one joint account with the
Commercial Bank. Mariano Velasco opened a joint checking account with Lim in the
amount of P120k with funds withdrawn from the account of Eastern and/or Lim.
Page | 32

Later on, Velasco died leaving an outstanding balance of P662,522.87 in the account. Lim
then transferred one-half of the balance amount to the bank account of Eastern.
Thereafter, Eastern obtained a loan with interest at 14% per annum from COMTRUST
evidenced by a promissory note. In addition, Eastern and Lim, and COMTRUST signed a
Holdout Agreement in the joint name of Lim and Velasco. In the meantime, the court in
the proceeding for the settlement of the estate of Velasco authorized Velasco’s heir to
withdraw the whole remaining balance in the joint account of Velasco and Lim.
Later on, petitioner filed a case against Lim and Eastern demanding payment of the
promissory note. Lim and Eastern, in turn, filed a counterclaim against BPI for the return
of the balance in the joint account subject of the Holdout Agreement and the interests
thereon after deducting the amount due on the promissory note.
Petitioner contended that the Holdout Agreement was subject to a suspensive condition
that the balance shall become a security for Lim’s promissory note only if respondents
interests to that amount are established as a result of a final and definitive judicial action
or a settlement between and among the contesting parties thereto.
Respondents denied that a suspensive condition exists since the money deposited in the
joint account of Velasco and Lim came from Eastern and Lim's own account who are the
rightful owners thereof. They further contended that by virtue of the Holdout
Agreement, petitioner has the duty to debit the account of the respondent under the
promissory note to set off the loan even though the same has no fixed maturity.
ISSUE: W/N BPI can demand payment of the loan despite the existence of the Holdout
Agreement.
RULING: YES
It is clear from the Holdout Agreement that BPI had every right to demand from
respondents the payment of the promissory note. However, it has no duty to apply or to
set off the deposit to the payment of a loan for such is merely a privilege which the bank
has the option to exercise.
The Holdout Agreement further provides that petitioner is not precluded from
demanding payment from Eastern and from instituting an action to recover payment of
the loan, which are alternative actions. Hence, when petitioner demanded payment of
the debt directly from Eastern and Lim, clearly it had opted not to exercise its right to
apply part of the deposit subject of the Holdout Agreement to the payment of the
promissory note. The "suspensive condition" theory of the petitioner is, therefore,
untenable.
Important ruling
Pursuant to Article 1980, bank deposits are in the nature of irregular deposits. They are
really loans because they earn interest. The relationship then between a depositor and a
bank is one of creditor and debtor. The deposit under the questioned account was an
ordinary bank deposit. Hence, it was payable on demand of the depositor.
The account was proved and established to belong to Eastern even if it was deposited in
the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to
withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay
Eastern simply because it already allowed the heirs of Velasco to withdraw the whole
balance of the account. The petitioner should not have allowed such withdrawal because
it had admitted in the Holdout Agreement the questioned ownership of the money
deposited in the account really belongs to Eastern.
Moreover, the order of the court in the estate proceeding merely authorized the heirs of
Velasco to withdraw the account. BPI was not specifically ordered to release the account
to the said heirs.
Because the ownership of the deposit remained undetermined, BPI, as the debtor with
respect thereto, had no right to pay to persons other than those in whose favor the
obligation was constituted or whose right or authority to receive payment is indisputable.
The payment made by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor, Eastern.
In conclusion, respondents are ordered to pay the petitioner the promissory note for
P73k with interest at 14% per annum on the principal, computed from the date the loan
was obtained (August 1978) until payment and 12% per annum on the interest which had
accrued up to the date of the filing of the complaint, computed from that date until
payment pursuant to Article 2212 of the CC. The award of P331,264.44 in favor of the
private respondents shall bear interest at the rate of 12% per annum computed from the
filing of the counterclaim.
So here, the Supreme Court mentioned Article 1980.
Art. 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan. (n)
Bank deposits are in the nature of irregular deposits. They are really loans. We
apply the rule on loans because they earn interest and the relationship is that of
a creditor-debtor. The deposit under the questioned account is an ordinary
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
bank deposit and it was payable on the demand of the depositor- in this
instance, Eastern.
What happened in the case of Metrobank?
METROBANK vs. BA FINANCE
FACTS:
Bitanga obtained a loan from respondent BA Finance. As a security thereof, Bitanga
mortgaged his car. In the contract, Bitanga has the duty to insure the mortgaged car and
that in case of loss shall be payable to BA Finance. Bitanga insured the car to Malayan
Insurance Co.
The car was stolen causing Malayan Insurance to issue a check as payment thereof.
However, without the indorsement or authority of his co-payee BA Finance, Bitanga
deposited the check to his account with the Asianbank Corporation, which is now merged
with petitioner Metrobank. Bitanga subsequently withdrew the entire proceeds of the
check.
Upon knowledge thereof, respondent BA Finance demanded the payment of the value of
the check from Asianbank. However, Asianbank failed to do so. This caused respondent
to file a complaint against Asianbank and Bitanga alleging that it is entitled to the entire
proceeds of the check.
Petitioner denied liability alleging that BA Finance has no cause of action since it has no
legal right and title to the check considering that the check was not delivered to BA
Finance.
The trial court ruled that Asianbank was negligent in allowing Bitanga to deposit the
check to his account and to withdraw the proceeds thereof without his co-payee BA
Finance having either indorsed it or authorized him to indorse it in its behalf. It further
ordered Asianbank and Bitanga jointly and severally liable to BA Finance in the sum of
P224,500 with interest thereon at the rate of 12% from the date of the demand
(September 25, 1992) until fully paid.
ISSUES:
1. W/N petitioner is liable to respondent BA Finance. YES
2. W/N the 12% interest rate is proper. NO
RULING:
First issue
In the present case, Bitanga is authorized to indorse the check as the drawer names him
as one of the payees. Moreover, his signature is not a forgery nor has he or anyone
forged the signature of the representative of BA Finance Corporation. No unauthorized
indorsement appears on the check.
Clearly, petitioner, through its employee, was negligent when it allowed the deposit of
the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact
that the check did not carry the indorsement of BA Finance.
As has been repeatedly emphasized, the banking business is imbued with public interest
such that the highest degree of diligence and highest standards of integrity and
performance are expected of banks in order to maintain the trust and confidence of the
public in general in the banking sector.
Second issue
Nevertheless, the trial court’s grant of legal interest of 12% per annum on the value of
the check is not proper. The obligation in this case did not arise out of a loan or
forbearance of money, goods or credit. Hence, Article 1980 of the CC does not apply since
the nature of the relationship between BA Finance and petitioner is one of agency
whereby petitioner, as collecting bank, is to collect for BA Finance the corresponding
proceeds from the check.
Not being a loan or forbearance of money, the interest should be 6% per annum
computed from the date of extrajudicial demand on September 25, 1992 until finality of
judgment; and 12% per annum from finality of judgment until payment, conformably
with Eastern Shipping Lines vs. Court of Appeals.
The Supreme Court emphasized that what we have here is a contract of Agency.
The bank is a collecting bank to collect for the BA finance for the corresponding
proceeds of the check. As to the diligence, the same degree of diligence is
required from the bank with that in a contract of agency and even in a simple
deposit.
With regard to the application interest, the Supreme Court emphasized that
Article 1980 does not apply because not being a loan or forbearance of money,
we have a contract of agency, and the interest should be 6% per annum from
the date of the extrajudicial demand and 12% per annum from the finality of
judgment.
What happened in the case of Reyes v. Court of Appeals?
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REYES vs. COURT OF APPEALS
FACTS:
In view of the 20th Asian Racing Conference to be held in Sydney, Australia, petitioner
Reyes applied to respondent Far East Bank for a foreign exchange demand draft in
Australian dollars.
At first, the application was denied because respondent did not have an Australian dollar
account in any bank in Sydney. Nevertheless, petitioner asked if there could be a way for
respondent bank to accommodate PRCI's urgent need to remit Australian dollars to
Sydney. The respondent bank then informed them of a roundabout way of effecting the
requested remittance to Sydney. Respondent explained that it would draw a demand
draft against Westpac Bank in Sydney and have the latter reimburse itself from the US
dollar account of the respondent in Westpac Bank in New York. Petitioner agreed to such
arrangement in order to effect the urgent transfer of Australian dollars
The respondent bank approved the said application of PRCI and issued Foreign Exchange
Demand Draft. However, upon due presentment of the foreign exchange demand draft, it
was dishonored because the respondent bank has no deposit dollar account with the
drawee Wespac-Sydney.
Later on, when petitioners went to Sydney to attend the said racing conference, they
could not register because the foreign exchange demand draft for their registration fee
had been dishonored. As a result, petitioners filed a case against the respondent bank.
The CA ruled that there is no basis to hold the respondent bank liable for damages for the
reason that the had done what an ordinary prudent person is required to do in the
particular situation, although petitioners expect the Bank to have done more. The Bank
having done everything necessary or usual in the ordinary course of banking transaction,
cannot be held liable for any embarrassment and corresponding damage that petitioners
may have incurred.
The petitioners contend that due to the fiduciary nature of the relationship between the
respondent bank and its clients, the respondent should have exercised a higher degree of
diligence than that expected of an ordinary prudent person in the handling of its affairs as
in the case at bar. The appellate court, according to petitioners, erred in applying the
standard of diligence of an ordinary prudent person only.
ISSUE: W/N the bank is liable for failure its to exercise higher degree of diligence as
required.
RULING: NO
In Philippine Bank of Commerce vs. CA, it was ruled that the degree of diligence required
of banks, is more than that of a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. In other words banks are duty bound to
treat the deposit accounts of their depositors with the highest degree of care. However,
such applies only to cases where banks act under their fiduciary capacity, that is, as
depositary of the deposits of their depositors. The same higher degree of diligence is not
expected to be exerted by banks in commercial transactions that do not involve their
fiduciary relationship with their depositors.
In the present case, the respondent bank was not required to exert more than the
diligence of a good father of a family in regard to the sale and issuance of the subject
foreign exchange demand draft.
The case at bar does not involve the handling of petitioners' deposit, if any, with the
respondent bank. Instead, the relationship involved was that of a buyer and seller,
between the respondent bank as the seller of the subject foreign exchange demand draft,
and PRCI as the buyer, with the 20th Asian Racing conference Secretariat in Sydney as the
payee thereof. The said foreign exchange demand draft was intended for the payment of
the registration fees of the petitioners as delegates of the PRCI to the 20 th Asian Racing
Conference in Sydney.
The evidence shows that the respondent bank did everything within its power to prevent
the dishonor of the subject foreign exchange demand draft. The erroneous reading of its
cable message to Westpac-Sydney by an employee of the Westpac-Sydney could not
have been foreseen by the respondent bank. If there was mistake committed by
Westpac-Sydney in decoding the cable message which caused the Bank's message to be
sent to the wrong department, the mistake was Westpac's, not the Bank's.
In conclusion, the dishonor of the subject foreign exchange demand draft is not
attributable to any fault of the respondent bank, whereas the petitioners are estopped
from denying the said arrangement or procedure, which have been a long standing
practice in banking to facilitate international commercial transactions.
The degree of diligence required of banks is more than that of a diligence of a
good father of a family where the fiduciary relationship with their depositors is
concerned – in the case for example of irregular deposits. The banks are duty-
bound to treat the deposit accounts of their depositor with the highest degree
of care. Again, this applies only where the banks act under their fiduciary
capacity- that is as depositary of the deposits of their depositors. The same high
degree of diligence is not expected to be exercised by banks in their commercial
transactions that do not involve the fiduciary relationship with their depositor.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
While it may be true that the spouses Reyes are depositors of the respondent
bank- they have money in the bank, the transactions involved here between the
bank and Reyes does not involve the fiduciary relationship. Therefore, the
respondent bank is not required to exert more than the diligence of a good
father of a family because what is involved here is the sale and issuance of the
subject Foreign Exchange Demand Draft. The relationship here is just that of a
buyer and seller. So the bank is not required to exercise extraordinary diligence.
The bank here was able to prove that they exercised ordinary diligence and was
in good faith.
Daphny, how about in the case of Guingona?
GUINGONA vs. CITY FISCAL
FACTS:
PR David, together with his sister, invested and deposited with the Nation Savings and
Loan Association (NSLA) certain amounts of money. However, the bank was placed under
receivership on March 1981. Nevertheless, upon the request of PR David, petitioners
Guingona assumed the bank’s obligation to PR David by executing a joint promissory note
in his favor thereby acknowledging the bank’s indebtedness. The amount of indebtedness
assumed appeared to be bigger than the original claim because of the added interest and
the inclusion of other deposits of PR’s sister.
When petitioners failed to pay the remaining balance of the investment, PR David
charged petitioners Guingona with estafa and for violation of the regulations on foreign
exchange transactions. PR alleged that petitioners misappropriated the said amounts.
Petitioners denied any criminal liability. They alleged that because NSLA was urgently in
need of funds and at David's insistence, his investments were treated as special- accounts
with interest above the legal rate. In other words, the transactions between David and
NSLA were simple loans which is a purely civil obligation. Being such, the case should be
dismissed for lack of jurisdiction.
The City Fiscal of Manila denied the motion to dismiss.
ISSUE: W/N a contract of deposit exists between the parties to hold petitioners liable for
estafa.
RULING: NO but a contract of loan or mutuum exists
Petitioners’ liability is civil in nature and therefore the City Fiscal of Manila does not have
jurisdiction over the charge of estafa.
When PR David invested his money with the bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit. Thus, pursuant to
Article 1980, it should be noted that fixed, savings, and current deposits of money in
banks and similar institutions are not true deposits but are considered simple loans and,
as such, are not preferred credits.
Furthermore, bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed, savings, or current
are to be treated as loans and are to be covered by the law on loans.
Hence, the relationship between PR David and the NSLS is that of creditor and debtor.
Consequently, the ownership of the amount deposited was transmitted to the Bank upon
the perfection of the contract and it can make use of the amount deposited for its
banking operations, such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has no obligation to
return or deliver the same money that was deposited. And, the failure of the Bank to
return the amount deposited will not constitute estafa through misappropriation
punishable under Article 315(1)(b) of the RPC, but it will only give rise to civil liability over
which the City Fiscal has no jurisdiction.
Even assuming that the failure of the bank to pay the time and savings deposits of PR
David would constitute estafa, novation resulted when petitioners assumed the
obligation of the bank to PR David thereby converting the original trust relation between
the bank and PR David into an ordinary debtor-creditor relation between the petitioners
and David. Consequently, the failure of the bank or petitioners to pay the deposits of PR
David would not constitute a breach of trust but would merely be a failure to pay the
obligation as a debtor.
What is the nature of the contract involved when David put his money in the
Time deposit? It was considered as a simple loan or Mutuum and not of a
contract of deposit for the purpose of safekeeping wherein the bank is expected
to return the exact same thing that he deposited in the bank. Again the
Supreme Court emphasized that current savings ad deposits in banks and
similar institutions are not true deposit. They are really loans because they earn
interest. Failure of the bank to honor the deposits is failure of the bank to pay
its obligation as a debtor.
Page | 34

Remember the effect of a loan – transfer of the ownership of the thing upon
delivery. While the bank has the obligation to return the amount deposited, it
has no obligation to return the very same money that was deposited. Failure of
the bank to return the amount deposited will not amount to Estafa through
misappropriation. It will only give rise to civil liability. In order for a person to be
held liable for Estafa through misappropriation, it must be proven that he has
the obligation to return the same money or personal property that he received.
Petitioners in this case have no such obligation to return the same money.
Dorothy, how about in the case of Province of Bataan?
PROVINCE OF BATAAN vs. VILLAFUERTE
FACTS:
A real property referred as the BASECO property was advertised for auction sale. No
bidder vied for the property thus the Province of Bataan acquired ownership thereof.
Later on, the Province of Bataan entered into a 10-year contract of lease with 7-R Port
Services for a minimum escalating annual rental of P18M. Another contract of lease was
also entered into between the Province of Bataan and Marina Port Services.
However, the auction sale of the BASECO property was subsequently declared null and
void by court order. The Province of Bataan was ordered to reconvey the property to the
Republic of the Philippines including all the proceeds and/or the fruits that they have or
may have receive from the property.
Not only this, upon learning of the lease contracts entered into by the petitioner, the
PCGG filed a petition to enjoin petitioner from collecting rental payments from the
lessees.
The trial court granted the petition and the Province of Bataan ordered to remit the lease
rentals it may receive from the 7-R Port Services and the Marina Port Services and to
deposit it with the Land Bank of the Philippines in the name and/or account of the Court
to be held in escrow for the person or persons, natural or juridical, who may be finally
adjudged lawfully entitled thereto.
The Province of Bataan appealed the decision arguing that the trial court, or any court for
that matter, is not authorized to issue such escrow order, whether as a provisional or
permanent remedy absent any legal basis.
ISSUE: W/N the order to deposit in escrow the rental payments pertaining to the
Province of Bataan is erroneous.
RULING: NO
An escrow is a written instrument which by its terms imports a legal obligation and which
is deposited by the grantor, promisor, or obligor, or his agent with a stranger or third
party, to be kept by the depositary until the performance of a condition or the happening
of a certain event, and then to be delivered over to the grantee, promisee, or obligee.
While originally, the doctrine of escrow applied only to deeds by way of grant, or
instruments for the conveyance of land, under modern theories of law, the term escrow
is not limited in its application to deeds, but is applied to the deposit of any written
instrument with a third person.
Particular instruments which have been held to be the subject of an escrow include
bonds or covenants, deeds, mortgages, oil and gas leases, contracts for the sale of land or
for the purchase of personal property, corporate stocks and stock subscriptions,
promissory notes or other commercial paper, insurance applications and policies,
contracts for the settlement of will-contest cases, indentures of apprenticeship, receipts
assigning concessions and discontinuances and releases of causes of action. Moreover, it
is no longer open to question that money may be delivered in escrow.
Applying the foregoing principles and considering the peculiarities of the instant case, the
lower court, in the course of adjudicating and resolving the issues presented in the main
suit, is clearly empowered to control the proceedings therein through the adoption,
formulation and issuance of orders and other ancillary writs, including the authority to
place the properties in custodia legis, for the purpose of effectuating its judgment or
decree and protecting further the interests of the rightful claimants of the subject
property.
The courts’ authority proceeds from its jurisdiction and power to decide, adjudicate and
resolve the issues raised in the principal suit. Stated differently, the deposit of the rentals
in escrow with the bank, in the name of the lower court, is only an incident in the main
proceeding. In conclusion, the escrow orders of the lower court were upheld.
I included this case so you can familiarize yourselves with the term Escrow. As
defined, an escrow is a written instrument which by its terms imports a legal
obligation and which is deposited by the grantor (so what you have here is a
contract of deposit), promisor, or obligor, or his agent with a stranger or third
party, to be kept by the depositary (so its for the purpose of safekeeping) until
the performance of a condition or the happening of a certain event (take note
of that. That is one of the distinctions of an escrow arrangement), and then to
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be delivered over to the grantee, promisee, or obligee. However, escrow is not
limited in its application to deeds, but is applied to the deposit of any written
instrument with a third person and money may be delivered to an escrow as
well. So what takes place here? Money subject to escrow for the purposes of
safekeeping. But this cannot be considered as an irregular deposit because here
there is a specific purpose to which it will be kept by the depositary. The
arrangement for escrow, we have here the bank again with the condition that it
will be released upon the happening of a certain condition or event. Just take
note of this escrow case.
FULGAR
December 6, 2016
Part 1 of 3
We emphasized the relevance of Article 1980, that when it comes to fixed,
savings, and current deposits of money in banks and similar institutions, they
shall be governed by the provisions concerning simple loan and not of the civil
code provisions governing deposits.
Art. 1981.
When the thing deposited is delivered closed and sealed, the depositary must
return it in the same condition, and he shall be liable for damages should the
seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there is proof to the
contrary.
As regards the value of the thing deposited, the statement of the depositor
shall be accepted, when the forcible opening is imputable to the depositary,
should there be no proof to the contrary. However, the courts may pass upon
the credibility of the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the depositary's fault, he
shall keep the secret of the deposit. (1769a)
Art. 1982.
When it becomes necessary to open a locked box or receptacle, the depositary
is presumed authorized to do so, if the key has been delivered to him; or
when the instructions of the depositor as regards the deposit cannot be
executed without opening the box or receptacle. (n)
These articles include additional obligations on the part of the depositary in
relation to the nature of what has been delivered.
If the thing delivered is closed and sealed, the depositary has the obligation to
the return the thing exactly - closed and sealed. However, if the seal or lock
should be broken, he should be liable for damages and there is a presumption
that he is at fault, that he is the reason why the seal or lock has been broken,
and he has to show proof that he is not be liable for damages.
Also, Article 1981, if the seal or lock is broken, regardless of whether the
depositary is at fault or not, the depositary has the obligation to keep sacred
the deposit. This obligations are emphasized, otherwise there's a violation of
the trust reposed on the depositary. Remember, he must respect the secrets
the depositors desires to keep and guard, and this intention is because of the
nature of the thing delivered - it is sealed and locked.
As regards to the value deposited, statements of the value by the depositor
shall be accepted. But this is only a prima facie evidence, as provided in the
third paragraph of Article 1981: the courts may pass upon the credibility of the
statements made by the depositor with regard to the value claimed by him.
Under Article 1982, when can the depositary be allowed to open a locked box
or receptacle delivered to him for safety? Only in two instances:
(a) a presumed authority which can arise if, for example, a key is given
to him, or
(b) through necessity, when there were instructions given by the
depositor and they cannot be executed without opening the box.
Art. 1983.
The thing deposited shall be returned with all its products, accessories and
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accessions.
Should the deposit consist of money, the provisions relative to agents in
article 1896 shall be applied to the depositary. (1770)
So who owns the products, accessories, and accessions of specific things? The
owner. So the depositor, as the owner, or the representative or who represents
the owner, he (the owner) should also be entitled to the return of the products,
accessories, and accessions. These are consequences of ownership. If what was
deposited was not money, the depositary has no right to make use of thereof,
otherwise it's not a contract of deposit anymore, and there is no liability to pay
interest. Recall Article 1978. Otherwise, if it involves money, we apply 1980 -
irregular deposit. Likewise, you can also apply the rules with regard to agency
under Article 1896.
Now, if the depositary is in delay or has used the money, he will be liable for
interest as indemnity. He owes interest on the sums he has applied to his own
use, from the day on which he did so and those which he still owes after the
extinguishment of the deposit. In other words, no need for demand for you to
be liable for interest.
Art. 1984.
The depositary cannot demand that the depositor prove his ownership of the
thing deposited.
Nevertheless, should he discover that the thing has been stolen and who its
true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the period
of one month, the depositary shall be relieved of all responsibility by
returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing has not
been lawfully acquired by the depositor, the former may return the same.
(1771a)
Ownership on the part of the depositor is not required for the validity of the
deposit. Likewise, the depositary cannot require the depositor to prove that he
owns the thing delivered because ownership is not required. Otherwise, this
may open the door to bad faith on the part of the depositary. Why? Because of
the pretense of requiring proof of ownership. Di ko to ibalik sayo unless you
show proof that you really own this subject matter. Then he can use that as a
reason to retain or keep the thing, which again has no basis because ownership
is not required for the perfection of the contract of deposit.
Article 1984 covers an instance wherein the depositary discovers that the thing
has been stolen and he knows who is thetrue owner. This imposes an obligation
upon him, provided this two requisites are present. What are the steps he
should take if he has knowledge that the thing in his possession for safekeeping
has been stolen, and he knows who the true owner is?
First, he must advise the true owner that he is in possession of the thing subject
of the contract of deposit, and he will give the true owner a period of one
month to claim. The true owner has one month to claim. This 30 day period is
for the protection of the depositary.
The true owner can recover through other legal process. What do you mean by
that? If naglampas na yung 30 days form the time the true owner was informed
that the depositary was in the possession of the stolen thing, the depositary can
return the same to the depositor without any obligation to the true owner. The
true owner cannot go after the depositary ("habulin kita for damages. Bakit gi
release mo doon sa depositor knowing that it has been stolen.") The defense of
the depositary "i informed you, but within 30 days you failed to claim. Under
the law I am authorized to release it to the depositor." On the part of the true
owner, he has other legal means to go after the depositor to recover the thing
that was stolen.
Also provided under 1984, last paragraph, if the depositary has reasonable
grounds that the thing has not been lawfully acquired by the depositor, in other
words, it may be stolen, but he does not know who the true owner is. What is
the obligation here on the part of the depositary? He can return the thing to the
depositor. Also notice, he has no obligation to report it to the police, unless of
course, if by itself, it is an illegal substance. Kunwari drugs diay to. So I think it's
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best if i-report niya. Pero if the thing itself is lawfully required, the depositary
has Article 1984 as his defense.
The problem here may arise wherein it is not covered by 1984. What if he
knows who is the true owner, and he informs the true owner thereof that he
can claim within 30 days. Kaso bago pa nag-lapse ng 30 days, the depositor now
demands for the return of the thing. Can the depositary refuse to return it to
the depositor on the ground na "you'll wait for 30 days diba?" since he claims
that he is the true owner. There's actually no provision in the civil code
regarding this instance. But if you look at the nature of the contract of deposit,
if the depositor demands the return of the thing, the depositary has the
obligation to return the thing to the depositor. Otherwise, it would be contrary
to the nature of a contract of deposit. You can also use it as a defense as with
regard to the true owner that the true owner has other legal remedies available
under the law, as long as here, ang depensa lang naman on the party of the
depositary, is that he has performed his duties as a depositary. And under the
rules on depositary, he has the obligation to return it upon the demand of the
depositor, and in a succeeding article, even if it subject to a period.
Art. 1985.
When there are two or more depositors, if they are not solidary, and the
thing admits of division, each one cannot demand more than his share.
When there is solidarity or the thing does not admit of division, the
provisions of Articles 1212 and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to one of the depositors, the
depositary shall return it only to the person designated. (1772a)
Recall your obligations and contracts. Divisibility or indivisibility of a thing is
different from an obligation being solidary. That is also emphasized here in
1985. If the thing deposited is divisible, for example sacks of rice, and the
depositors are not solidary, in other words there is no stipulation that they will
be solidarily liable, there is no law which provides that they are solidarily liable,
and the obligations does not provide for solidarity, what would be the effect?
The depositary can only demand his proportionate share. But what if the
obligation is solidary, or that there is a stipulation that the obligation is solidary;
or the thing deposited is not divisible, like a car. So obligation solidary or thing
deposited not divisible. Article 1985 tells us that the rule on active solidarity
shall apply, so you have article 1212, 1214.
However, even if the depositors are solidary and it is stipulated that the
depositary is bound to return it to a specific or designated depositor, the
depositary has to return the subject matter to him, although that person has
not made any demand for its return.
For example, Pedro and Juan deposited a car. Indivisible thing. They have
stipulated that Pedro is the one who is entitled to the return of the thing. If Juan
made the demand, is the depositary obligated to return the thing to Juan? No,
because of the stipulation. If there is a stipulation that the thing should be
returned to one of the depositors, the depositary shall return it only to the
person designated.
Art. 1986.
If the depositor should lose his capacity to contract after having made the
deposit, the thing cannot be returned except to the persons who may have
the administration of his property and rights. (1773)
Do not confuse this with Article 1970. In Article 1970, at the time the contract
of deposit was perfected, the depositor was already capacitated. As we learned
in Article 1970, the property must be returned to his, guardian, administrator,
or to him, the depositor, should he acquire capacity.
Article 1986 tells us that at the time of perfection, both were capacitated.
Subsequently, the depositor loses his capacity. 1986 imposes an obligation to
the depositary that the subject of the deposit must be returned to his legal
representative. Article 1986 does not state that the obligation is suspended. So
the obligation of the depositary continues plus the obligation that he return it
to the legal representative of the depositor who has already lost his capacity.
Art. 1987.
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If at the time the deposit was made a place was designated for the return of
the thing, the depositary must take the thing deposited to such place; but the
expenses for transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be made where the
thing deposited may be, even if it should not be the same place where the
deposit was made, provided that there was no malice on the part of the
depositary. (1774)
Compare this with Article 1251, the general rules with regard to ----- obligations.
Of course, if you have a stipulation that will govern in the absence of stipulation
you have to consider whether the subject matter is a determinate thing or not.
If it is a determinate thing, then it should be where the thing was at that time
the contract was perfected; which is different here because it states that even if
it should not be the same place where the original deposit was made, where
the thing deposited might be.
Art. 1988.
The thing deposited must be returned to the depositor upon demand, even
though a specified period or time for such return may have been fixed.
This provision shall not apply when the thing is judicially attached while in the
depositary's possession, or should he have been notified of the opposition of
a third person to the return or the removal of the thing deposited. In these
cases, the depositary must immediately inform the depositor of the
attachment or opposition. (1775)
This is the article referred to earlier, wherein the depositary has the obligation
to return the thing upon demand of the depositor. Remember the general rule:
the depositor can demand the return of the thing deposited at will whether a
period has been stipulated or not. Whenever a period is agreed to, the same is
for the benefit of the depositor, but it may be validly waived by him. But what if
the deposit is subject to compensation. For example, the deposit is good for one
year and then you have agreed that the compensation that the depositary is
entitled to is 1000/month. If the depositor demands for the return of the thing,
the depositor has the obligation to pay the depositary for the whole period
agreed upon. So bayaran niya yung 1000 per month for the whole year, that
was the agreement. The depositary is entitled to the compensation
corresponding to the entire period agreed upon.
The exception to the general rule: if the thing is judicially attached while in the
depositary's possession, of course he cannot return it upon demand of the
depositor. Otherwise, the depositary would be disobeying the judicial order of
he court. Another instance would be if he is notified of the opposition of a third
person to the return or the removal of the thing deposited. So the depositary
should only be authorized in case of conflicting claims. This is an exception to
which the depositary can continue to retain the thing if there is a third person
opposing the right of the depositor as to the return of the thing. The better step
to be taken on the part of the depositary is to file before the court for an action
for interpleader. This third person, magsamok samok lang. What could happen
is that the depositary can go and file before the court and file an action for
interpleader, so that it will be resolved. Otherwise, forever niya ihold, to the
detriment of the depositor, just because of a third person presupposing it
without the filing of any case. So for the depository to be safe, it is better that
the conflicting claims be submitted to the court to which the depositary can file
an action for an interpleader.
Art. 1989.
Unless the deposit is for a valuable consideration, the depositary who may
have justifiable reasons for not keeping the thing deposited may, even before
the time designated, return it to the depositor; and if the latter should refuse
to receive it, the depositary may secure its consignation from the court.
Sa 1988, the depositor demands the return of the thing. Sa 1989, the depositary
will be the one who will initiate the return of thing. With that, you determine if
the deposit is gratuitous or subject to compensation. If it is gratuitous, the
depositary may return the thing deposited notwithstanding that a period has
been fixed, but it must be for a justifiable reason. If the depositor refuses to
receive the thing, the depositary, as his remedy, can deposit the thing to a
judicial authority, through an action for consignation. When there is refusal to
accept delivery, consignation may be resorted to.
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Kasi gratuitous ito, so the law allows the depositary kasi wala namang
ginabayad sa kanyan ang depositor, provided it is for a justifiable reason. If it is
for a valuable consideration, the depositary has no right to return the thing
deposited before the expiration of the time designated, even if he suffers
inconvenience. Because form the very beginning, he already knew of the nature
and that it will be subject to compensation.
Art. 1990.
If the depositary by force majeure or government order loses the thing and
receives money or another thing in its place, he shall deliver the sum or other
thing to the depositor.
Article 1972 - the obligation of the depositary to return the exact same thing
that was deposited. Article 1990 provides the exception to which the thing was
lost by force majeure or by government order. Of course the obligation of the
depositary will be extinguished. However, if the depositary receives money or
other things, he has the obligation to deliver the same to the depositor. If for
example, it’s not that often that a personal property may be expropriated, but
for example it is expropriated so may just compensation. The just compensation
should be given to the depositor. That is the obligation under 1990. Otherwise,
the depositary would unjustly enrich himself at the expense of the depositor.
Art. 1991.
The depositor's heir who in good faith may have sold the thing which he did
not know was deposited, shall only be bound to return the price he may have
received or to assign his right of action against the buyer in case the price has
not been paid him.
The first thing you should take note here is that this refers to the depositary's
heirs, not the depositor's heirs, because were talking about possession, and
who is in possession? The depositary. So namatay yung depositary, and one of
his heirs noticed that there is this thing in the possession or among the things of
the depositary. So the depositary dies, the object is left to the heirs and then
the heirs in good faith, sells it to another person. What is the obligation of the
heirs? He must return the price received or if wala pa na-collect, assign to the
depositor to collect the same if it has not been paid, and what is to be collected
is the purchase price and not the value of the thing. However, if the heir is in
bad faith, to which he acknowledges that the object is the subject matter of this
deposit, the heir could be liable for damages. If the heir had knowledge of the
contract of deposit, any --- or appropriation of the thing deposited constitutes
estafa. Kasi alam man niya that it is subject to the safekeeping, but despite of
that he sells the same to another person.
The articles enumerate the obligations of the depositary. 1972 - to keep the
things safely, to return the thing as a general rule upon demand. 1989 - if
gratuitous the depositary can return the same provided there is justifiable
reason, the depositary likewise has the obligation to return the thing plus
products, accessories, and accession; if the thing is lost through a force majeure
or government order and he receives money or another thing in its place, the
depositary has the obligation to deliver the sum or the thing to the depositor.
Where to be delivered? By agreement, in the absence thereof, where the thing
is deposited; obligation not to deposit to a third person unless authorized;
obligation under 1974 to change the way of deposit; the earning of interest
which we distinguished from the rent of safety deposit boxes; the obligation not
to comingle things if stipulated or if the things are of different kind and quality;
obligation not to make use of the thing deposited unless authorized; liability for
loss in cases of fortuitous events - what are those instances? Those are
exceptions to the general rule; obligations when the thing deposited is closed or
sealed; obligation to pay interest to sum converted to personal use if deposit
consists of money; obligation to advise the true owner when discovered that
the thing deposited was stolen.
On the part of the depositor what are his general obligations? To pay expenses
for preservation, and to pay for losses incurred by the depositary due to the
character of the thing deposited.
SECTION 3. - OBLIGATIONS OF THE DEPOSITOR
Art. 1992.
If the deposit is gratuitous, the depositor is obliged to reimburse the
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depositary for the expenses he may have incurred for the preservation of the
thing deposited.
This applies to a gratuitous deposit. The rule here is based on equity. Why?
Becasue the depositor would have incurred expenses for preservation just the
same. Otherwise, the depositor would unjustly enrich himself at the expense of
the depositary. This is different from commodatum, Article 1941. In Article
1992, the depositor is the one obliged to reimburse the depositary. It covers the
right to reimbursement from the depositor, covers all expenses for
preservation, whether ordinary or extraordinary, as long as it is for necessary
expenses. Recall commodatum, you have to distinguish whether it is ordinary or
extraordinary. If it is extraordinary, is it for preservation of the thing or did it
arise from the use of the thing. In Article 1992, walang distinction. However, it is
also clear that with regard to useful expenses or charges for pure luxury or pure
pleasure, these are not governed.
What if the deposit is for compensation? The general rule is that the expenses
shall be borne by the depositary. Why? Because these expenses are deemed
already included in the consideration agreed upon by the parties. Of course, as
an exception, stipulation between the parties.
NARCA
December 6, 2016
Part 2 of 3
Article 1993.
The depositor shall reimburse the depositary for any loss arising from the
character of the thing deposited, unless at the time of the constitution of the
deposit the former was not aware of, or was not expected to know the
dangerous character of the thing, or unless he notified the depositary of the
same, or the latter was aware of it without advice from the depositor. (n)
The general is that a depositary must be reimburse for loss suffered by him
because of the character of thing deposited. It is possible that the thing
deposited is flammable or may chemical bah. So if there is a loss suffered by the
depositary, the depositor shall be held liable. However, take note of the four
exceptions:
(1) If at the time of the constitution of the deposit, the depositor was
not aware of the character of thing deposited.
(2) The depositor was not expected to know the dangerous character of
the thing.
(3) The depositary was notified of the character of the thing.
(4) The depositary was aware of it even if without any advice from the
depositor.
Those four instances the depositary cannot seek reimbursement from any loss
suffered.
Art. 1994.
The depositary may retain the thing in pledge until the full payment of what
may be due him by reason of the deposit. (1780)
What is placed here is a pledge created by law wherein the thing subject of the
deposit is retained by the depositary and serves as security for the payment of
what may due to the depositary by reason of the deposit.
Like for example, the depositor shall be liable for the expenses for preservation
if the deposit is gratuitous. So meron na incur si depositary pwede siyang
magpareimburse, hindi man magbayad si depositor so pwede i-hold or i-retain
as a form of security.
What if may utang si depositor kay depositary? Pwede ba i-hold ni depositary
ang thing subject of a deposit? NO because it can only be retained by the
depositary for whatever may be due to him by reason of the deposit not for any
other reason.
Another thing that you should take note of, what if the subject of the thing is
already returned to the depositor but the depositor did not reimburse the
depositary and sabihin natin may iba pang gamit in the possession of the
depositary. Again ibang obligation naman yun or ibang nature sa..ahh..not in
relation to the demand for reimbursment. So it cannot be retained by the
depositary at that instance, so the thing to be retained must be by virtue of the
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expenses in relation to the same contract of deposit. Not from other kind of
obligation. Not from other kind of deposit.
Art. 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary. (n)
Take this list is not exclusive for there are other causes of extinguishment of a
deposit:
(1) Return of the thing
(2) Novation
(3) Merger
(4) Expiration of the term
(5) Fulfillment of the resolutory condition
However, recall COMPENSATION cannot be a ground for the extinguishment of
a deposit as provided under Article 1287.
Art. 1287.
Compensation shall not be proper when one of the debts
arises from a depositum or from the obligations of a
depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who
has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of Article 301.
(1200a)
Now if the deposit is gratuitous, death of either depositor or depositary
extinguishes the deposit. Again noh, because here the depositary is not obliged
to continue with the contract of deposit.
But if it is compensation, death of either party will not extinguish the deposit as
the deposit is onerous and not personal as compared to a gratuitous deposit to
which the rights and obligations may be transmitted to the respective heirs BUT
the heirs have a right to terminate the deposit even before the expiration of the
term.
III. NECESSARY DEPOSIT
We continue with the NECESSARY DEPOSIT.
Sabi natin 2 types of necessary deposit: VOLUNTARY and NECESSARY.
CHAPTER 3. - NECESSARY DEPOSIT
Art. 1996.
A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire,
storm, flood, pillage, shipwreck, or other similar events. (1781a)
Art. 1997.
The deposit referred to in No. 1 of the preceding article shall be governed by
the provisions of the law establishing it, and in case of its deficiency, by the
rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be regulated by
the provisions concerning voluntary deposit and by Article 2168. (1782)
Remember the distinction between VOLUNTARY and NECESSARY deposit. Sa
VOLUNTARY deposit, the depositor has the free will to choose who will be the
depositary but such freedom is absent in this contract of NECESSARY deposit.
Articles 1996 enumerates TWO NECESSARY DEPOSITS.
The first one: “When it is made in compliance with a legal obligation”
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The second one: “When it takes place on the occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck, or other similar events.” Also knows as
MISERABLE DEPOSIT because you have there acts of calamity.
Other instances are those which are covered in Art.1998, travelers in motels
and inns. And the other one is Art.1754 so transportation law na yan,
passengers with common carriers.
Art. 1998.
The deposit of effects made by the travellers in hotels or inns shall also be
regarded as necessary. The keepers of hotels or inns shall be responsible for
them as depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their effects. (1783)
Art. 1754.
The provisions of Articles 1733 to 1753 shall apply to the
passenger's baggage which is not in his personal custody or in
that of his employee. As to other baggage, the rules in
Articles 1998 and 2000 to 2003 concerning the responsibility
of hotel-keepers shall be applicable.
The first one: “When it is made in compliance with a legal obligation”
Legal obligations under Art.1996 (1), this shall be governed primarily by the law,
upon default we apply the rules on voluntary deposit.
What are the instances of legal obligation?
(a) Art. 538. It is a Property provision. Judicial deposit of a thing the
possession of which is being disputed in a litigation by two or more
persons.
Art. 538.
Possession as a fact cannot be recognized at the same time in
two different personalities except in the cases of co-
possession. Should a question arise regarding the fact of
possession, the present possessor shall be preferred; if there
are two possessors, the one longer in possession; if the dates
of the possession are the same, the one who presents a title;
and if all these conditions are equal, the thing shall be placed
in judicial deposit pending determination of its possession or
ownership through proper proceedings. (445)
(b) Deposit with a bank or public institutions of public bonds or
instruments of credit payable to order or bearer given.
Art. 586.
Should the usufructuary fail to give security in the cases in
which he is bound to give it, the owner may demand that the
immovables be placed under administration, that the
movables be sold, that the public bonds, instruments of
credit payable to order or to bearer be converted into
registered certificates or deposited in a bank or public
institution, and that the capital or sums in cash and the
proceeds of the sale of the movable property be invested in
safe securities.
The interest on the proceeds of the sale of the movables and
that on public securities and bonds, and the proceeds of the
property placed under administration, shall belong to the
usufructuary.
Furthermore, the owner may, if he so prefers, until the
usufructuary gives security or is excused from so doing, retain
in his possession the property in usufruct as administrator,
subject to the obligation to deliver to the usufructuary the
net proceeds thereof, after deducting the sums which may be
agreed upon or judicially allowed him for such
administration. (494)
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(c) So under pledge na ito. Deposit of a thing pledged when a creditor
uses the same without authority of the owner or misuses it without
any other way.
Art. 2104.
The creditor cannot use the thing pledged, without the
authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it
be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be
used by the creditor but only for that purpose. (1870a)
(d) Another those suits required under the Rules of Court.
(e) Those constituted to guarantee contracts with the government
wherein the deposit arises from an obligation of public or
administrative character.
The second one: “When it takes place on the occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck, or other similar events.”
The deposit here takes place by accident or fortuitous event. The law imposes
on the recipient the obligations of a bailee. Here, remember, the depositor does
not yet choose who will save his things in case there is fortuitous event. The
more immediate object here is to save the property rather than its safekeeping.
The owner of the house has left for a vacation. There is fire. The neighbor
rescues some of the things of the former who is in vacation. In the meantime na
rescue niya, hindi naman possession yan dahil binigay sa kanya or i-deniliver sa
kanya for safekeeping but again more to save the property and necessary
deposit takes place because if ____ pending the return of his neighbor.
You have here a quasi-bailment, voluntary bailment, or involuntary deposit, as
mentioned earlier miserable deposit or deposit of miserable, causal relation
between the calamity and the constitution of the deposit.
So governing rules we have rules on voluntary deposit as well as Art. 2168
(Quasi-Contract)
Art. 2186.
Every owner of a motor vehicle shall file with the proper
government office a bond executed by a government-
controlled corporation or office, to answer for damages to
third persons. The amount of the bond and other terms shall
be fixed by the competent public official. (n)
So we already know that. Otherwise there will be unjust enrichment.
We have Articles 1998 and 1999.
Art. 1998.
The deposit of effects made by the travellers in hotels or inns shall also be
regarded as necessary. The keepers of hotels or inns shall be responsible for
them as depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their effects. (1783)
Art. 1999.
The hotel-keeper is liable for the vehicles, animals and articles which have
been introduced or placed in the annexes of the hotel. (n)
So you have here the phrase travellers and guests there are used synonymously.
It refers to transients not borders. Non-transients including borders are not
governed under the rules on necessary deposit but rather on the rules on
contracts of lease.
Also the terms ‘hotel keeper’ and ‘inn keeper’ they are used synonymously.
Strictly speaking there may be difference but di naman masyado inaaply when
we refer to a hotel we have a building of many rooms, for overnight
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accommodation for transients and several floors and elevators usually with a
large open lobby.
If you are talking about an INN, it is a public house where the lodging of
travelers for compensation and until capacity is ___ public entertainment
essentially.
And then you have also MOTEL. Saan galing ang word na motel? Motorist hotel
yan siya. (HAHAHA). What makes it a motorist hotel? 2 floors lang yan siya
tapos sa labas grahe na. (Expert si maam..Hmmm). it is an establishment that
provides for lodging and parking in which the rooms are accessible from an
outdoor parking area.
So general rule, motel keepers are held responsible as depositaries with regard
to the effect of their guest. This is the THIRD KIND OF NECESSARY DEPOSIT.
Provided these TWO REQUISITES are present:
(1) They have been previously informed about the effect brought by the
guests; and
(2) The guests have taken precautions prescribed regarding safekeeping.
DURBAN APARTMENTS vs. PIONEER
FACTS:
See arrived and checked in at the City Garden Hotel. Justimbaste, who was a valet of the
hotel, approached and asked for See’s ignition key and told him that he would park the
Vitara for him in front of the hotel. Justimbaste then issued him a valet parking customers
claim stub.
However, the Vitara owned by See was carnapped while it was parked unattended at the
parking area of Equitable Bank. Upon payment of insurance to See, Pioneer subrogated See
and filed a complaint against petitioner.
Pioneer argued that the Vitara was lost due to the negligence of petitioner. It alleged that a
contract of necessary deposit existed between the insured See and petitioner.
Petitioner denied any liability arguing that it was See who requested a parking attendant to
park the Vitara at any available parking space, and it was parked at the Equitable Bank
parking area, which was within Sees view. Furthermore, it alleged that valet parking
services are provided by the hotel for the convenience of its customers looking for a
parking space near the hotel premises. But, it does not include responsibility for any losses
or damages to motor vehicles and its accessories in the parking.
ISSUE: W/N a contract of deposit exists between the parties to render petitioner liable for
the loss of the car.
RULING: YES
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a
necessary deposit made by persons in hotels or inns.
In the present case, the insured See deposited his vehicle for safekeeping with petitioner,
through the latters employee, Justimbaste. In turn, Justimbaste issued a claim stub to See.
Thus, the contract of deposit was perfected from Sees delivery, when he handed over to
Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely
keeping and returning it. Ultimately, petitioner is liable for the loss of Sees vehicle even if
the car was not parked within the premises of petitioner. The Equitable PCI Bank parking
area became an annex of City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in the evening after banking
hours.
Here there was a contract of necessary deposit between See and the petitioner.
This was (protected?) when the Vitara was entrusted to the employee of
Durban Apartments. And as an exchange, a parking stub was given to him. Even
if the Vitara was not parked within the vicinity or not in the garage of the City
Garden Hotel, the Equitable PCI Bank parking area became an annex of the City
Garden Hotel when the management of the bank allowed the parking of hotetl
guests in the evening after banking hours. There was already an arrangement
and this was considered as an extension of the premises of the City garden
Hotel. See deposited his vehicle for safekeeping. A stub was issued. The
contract of deposit is perfected when he handed the keys of his vehicle to
which Durban Apartments is liable for the loss of the vehicle.
So again noh this would include the liabilities not limited to the effect loss or
damaged in the hotel rooms but include those loss or damages in hotel annexes
such as vehicle in hotel’s garage or as in this case of Durban Apartments
through practice it is considered as annex of the City Garden Hotel
Take note of the succeeding Articles 2000, 2001 and 2002.
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Art. 2000.
The responsibility referred to in the two preceding articles shall include the
loss of, or injury to the personal property of the guests caused by the servants
or employees of the keepers of hotels or inns as well as strangers; but not
that which may proceed from any force majeure. The fact that travellers are
constrained to rely on the vigilance of the keeper of the hotels or inns shall be
considered in determining the degree of care required of him. (1784a)
Art. 2001.
The act of a thief or robber, who has entered the hotel is not deemed force
majeure, unless it is done with the use of arms or through an irresistible
force. (n)
Art. 2002.
The hotel-keeper is not liable for compensation if the loss is due to the acts of
the guest, his family, servants or visitors, or if the loss arises from the
character of the things brought into the hotel. (n)
These three provisions emphasize that a hotel business is a business that is
imbued with public interest to which the hotel keepers may be held liable with
regard to the care that to be exercised to the belongings to their guests.
To summarize these three provisions we categorize it in two ways when is the
hotel keepers liable regardless of the amount of care exercised:
(1) If there is loss or injury caused by the servants or employees as well
as by strangers (under Art. 2000). Do remember, however, the
requirement under Art. 1998, provided that notice has been given
and proper precautions taken.
(2) Another instance, when the loss is caused by the act of a thief or
robber done without the use of arms or irresistible force. Because
here the hotel keeper is apparently negligent (Art. 2001).
When is the hotel keepers not liable? We have three instances:
(1) When the loss or injuries caused by force majeure, thief or robbery
by a stranger, not hotel keeper servant or employee, WITH THE
USE OF ARMS OR IRRESISTIBLE FORCE (Art. 2001) unless he is guilty
of fault or negligence in failing to provide against the loss or injury in
this case. (Art. 2000)
(2) Loss is due to the acts of the guests, his family servants or visitors.
(Art 2002)
(3) When the loss arises from the character of the things brought into
the hotel. (Art. 2002)
Art. 2003.
The hotel-keeper cannot free himself from responsibility by posting notices to
the effect that he is not liable for the articles brought by the guest. Any
stipulation between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to 2001 is suppressed
or diminished shall be void. (n)
Despite numerous instances you go to a hotel. The hotel will not be liable.
Please take care of your belongings. Hotel will not be liable in case of loss
thereof. That posting made by the hotel would not be binding as to the guests
because it is very clear under Art. 2003, any stipulation shall be considered void.
Hotel keepers cannot free himself from responsibility just because he posts
such notices. This is similar with the rule with regard to common carriers where
the law does not allow to dispense with or limit the responsibility by stipulation
or by posting of notices.
Hotel keepers or inn keepers as depositaries should be subject to an
extraordinary degree of responsibility for the protection and safety of travelers
with no alternative but rely on the good faith and care of those with whom they
take lodging.
Inn keepers or hotel keepers have supervision and control of their inns/hotel
and the premises thereof. It is not necessary in order to hold an inn-keeper
liable that the effects of the guests be actually delivered to him or his
employees; it is enough that they are within the inn.
We have the case of YHT REALTY VS CA
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YHT Realty vs. COURT OF APPEALS
FACTS:
During his trips to the Philippines, PR McLoughlin stayed at Tropicana Hotel upon Tan’s
suggestion. Lopez served as manager of the hotel while Lainez and Payam had custody of
the keys for the safety deposit boxes of Tropicana.
During his stay, PR McLoughlin rented a safety deposit box where he placed his important
belongings such as money, credit cards and pieces of jewelry. The safety deposit box could
only be opened through the use of two keys, one of which is given to the registered guest,
and the other remaining in the possession of the management of the hotel. When a
registered guest wished to open his safety deposit box, he alone could personally request
the management who then would assign one of its employees to accompany the guest and
assist him in opening the safety deposit box with the two keys.
At some point in time, McLoughlin discovered that some of the items inside his safety
deposit box were missing. He confronted Lainez and Payam who admitted that Tan opened
the safety deposit box three times with the key assigned to him. Tan also admitted that she
had stolen McLoughlin's key and was able to open the safety deposit box with the
assistance of Lopez, Payam and Lainez. Thereafter, Lopez executed a promissory note in
favor of McLoughlin. Nevertheless, McLoughlin insisted that it must be the hotel who must
assume responsibility for the loss he suffered.
Lopez refused to accept the responsibility relying on the conditions for renting the safety
deposit box entitled Undertaking For the Use Of Safety Deposit Box specifically paragraphs
(2) and (4) thereof which provides that:
(1) Tropicana Apartment Hotel is released from any liability arising from any loss
in the contents and/or use of the said deposit box for any cause whatsoever,
including but not limited to the presentation or use thereof by any other
person should the key be lost; and
(2) To return the key and execute the release in favor of Tropicana upon giving up
the use of the box.
McLoughlin alleged that YHT Realty Corporation, Lopez, Lainez, Payam and Tan acted with
gross negligence in the performance and exercise of their duties and obligations as
innkeepers and were therefore liable to answer for the losses he incurred. He further
contend that the conditions for the use of the safety deposit box are null and void for being
contrary to the express mandate of Article 2003 of the NCC and against public policy.
On the other hand, petitioners anchor their defense on Article 2002 which exempts the
hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors.
ISSUES:
(1) W/N the condition for the use of the safety deposit box are null and void. YES
(2) W/N YHT Realty acted with gross negligence in the performance and exercise
of their duties and obligations as innkeepers and thus liable for the loss. YES
RULING: BOTH YES
First issue
Article 2003 was incorporated in the NCC as an expression of public policy precisely to
apply to situations such as that presented in this case. The hotel business like the common
carrier's business is imbued with public interest. Catering to the public, hotelkeepers are
bound to provide not only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the business. The law in turn does not
allow such duty to the public to be negated or diluted by any contrary stipulation in so-
called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers
on guests for their signature.
To hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary
that they be actually delivered to the innkeepers or their employees. It is enough that such
effects are within the hotel or inn. With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken without the guest's knowledge
and consent from a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the NCC
for they allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever.
Evidently, the undertaking was intended to bar any claim against Tropicana for any loss of
the contents of the safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The NCC is explicit that the responsibility of the hotel-keeper
shall extend to loss of, or injury to, the personal property of the guests even if caused by
servants or employees of the keepers of hotels or inns as well as by strangers, except as it
may proceed from any force majeure. It is the loss through force majeure that may spare
the hotel-keeper from liability.
Second issue
In the case at bar, there is no showing that the act of the thief or robber was done with the
use of arms or through an irresistible force to qualify the same as force majeure.
Article 2002 presupposes that the hotel-keeper is not guilty of concurrent negligence or has
not contributed in any degree to the occurrence of the loss. A depositary is not responsible
for the loss of goods by theft, unless his actionable negligence contributes to the loss.
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In the case at bar, the responsibility of securing the safety deposit box was shared not only
by the guest himself but also by the management since two keys are necessary to open the
safety deposit box. Without the assistance of hotel employees, the loss would not have
occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not
the registered guest, to open the safety deposit box of McLoughlin, even assuming that the
latter was also guilty of negligence in allowing another person to use his key.
To rule otherwise would result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any person, under the
pretense of being a family member or a visitor of the guest, to have access to the safety
deposit box without fear of any liability that will attach thereafter in case such person turns
out to be a complete stranger. This will allow the hotel to evade responsibility for any
liability incurred by its employees in conspiracy with the guest's relatives and visitors.
If only petitioners exercised due diligence in taking care of McLoughlin's safety deposit box,
they should have confronted him as to his relationship with Tan considering that the latter
had been observed opening McLoughlin's safety deposit box a number of times at the early
hours of the morning. Tan's acts should have prompted the management to investigate her
relationship with McLoughlin. Then, petitioners would have exercised due diligence
required of them. Failure to do so warrants the conclusion that the management had been
remiss in complying with the obligations imposed upon hotel-keepers under the law.
What additional factors that the court considered that the management by the
hotel were clearly negligent? When was the safety deposit box accessed?
Suspicious circumstances, early hours in the morning AND they just rely that he
is a friend of the depositor.
MASANGUID
December 6, 2016
Part 3 of 3
Here, TROPICANA had prior knowledge to the person, aside from the registered
guest, had access to the safety deposit box. We have here a contract of SAFETY
deposit box between the hotel and the guest, to which TROPICANA should be
held responsible for the damages suffered by the guest by reason of the
negligence of its employees. Article 2003 was incorporated in the New Civil
Code as an expression of public policy precisely to apply to situations such as
that presented in this case such as common carrier. The hotel business like the
common carriers business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty constitutes the essence
of the business. The law in turn does not allow such duty to the public to be
negated or diluted by any contrary stipulation in so-called undertakings that
ordinarily appear in prepared forms imposed by hotel keepers on guests for
their signature. Evidently, the undertaking was intended to bar any claim
against Tropicana for any loss of the contents of the safety deposit box whether
or not negligence was incurred by Tropicana or its employees. The New Civil
Code is explicit that the responsibility of the hotel-keeper shall extend to loss of,
or injury to, the personal property of the guests even if caused by servants or
employees of the keepers of hotels or inns as well as by strangers, except as it
may proceed from any force majeure. It is the loss through force majeure that
may spare the hotel-keeper from liability. In the case at bar, there is no showing
that the act of the thief or robber was done with the use of arms or through an
irresistible force to qualify the same as force majeure.
Petitioners likewise anchor their defense on Article 2002 which exempts the
hotel-keeper from liability if the loss is due to the acts of his guest, his family, or
visitors. This provision presupposes that the hotel is not guilty of negligence.
Even a cursory reading of the provision would lead us to reject petitioners
contention. The justification they raise would render nugatory the public
interest sought to be protected by the provision. What if the negligence of the
employer or its employees facilitated the consummation of a crime committed
by the registered guests relatives or visitor? Should the law exculpate the hotel
from liability since the loss was due to the act of the visitor of the registered
guest of the hotel? Hence, this provision presupposes that the hotel-keeper is
not guilty of concurrent negligence or has not contributed in any degree to the
occurrence of the loss. A depositary is not responsible for the loss of goods by
theft, unless his actionable negligence contributes to the loss.
In the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since two
keys are necessary to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred. Thus, Tropicana was guilty
of concurrent negligence in allowing Tan, who was not the registered guest, to
open the safety deposit box of McLoughlin, even assuming that the latter was
also guilty of negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any person, under
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 Credit Transactions – First Exam Coverage 2016-2017
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the pretense of being a family member or a visitor of the guest, to have access in judgment has a right or third party who
to the safety deposit box without fear of any liability that will attach thereafter deposited
in case such person turns out to be a complete stranger. This will allow the Right of return Through the order of the Upon demand of the
court or when litigation has depositor
hotel to evade responsibility for any liability incurred by its employees in
ended
conspiracy with the guests, relatives and visitors.
What is Notice of lis pendens? It serves as a notice to third persons that the
property is under litigation.
Art. 2004.
The hotel-keeper has a right to retain the things brought into the hotel by the
LOS BAÑOS vs. AFRICA
guest, as a security for credits on account of lodging, and supplies usually FACTS:
furnished to hotel guests. The TCT registered in the name of respondent Pacita Africa was destroyed when a fire
razed the ROD. The TCT was reconstituted and was again registered in the name of
So, there is a right to retain. This is another instance wherein contract of pledge respondent. However, while the reconstituted title was in Macy’s possession, she
is created by operation of law. The hotel-keepers must compensate them due allegedly forged Pacita’s signature on a DAS purporting to transfer ownership of the
property to Macy.
to the liabilities impose to them by law. The bailee in commodatum may
likewise return the thing loaned by reason of the hidden defects thereof. By virtue of the forged DAS, Macy caused the issuance of a TCT in her name, without the
knowledge of the respondents. Later on, the respondents discovered that Macy
Do remember however that an act obtaining accommodation, food, etc without mortgaged the property to petitioner Los Baños. To protect their interests, respondents
paying constitutes estafa. So, there is a right to retain with regard to civil and sought the annulment of the TCT in the name of Macy, the DAS and the mortgage.
estafa with regard to criminal liability. However, pending litigation, petitioner foreclosed the property. This caused respondents
to file a writ of preliminary injunction to stop the respondent bank from consolidating
title to the subject property.

IV. Sequestration and Necessary Deposit
CHAPTER 4. - SEQUESTRATION OR JUDICIAL DEPOSIT
Art. 2005.
A judicial deposit or sequestration takes place when an attachment or seizure
of property in litigation is ordered. (1785)
Since it is judicial, it is ordered by the court. Attachment by sheriff, receiver by
the court, Replevin. The properties here may be attached by the sheriff upon
the filing of a complaint or a receiver may be appointed by the court to
administer and preserve the property in litigation. If it is a personal property, it
may be seized by the sheriff in actions such as replevin or manual delivery of
personal property. The depositary here is appointed by the court.
Art. 2006.
Movable as well as immovable property may be the object of sequestration.
(1786)
Petitioner contended that respondents are not entitled to the relief prayed for because
they caused the annotation of a notice of lis pendens at the back of TCT registered in the
name of Macy. Thus, the said notice provided ample protection of their rights and
interests.
ISSUE: W/N the notice of lis pendens provided ample protection of the rights and
interests of petitioner.
RULING: NO
A notice of lis pendens serves as an announcement to the whole world that a particular
real property is in litigation and as a warning that those who acquire an interest in the
property do so at their own risk -- they gamble on the result of the litigation over it.
However, the cancellation of such notice may be ordered by the court that has
jurisdiction over it at any given time. Its continuance or removal -- like the continuance or
the removal of a preliminary attachment or injunction -- is not contingent on the
existence of a final judgment on the action and ordinarily has no effect on the merits
thereof. Thus, the notice of lis pendens does not suffice to protect herein respondents’
rights over the property. It does not provide complete and ample protection.
Since the notice of lis pendens merely serves as a warning that the property is involved in
litigation and that two requisites for the issuance of the writ of preliminary injunction
were satisfied, the issuance thereof is proper and the petitioner bank is enjoined from
consolidating title over the subject property.

Art. 2007. Discussion: So, here lis pendens is not a judicial deposit.
The depositary of property or objects sequestrated cannot be relieved of his
responsibility until the controversy which gave rise thereto has come to an
end, unless the court so orders. (1787a)
ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW
Purpose:
(1) To regulate the status, rights, and liabilities of a person in a warehousing
Art. 2008. contract;
(2) To protect those who in good faith and for value, acquire negotiable
The depositary of property sequestrated is bound to comply, with respect to
warehouse receipts by negotiation;
the same, with all the obligations of a good father of a family. (1788) (3) To render the title to and right of possession of property stored in warehouses
more easily convertible;
(4) To facilitate the use of warehouse receipts as documents of title;
Art. 2009. (5) To place greater responsibility on the warehouseman
As to matters not provided for in this Code, judicial sequestration shall be
Sec. 58. Definitions. —
governed by the Rules of Court. (a) In this Act, unless the content or subject matter otherwise requires:

JUDICIAL DEPOSIT EXTRA-JUDICIAL DEPOSIT "Action" includes counterclaim, set-off, and suits in equity as provided by law
in these islands.
How it happens By the will of the court By the will of the parties
(contract)
"Delivery" means voluntary transfer of possession from one person to another.
Security For the safekeeping of the
"Fungible goods" means goods of which any unit is, from its nature by
(secure the right of the party property
mercantile custom, treated as the equivalent of any other unit.
in case of a favorable
judgement)
"Goods" means chattels or merchandise in storage or which has been or is
Subject matter Generally immovable Only movable property
about to be stored.

Remuneration Always onerous May be gratuitous or "Holder" of a receipt means a person who has both actual possession of such
subject to compensation receipt and a right of property therein.

For whom In behalf of the person who In behalf of the depositor

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"Order" means an order by indorsement on the receipt.
"Owner" does not include mortgagee.
"Person" includes a corporation or partnership or two or more persons having
a joint or common interest.
To "purchase" includes to take as mortgagee or as pledgee.
"Receipt" means a warehouse receipt.
"Value" is any consideration sufficient to support a simple contract. An
antecedent or pre-existing obligation, whether for money or not, constitutes
value where a receipt is taken either in satisfaction thereof or as security
therefor.
"Warehouseman" means a person lawfully engaged in the business of storing
goods for profit.
(b) A thing is done "in good faith" within the meaning of this Act when it is in fact
done honestly, whether it be done negligently or not.
Sec. 2. Form of receipts; essential terms. — Warehouse receipts need not be in any
particular form but every such receipt must embody within its written or printed terms:
(a) The location of the warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received will be delivered to the bearer, to a
specified person or to a specified person or his order,
(e) The rate of storage charges,
(f) A description of the goods or of the packages containing them,
(g) The signature of the warehouseman which may be made by his authorized
agent,
(h) If the receipt is issued for goods of which the warehouseman is owner, either
solely or jointly or in common with others, the fact of such ownership, and
(i) A statement of the amount of advances made and of liabilities incurred for
which the warehouseman claims a lien. If the precise amount of such
advances made or of such liabilities incurred is, at the time of the issue of,
unknown to the warehouseman or to his agent who issues it, a statement of
the fact that advances have been made or liabilities incurred and the purpose
thereof is sufficient.
A warehouseman shall be liable to any person injured thereby for all damages caused by
the omission from a negotiable receipt of any of the terms herein required.
Sec. 3. Form of receipts. — What terms may be inserted. — A warehouseman may insert in
a receipt issued by him any other terms and conditions provided that such terms and
conditions shall not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care in the safe-
keeping of the goods entrusted to him which is reasonably careful man would
exercise in regard to similar goods of his own.
Sec. 4. Definition of non-negotiable receipt. — A receipt in which it is stated that the
goods received will be delivered to the depositor or to any other specified person, is a non-
negotiable receipt.
Sec. 5. Definition of negotiable receipt. — A receipt in which it is stated that the goods
received will be delivered to the bearer or to the order of any person named in such receipt
is a negotiable receipt.
No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such
provision, if inserted shall be void.
Sec. 6. Duplicate receipts must be so marked. — When more than one negotiable receipt
is issued for the same goods, the word "duplicate" shall be plainly placed upon the face of
every such receipt, except the first one issued. A warehouseman shall be liable for all
damages caused by his failure so to do to any one who purchased the subsequent receipt
for value supposing it to be an original, even though the purchase be after the delivery of
the goods by the warehouseman to the holder of the original receipt.
Sec. 7. Failure to mark "non-negotiable." — A non-negotiable receipt shall have plainly
placed upon its face by the warehouseman issuing it "non-negotiable," or "not
negotiable." In case of the warehouseman's failure so to do, a holder of the receipt who
purchased it for value supposing it to be negotiable, may, at his option, treat such receipt
as imposing upon the warehouseman the same liabilities he would have incurred had the
receipt been negotiable.
This section shall not apply, however, to letters, memoranda, or written acknowledgment
of an informal character.
OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN UPON THEIR RECEIPTS
Sec. 8. Obligation of warehousemen to deliver. — A warehouseman, in the absence of
some lawful excuse provided by this Act, is bound to deliver the goods upon a demand
Credit Transactions – First Exam Coverage 2016-2017
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made either by the holder of a receipt for the goods or by the depositor; if such demand is
accompanied with:
(a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such indorsements as
would be necessary for the negotiation of the receipt; and
(c) A readiness and willingness to sign, when the goods are delivered, an
acknowledgment that they have been delivered, if such signature is requested
by the warehouseman.
In case the warehouseman refuses or fails to deliver the goods in compliance with a
demand by the holder or depositor so accompanied, the burden shall be upon the
warehouseman to establish the existence of a lawful excuse for such refusal.
Sec. 9. Justification of warehouseman in delivering. — A warehouseman is justified in
delivering the goods, subject to the provisions of the three following sections, to one who
is:
(a) The person lawfully entitled to the possession of the goods, or his agent;
(b) A person who is either himself entitled to delivery by the terms of a non-
negotiable receipt issued for the goods, or who has written authority from the
person so entitled either indorsed upon the receipt or written upon another
paper; or
(c) A person in possession of a negotiable receipt by the terms of which the goods
are deliverable to him or order, or to bearer, or which has been indorsed to
him or in blank by the person to whom delivery was promised by the terms of
the receipt or by his mediate or immediate indorser.
Sec. 10. Warehouseman's liability for misdelivery. — Where a warehouseman delivers the
goods to one who is not in fact lawfully entitled to the possession of them, the
warehouseman shall be liable as for conversion to all having a right of property or
possession in the goods if he delivered the goods otherwise than as authorized by
subdivisions (b) and (c) of the preceding section, and though he delivered the goods as
authorized by said subdivisions, he shall be so liable, 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 deliver; or
(b) Had information that the delivery about to be made was to one not lawfully
entitled to the possession of the goods.
Sec. 14. Lost or destroyed receipts. — Where a negotiable receipt has been lost or
destroyed, a court of competent jurisdiction may order the delivery of the goods upon
satisfactory proof of such loss or destruction and upon the giving of a bond with sufficient
sureties to be approved by the court to protect the warehouseman from any liability or
expense, which he or any person injured by such delivery may incur by reason of the
original receipt remaining outstanding. The court may also in its discretion order the
payment of the warehouseman's reasonable costs and counsel fees.
The delivery of the goods under an order of the court as provided in this section, shall not
relieve the warehouseman from liability to a person to whom the negotiable receipt has
been or shall be negotiated for value without notice of the proceedings or of the delivery of
the goods.
Sec. 16. Warehouseman cannot set up title in himself . — No title or right to the
possession of the goods, on the part of the warehouseman, unless such title or right is
derived directly or indirectly from a transfer made by the depositor at the time of or
subsequent to the deposit for storage, or from the warehouseman's lien, shall excuse the
warehouseman from liability for refusing to deliver the goods according to the terms of the
receipt.
Sec. 17. Interpleader of adverse claimants. — If more than one person claims the title or
possession of the goods, the warehouseman may, either as a defense to an action brought
against him for non-delivery of the goods or as an original suit, whichever is appropriate,
require all known claimants to interplead.
Sec. 18. Warehouseman has reasonable time to determine validity of claims. — If
someone other than the depositor or person claiming under him has a claim to the title or
possession of goods, and the warehouseman has information of such claim, the
warehouseman shall be excused from liability for refusing to deliver the goods, either to
the depositor or person claiming under him or to the adverse claimant until the
warehouseman has had a reasonable time to ascertain the validity of the adverse claim or
to bring legal proceedings to compel claimants to interplead.
Sec. 19. Adverse title is no defense except as above provided. — Except as provided in the
two preceding sections and in sections nine and thirty-six, no right or title of a third person
shall be a defense to an action brought by the depositor or person claiming under him
against the warehouseman for failure to deliver the goods according to the terms of the
receipt.
Sec. 20. Liability for non-existence or misdescription of goods. — A warehouseman shall
be liable to the holder of a receipt for damages caused by the non-existence of the goods
or by the failure of the goods to correspond with the description thereof in the receipt at
the time of its issue. If, however, the goods are described in a receipt merely by a
statement of marks or labels upon them or upon packages containing them or by a
statement that the goods are said to be goods of a certain kind or that the packages
containing the goods are said to contain goods of a certain kind or by words of like purport,
such statements, if true, shall not make liable the warehouseman issuing the receipt,
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although the goods are not of the kind which the marks or labels upon them indicate or of
the kind they were said to be by the depositor.
Sec. 21. Liability for care of goods. — A warehouseman shall be liable for any loss or injury
to the goods caused by his failure to exercise such care in regard to them as reasonably
careful owner of similar goods would exercise, but he shall not be liable, in the absence of
an agreement to the contrary, for any loss or injury to the goods which could not have been
avoided by the exercise of such care.
Sec. 22. Goods must be kept separate. — Except as provided in the following section, a
warehouseman shall keep the goods so far separate from goods of other depositors and
from other goods of the same depositor for which a separate receipt has been issued, as to
permit at all times the identification and redelivery of the goods deposited.
Sec. 23. Fungible goods may be commingled if warehouseman authorized. — If authorized
by agreement or by custom, a warehouseman may mingle fungible goods with other goods
of the same kind and grade. In such case, the various depositors of the mingled goods shall
own the entire mass in common and each depositor shall be entitled to such portion
thereof as the amount deposited by him bears to the whole.
Sec. 24. Liability of warehouseman to depositors of commingled goods. — The
warehouseman shall be severally liable to each depositor for the care and redelivery of his
share of such mass to the same extent and under the same circumstances as if the goods
had been kept separate.
Sec. 25. Attachment or levy upon goods for which a negotiable receipt has been issued.
— If goods are delivered to a warehouseman by the owner or by a person whose act in
conveying the title to them to a purchaser in good faith for value would bind the owner,
and a negotiable receipt is issued for them, they can not thereafter, while in the possession
of the warehouseman, be attached by garnishment or otherwise, or be levied upon under
an execution unless the receipt be first surrendered to the warehouseman or its
negotiation enjoined. The warehouseman shall in no case be compelled to deliver up the
actual possession of the goods until the receipt is surrendered to him or impounded by the
court.
Sec. 26. Creditor's remedies to reach negotiable receipts. — A creditor whose debtor is
the owner of a negotiable receipt shall be entitled to such aid from courts of appropriate
jurisdiction, by injunction and otherwise, in attaching such receipt or in satisfying the claim
by means thereof as is allowed at law or in equity in these islands in regard to property
which can not readily be attached or levied upon by ordinary legal process.
Sec. 27. What claims are included in the warehouseman's lien. — Subject to the provisions
of section thirty, a warehouseman shall have a lien on goods deposited or on the proceeds
thereof in his hands, for all lawful charges for storage and preservation of the goods; also
for all lawful claims for money advanced, interest, insurance, transportation, labor,
weighing, coopering and other charges and expenses in relation to such goods, also for all
reasonable charges and expenses for notice, and advertisements of sale, and for sale of the
goods where default had been made in satisfying the warehouseman's lien.
Sec. 30. Negotiable receipt must state charges for which the lien is claimed. — If a
negotiable receipt is issued for goods, the warehouseman shall have no lien thereon except
for charges for storage of goods subsequent to the date of the receipt unless the receipt
expressly enumerated other charges for which a lien is claimed. In such case, there shall be
a lien for the charges enumerated so far as they are within the terms of section twenty-
seven although the amount of the charges so enumerated is not stated in the receipt.
Sec. 35. Other methods of enforcing lien. — The remedy for enforcing a lien herein
provided does not preclude any other remedies allowed by law for the enforcement of a
lien against personal property nor bar the right to recover so much of the warehouseman's
claim as shall not be paid by the proceeds of the sale of the property.
Sec. 36. Effect of sale. — After goods have been lawfully sold to satisfy a warehouseman's
lien, or have been lawfully sold or disposed of because of their perishable or hazardous
nature, the warehouseman shall not thereafter be liable for failure to deliver the goods to
the depositor or owner of the goods or to a holder of the receipt given for the goods when
they were deposited, even if such receipt be negotiable.
Sec. 40. Who may negotiate a receipt. — A negotiable receipt may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the receipt has been
entrusted by the owner, if, by the terms of the receipt, the warehouseman
undertakes to deliver the goods to the order of the person to whom the
possession or custody of the receipt has been entrusted, or if, at the time of
such entrusting, the receipt is in such form that it may be negotiated by
delivery.
Sec. 41. Rights of person to whom a receipt has been negotiated. — A person to whom a
negotiable receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him had or had
ability to convey to a purchaser in good faith for value, and also such title to
the goods as the depositor or person to whose order the goods were to be
delivered by the terms of the receipt had or had ability to convey to a
purchaser in good faith for value, and
(b) The direct obligation of the warehouseman to hold possession of the goods for
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
him according to the terms of the receipt as fully as if the warehouseman and
contracted directly with him.
Sec. 42. Rights of person to whom receipt has been transferred. — A person to whom a
receipt has been transferred but not negotiated acquires thereby, as against the transferor,
the title of the goods subject to the terms of any agreement with the transferor.
If the receipt is non-negotiable, such person also acquires the right to notify the
warehouseman of the transfer to him of such receipt and thereby to acquire the direct
obligation of the warehouseman to hold possession of the goods for him according to the
terms of the receipt.
Prior to the notification of the warehouseman by the transferor or transferee of a non-
negotiable receipt, the title of the transferee to the goods and the right to acquire the
obligation of the warehouseman may be defeated by the levy of an attachment or
execution upon the goods by a creditor of the transferor or by a notification to the
warehouseman by the transferor or a subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor.
Sec. 44. Warranties of a sale of receipt. — A person who, for value, negotiates or transfers
a receipt by indorsement or delivery, including one who assigns for value a claim secured
by a receipt, unless a contrary intention appears, warrants:
(a) That the receipt is genuine,
(b) That he has a legal right to negotiate or transfer it,
(c) That he has knowledge of no fact which would impair the validity or worth of
the receipt, and
(d) That he has a right to transfer the title to the goods and that the goods are
merchantable or fit for a particular purpose whenever such warranties would
have been implied, if the contract of the parties had been to transfer without a
receipt of the goods represented thereby.
Sec. 45. Indorser not a guarantor. — The indorsement of a receipt shall not make the
indorser liable for any failure on the part of the warehouseman or previous indorsers of the
receipt to fulfill their respective obligations.
Sec. 46. No warranty implied from accepting payment of a debt. — A mortgagee, pledgee,
or holder for security of a receipt who, in good faith, demands or receives payment of the
debt for which such receipt is security, whether from a party to a draft drawn for such debt
or from any other person, shall not, by so doing, be deemed to represent or to warrant the
genuineness of such receipt or the quantity or quality of the goods therein described.
Sec. 49. Negotiation defeats vendor's lien. — Where a negotiable receipt has been issued
for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any
purchaser for value in good faith to whom such receipt has been negotiated, whether such
negotiation be prior or subsequent to the notification to the warehouseman who issued
such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the
warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller
unless the receipt is first surrendered for cancellation.
What is the scope of the Warehouse Receipts Law? It covers all types of
warehouses whether public or private warehouses bonded or not bonded.
However there is a special law towards bonded warehouses (General Bonded
Warehouse Act).
GBWA regulates and supervises warehouses which puts up a bond. While the
WRL, describes mutual duties and rights of a warehouseman who issues
warehouse receipts to the depositor; and covers all warehouses whether
bonded or not.
Applicability of the WRL: it applies to warehouse receipts issued by a
warehouseman as defined under Section 58 of the WRL. The civil code
(specifically provisions on documents of title) is applied to all other instances
where the receipt is not issued by the warehouseman. This is in connection to a
contract of deposit wherein you deliver the goods to a warehouse man for the
purpose of security. However, a depositary is not necessarily a holder of a
warehouse receipt.
Warehouse receipts are considered as a negotiable document of title, as
distinguished from your negotiable instruments. Warehouseman is a person
lawfully engaged in the business of storing goods for profit. Warehouse, on the
other hand, is defined as a building or place where the goods are deposited and
stored for profit.
Take note of what is described as a warehouse receipt. It is a written
acknowledgment by a warehouseman that he has received and holds certain
goods therein described in store for the person whom it is issued. As document
of title. It is provided under Art 1636.
It therefore has a threefold nature:
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 Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

(1) A contract – a contract of deposit or a contract of carriage So you have to distinguish a trust receipt transaction from other arrangements.
(2) Evidence of receipt of goods
(3) Operates as a transferable document of title There is no trust receipt transaction if the agreement is for mere consignment
of goods with the obligation on the part of the person to whom it is delivered to
Negotiable Instruments Law Warehouse Receipt Law remit proceeds of the sale or return when unsold.
Subject matter is money Subject matter is goods
Object of value is the instrument Object of value refers to the Distinguish a trust receipt transaction from a contract of pledge. In a trust
itself goods deposited receipt transaction, there is a person who is being financed, possesses the
There are parties secondarily No parties that are secondarily property. In a contract of pledge, it is the financer that possesses the property
liable liable as a form of security.
An original bearer instrument will An original bearer instrument
always be considered a bearer subsequently indorsed, it In a trust receipt transaction there is no contract of sale. In a trust receipt, there
instrument, thus can be becomes an order instrument is no lien created over the goods that were delivered unlike that of a chattel
negotiated by mere delivery mortgage which subjects the property to lien.
There is a concept of holder in There is no concept of holder
due course who has a better title in due course In negotiable In a trust receipts you have three parties. However the seller does not retain
than the transferor instruments, an originally title to the property. Compare it to consignment, you have the consignor and
bearer instrument, can still be the consignee, bipartite, where the consignor retains ownership of the
negotiated by delivery even if property. So who are essentially the parties here? You have the seller,
it has been indorsed. entruster and entrustee. These three are the parties in a true trust receipt
agreement. However, the seller here is not strictly a party to a trust receipt
transaction but he is a party to the contract of sale wherein he is the seller and
CANDOLITA who is the buyer? It is the buyer/importer-entrustee. Now you have here the
December 8, 2016
Part 1 of 1
entruster. The entruster here is the lender or the financier. He is the person
holding title over the goods. He holds title over the goods but he is not the
V. Trust Receipts Law
owner of the good but actually, he is merely a holder of security interest.
TRUST RECEIPTS LAW
On the other hand you have the entrustee, the borrower, the buyer, the
Now, under The Trust Receipts Law you have Section 4. Under section 4 of the
importer, to whom the goods are delivered for sale or processing in trust with
trust receipt law trust receipt is defined as a written document signed by the
the obligation to return the proceeds of the sale or to return the goods if
trustee in favor of the entruster whereby the latter releases the goods to the
unsold. So essentially the entrustee here is considered as the owner of the
possession of the former upon the trustee‘s promise to hold the said goods in
goods. While the entruster holds title as a form of security. So the law imposes
trust for the entruster (the one who delivered the goods) to sell or dispose of
on the entrustee the risk of loss of the goods.
the goods and to return the proceeds thereof to the extent of the amount
owing to the entruster or to return the goods if unsold or not otherwise
So take note here it is a unique arrangement. As a general rule, res perit
disposed.
domino. Owner bears the loss. But here, if you take into consideration the
entruster holds title of the goods but you cannot say if the goods were lost due
Purpose of the law:
to a fortuitous event, the entruster would be the one who would suffer the loss.
 To punish dishonesty and abuse of confidence of one who tends in
the handling of money or goods to the prejudice of the owner
So take note that in a true trust receipt agreement covered by the trust receipts
regardless of whether or not the latter is the owner. (crime of
law, what are the rights available to the entruster?
estafa);
(1) Entitled to the proceeds
 To encourage and promote the use of trust receipts as an additional
(2) Entitled to the return of the goods if unsold
and convenient aid to commerce and trade; (3) As against an innocent purchaser for value of the goods subject to a
 To regulate of trust receipts transactions in order to assure the trust receipts agreement. As against an innocent purchaser for value,
protection of the rights and enforcement of obligations of the the entruster is not preferred. As against the creditors of the
parties involved therein; entrustee, the entruster is preferred. (Section 11)
 To declare the misuse and/or misappropriation of goods or proceeds (4) The entruster has the right to transfer the trust take possession of
realized from the sale of goods, released under trust receipts as a the goods and to sell the goods in a public sale (Section 12)
criminal offense punishable under the revised penal code. (Art. 315) (5) The entruster likewise has the right to purchase the same goods at
the intended public sale(Section 7)
Under section 4 of the same law the trust receipt need not be in any particular
form however it must substantially contain the following essential terms: Obligations of an entruster
 a description of the goods, value of the goods, undertaking or a (1) to give possession of the goods to the entrustee and to give at least
commitment of the entrustee to hold in trust for the entruster the 5 day notice to the entrusteeof the intention to sell the goods at an
goods; intended public sale. The entrustee on the other hand has the right
 to dispose of them in the manner provided for in the trust receipt; to receive the surplus in case of a public sale as provided under
and section 7.
 to turn over the proceeds of the sale of the goods (2) To have possession of the goods as a condition for his liability.

In a trust receipt transaction, no agency relationship is established. However, as Obligations of the entrustee
you have learned in Criminal Law, an entrustee‘s breach of trust may subject (1) To hold the goods or the sale proceeds;
him to criminal liability like for estafa as well as civil liability. (2) To return the goods in the event of non-sale or upon demand of the
entruster;
What is the coverage of a trust receipt agreement? It applies to items destined (3) To comply with his alternative obligation to return the proceeds or
for sale, process as a component of a product ultimately sold and the goods. The return of the proceeds- entre garla. The obligation to
manufactured, and used to repair equipment used to maintain in business. return the goods unsold- vevol vera;
Under the same section, section 4, the trust receipt law does not cover the sale (4) To ensure against loss of the goods;
of goods, document or instruments by a person in the business of selling goods, (5) To keep the goods and sale proceeds separate and identifiable;
documents or instruments for profit who has general property rights in such (6) If there are other conditions provided under the trust receipt,
goods documents or installments or sells the same to the buyer on credit observe those conditions.
retaining title and other interest as security of the payment of the purchase
price. ROSARIO TEXTILE vs. HOME BANKERS

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FACTS:
RTMC filed with the Home Bankers an application for a credit line in the amount of P10M,
but only P8M was approved. RTMC then made withdrawals from this credit line and issued
several promissory notes and trust receipts in favor of the bank. Yujuico signed a surety
agreement in favor of the bank binding himself solidarily liable with RTMC.
However, despite the lapse of the respective due dates under the promissory notes and
notwithstanding the bank’s demand letters, RTMC failed to pay its loans. Hence, the bank
filed a complaint for sum of money against RTMC and Yujuico.
RTMC and Yujuico denied any liability claiming that the importation of raw materials under
the credit line was with a grant of option to them to turn-over to the bank the imported
raw materials should these fail to meet their manufacturing requirements. However, when
they turned it over, the bank refused to accept the materials until a fire destroyed it.
Hence, according to petitioners, under the trust receipt contracts between the parties,
they merely held the goods described therein in trust for respondent Home Bankers who
are the real owners of the said goods. Since the ownership of the goods remains with the
bank, it should bear the loss in accordance with the principle of res perit domino. With the
destruction of the goods by fire, petitioners should have been relieved of any obligation to
pay.
ISSUE: W/N the transaction between the parties is trust receipts.
RULING: NO but it is a contract of loan
A credit line is that amount of money or merchandise which a banker, merchant, or
supplier agrees to supply to a person on credit and generally agreed to in advance. Hence,
the principal transaction between petitioner RTMC and the bank is a contract of loan.
RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad. In
order to secure the payment of the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to evidence this security
arrangement. Simply stated, the trust receipts were mere securities.
A trust receipt is a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. A trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a ‘security interest’
in the goods. It secures an indebtedness and there can be no such thing as security interest
that secures no obligation.
If under the trust receipt, the bank is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the
goods in any manner it wants, which it cannot do, just to give consistency with purpose of
the trust receipt of giving a stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of the transaction would be to
disregard the loan feature thereof. Thus, petitioners cannot be relieved of their obligation
to pay their loan in favor of the bank.
The contract between the parties is a loan. What respondent bank sought to collect as
creditor was the loan it granted to petitioners. Petitioners’ recourse is to sue their supplier,
if indeed the materials were defective.
Q: How is security interest defined in trust receipt law?
A: Security Interest means a property interest in goods, documents, or
instruments to secure performance of some obligation of the entrustee or of
some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or retained
for security only.
Q: How do you reconcile it with the fact that the trust receipts were executed as
security for the contract of loan? Why is it that there is no violation even if it
were trust receipts issued as security or collateral?
A: (Si maam nagsagot sa sarili nyang tanong) The trust receipts executed were
mere securities. No violation because security sya for the contract of loan,
wherein the obligation of Rosario Textiles is isa lang: To pay. If under the Trust
receipt, the bank was made to appear as the owner, more of legal fiction that in
fact, it could not be considered as owner of the raw materials. The Supreme
Court held, here the trust receipt was issued by the bank, so the bank was
deemed the entruster/lender/financier. To consider the bank as the true owner
from the inception of the transaction would be to disregard the loan feature
thereof. Because again, the bank here is considered the holder of the title
merely for purpose of security. If the materials were indeed defective, RT could
not go after the bank kasi di naman ang bank ang nag supply sa kanila.
LAND BANK vs. PEREZ
FACTS:
LBP extended a credit accommodation to ACDC through the execution of an Omnibus
Credit Line Agreement. ACDC used the Letters of Credit/Trust Receipts Facility of the
Agreement to buy construction materials. The respondents then executed trust receipts in
connection with the construction materials.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
. Later on, the trust receipts matured, but ACDC failed to return to LBP the proceeds of the
construction projects or the construction materials subject of the trust receipts. When
ACDC failed to pay upon demand, LBP filed a complaint for estafa against ACDC.
ACDC denied criminal liability alleging that the trust receipt documents actually pertains as
security to the contract of loan it entered into with petitioner. It further alleged that it
cannot be held liable for estafa since its clients for the construction projects have not yet
paid them. Thus, ACDC had yet to receive the proceeds of the construction materials that
were the subject of the trust receipts. As there were no proceeds received from these
clients, no misappropriation thereof could have taken place.
The CA ruled that the case did not involve a trust receipt transaction, but a mere loan. The
construction materials, which are the subject of the trust receipt transaction, were
delivered to ACDC even before the trust receipts were executed. LBP did not offer proof
that the goods were received by ACDC, and that the trust receipts did not contain a
description of the goods, their invoice value, the amount of the draft to be paid, and their
maturity dates.
ISSUE: W/N the transactions between LBP and ACDC were trust receipts to render ACDC
liable for estafa.
RULING: NO, not trust receipts but a mere loan
There are two obligations in a trust receipt transaction:
(1) The first is covered by the provision that refers to money under the obligation
to deliver it (entregarla) to the owner of the merchandise sold.
(2) The second is covered by the provision referring to merchandise received
under the obligation to return it (devolvera) to the owner.
Under the Trust Receipts Law, intent to defraud is presumed when:
(1) The entrustee fails to turn over the proceeds of the sale of goods covered by
the trust receipt to the entruster; or
(2) When the entrustee fails to return the goods under trust, if they are not
disposed of in accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the part of the trustee exist in the
alternative – the return of the proceeds of the sale or the return or recovery of the goods,
whether raw or processed.
When both parties enter into an agreement knowing that the return of the goods subject
of the trust receipt is not possible even without any fault on the part of the trustee, it is
not a trust receipt transaction penalized under Section 13 of PD 115. In such case, the only
obligation actually agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase of the goods.
Pursuant to Article 1371 of the CC, the contemporaneous actions of the parties may be
examined in order to understand the transaction through their intent rather than to rely
purely on the trust receipts that they signed.
In the present case, LBP knew that ACDC was in the construction business and that the
materials that it sought to buy under the letters of credit were to be used for construction
projects. LBP was aware of the fact that there was no way it could recover the buildings or
constructions for which the materials subject of the trust receipts had been used.
Nevertheless, LBP had authorized the delivery of these materials to a construction site of
two government projects for which they were used. When it had done so, LBP should have
been aware that it could not possibly recover the processed materials as they would
become part of government projects. As an immovable property, the ownership of
whatever was constructed with those materials would presumably belong to the owner of
the land, under Article 445 of the CC.
Even if we consider the vague possibility that the materials, consisting of cement, bolts and
reinforcing steel bars, would be used for the construction of a movable property, the
ownership of these properties would still pertain to the government and not remain with
the bank as they would be classified as property of the public domain under Article 420 of
the CC.
Furthermore, despite the allegations in the affidavit-complaint wherein LBP sought the
return of the construction materials, its demand letter actually sought the payment of the
balance but failed to ask, as an alternative, for the return of the construction materials or
the buildings where these materials had been used.
The following scenarios are in contrast with trust receipt transaction because it is
fundamental in a trust receipt transaction that the person who advanced payment for the
merchandise becomes the absolute owner of said merchandise and continues as owner
until he or she is paid in full, or if the goods had already been sold, the proceeds should be
turned over to him or to her.
In the case of Colinares, the SC ruled that goods sold in retail are often within the custody
or control of the trustee until they are purchased. In the case of materials used in the
manufacture of finished products, these finished products – if not the raw materials or
their components – similarly remain in the possession of the trustee until they are sold.
But the goods and the materials that are used for a construction project are often placed
Page | 46

under the control and custody of the clients employing the contractor, who can only be
compelled to return the materials if they fail to pay the contractor and often only after the
requisite legal proceedings. The contractor’s difficulty and uncertainty in claiming these
materials (or the buildings and structures which they become part of), as soon as the bank
demands them, disqualify them from being covered by trust receipt agreements.
Based on these premises, the agreements between the parties in this case to be trust
receipt transactions because
(1) From the start, the parties were aware that ACDC could not possibly be
obligated to reconvey to LBP the materials or the end product for which they
were used; and
(2) From the moment the materials were used for the government projects, they
became public, not LBP’s, property.
Since these transactions are not trust receipts, an action for estafa should not be brought
against the respondents, who are liable only for a loan.
Even assuming that the transactions were trust receipts, the complaint should still be
dismissed. The Trust Receipts Law punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another, regardless of whether the latter is
the owner or not. The law does not singularly seek to enforce payment of the loan, as
"there can be no violation of the right against imprisonment for non-payment of a debt."
In this case, the misappropriation could be committed if the entrustee fails to turn over
the proceeds of the sale of the goods covered by the trust receipt transaction or fails to
return the goods themselves. In the present case, respondents could not have failed to
return the proceeds since their allegations that the clients of ACDC had not paid for the
projects it had undertaken with them at the time the case was filed had never been
questioned or denied by LBP. What can only be attributed to the respondents would be
the failure to return the goods subject of the trust receipts.
Q: In this case what is the obligation of the officers of ACDC?
A: To pay the loan acquired from Landbank.
Q: Was there a violation of the trust receipt law?
A: No, there was none. The obligation of ACDC was to pay the loan and not
return the materials.
In Land Bank of the Philippine vs Perez et al, wherein what is the effect thereof?
There was a demand or in this case, a complaint was filed against the entrustee
for estafa. But the Supreme Court held therein that this was not the trust
receipt agreement covered under the trust receipts law to be held liable for
estafa. Because the arrangement here was that the trust receipt was issued
merely to secure the contract of loan by virtue of the letter of credit. So read
that case for you to understand more when to make a person liable for estafa
under the trust receipt law and when is he not liable. Because, if you take into
consideration criminal liability for estafa for violation of the trust receipts law,
the entrustee fails to turn over the proceeds of the sale of goods covered by the
trust receipt to the entruster. Or the entrustee fails to return the goods under
the trust agreement if not disposed in accordance with the agreement of the
trust receipt. But if you take a look at the true nature of this kinds of
transaction, on the part of X, his obligation is not really to return the goods
subject of the trust receipt if it is not sold or if it is sold to remit the proceeds.
His obligation is just to pay the loan and the trust receipt was issued as a form
of security-interest.
Do also take note that in this case the SC also enumerated the elements of
estafa in relation to the trust receipts law, in this case no dishonesty or abuse of
confidence is present in the handling of the construction of materials.
HUR TIN YANG vs. PEOPLE
FACTS:
Supermax is engaged in construction business. Metrobank extended several commercial
letters of credit to Supermax. These commercial LCs were used by Supermax to pay for the
delivery of several construction materials which will be used in their construction business.
Thereafter, Metrobank required petitioner to sign 24 trust receipts as security for the
construction materials and to hold those materials or the proceeds of the sales in trust for
Metrobank to the extent of the amount stated in the trust receipts.
The 24 trust receipts fell due but Supermax failed to pay or deliver the goods or proceeds
to Metrobank. As a consequence, Metrobank filed a case for estafa against petitioner Hur
Tin Yang as the representative and VP of Supermax’s internal affairs.
Petitioner admitted that he signed the trust receipts. However, he argued that said trust
receipts were demanded by Metrobank as additional security for the loans it extended to
Supermax for the purchase of construction equipment and materials. In fact, the
construction materials covered by the trust receipts were delivered way before petitioner
signed the corresponding trust receipts. Not only this, petitioner argued that Metrobank
knew all along that the construction materials subject of the trust receipts were not
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
intended for resale but for personal use of Supermax relating to its construction business.
ISSUE: W/N Metrobank’s previous knowledge that the goods (construction materials)
subject of the trust receipts were never intended to be sold but only for use in the
entrustee’s construction business is a valid defense against estafa.
RULING: YES
In determining the nature of a contract, the intention of the parties by their conduct,
words, actions and deeds should govern and not the title they give to such contract.
The dealing between petitioner and Metrobank was not a trust receipt transaction but one
of simple loan. Petitioner’s admission that he signed the trust receipts does not
conclusively prove that the transaction was, indeed, a trust receipts transaction. In
contrast to the nomenclature of the transaction, the parties really intended a contract of
loan.
The fact that the entruster bank knew even before the execution of the trust receipt
agreements that the construction materials covered were never intended by the entrustee
for resale or for the manufacture of items to be sold is sufficient to prove that the
transaction was a simple loan and not a trust receipts transaction.
A trust receipt transaction is one where the entrustee has the obligation to deliver to the
entruster the price of the sale, or if the merchandise is not sold, to return the merchandise
to the entruster.
Nonetheless, when both parties enter into an agreement knowing fully well that the return
of the goods subject of the trust receipt is not possible even without any fault on the part
of the trustee, it is not a trust receipt transaction penalized under Section 13 of PD 115 in
relation to estafa under the RPC, as the only obligation actually agreed upon by the parties
would be the return of the proceeds of the sale transaction. This transaction becomes a
mere loan, where the borrower is obligated to pay the bank the amount spent for the
purchase of the goods.
In the case of Ng vs. People, the Court ruled that the Trust Receipts Law was created to aid
in financing importers and retail dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the merchandise imported or purchased.
Following the precept of the law, such transactions affect situations wherein the entruster,
who owns or holds absolute title or security interests over specified goods, documents or
instruments, releases the subject goods to the possession of the entrustee. The release of
such goods to the entrustee is conditioned upon his execution and delivery to the
entruster of a trust receipt wherein the former binds himself to hold the specific goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation to turn over to the entruster the
proceeds to the extent of the amount owing to the entruster or the goods, documents or
instruments themselves if they are unsold. The entruster is entitled only to the proceeds
derived from the sale of goods released under a trust receipt to the entrustee.
As ruled in the case of Land Bank vs. Perez, when both parties enter into an agreement
knowing that the return of the goods subject of the trust receipt is not possible even
without any fault on the part of the trustee, it is not a trust receipt transaction. The only
obligation actually agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase of the goods.
The practice of banks of making borrowers sign trust receipts to facilitate collection of
loans and place them under the threats of criminal prosecution should they be unable to
pay it may be unjust and inequitable. if not reprehensible. Such agreements are contracts
of adhesion which borrowers have no option but to sign lest their loan be disapproved.
The resort to this scheme leaves poor and hapless borrowers at the mercy of banks and is
prone to misinterpretation.
Q: In other words, when could the issuance of a trust receipt be considered
within the scope of the trust receipt law?
A: When the goods will be delivered to the entrustee, the intention should be
to sell, which is not present in the cases we discussed. The intention was only
for loan. No intention of resale of the goods, which is why not covered by Trust
Receipt Law.
It has been the practice of banks to make borrowers sign trust receipts to
facilitate collection of loans and then place them under the criminal threat for
estafa should they be unable to pay. The SC said this is unjust and equitable
since these agreements are contracts of adhesion. The mere fact that there are
trust receipts issued does not automatically make it covered under the trust
receipts law or that the entrustee would be liable for estafa. In this case the
bank knew even before the execution of the trust receipt agreement that the
construction materials covered were never intended for resale or for the
manufacture of items to be sold. It was a simple loan.
So you look at the intention. And look at WON the entrustee has the alternative
obligation to deliver the proceeds of the sale of the goods covered by the trust
receipts or to return the goods unsold. The transaction becomes a mere loan
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where the borrower is obligated to pay the bank the amount spent for the
purchase of goods.
Now notice here that the information of this case were all dated March 15,
2002, and as we have read or hopefully read, we have here a “try and try until
you succeed”, because why? The trial court would find them guilty, the Court of
appeals would uphold the decision, and the SC even initially dismissed the case.
Tingnan nyo, 2002 gi-file ang criminal action until 2013 na-dismiss na lahat ng
criminal liability for estafa.
VI. LETTERS OF CREDIT
How about letters of credit? LOC in Code of Commerce specifically Articles 567
to 572.
Art. 567
Letters of credit are those issued by one merchant to another or for the
purpose of attending to a commercial transaction.
However, this definition has become obsolete, since nowadays, LOC are strictly
bank-to-bank transactions. It is issued by a bank that guarantees its clients
ability to pay for imported goods or services. The underlying idea of a letter of
credit is to ensure certainty of payment. Seller is assured of payment because
the bank intervenes and makes the commitment to pay. The idea behind it is
like your credit card. You walk into a department store and they sell to you on
credit although you’re a total stranger because you show your credit card,
which means that the bank which issued the credit card tells the seller that it
will pay the goods being bought.
A basic principle in letters of credit is that the bank deals with documents only.
Aside from certain conditions, the seller will be required to submit certain
documents together with the draft that he will draw in order to collect. These
documents shall be negotiated and agreed upon between the buyer and the
seller. Normally, the seller would have to submit together with the draft a bill of
lading, packing list, commercial invoice. As banks deal with documents only,
they are not qualified to deal with goods. They’re not competent to deal with a
thousand and one type of goods. They will act on the basis of the documents
only.
A letter of credit is also not a contract of guarantee or suretyship, because it
entails a primary liability on the part of the issuer-borrowee in default. And
moreover, it is not a negotiable instrument.
PRUDENTIAL BANK vs. IAC
FACTS:
Respondent Philippine Rayon applied for a commercial letter of credit with petitioner
Prudential Bank to effect payment for the importation of machineries with Nissho
Company. By virtue of the application, the petitioner bank opened a Letter of Credit in
favor of respondent. Against this letter of credit, drafts were drawn and issued by Nissho
which were all paid by petitioner bank.
Upon the arrival of the machineries, the petitioner bank indorsed the shipping documents
to respondent which accepted the delivery. To enable the respondent to take delivery of
the machineries, it executed a trust receipt in favor of petitioner bank.
Later on, respondent ceased business operation. However, its obligation arising from the
letter of credit and the trust receipt remained unpaid and unliquidated despite the
repeated demands of petitioner bank.
The IAC ruled that the relationship existing between the petitioner and respondent is
governed by specific contracts, namely the application for letters of credit, the promissory
note, the drafts and the trust receipt. It further ruled that respondent could only be held
liable for the 2 drafts because only these appear to have been accepted by the latter after
due presentment. However, the liability for the remaining 10 drafts did not arise because
the same were not presented for acceptance. The IAC concluded that acceptance of the
drafts by Philippine Rayon was indispensable to make it liable.
ISSUE: W/N respondent Philippine Rayon is liable on the basis of the trust receipt.
RULING: YES
A letter of credit is defined as an engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts or other demands for payment
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
upon compliance with the conditions specified in the credit.
Through a letter of credit, the bank merely substitutes its own promise to pay for one of its
customers who in return promises to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees mutually agreed upon.
In the instant case, by virtue of the Application and Agreement for Commercial Letter of
Credit, petitioner bank as under obligation to pay through its correspondent bank in Japan
the drafts that Nissho Company periodically drew against said letter of credit pursuant to
petitioner's contract with respondent. In turn, respondent was obligated to pay petitioner
bank the amounts of the drafts drawn by Nissho Company against petitioner together with
any accruing commercial charges, interest, etc. pursuant to the terms and conditions
stipulated in the Application and Agreement of Commercial Letter of Credit.
Hence, the drawee was necessarily the petitioner bank. It was to the petitioner that the
drafts were presented for payment. In fact, there was no need for acceptance as the
issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the NIL.
Furthermore, respondent not only have presumably put said machinery to good use and
have profited by its operation and/or disposition but respondent already sold the
machinery covered by the trust receipt to Yupangco Cotton Mills. Clearly, respondent
willfully violated their duty to account for the whereabouts of the machinery covered by
the trust receipt or for the proceeds of any lease, sale or other disposition of the same that
they may have made, notwithstanding demands therefor.
Q: Is there a contract of sale here?
A: Yes, between Phil. Rayon and Nissho.
Q: Will the validity of the sale be affected by the letter of credit arrangement
between Phil. Rayon and Prudential?
A: No, maam.
Q: So, when will the obligation of the bank to Nissho arise?
Q: Can it refuse to pay on the ground of breach of contract or on the ground
that the goods delivered were not in accordance with what was agreed
between Phil. Rayon and Nissho?
Q: Do we have here a true trust receipt transaction covered by the trust receipt
law?
So here, Phil. Rayon immediately became liable upon payment of Prudential to
Nissho. A different conclusion would invalidate the principle upon which a
commercial letter or credit is founded.
When is a letter of credit availed of? Usually in international transactions. Phil.
Rayon would not be willing to pay for such a huge amount without the
assurance that upon payment the goods will be delivered. Remember that a
letter of credit is a financial device developed as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of the seller, who refuses to part with his goods before he is paid, and
a buyer, who wants to have control of the goods before paying.
To break the impasse, the buyer may be required to contract a bank to issue a
letter of credit; the issuing bank can authorize the seller to draw drafts and
engage to pay them upon their presentment simultaneously with the tender of
documents required by the letter of credit. The buyer and seller agree on what
documents are to be presented for payment, but ordinarily they are documents
of title evidencing or attesting to the shipment of the goods to the buyer
Once the letter of credit is established, the seller ships the goods to the buyer
and in the process secures the required shipping documents and documents of
title. To get paid, the seller executes a draft and presents it together with the
required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit
requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when the buyer reimburses the issuing
bank and acquires the documents entitling him to the goods. The seller gets
paid only if he delivers the documents of title over the goods while the buyer
acquires the said documents and control over the goods only after reimbursing
the bank.
ESTILLORE
December 13, 2016
Part 1 of 1
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BANK OF AMERICA vs. CA
FACTS:
Petitioner Bank of America received an Irrevocable Letter of Credit issued by Bank of
Ayudhya for the account of General Chemicals of Thailand to cover the sale of plastic ropes
and "agricultural files," with the petitioner as advising bank and respondent Inter-Resin as
beneficiary.
Upon receipt of the letter-advice with the letter of credit, respondent sent Atty. Tanay to
petitioner to have the letter of credit confirmed. The bank did not. A bank employee in
charge of letters of credit, however, explained to Atty. Tanay that there was no need for
confirmation because the letter of credit would not have been transmitted if it were not
genuine.
Respondent sought to make a partial availment under the letter of credit by submitting to
petitioner invoices, covering the shipment of ropes to General Chemicals, the
corresponding packing list, export declaration and bill of lading. Finally, after being
satisfied that respondent's documents conformed with the conditions expressed in the
letter of credit, petitioner issued in favor of respondent a Cashier's Check.
Petitioner wrote Bank of Ayudhya advising the latter of the availment under the letter of
credit and sought the corresponding reimbursement therefor.
Meanwhile, respondent presented to petitioner the documents for the second availment
under the same letter of credit for the second shipment of goods. Immediately upon
receipt of a telex from the Bank of Ayudhya declaring the letter of credit fraudulent,
petitioner stopped the processing of respondent's documents and sent a telex to its
branch office in Thailand requesting assistance in determining the authenticity of the letter
of credit.
Petitioner sued respondent for the recovery of the peso equivalent of the draft on the
partial availment of the now disowned letter of credit. On the other hand, respondent
claimed that not only was it entitled to retain the amount on its first shipment but also to
the balance covering the second shipment.
ISSUES:
(1) W/N the Bank of America is a mere advising bank under the letter of credit
hence it cannot be held liable. YES
(2) W/N the Bank of America may recover against Inter-Resin under the draft
executed in its partial availment of the letter of credit. YES
RULING: BOTH YES
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable
interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying.
To break the impasse, the buyer may be required to contract a bank to issue a letter of
credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank can
authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit. The buyer
and the seller agree on what documents are to be presented for payment, but ordinarily
they are documents of title evidencing or attesting to the shipment of the goods to the
buyer.
Once the credit is established, the seller ships the goods to the buyer and in the process
secures the required shipping documents or documents of title. To get paid, the seller
executes a draft and presents it together with the required documents to the issuing bank.
The issuing bank redeems the draft and pays cash to the seller if it finds that the
documents submitted by the seller conform with what the letter of credit requires. The
bank then obtains possession of the documents upon paying the seller.
The transaction is completed when the buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this arrangement, the seller gets paid only if
he delivers the documents of title over the goods, while the buyer acquires said
documents and control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory contracts, is the
engagement of the issuing bank to pay the seller of the draft and the required shipping
documents are presented to it. In turn, this arrangement assures the seller of prompt
payment, independent of any breach of the main sales contract. By this so-called
"independence principle," the bank determines compliance with the letter of credit only
by examining the shipping documents presented; it is precluded from determining
whether the main contract is actually accomplished or not.
There would at least be 3 parties:
(a) The buyer, who procures the letter of credit and obliges himself to reimburse
the issuing bank upon receipts of the documents of title;
(b) The bank issuing the letter of credit, which undertakes to pay the seller upon
receipt of the draft and proper document of titles and to surrender the
documents to the buyer upon reimbursement; and
(c) The seller, who in compliance with the contract of sale ships the goods to the
buyer and delivers the documents of title and draft to the issuing bank to
recover payment.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
First issue
Bank of America has only been an advising bank as evidenced by the provisions of the
letter of credit itself, the petitioner bank's letter of advice, its request for payment of
advising fee, and the admission of respondent Inter-Resin that it has paid the same.
The fact that petitioner asked respondent to submit documents required by the letter of
credit and eventually has paid the proceeds thereof did not make it a confirming bank.
Likewise, the fact that the draft required by the letter of credit is to be drawn under the
account of General Chemicals (buyer) only means the same had to be presented to Bank of
Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of credit
is an engagement of the issuing bank, not the advising bank, to pay the draft.
Most importantly, the Bank of America's letters expressly stated that "the enclosure is
solely an advise of credit opened by the abovementioned correspondent and conveys no
engagement by us." This written reservation by Bank of America in limiting its obligation
only to being an advising bank is in consonance with the provisions of UCP.
As an advising or notifying bank, petitioner did not incur any obligation more than just
notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter
of credit. The bare statement of the bank employees on the authenticity of the letter of
credit did not have the effect of novating the letter of credit and petitioner's letter of
advise, nor can it justify the conclusion that the bank must now assume total liability on
the letter of credit.
Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As the seller,
the issuance of the letter of credit should have obviously been a great concern to it. It
would have, in fact, been strange if it did not, prior to the letter of credit, enter into a
contract, or negotiated at the every least, with General Chemicals. In the ordinary course
of business, the perfection of contract precedes the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation of an
advising bank. The view that Bank of America should have first checked the authenticity of
the letter of credit with bank of Ayudhya, by using advanced mode of business
communications, before dispatching the same to Inter-Resin finds no real support in
Article 18 of the UCP which states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the transmission of any
telecommunication. As advising bank, petitioner is bound only to check the "apparent
authenticity" of the letter of credit, which it did.
Second issue
The kind of transaction between the parties is what is commonly referred to as a
discounting arrangement. This time, Bank of America has acted independently as a
negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents
directly to Bank of Ayudhya to recover payment. As a negotiating bank, Bank of America
has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-
Resin, as the drawer of the draft, continues to assume a contingent liability thereon.
Inter-Resin admits having received P10,219,093.20 from bank of America on the letter of
credit and in having executed the corresponding draft. The payment to Inter-Resin has
giventhe Bank of America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however,
Bank of America may now turn to Inter-Resin for restitution.
The fact that Inter-Resin sent waste instead of its products, is really of no consequence. In
the operation of a letter of credit, the involved banks deal only with ƒdurdocuments and
not on goods described in those documents. Hence, Inter-Resin is ordered to refund to
petitioner Bank of America.
M: Who applied for the Letter of Credit?
S: General Chemicals Ltd., Inc
M: Who issued the Letter of Credit?
S: Bank of Ayudhya from Thailand
M: In whose favor was the Letter of Credit supposed to be?
S: Inter-Resin through Bank of America.
This is more or less similar to Prudential Bank. The difference, however, is here,
ang nag-issue is from another country. Unlike in Prudential Bank, the letter of
credit was issued here in the Philippines.
M: What is the role here of Bank of America?
S: As an advising bank, its role is only to advise or notify Inter-Resin that a
Letter of Credit was issued in the latter’s favor. The Bank cannot confirm the
authenticity thereof.
M: Is Inter-Resin liable to Bank of America?
S: Yes. Bank of America already released the money assming that the Letter of
Credit was genuine.
Page | 49

M: What do you mean by Independence Principle?
S: It states that the bank determines compliance with the letter of credit only
by examining the shipping documents presented; it is precluded from
determining whether the main contract is actually accomplished or not.
So here, the SC defined a LETTER OF CREDIT as financial device developed by
merchants as a convenient and relatively safe mode of dealing with sales of
goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to
part with his goods before he is paid, and a buyer, who wants to have control of
the goods before paying.
The transaction is completed when the buyer reimburses the issuing bank and
acquires the documents entitling him to the goods. Under this arrangement, the
seller gets paid only if he delivers the documents of title over the goods, while
the buyer acquires said documents and control over the goods only after
reimbursing the bank.
The engagement of the issuing bank to pay the seller of the draft and the
required shipping documents are presented to it. So that’s what happened in
regard to Bank of America.
In relation thereto, please take note of the INDEPENDENCE PRINCIPLE. The
bank determines compliance with the letter of credit only by examining the
shipping documents presented; it is precluded from determining whether the
main contract is actually accomplished or not. So, whether there was a
perfected sale, whether actual delivery took place, whether there is a breach of
warranty.. That issues are independent with regard to the compliance of the
Letter of Credit.
Also in this case, the SC mentioned that there would at least be three (3)
parties:
(a) the BUYER, who procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipts of the documents of title;
(b) the bank issuing the letter of credit, which undertakes to pay the
seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and,
(c) the seller, who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to
the issuing bank.
It may be increased as there maybe services of an advising (notifying) bank may
be utilized to convey to the seller the existence of the credit; or, of a confirming
bank which will lend credence to the letter of credit issued by a lesser known
issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn
by the exporter.
In this case, Bank of America was only an advising and nor a confirming bank, as
clearly provided in the letter of advice. As an advising or notifying bank, Bank of
America did not incur any obligation more than just notifying Inter-Resin of the
letter of credit issued in its favor, let alone to confirm the letter of credit. As an
advising bank, the Bank of America is bound only to check the apparent
authenticity of the Letter of Credit, in which it did.
May Bank of America then recover what it has paid under the letter of credit
when the corresponding draft for partial availment thereunder and the required
documents were later negotiated with it by Inter-Resin? Yes, to which the SC
held that such transaction is considered as a discounting arrangement.
Bank of America has acted independently as a negotiating bank, saving Inter-
Resin from the hardship of presenting the documents directly to Bank of
Ayudhya to recover payment. As a negotiating bank, Bank of America has a
right to recourse against the issuer bank and until reimbursement is made. And
in this case, Inter-Resin is considered as the drawer of the draft, continues to
assume a contingent liability.
Bank of America, as a notifying bank, did not assume the responsibility of a
confirming bank.
ESSENTIAL CONDITIONS OF A LETTER OF CREDIT
(1) It is issued in favor of a definite person and not to order. When you
had negotiable instruments, letters of credit is not a negotiable
instrument because it is payable to a specific person.
Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
(2) Limited to fixed or specified amount, or to one or more
undetermined amounts, but with maximum stated limit.
Also, in relation to letters of credit, as mentioned in the Bank of America, we
have three parties: buyer, issuing bank, and the seller. And then as an
additional party, we have either advising, notifying, confirming or paying bank.
In this transaction involving letters of credit, there are separate independent
contracts involved. Of course, there would be a Contract of Sale between the
buyer and the seller. And then the contract of the buyer would be with the
issuing bank and then there is a letter of credit proper.
As mentioned in the case of Bank of America, take note of the Independence
Principle in a letter of credit. A bank, in determining compliance of the terms of
a letter of credit, is required only to examine only the shipping documents
presented by the seller. And, again, it is precluded from determining whether
the main contract is actually accomplished or not. Independent ‘yun. This
arrangement assures the seller from payment, independent of a breach of the
sales contract.
Now, RULE OF STRICT COMPLIANCE IN THE LETTER OF CREDIT TRANSACTION.
That the documents tendered by the seller or the beneficiary must strictly
conform to the terms of the letter of credit. So naka-specify na ‘yan sa letters
of credit. A corresponding bank, which departs from what has been stipulated
under the letter of credit as when it accepts a faulty tender, acts on its own risk,
and it may not thereafter be able to recover from the buyer or issuing
bank, as the case may be, the money thus paid to the beneficiary.
Another term where you should also be familiar with as the STAND-BY LETTER
OF CREDIT. This is a bank issued option on the loan involving three parties: the
bank issues the credit, the party requesting for such issuance, and then we have
the beneficiary. The beneficiary has the right to trigger(?) the loan option if the
party fails to fulfill its commitment, the standby letter of credit, meron nang
maximum amount specified therein in which case the issuing bank disburses a
specified sum to the beneficiary and books an equivalent loan. It will consider it
as a loan of its customer. Such standby letter of credit may support one
financial obligation such as those of bidder. Yung mag-bid ka specially for those
which involve huge amounts. So kung mag-bid ka, hindi ka pa man maglabas
ng pera pero dapat meron kang available na pera. As a proof you can have a
standby letters of credit. Or financial obligations as those of borrowers. Do
take note that standby letters of credit may be considered as a security
arrangement but they are not considered or converted contracts of guarantee.
The bank doesn’t act as a guarantor.
TYPES OF LETTER OF CREDIT
(1) Irrevocable
− Obligates the issuing bank to honor trust drawn in
compliance with the credit and cannot be cancelled
− It cannot be modified without the consent of all the
parties including the beneficiary-exporter.
(2) Revocable
− It can be cancelled or amended at any time before
payment and intended to serve as a means of arranging
payment, but it is not a guarantee of payment
(3) Confirmed
− Both banks are obligated to honor drafts drawn in
compliance with the credit
(4) Unconfirmed
− Obligation only of the issuing bank and issued if exporter
has doubts about the foreign banks ability to be paid.
Such doubts may arise if the exporter is unsure of the
financial standing of the foreign bank or if political or
economic conditions of the foreign country are unstable.
A confirming bank is better able to judge the credibility of
a bank issuing a letter of credit
(5) Non-revolving
− Valid only for one transaction.
(6) Revolving
− Valid for several transactions over a given period of time.
Most revolving letters of credit are revocable in form
(7) Cumulative
− Undrawn amounts can be carried over to future periods
(8) Non-cumulative
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 Credit Transactions – First Exam Coverage 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA

− A revolving letter of credit maybe non-cumulative, in

which case, any amount not used by the beneficiary
during a specified period, may not be drawn against a
latter periods

-Case Digests by GUMBOC

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