CREDIT TRANSACTIONS
The first two kinds are gratuitous bailments – there is really no consideration for
Meaning and Scope of Credit Transactions
1) Include all transactions involving the purchase or loan of goods, services, or
money in the present with a promise to pay or deliver in the future
2) More exchanges are possible, persons are able to enjoy a thing today but
pay for it later, and through the banking system, actual money transfer is
eliminated by cancellation of debts and credits
3) CT’s are contracts of security
a) Contracts of Real Security – supported by a collateral or an
encumbrance of property
b) Contracts of Personal Security – the fulfilment of which by the principal
debtor is secured or supported only by a promise to pay or the
personal commitment of another such as a guarantor or surety
4) Bailment contracts, together with the other related subjects such as usury,
contracts of guaranty and suretyship, mortgage, antichresis and
concurrence and preference of credits
Meaning and Kinds of Security
Security – something given, deposited or serving as a means to ensure the
fulfilment or enforcement of an obligation or of protecting some interest in the
property.
Bailment
Delivery of property of one person to another in trust for a specific purpose, with a
contact, express or implied, that the trust shall be faithfully executed and the
property returned or duly accounted for when the special purpose is accomplished
or kept until the bailor reclaims it.
Creation of Bailment
Bailment may be a contractual relation (must contain all the elements of a valid
contract)
Parties in Bailment
1) Bailor (Comodatario) – the giver; the party who delivers the possession or
the custody of the thing bailed; and
2) Bailee (Comodante) – the recipient, the party who receives the possession
or custody of the thing delivered
Kinds of Contractual Bailment
1) Those for the sole benefit of the bailor;
2) Those for the sole benefit of the bailee; and
ADAN, RAFAEL III Z.
CREDIT TRANSACTIONS (DE LEON)
3) Those for the benefit of both parties
they are considered more as a favor by one party to the party benefited; but the
law imposes definite obligations upon both the bailor and the bailee. The third kind
usually results from bailments involving business transactions (mutual-benefit
bailments)
Kinds of Bailment for Hire
(Locatio et conductio) arises when goods are left with the bailee for some use or
service by him and is always for some compensation.
1) Hire of Things (locatio rei) – where goods are delivered for the temporary
uses of the hirer;
2) Hire of service (locatio operis faciendi) – where goods are delivered for
some work or labor upon it by the bailee
3) Hire for Carriage of Goods (locatio operis mercium vehendarum) – where
goods are delivered either to a common carrier (Art. 1732, NCC) or to a
private person for the purpose of being carried from place to place; and
4) Hire of Custody (locatio custodiae) – where goods are delivered for storage
LOAN
(Art. 1933, NCC)
Characteristics of Contract of Loan
1) Real Contract – the delivery of the thing loaned is necessary for the
perfection of the contract (Art. 1934; 1316, NCC); and
2) Unilateral Contract – once the subject matter has been delivered it creates
obligations on the part of only one of the parties – the borrower.
Cause or Consideration in a Contract of Loan
1) Borrower: acquisition of the thing; and
2) Lender: the right to demand its return or its equivalent
Kinds of Loan
1) Commodatum – whre the bailor (lender) delivers to the bailee (borrower) a
non-consumable thing so that the latter may use it for a certain time and
return the identical thing; and
2) Simple Loan or Mutuum – where the lender delivers to the borrower
money or other consumable thing upon the condition that the latter shall
pay the same amount of the kind and quality

LOANS vs. CREDIT
Credit – individual’s 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.
Loan (mutuum) – delivery by one party (lender/creditor), and the receipt by the
other party (borrower/debtor) who become the owner, of a given sum of money or
other consymable thing upon an agreement, express or implied, to repay the same
amount of the same kind and quality, with or without interest.
CREDIT vs. DEBT
Credit – sum credited on the books of a company to a person who appears to be
entitled to it. It presupposes a creditor-debtor relationship, and may be said to
imply ability, by reason of property or estates, to make a promised payment.
Debt – which is due to any person as distinguished from that which he owes
LOAN vs. DISCOUNT
1) Discount, interest is deducted in advance; in loan, interest is usually taken
at the expiration of a credit; and
2) Discount is always on a double-name paper; loan is generally on a single-
name paper.
COMMODATUM vs. MUTUUM
1) Commodatum ordinarily involves something not consumable; mutuum
involves money or other consumable thing;
2) Commodatum involves ownership of the thing loaned that is retained by
the lender; in mutuum, the ownership is transferred to the borrower;
3) Commodatum is essentially gratuitous; mutuum may be gratuitous or
onerous, that is, with stipulation to pay interest;
4) Commodatum: the borrower must return the same thing loaned; in
mutuum, the borrower need only pay the same amount of the same kind
and quality;
5) Commodatum may involve real or personal property; mutuum refers only
to personal property
6) Commodatum is a loan for use or temporary possession; mutuum is a loan
for consumption;
7) Commodatum: the bailor may demand the return of the loaned before the
expiration of the term in case of urgent need; mutuum: the lender may not
demand its return before the lapse of the term agreed upon; and
ADAN, RAFAEL III Z.
CREDIT TRANSACTIONS (DE LEON)
8) Commodatum: the loss of the subject matter is suffered by the bailor since
he is the owner; mutuum: the borrower suffers the loss even if caused
exclusively by a fortuitous event and he is not, therefore, discharged from
his duty to pay
Kinds of Commodatum
1) Ordinary (Art. 1933, NCC); and
2) Precarium – one whereby the bailor may demand the thing loaned at will
(Art. 1947, NCC)
Delivery Essential to Perfection of Loan
Commodatum and mutuum are real contracts which require the delivery of the
object of the contract. Delivery is necessary in view of the purpose of the contract
which is to transfer either the use or ownership of the thing loaned.
Binding Effect of Accepted Promise to Lend
An accepted promise to make a future loan is a consensual contract and, therefore,
binding upon the parties.
1) Application for loan approved by corporation – Where an application for a
loan of money was approved by resolution of the corporation (lender) and
the corresponding mortgage was executed and registered, there arises a
perfected consensual contract of loan.
2) Mortgage executed by virtue of loan granted – where the mortgage deed
was executed for and on condition of the loan granted to the mortgagors,
the fact the latter did not collect from the mortgagee bank the
consideration of the mortgage on the date it was executed but 6 days later
when then mortgagors and their co-maker signed the promissory note is
immaterial. A contract of loan being consensual, it was perfected at the
same time that the contract of mortgage was executed, the promissory
note being only an evidence of an indebtedness and did not indicate lack of
consideration of the mortgage at the time of its execution
3) Only partial amount released – Where a bank and a borrower undertook
reciprocal obligations by entering an P80,000 loan agreement on April 28,
1965 when the borrower executed real estate mortgage, but the bank was
able to release only P17,000, the bank was held in default for P63,000 to
the borrower.
COMMODATUM
Essentially Gratuitous
The contract ceases to be a commodatum if any compensation is to be paid by the
borrower who acquires the use.
Contract Similar to Donation
It confers a benefit to the recipient. The presumption is that the bailor has loaned
the thing for having no need therefore.
Extent of Bailee’s Right of Use
Limited to the thing loaned but not to its fruits unless there is a stipulation to the
contrary. As owner of the thing loaned, the bailor is naturally entitled to its fruits.
Purpose of the Contract
Must be the temporary use of the thing loaned. If the bailee is not entitled to the
use of the thing, the contract may be a deposit. It is essential feature of the contract
of commodatum that the use of the property of another shall be “for a certain
time”
Subject Matter of the Contract
Non-consumable things, whether real or personal.
Commodatum Involving Real Property
When a person allowed another to build a warehouse on the former’s land so that
the latter may use the property for a certain period without any payment of rentals.
If no time for use of the land is specified, the contract would be that specie of
commodatum called “precarium” expressly recognized in Art. 1947. If rental is paid,
the contract would be one of lease.
Bailor need not be the Owner
Since by the loan, ownership does not pass to the borrower. It is sufficient if the
bailor has such possessory interest in the subject matter or right to its use which he
may assert against the bailee and the third persons although not against the rightful
owner. Hence a mere lessee of the thing or the usufructuary may lend but the
borrower or bailee himself may not lend nor lease the thing loaned to him to a third
person.
Commodatum, purely personal in Character
Art. 1939, NCC constitutes an exception to the GR that all rights acquired in virtue of
an obligation are transmissible. Unlike mutuum, commodatum is a purely personal
contract, the lender having in view the character, credit, and conduct of the
borrower. Hence the death of either party terminates the contract unless by
stipulation, the commodatum is transmitted to the heirs of either or both parties. If
there are two or more borrowers, the death of one does not extinguish the contract
in the absence of stipulation to the contrary.
ADAN, RAFAEL III Z.
CREDIT TRANSACTIONS (DE LEON)
Right of Bailee to Lend Thing Loaned to Third Persons
Generally, the bailee can neither lend nor lease the object of the contract to a third
person, in the absence of some understanding or agreement to that effect.
However, the use of the thing loaned may extend to the members of the bailee’s
household except in two cases: (1) there is a stipulation to the contrary; and (2) the
nature of the thing forbids such use.
Contrary Stipulation as to Fruits
The bailee is entitled only to the use of the thing loaned and not to its fruits.
OBLIGATIONS OF BAILEE
Liability 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 (Art. 1933, NCC). As a rule, the borrower must take good care of
the thing with the diligence of a good father of a family.
Liability for Loss of Thing Loaned
1) GR – the bailee must exercise proper diligence with regard to the care and
preservation of the thing loaned for he must return the thing after its use.
As a GR, the bailee is not liable for loss or damage due to fortuitous event.
The reason is that the bailor reatains the ownership of the thing loaned.
2) XPNs – Art. 1942, NCC. The purpose of the law is to punish the bailee for
his improver acts although they may not be proximate cause of the loss.
Liability for Deterioration of the Thing Loaned
1) Due to ordinary wear and tear – the parties to the contract know that the
thing borrowed cannot be used without deterioration due to ordinary wear
and tear. Hence, in the absence of agreement to the contrary, the
depreciation caused by the reasonable and natural use of the thing is
borne by the bailor.
2) Due to bailee’s fault or negligence – the bailee is liable if he is guilty of fault
or negligence or if he devotes the thing to any purpose different from that
for which it has been loaned.
Obligation to Return Thing Loaned
Except for a claim for damages suffered because the flaws of the thing loaned, the
borrower has no right to retain the thing loaned as security for claims he has against
the lender, even though they may be by reason of extraordinary expenses.
 1) Ownership remains in bailor – the borrower acquires only the use of the
thing the ownership of which remains in the lender. It would be extremely
harsh if the bailor, after benefiting the bailee, and the use having been
accomplished, should be depreived of its enjoyment on the excuse of the
expenses more or less certain or just.
2) Only temporary use given to bailee – The bailee would be violating the
bailor’s trust in him to return the thing as soon as the period stipulated
expires or the purpose has been accomplished.
Effect of Retention or Adverse Claim by Bailee
1) The mere failure of the bailee to return the subject matter of
commodatum to the bailor does not constitute adverse possession on the
part of the bailee who holds the same in trust.
Right of Retention for Damages
The bailee’s right extends to no further that to the retention of the thing loaned
until he is reimbursed for the damages suffered to him. He cannot lawfully sell the
thing to satisfy said damages.
Liability when there are Two or More Bailees
The reason for imposing solidary liability where there are two or more borrowers is
to safeguard effectively the rights of the lender. The law presumes that the bailor
takes into account the personal integrity and responsibility of all the bailees and
that, therefore, he would not have constituted the commodatum if there were only
one bailee.
OBLIGATIONS OF THE BAILOR
Obligation to Respect Duration of Loan
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. The bailor is bound by the terms of
the contract of commodatum which is for a certain time. However if he should have
an urgent need of the thing, or if the borrower commits an act of ingratitude, he
may demand its return or temporary use. This right of the bailor is based on the fact
the commodatm is essentially gratuitous.
Precarium
A kind of commodatum where the bailor may demand the thing at will. It has been
defined as a “contract by which the owner of a thing, at the request of another
person, gives the latter the thing for use as long as the owner shall please.”
ADAN, RAFAEL III Z.
CREDIT TRANSACTIONS (DE LEON)
Cases when Contract is Precarium
(Art. 1947, NCC)
Right of Bailor to Demand Return of Thing for Acts of Ingratitude (IOS)
1) 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 the
act has been committed against the bailee himself, his wife or children
under his authority;
2) If the bailee should commit some Offenses against the person, honor or
property of the bailor, or his wife or children under his parental authority;
and
3) If the bailee unduly refuses the bailor Support when the bailee is legally or
morally bound to give support to the bailor
Obligation to Refund Extraordinary Expenses
1) Extraordinary expenses for the preservation of the thing loaned – Such
expenses shall be borne by the bailor
2) Extraordinary expenses arising from actual use of the thing loaned – such
expenses arising on the occasion of the actual use of the thing loaned shall
be borne by the bailor and bailee alike on a 50-50 basis
Liability to Pay Damages for Known Hidden Flaws
1) There is flaw or defect in the thing loaned;
2) The flaw or defect is hidden
3) The bailor is aware thereof;
4) He does not advise the bailee of the same; and
5) The bailee suffers damages by reason of said flaw or defect
SIMPLE LOAN OR MUTUUM
Defined
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
and quality shall be paid. It involves the return of the equivalen only and not the
identical thing because the borrower acquires ownership thereof. A loan of money,
however may be payable in kind.
Obligation of Borrower is to Pay
The law uses the word “pay” and not “return” because the consumption of the
thing loaned is the distinguishing character of the contract of mutuum from that of
commodatum. The obligation “to pay” may include the accessory duty to pay
interest.
No Criminal Liability for Failure to pay
In mutuum, the borrower acquire ownership of the money, goods or personal
property borrowed. Being the owner, the borrower can dispose of the thing
borrowed and his act will not be considered misappropriation thereof
Distinguished from Contract of Rent
1) Loan signifies the delivery of money or some other consumable thing to
another with a promise to repay an equivalent amount of the same kind
and quality but not a promise to return the same thing; Rent is a contract
by which one of the parties delivers to another some non-consumable
thing in order that the latter may use it during a certain period and return
it to the former. The owner or lessor does not lose his ownership. He
simply loses control over the property rented during the period of the
contract.
2) Loan: the creditor receives “payment” for his loan; Rent: the owner of the
property rented receives “compensation” or “price” either in money,
provisions, chattels, or labor from the occupant thereof in return for its
use.
Distinguished from Trust Receipt
Trust receipt shall refer to the written or printed document signed by the entrustee
in favour of the entruster containing terms and conditions substantially complying
with the provisions of PD 115.
Fungible Things
Those which are usually dealt with by number, weight, or measure such as rice, oil,
sugar, etc. so that any given unit or portion is treated as the equivalent of any other
unit or proportion.
Mutuum and Commodatum Distinguished from Barter
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 (Art. 1638, NCC).
The distinction lies in the subject matter. In mutuum, it is money or any other
fungible things; in barter, non-fungible things.
In commodatum, the bailee is bound to return the identical thing borrowed when
the time has expired or the purpose has been served. In barter, the equivalent thing
is given in return for what has been received
Mutuum may be gratuitous and commodatum is always gratuitous. Barte on the
other hand, is an onerous contract.
ADAN, RAFAEL III Z.
CREDIT TRANSACTIONS (DE LEON)
Form of Payment
The object of simple loan may be either money or consumable or fungible things
1) Loan of money – payment must be made in the currency stipulated, if it is
possible to deliver such currency; otherwise if it is payable in the currency
which is legal tender in the Philippines. In case of extraordinary inflation or
deflation, the basis of payment shall be the value of the currency at the
time of the creation of the obligation. (All notes and coins issued by BSP
are legal tender in the Philippines.
EX: D borrowed from C P50-K payable after five years. On maturity date, the value
of P50-K dropped to P25-K because of inflation
In this case, the basis of payment shall be the equivalent value of the currency five
years ago. Hence, D is liable to pay C P100-K unless there is an agreement to the
contrary.
2) Loan of fungible thing – if fungible thing other than money, the borrower is
under obligation to pay the lender another thing of the same kind, quality
and quantity. In case it is impossible, the borrower shall pay its value at the
time of the perfection of the loan.
EX: D borrowed from C two sacks of rice of a certain kind and quality. At the time
the loan was perfected, the price of each sack was P1.4-K
D should return to C two sacks of rice of the same kind and quality although at the
time of payment, the price had increased at P1.6-K. If on the due date of the
obligation, the same kind of rice could not be delivered by D because it was not
available for some reason, then D should pay C the sum of P2.8-K instead, the value
of the rice at the time of the perfection of the loan.
Requisites for Recovery of Interest (WilLS)
1) The agreement must be in Writing
2) The interest must be Lawful
3) The interest must be expressly Stipulated
Interest may be paid either as compensation for use of money (monetary interest
[Art. 1956, NCC]) or imposed by law or courts as penalty or indemnity for damages
(compensatory interest [Art. 2209 and 2212, NCC])
Existence of Stipulation to Pay Interst
1) If a particular rate of interest has been expressly stipulated by the parties,
the interest, not the legal interest shall be applied.
2) If the exact rate of the interest is not mentioned, the legal rate of 12% shall
be payable.
 3) No increase in interest shall be due unless such increase has also been
expressly stipulated.
Liability for Interest even in the Absence of Stipulation
Art. 1596, NCC is subject to two XPNs
1) Indemnity for damages – debtor in delay is liable to pay legal interest (6% /
12%) as indemnity for damages even in the absence of stipulation for the
payment of interest.
2) Interest accruing from unpaid - interest due shall earn interest from the
time it is judicially demanded although the obligation may be silent upon
this point

Usurious Contracts Declared Void

1) Form of Contract not Conclusive – parol evidence is admissible to show that
a written document though legal in form was in fact a cloak or device to
cover usury if from a construction of the whole transaction it becomes
apparent there exists a corrupt intention to violate laws on usury.
2) Contract void only as to interest involved – a usurious contract should not
be considered void in its entirety buy only as to the interest involved. It is
only the stipulation on usurious interest which should be treated as void so
that the loan becomes without stipulation to pay interest.
3) Right of debtor – with respect to debtor, the amount paid as interest under
a usurious agreement is recoverable by him, since the payment is deemed
to have been made under restraint, rather than voluntarily.

Determination of Interest Payable in Kind

Purpose: to make usury harder to perpetrate

When Unpaid Interest Earns Interest

GR: Accrued interest shall not earn interest; XPN: (1) When judicially demanded
(Art. 2212, NCC); and (2) When there is an express stipulation made by the parties,
to wit: that the interest due an unpaid shall be added to the principal obligation and
the resulting total amount shall earn interest.

ADAN, RAFAEL III Z.

CREDIT TRANSACTIONS (DE LEON)