CHAPTER 2

Simple Loan or Mutuum

Article 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)

Article 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)

Article 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 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

Article 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)

Article 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)

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. (n)

Article 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)

Article 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far
as they are not inconsistent with this Code. (n)

TITLE XII
DEPOSIT
 CHAPTER 1
Deposit in General and its Different Kinds

Article 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)

Article 1963. An agreement to constitute a deposit is binding, but the deposit itself is not perfected
until the delivery of the thing. (n)

Article 1964. A deposit may be constituted judicially or extrajudicially. (1759)

Article 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary,
or unless the depositary is engaged in the business of storing goods. (1760a)

Article 1966. Only movable things may be the object of a deposit. (1761)

Article 1967. An extrajudicial deposit is either voluntary or necessary. (1762)

CHAPTER 2
Voluntary Deposit

SECTION 1
General Provisions

Article 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. (1763)

Article 1969. A contract of deposit may be entered into orally or in writing. (n)

Article 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. (1764)

Article 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. (1765a)
 SECTION 2
Obligations of the Depositary

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. (1766a)

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. (n)

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 decision, unless delay would cause danger. (n)

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. (n)

Article 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)

Article 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)

Article 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)

Article 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)

Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan. (n)

Article 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)

Article 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)

Article 1983. The thing deposited shall be returned with all its products, accessories and
accessions.

Should the deposit consist of money, the provisions relative to agents in article 1896 shall be applied
to the depositary. (1770)

Article 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)

Article 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)

Article 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)

Article 1987. 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)

Article 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)

Article 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. (1776a)

Article 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. (1777a)

Article 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. (1778)

SECTION 3
Obligations of the Depositor

Article 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for the
expenses he may have incurred for the preservation of the thing deposited. (1779a)

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)
Article 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)

Article 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)

CHAPTER 3
Necessary Deposit

Article 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)

Article 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)

Article 1998. The deposit of effects made by 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)

Article 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)

Article 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)

Article 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)

Article 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)
Article 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)

Article 2004. The hotel-keeper has a right to retain the things brought into the hotel by the guest, as
a security for credits on account of lodging, and supplies usually furnished to hotel guests. (n)

CHAPTER 4

Sequestration or Judicial Deposit

Article 2005. A judicial deposit or sequestration takes place when an attachment or seizure of
property in litigation is ordered. (1785)

Article 2006. Movable as well as immovable property may be the object of sequestration. (1786)

Article 2007. 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)

Article 2008. The depositary of property sequestrated is bound to comply, with respect to the same,
with all the obligations of a good father of a family. (1788)

Article 2009. As to matters not provided for in this Code, judicial sequestration shall be governed by
the Rules of Court.

SECTION 4. - Liquidated Damages

Art. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in
case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.

Art. 2228. When the breach of the contract committed by the defendant is not the one
contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the
measure of damages, and not the stipulation.

Geniza v Henry Sy
5 SCRA 754 
FACTS:

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias Rivera, mortgaged
to the defendant Asia Mercantile Corporation Lot No. 551 of the Piedad estate subdivision for P
50,000.00, payable within a period of thirty days with interest at the rate of 12% per annum. Paragraph 4,
of the contract provides that upon failure of the mortgagor to pay the indebtedness and the interest when
due, the mortgage shall become due and demandable, and without necessity of demand the mortgagee
may immediately foreclose the mortgage, judicially or extrajudicially, and for this purpose the mortgagor
appoints the mortgagee as his attorney-in-fact to sell the properties and to sign all documents and
perform any act requisite and necessary to accomplish said purpose. It was further expressly agreed that
in case of foreclosure the mortgagor binds himself to pay the mortgagee 30% of the sum owing and
unpaid as attorney’s fees and liquidated damages, exclusive of costs and expenses of the sale. On the
same date another mortgage was executed by plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo
Rivera over two parcels of registered land for the sum of P 50,000.00 and, with the same conditions as
the mortgagee executed by the spouses Catalina Carreon and Zacarias Rivera.

The mortgagors in both mortgage contracts defaulted in the payment of their respective
obligations. The mortgage executed by Catalina Carreon Rivera and Zacarias Rivera was foreclosed
extra-judicially and the proceeds of the sale of the land amounting to P 68,567.57 was disposed of by the
mortgagee.

Plaintiff brought this action to obtain a judicial declaration that the stipulation in the deeds of
mortgage fixing the amount of 30% as attorney’s fees and liquidated damages is excessive,
unconscionable and iniquitous and that the same should be reduced to P 200.00 (or 1%). The
complainants also asked for P 5,000.00 as attorney’s fees for bringing this action; that the mortgage
executed by Emma. R. Geniza and Aurelio Geniza has not yet been foreclosed; that the mortgagors are
estopped from alleging that he stipulation regarding liquidated damages and attorney’s fees is excessive
and unreasonable.

CFI dismissed the action of plaintiffs Emma Geniza and Aurelio Geniza as premature and
ordered the defendant Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of P
13,567.57 which represents the excess of the total obligations of the mortgagor. It is against the above
judgement that the plaintiffs have prosecuted the appeal to this Court, claiming that the lower court erred
in not reducing the liquidated damages and the attorney’s fees and liquidated damages as a usurious
stipulation, by reason of which plaintiffs (apellants herein) should be entitled to attorney’s fees amounting
to P5,000.00.

Issue:
 Whether the reduction of a 30% stipulated attorney’s fees and litigation damages to 5% by a
lower court judges is justified.

Held:

Yes. Affirmed.

In reducing the 30% attorney’s fees and liquidated damages from 30% to 5%, the judge below
appears to be fully justified. As the loan was for a period of 30 days only, damages amounting to 30% of
the loan of P 50,000 would appear to be iniquitous and subject to reduction in accordance with the
provisions of Article 1227 and 1229 of the Civil Code of the Philippines. We do not agree with counsel for
plaintiffs-appellants that the contract was a usurious contract there being no allegation of fact that the
mortgagee’s intention was to exact a usurious interest, nor evidence to that effect. Neither is there any
allegation or claim that the mortgage is contra bonos mores, so that we may assume that he demanded
the insertion of the iniquitous clause or 30% damages to cover a usurious deal. Under these
circumstances we cannot sustain the claim of the plaintiffs-appellants that the agreement was a usurious
one, so that we hold that the trial court was fully justified in considering the provision only as an iniquitous
clause subject to reduction. We also find the reduced liquidated damages and attorney’s fees to be fain
and we find no reason for disturbing the discretion of the court below in this respect.  

Article 1250 of the Civil Code provides: 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

Nicolas v Matias
97 Phil 795 

FACTS:
1.       June 29, 1944 – the defendants mortgaged to the plaintiffs Sps. parcels of land to guarantee the
payment of the sum of P30,000 in Japanese military notes 1 year after the expiration of 5 years from said
date, with interest (6% per annum) thereon.
2.       The plaintiffs instituted the present action for foreclosure of the mortgage. The lower court decided that
the sum lent should be paid in accordance with the Ballantyne schedule; and, accordingly, rendered
judgment "ordering defendants to pay plaintiffs the amount of P2,000, Philippine currency, with interest at
six per cent (6%) a year, from June 29, 1945, up to the date when it is actually paid."

ISSUE:
             Whether the sum lent by the plaintiffs in Japanese war notes, should be paid by the defendants in
Philippine currency, peso for peso, or in accordance with the Ballantyne schedule (peso for peso)

HELD:
1.       It is settled that the contracting parties are free to stipulate on the currency in which their respective
obligations shall be settled, and that whenever, pursuant to the terms of an agreement, an obligation
assumed during the Japanese occupation is not payable until after liberation of the Philippines, the parties
to the agreement are deemed to have intended that the amount stated in the contract be paid in such
currency as may be legal tender at the time when the obligation becomes due.
2. If, according to the stipulation of the parties, the money to be paid by the debtor to the creditor, or by the
vendor with pacto to the creditor, to redeem the property mortgaged, or sold shall be due and payable
after liberation, as agreed upon by the parties in the present case, it shall be paid in legal tender or
Philippine currency at par value or at the rate of one Philippine peso for each peso in Japanese military
notes; but if it shall be due and payable before liberation after the liberation shall be made in Philippine
currency, in accordance with the Balletyne schedule. (De la Cruz v. Del Rosario, G.R. No. L-4859, July
24, 1951.)
3. The deed of mortgage in question provides that the obligation of the mortgagees shall be paid
one year after the expiration of five (5) years form June 29, 1944, which is the date of said instrument. In
other words, the obligation is not payable until June 29, 1949. The obligation involved in the present case
must be satisfied, peso for peso, in Philippine currency.
PARAS, J., dissenting: chanrob1es virtual 1aw library

As correctly pointed out by the majority, in the construction of an instrument where

there are several provisions or particulars, such a construction is, if possible, to be
adopted as will give effect to all (Rule of Court No. 123, section 59). Under paragraph 3
of the mortgage in question, the debtor shall (not merely "may") repay the loan within
a period of three years. Upon the other hand, it is provided in the succeeding paragraph
4 that "the mortgagor binds himself, if the mortgagee so desires, not to redeem the
mortgaged properties, during the continuance of this mortgage." The majority have
ruled that the mortgagor cannot pay the debt before the expiration of three years
without the consent of the mortgagee, — a construction that obviously gives effect only
to paragraph 4 in utter disregard of paragraph 3 and, hence, in contravention of the
very rule invoked by them. In my opinion, a reverse interpretation is, under the facts of
this case, not only fair and equitable but conformable to the rule of construction
embodied in section 59 of Rule of Court No. 123. In other words, I hold that the
mortgagor has the right to pay the indebtedness at any time within three years
provided that, as in this case, he pays the interest for whole term of the mortgage. In
the ordinary course of things, a loan is granted in consideration of interest, and if by
the early payment of the obligation, the creditor would not lose any part of the
stipulated interest, both paragraph 3 and 4 would practically be enforced. It cannot be
alleged that the creditor herein, in addition to interest, wanted to have his money in the
safekeeping of the debtor, because the contract is one of loan and not of deposit. It is
to be remembered, moreover, that the debt was as being paid in the same currency
loaned (Japanese money). The effect of inflation is one of the risks naturally incident to
the money-lending business, and the lender should protect himself against it by plain
covenants.

In view of the foregoing, I vote for the reversal of the appealed judgment.

PADILLA, J.:

I concur in this dissent.

Ang Lam v Peregrina

92 Phil 506
On December 26, 1944, Eugenia Peregrina borrowed P100,000, Philippine currency prevailing on
that date, from Ang Lam, promising to pay it within a period of one year therefrom.
Peregrina died on April 1, 1945, and thereupon Ang Lam presented a claim against her estate for
the full amount of the indebtedness.
Judgment having been rendered thereon for P1,000, the equivalent thereof according to the
Ballantyne Conversion Table, Ang Lam has prosecuted this appeal, contending that as the currency in
which the indebtedness was to be paid was not agreed upon or stipulated in the contract of loan, this
should be in the legal tender on December 25, 1945, or one year from the date of the loan, because both
parties had elected to subject their rights to a contingency, i.e., the change in the intrinsic value and
purchasing power of the currency.

Issue:
Whether a stipulation that makes the loan payable within the 1-year period when the liberation
occurred will cause the application of the currency at the time prior to the liberation. (Ballantyne scale)

Held: Yes.

Ratio: The loan was payable within one year from December 26, 1944. It could be paid the following day,
or any day before liberation, in Japanese military notes, had the debtor chosen to do so. It is incorrect to
assume that the parties intended to subject their rights and obligations under the contract to a
contingency, a change in the currency, without evidence of said intent. While perhaps they could be
presumed to be bound by the fluctuations in the value of the currency they contracted in, it may not be
presumed that they intended to gamble on a change therein, in the absence of an agreement, express or
implied, to that effect. If it is unfair and unjust that the loan be decreased or completely wiped out because
of a change in the currency; it is also unfair and unjust that the loan be paid in the same amount in which
it was contracted and at the restored currency, because then the lender would be unduly enriched at the
expense of the debtor. The fair and just rule to apply is, therefore, for the debtor to pay the actual value or
worth of the loan at the time it was contracted in the currency in existence at the time of payment.

Central Bank Circular No. 905;

P.D. 1684;

Section 1. A new Section 259-A is hereby added to Title VII of the National Internal Revenue Code
of 1977, as amended, which shall read as follows:

"Sec. 259(a). Flexibility Clause. In the interest of the national economy and general welfare, the
President, upon recommendation of the Minister of both the Ministries of Finance and Natural
Resources, is hereby empowered to revise the rates of tax on and classification of mineral products,
as well as to prescribe the rates of tax in cases of marginal mines requiring protection, assistance or
incentives.

"The foregoing authority may be exercised by the President if any of the following conditions exist:

"(a) Where, in the interest of economic development, it is necessary to redirect

expenditures or consumption patterns;

"(b) Whenever by reason of fluctuation of currency values and/or inflation or

deflation, the existing taxable base and rate levels are no longer realistic or
consistent with the current price levels;

"(c) When it is necessary to counter adverse action on the part of another country or
adverse international market conditions; or

"(d) When there is need to obviate unemployment and economic and social
dislocation.
"Before any recommendation is submitted to the President by the Minister of Finance and the
Minister of Natural Resources pursuant to the provisions of this section, a public hearing shall,
whenever practicable, be held and interested parties afforded a reasonable opportunity to be heard."

Section 2. A new Section 281-A is hereby added to Title VIII of the same Code which shall read as
follows:

"Sec. 281(a) Flexibility Clause. In the interest of the national economy and general welfare, the
President, upon recommendation of the Minister of both the Ministries of Finance and Natural
Resources, is hereby empowered to revise the rates of tax on and classification of forest products.

"The foregoing authorities may be exercised by the President if any of the following conditions exist:

"(a) Where, in the interest of economic development, it is necessary to redirect

expenditures or consumption patterns;

"(b) Whenever by reason of fluctuation of currency values and/or inflation or

deflation, the existing taxable base and rate levels are no longer realistic or
consistent with the current price levels;

"(c) When it is necessary to counter adverse action on the part of another country or
adverse international market conditions; or

"(d) When there is need to obviate unemployment and economic and social
dislocation.

"Before any recommendation is submitted to the President by the Minister of Finance and the
Minister of Natural Resources pursuant to the provision of this section, a public hearing shall,
whenever practicable, be held and interested parties afforded a reasonable opportunity to be heard."

Section 3. This Decree shall take effect immediately.

Done in the City of Manila, this 18th day of September, in the year of Our Lord, nineteen hundred
and eighty.

Act. No. 2655

ACT NO. 2655

ACT NO. 2655 - AN ACT FIXING RATES OF INTEREST UPON LOANS AND
DECLARING THE EFFECT OF RECEIVING OR TAKING USURIOUS RATES AND FOR
OTHER PURPOSES

Section 1. 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 express contract as to such rate of interest, shall be
six per centum per annum or such rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in accordance with the authority hereby granted.

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher
maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board
is also authorized to prescribe different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries.

Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other
property, real or personal, or choses in action, a higher rate of interest or greater sum or value,
including commissions, premiums, fines and penalties, for the loan or renewal thereof or
forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in
whole or in part by a mortgage upon real estate the title to which is duly registered, or by any
document conveying such real estate or an interest therein, than twelve per centum per annum or
the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal
thereof or forbearance is granted: Provided, That the rate of interest under this section or the
maximum rate of interest that may be prescribed by the Monetary Board under this section may
likewise apply to loans secured by other types of security as may be specified by the Monetary
Board.

Sec. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to
charge in money or other property, real or personal, a higher rate or greater sum or value for the
loan or forbearance of money, goods, or credits where such loan or forbearance is not secured as
provided in Section two hereof, than fourteen per centum per annum or the maximum rate or
rates prescribed by the Monetary Board and in force at the time the loan or forbearance is
granted.

Sec. 4. No pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge,

demand, take or receive any higher rate or greater sum or value for any loan or forbearance than
two and one-half per centum per month when the sum lent is less than one hundred pesos; two
per centum per month when the sum lent is one hundred pesos or more, but not exceeding five
hundred pesos; and fourteen per centum per annum when it is more than the amount last
mentioned; or the maximum rate or rates prescribed by the Monetary Board and in force at the
time the loan or forbearance is granted. A pawnbroker or pawnbroker's agent shall be considered
such, for the benefits of this Act, only if he be duly licensed and has an establishment open to the
public.

It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a
person into two or more fractions in order to collect greater interest than the permitted by this
section.
It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an
additional charge as insurance premium for the safekeeping and conservation of the article
pawned.

Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest
rate ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or
credit, whenever warranted by prevailing economic and social conditions.

Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this
Act, the Monetary Board shall be guided by the following:

1. The existing economic conditions in the country and the general requirements of the national
economy;

2. The supply of and demand for credit;

3. The rate of increase in the price levels; and

4. Such other relevant criteria as the Monetary Board may adopt.

Sec. 5. In computing the interest on any obligation, promissory note or other instrument or
contract, compound interest shall not be reckoned, except by agreement: Provided, That
whenever compound interest is agreed upon, the effective rate of interest charged by the creditor
shall not exceed the equivalent of the maximum rate prescribed by the Monetary Board, or, in
default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per
centum per annum interest or such rate as may be prescribed by the Monetary Board. No person
or corporation shall require interest to be paid in advance for a period of more than one year:
Provided, however, That whenever interest is paid in advance, the effective rate of interest
charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by the
Monetary Board.

Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall
have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed to be
taken or received, may recover the whole interest, commissions, premiums penalties and
surcharges paid or delivered with costs and attorneys' fees in such sum as may be allowed by the
court in an action against the person or corporation who took or received them if such action is
brought within two years after such payment or delivery: Provided, however, That the creditor
shall not be obliged to return the interest, commissions and premiums for a period of not more
than one year collected by him in advance when the debtor shall have paid the obligation before
it is due, provided such interest, and commissions and premiums do not exceed the rates fixed in
this Act.

Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes,
and other contracts or evidences of debts, and all deposits of goods or other things, whereupon or
whereby there shall be stipulated, charged, demanded, reserved, secured, taken, or received,
directly or indirectly, a higher rate or greater sum or value for the loan or renewal or forbearance
of money, goods, or credits than is hereinbefore allowed, shall be void: Provided, however, That
no merely clerical error in the computation of interest, made without intent to evade any of the
provisions of this Act, shall render a contract void: Provided, further, That parties to a loan
agreement, the proceeds of which may be availed of partially or fully at some future time, may
stipulate that the rate of interest agreed upon at the time the loan agreement is entered into, which
rate shall not exceed the maximum allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the Monetary Board: And Provided, finally,
That nothing herein contained shall be construed to prevent the purchase by an innocent
purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration
before maturity, when there has been no intention on the part of said purchaser to evade the
provisions of this Act and said purchase was not a part of the original usurious transaction. In
any case, however, the maker of said note shall have the right to recover from said original
holder the whole interest paid by him thereon and, in case of litigation, also the costs and such
attorney's fees as may be allowed by the court.

Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any
other kind of commodities shall also be null and void unless they provide that such products or
seed or other commodities shall 6e appraised at the time when the obligation falls due at the
current local market price: Provided, That unless otherwise stated in a document written in a
language or dialect intelligible to the debtor and subscribed in the presence of not less than two
witnesses, any contract advancing money to be repaid later in agricultural products or seed or
any other kind of commodities shall be understood to be a loan, and any person or corporation
having paid otherwise shall be entitled in case action is brought within two years after such
payment or delivery to recover all the products or seed delivered as interest, or the value thereof,
together with the costs and attorney's fees in such sum as may be allowed by the court. Nothing
contained in this section shall be construed to prevent the lender from taking interest for the
money lent, provided such interest be not in excess of the rates herein fixed.

Sec. 9. The person or corporation sued shall file its answer in writing under oath to any
complaint brought or filed against said person or corporation before a competent court to recover
the money or other personal or real property, seeds or agricultural products, charged or received
in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint
will mean the admission of the facts contained in the latter.

Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary
to implement effectively the provisions of this Act.

Sec. 10. Without prejudice to the proper civil action violation of this Act and the implementing
rules and regulations promulgated by the Monetary Board shall be subject to criminal
prosecution and the guilty person shall, upon conviction, be sentenced to a fine of not less than
fifty pesos nor more than five hundred pesos, or to imprisonment for not less than thirty days nor
more than one year, or both, in the discretion of the court, and to return the entire sum received
as interest from the party aggrieved, and in the case of non-payment, to suffer subsidiary
imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations,
associations, societies, or companies the manager, administrator or gerent or the person who has
charge of the management or administration of the business shall be criminally responsible for
any violation of this Act.

Sec. 11. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby
repealed.

Sec. 12. This Act shall take effect on the first day of May, nineteen hundred and sixteen

First Metro Investment Corp v. Este Del Sol 369 SCRA 99

FACTS:
1. FMIC granted respondent Este del Sol a loan of P7,385,500.00 to finance the construction and
development of the Este del Sol Mountain Reserve.
2. As security, Este del Sol executed a Real Estate Mortgage and an Underwriting Agreement
whereby FMIC shall underwrite the public offering of common shares of Este del Sols capital
stock.
3. The Underwriting Agreement also stipulated the payment by Este del Sol of a consultancy fee of
P332,500 per annum for a period of 4 years. Simultaneous to this, a Consultancy Agreement was
also executed whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee
as consultant to render general consultancy services
4. EdS failed to meet the schedule of repayment in accordance and incurred a total obligation of
P12,679,630.98.
5. FMIC caused the extrajudicial foreclosure of the real estate mortgage. Leaving a balance of 
P6,863,297.73 on the principal amount of the loan.
6. petitioner instituted on November 11, 1980 the instant collection suit against the respondents to
collect the alleged deficiency balance plus interest at twenty-one (21%) percent per annum until
fully paid, and twenty-five (25%) percent thereof as attorneys fees and costs.
7. Este del Sol sought the dismissal of the case and argued that the Underwriting and Consultancy
Agreements executed were to camouflage the usurious interest being charged by petitioner
FMIC.
8. The trial court ruled in favor of FMIC but the CA reversed the decision and declared that the fees
provided for in the Underwriting and Consultancy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged by the petitioner FMIC

ISSUES:
1. WON the Central Bank Circular No. 905 which took effect on January 1, 1983 and removed the
ceiling on interest rates for secured and unsecured loans, regardless of maturity, should be
applied retroactively. (NO)
2. WON the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the
usurious interest charged by the petitioner. (YES)

RULING:

1. NO. It is an elementary rule of contracts that the laws, in force at the time the contract was made
and entered into, govern it. More significantly, Central Bank Circular No. 905 did not repeal nor in
any way amend the Usury Law but simply suspended the latter’s effectivity. The illegality of usury
is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can
repeal another law. Thus, retroactive application of a Central Bank Circular cannot, and should
not, be presumed.
 2. YES. The form of the contract is not conclusive for the law will not permit a usurious loan to hide
itself behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury.

An apparently lawful loan is usurious when it is intended that additional compensation for the loan
be disguised by an ostensibly unrelated contract providing for payment by the borrower for the
lenders services which are of little value or which are not in fact to be rendered, such as in the
instant case. In this connection, Article 1957 of the New Civil Code clearly provides that:

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.
In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to
the usurious interest is void, consequently, the debt is to be considered without stipulation as to
the interest

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence, being separable, the latter only
should be deemed void, since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to
receive back the principal amount of the loan. With respect to the 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. 

Verdejo v CA
157 SCRA 743 
Facts:
November 17, 1983, private respondents executed in his favor a Deed of Sale with Right to
Repurchase for the sum of P60,560.00, to be paid every 15 days starting January 1984 until fully paid.
Private respondents failed to make any payment notwithstanding repeated demands by petitioner,
causing the latter to file said action 

On January 11, 1985, petitioner instituted an action for sum of money against private
respondents, docketed as Civil Case No. 2546-P before the Regional Trial Court, Branch 111, Pasay City.

In their answers, they have pointed out that the amount claimed was never received bt the private
respondent.
accounts of P20,000.00 at 10% interest per month, and P7,000.00 at 12% interest per month, the said
deed of sale was executed.
 
Private respondents further argued that petitioner charged usurious interest rates of 10% to 12%
per month in contravention of the Usury Law. They sought the recovery of P12,490.00 representing
overpayment of interest, damages and attorney's fees.

Trial court rendered in favor of the petitioner while court of appeals rendered the decision in favor
of the private respondent.
Hence, this petition.

Issue:  whether or not the interest is usurious  and the interest was incorporated with the amount sought
by petitioner.
HELD: Yes, the interest is usurious  and the interest was incorporated with the amount sought by
petitioner.

Considering that at the time the loans were entered into, the Usury Law was still in effect and
beyond the scope of Central Bank (CB) Circular No. 905, January 1, 1983, which lifted the ceiling on
interest rates prescribed under the Usury Law, it held that the contract of loan was valid as to the loan but
avoid as to the usurious interest.

The petition is bereft of merit and merely raises factual issues, the determination of which is best
left to the trial court. Well-settled is the rule that findings of fact of the trial court and the Court of Appeals
are not to be disturbed on appeal and are entitled to great weight and respect

Imperial v Juacian
427 SCRA 517
Facts:
1. Alex A. Jaucian filed  collection for money against Restituta Imperial, alleging that the former obtained
six separate loan, hence, Imperial executed separate promissory notes, and several checks as a
guarantee in favor of Jaucian. The promissory notes indicate the interest of 16% per month.

2. Although, admittedly, Imperial made several payments, the same were not enough and she always
defaulted whenever her loans mature[d].

3. RTC reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per annum;
and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum  ;
CA affirmed.

Issue: whether or not the interest rate imposed is usurious, hence the court may validly reduced it.

RuLING: YES.
1. An agreement between the parties for the payment of interest on the subject loans at the rate of 16
percent per month, as decreed by the lower courts, this rate must be equitably reduced for being
iniquitous, unconscionable and exorbitant. While the Usury Law ceiling on interest rates was lifted by C.B.
Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates
to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

2. In Medel v. CA, the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per
annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it
amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is
considered contrary to morals, if not against the law. Such stipulation is void.

3. Since the stipulation on the interest rate is void, it is as if there were no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand. Thus, no justification to reverse
or modify the rate imposed by the two lower courts.

Macalinao v BPI
G.R. No. 175490, September 17, 2009 
FACTS:
Macalinao was an approved cardholder of BPI Mastercard. She made some purchases through
the use of the said credit card and defaulted in paying for said purchases. She subsequently received a
letter dated January 5, 2004 from BPI, demanding payment of the amount of PhP 141,518.34.

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI
Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the
monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty
fee equivalent to another 3% of the amount due for every month or a fraction of a month’s delay.

For failure of Macalinao to settle her obligations, BPI filed with the MeTC of Makati City a
complaint for a sum of money against her and her husband, Danilo SJ. Macalinao, and BPI prayed for the
payment of the amount of PhP 154,608.78 plus 3.25% finance charges and late payment charges
equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the total
amount due as attorney’s fees, and of the cost of suit. The Macalinao’s failed to file an Answer.

MeTC Decision: ruled for BPI and ordered the Macalinaos to pay the amount of P141,518.34 plus
interest and penalty charges of 2% per month. Macalinao appealed to the RTC.

RTC Decision: affirmed the decision in toto. The Macalinaos filed a petition for review with the CA.

CA Decision: affirmed with modifications the RTC Decision by ordering the payment of the principal
amount of P126, 706.70 plus interest and penalty charges of 3% per month from date of demand until
fully paid. The Motion for Reconsideration was denied, hence this case that was filed by Macalinao.
 
ISSUE:
            WoN the 3% per month interest charge and penalty by a credit card company is usurious?
            In corollary, WoN the court has the power to reduce such usurious rates for interest and penalty
into a more reasonable and equitable one?
 
HELD: YES on both issues.

            The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be
Reduced to 2% Per Month or 24% Per Annum.

            In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of
9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being
clearly excessive, and was thus reduced to 2% per month or 24% per annum.

            On appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per
month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of
the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI.
Nevertheless, it should be noted that this is not the first time that this Court has considered the interest
rate of 36% per annum as excessive and unconscionable as held in Chua vs. Timan. Since the
stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may
reduce the interest rate as reason and equity demand.

            The same is true with respect to the penalty charge. Notably, under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI
shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code
states that the judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor.
 Even if there has been no performance, the penalty may also be reduced by the courts if it
is iniquitous or unconscionable. In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of each case since what may be iniquitous and
unconscionable in one may be totally just and equitable in another.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by
the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in
accordance with Art. 1229 of the Civil Code.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the re-
computation of the interest considering that this was the first amount which appeared on the Statement of
Account of petitioner Macalinao. There is no other amount on which the recomputation could be based,
as can be gathered from the evidence on record. The principal amount to be paid should be P112,
309,52.

Overseas Bank of Manila vs. Cordero

 
Facts:
Private respondent opened a 1-year time deposit with petitioner bank amounting to P80,000, with interest
of 6% p.a. Due to its distressed financial condition, the bank was unable to pay. Cordero instituted an
action before the CFI Manila. Petitioner raised the defenses of insolvency and prejudice to other
depositors. The lower court, and the Court of Appeals, ruled in favor of Cordero. Hence, the instant
petition for review on certiorari. Certain supervening events rendered the issue moot and academic.
Respondent’s brother and attorney-in-fact sent a letter to the Commercial Bank of Manila (petitioner’s
successor
-in-interest), acknowledging receipt of P10,000, and another manifestation for P73,840, with waiver of
damages. Upon further examination, it was found that the respondent’s brother has no SPA.
Respondent’s brother submitted the SPA, with explanatory comment that the waiver applies only to third
partyclaims, suits and damages, not to interest and attorney ’s fees.
 
Issue:
Whether respondent is entitled to interest and attorney’s fees
 
Held:
The obligation to pay interest on the deposit ceases the moment the operation of the bank is completely
suspended by the Central Bank. Neither can respondent. Cordero recover attorney’s fees. Petitioner’s
refusal to pay was not due to a willful and dishonest refusal to comply with its obligation but to restrictions
imposed by Central Bank.
 

B. Deposit

1. Voluntary Deposit

a. Characteristics

Aquino v. Deala, 63 Phil 582

FACTS:

The defendant approached Mariano Aquino, the plaintiff's father, to solicit a P4,000 loan secured

by the real property on which a house of strong materials was built. Mariano Aquino acceded on condition
that the transaction be evidenced by a deed of sale with a 4 year right of repurchase, obligation to build a

house, and obligation to lease the property from Mariano Aquino for the sum of P40 per month. The

instrument was later novated, the only alteration being the price and the rent – P4,500 and P45,

respectively. It was novated again to change the price and rent to P5,200 and P52, respectively. Then

again to P6,600 and P49.50 and extending the period or repurchase to April 20, 1933.

The defendant was able to get permission from the Department of Engineering and Public Works

to build a 2-storey house, and he completed the building of the house in 2 years.

Mariano Aquino, sometime in 1933, had the consolidation of the property registered with the

registry of deeds, and a transfer certificate of title was issued to him. He died sometime later. His son, as

special administrator, instituted the ejectment proceeding.

MTC Decision: The municipal court ordered the defendant to vacate the property.

CFI Decision: The CFI affirmed.

ISSUE:

WoN a contract of deposit which has a stipulation

for the payment of interest is actually a loan?

HELD:  YES.

The subsequent conduct of the parties and other circumstances of the case warrant the

conclusion that the true intention of the parties was the granting of a loan in a certain amount to the

defendant, with interest at 12 per cent per annum which, in view of the defendant's precarious situation,

was later reduced to 9 per cent so that he could build another house on the vacant part of the lot in

question, the loan being secured by said lot, the house already built thereon at the time of the execution

of the contract and that which the defendant intended to build with the money received from Mariano

Aquino. If the

words "sale with right of repurchase", "price", "repurchase", "right of redemption", "lease", "rent",

"purchaser", "vendor", and other similar words used according to custom in the deed Exhibit 1, the other
stipulations contained therein and the other circumstances of the case are incompatible with the idea that

it was the intention of the assignor to transfer the ownership of the property in question to the purchaser

at a certain price, the vendor reserving for himself only the right to repurchase it within a certain period.

Let us begin with the stipulations of the original contract Exhibit 1. Those contained in paragraphs

5, 6, 10 and 11 thereof are, in our opinion, incompatible with the theory that the contract was one of

purchase and sale as claimed by the plaintiff. We should not lose sight of the fact that between an

absolute sale and a sale with right of

repurchase, no difference exists except that in the latter the ownership of the purchaser is subject to the

resolutory

condition that the vendor exercises his right of repurchase with the time agreed upon.

Under paragraph 5, the so-called vendor found himself to construct a two-story house of strong

materials within six months on the vacant part of the lot referred to in the contract. It is not explained why

the vendor should have to assume said obligation and spend the money received from the purchaser in

compliance therewith when such obligation is an act of ownership and the performance thereof devolved

upon the purchaser-owner, not upon the vendor-lessees. It is stated in their contract that the security

offered is insufficient and, therefore, the creditor required the debtor to amplify it by constructing another

additional house on the lot given as security. Had it been the intention of the parties to make this new

house a part of the subject matter of the said sale, a stipulation regarding payment of additional rent

would have been inserted in the contract inasmuch as a rental of P40 a month was fixed for the use and

occupation of the house already existing on the property which is the subject matter of the contract. It is

true that under paragraph 10 this sum of P40 was for the rent not only of the house already existing but

also of that which the defendant undertook to construct, but this part of the contract is clearly fictitious,

because if the rent of P40 covered the two houses, it is not explained why the lessee should agree to pay

rent for the occupation of an inexistent house which he himself was to construct with his own money and

how the lessor should accept rent of only P40 for two houses of strong materials, one of which consists of

two stories.
 Paragraph 6 and paragraph 10, subparagraph (d) imposed upon the vendor the obligation to

insure against fire the buildings constructed on the property which is the subject matter of the contract, for

not less than P3,000, the payment of the premiums thereof being to the account of said vendor who was

obliged to indorse the policy immediately to the purchaser and to pay, also for his own account and

responsibility, the land tax and any other taxes imposed or that might thereafter be imposed upon the

property. 

When a property is insured, the indemnity, in case of loss, is paid to the owner because the

insurable interest is his. This being so, the correlative obligation to pay for the insurance premiums should

devolve upon the owner and not upon the lessee or vendor with right of repurchase who, with the

exception of his right of redemption, should have considered all other juridical relations with the property

sold extinguished after the contract.

The same is true with respect to the payment of the land tax. This lien should have been

shouldered by the owner and not by the lessee.

Under paragraph 10, subparagraph (e), the expenses for the conservation of the property should

likewise be for the account of the defendant. However, these expenses are ordinarily for the account of

the lessor (article 1554, Civil Code).

It appears that Mariano Aquino desired to obtain a net income of 12 per cent per annum from his

investment and for this reason he caused the defendant to assume the obligation to pay not only the land

tax and insurance of the property but also the expenses for its conservation. If Mariano Aquino had

assumed these obligations which strictly belong to the owner of the property, instead of imposing them

upon the defendant, he would not have been able to realize said net income of 12 per cent per annum on

his capital, because he would have had to deduct therefrom the sum represented by the insurance, the

land tax and the expenses for the conservation of the property. On the other hand, had he assumed such

obligations and compensated these liens by charging interest in excess of 12 per cent he would have

openly violated the Usury Law.

 When the alleged sale price was increased to P4,500 in the first novation of the contract on

December 26, 1926, the rent of the property was increased to P45, in spite of the fact that said property

had suffered no change, in order to maintain the rate of interest at 12 per cent. When the contract was

novated for the second time on May 31, 1927, by increasing the so- called selling price to P5,200, the rent

was likewise increased to P52 in order to continue maintaining the rate of interest at 12 per cent. It was

only when said contract was novated for the last time on April 20, 1931, and the so-called selling price

was increased to P6,600 that the rent was reduced to P49.50 a month because Mariano Aquino had

acceded to reduce the rate of interest to 9 per cent. The new house on the lot in question had just been

finished about June 23, 1928, and it is strange that the fluctuations of the amount of the rent had nothing

to do with the construction of said new house but with the successive increases of the so-called selling

price, or the amount of the loan. In other words, the rent went up or down not because of the

improvement or amplification of the leased property but because of the increase of the amount of the loan

and the rate of the interest agreed upon by the parties.

The term of the right of redemption, under the original deed, was supposed to expire and it

expired on September 25, 1930. However, the so-called purchaser, far from having the consolidation of

his ownership registered in the registry of deeds, executed Exhibit 5, on April 20, 1931, "extending" the

already expired original term of four years stipulated in Exhibit 1 to April 20, 1933. This shows that,

notwithstanding the form of the contract, Mariano Aquino always considered the transaction as a simple

loan. The affirmation made in paragraph 3 of the deed Exhibit 5 that "as the term of the contract had

expired on September 25, 1930, the same remaining in status quo, etc." excludes every idea that the

parties intended to enter into a contract of sale. In fact, once the period for the right have been exercised,

it could not be said, if the contract were on of sale with pacto de retro, that "the contract has remained in

status quo", because failure to exercise the right of redemption, in such contract, automatically produces

the effect of consolidating the ownership of the purchaser without the necessity of any other act on his

part, the fact on which his ownership was temporarily conditioned not having been realized.
 In Padilla vs. Linsangan (19 Phil., 65), we stated that "the court will not construe an instrument to

be one of a sale con pacto de retro, with the stringent and onerous effects that follow, unless the terms of

the instrument and all the circumstances positively require it. Whenever, under the terms of the writing,

any other construction can fairly and reasonably be made, such construction will be adopted. Sales with a

right to repurchase, as defined by the Civil Code, are not favored, and the contract will be construed as a

mere loan unless the court can see that, if enforced according to its terms, it is not an unconscionable

one."

It may be contended that "the contracting parties may establish any agreements, terms and

conditions that may deem advisable, provided they are not contrary to law, morals, or public order." (Art.

1255, Civil Code.) However, we do not declare herein the nullity of the agreements contained in Exhibit 1

and in its various novations. None of said agreements is contrary to law, morals, or public order, and all of

them should therefore be maintained out of respect to the will of the contracting parties. The validity of

these agreements, however, is one thing, while the juridical qualification of the contract resulting

therefrom is very distinctly another. Such agreements, in our opinion, change the status of the sale with

pacto de retro and give rise to juridical relations of a different nature.

Similar thereto is a contract of commodatum wherein payment of compensation by the

person acquiring the use of the thing is stipulated. This stipulation is valid but the commodatum,

although so termed, ceases to exist and it converted into another contract with different effects

(art. 1741). The same thing happens with the contract of depositum. Although it would seem that

article 1760 of the Civil Code indirectly authorizes the constitution of an onerous deposit, when

there is an express stipulation to that effect, this court has repeatedly held that the deposit should

be considered a loan when it contains a stipulation for payment of interest. (Garcia Gavieres vs.

Pardo de Tavera, 1 Phil., 71; Barretto vs. Reyes, 10 Phil., 489; In re Guardianship of the minors

Tamboco, 36 Phil., 939, 941.) In order not to multiply the examples, we shall cite the cases of use and

habitation wherein the usuary who consumes all the fruits of the thing subject to use, and the person

having the right of habitation who occupies the whole house, are considered usufructuaries (art. 527).
 Javellana v. Lim, 11 Phil 141

FACTS:

The defendants received from the plaintiff the sum of P2,686.58 as a deposit without interest

sometime in 1897 which was to be returned, jointly and severally, in 1898. When the obligation became

due, the defendants begged the plaintiff for an extension of time for the payment thereof, binding

themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which the

plaintiff acceded.

On May 15, 1902, the debtors paid interest of P1,000 and then made no other payments. The

plaintiff filed a case.

CFI Decision: Defendants are liable jointly and severally.

ISSUE:

WoN Whether a contract denominated as a deposit but which did not require the return of exactly

the same coins and which eventually provided for the payment of interest is actually a loan?

HELD: YES.

They did not engage to return the same coins received and 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. 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 subsequently shown when asking for an

extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the

lender, 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.
 It may be inferred that there was no renewal of the contract of deposit converted into a loan,

because, as has already been stated, the defendants received said amount by virtue of a real loan

contract under the name of a deposit, since the so-called bails were forthwith authorized to dispose of the

amount deposited. This they have done, as has been clearly shown. The original joint obligation

contracted by the defendant debtors still exists, and it has not been shown or proven in the proceedings

that the creditor had released Jose Lim from complying with his obligation in order that he should not be

sued for or sentenced to pay the amount of capital and interest together with his co-debtor.

BPI v. IAC, 164 SCRA 630

FACTS:

Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City

Branch, a dollar savings account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia,

Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the

amount of $1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar

Savings Acct. No. 25-4109, the savings account of the Zshornacks; the charges for commission,

documentary stamp tax and others totalling P17.46 were to be charged to Current Acct. No. 210-465-29,

again, the current account of the Zshornacks. There was no indication of the name of the purchaser of the

dollar draft.

On the same date, October 27, 1975, COMTRUST, under the signature of Virgilio V. Garcia,

issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase

Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-

4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an

explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was

given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27,1975 when he (Ernesto)
encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation

payable to Ernesto.

In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the

bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount

withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's

Check. At the same time, the bank claims that the withdrawal was made pursuant to an agreement where

Zshornack allegedly authorized the bank to withdraw from his dollar savings account such amount which,

when converted to pesos, would be needed to fund his peso current account.

Zshornack also entrusted to COMTRUST, thru Garcia, US$3,000.00 cash (popularly known as

greenbacks) for safekeeping. Despite demand, the bank refused to return the money. COMTRUST

averred that the US$3,000 was credited to Zshornack's peso current account at prevailing conversion

rates.

BPI later absorbed COMTRUST. Zshornack filed a case against BPI.

RTC Decision: Ruled in favor or Zshornack.

ISSUE:

WoN money that is given to the bank for safekeeping is a deposit?

HELD: YES.

The explanations of the bank are unavailing. With regard to the first explanation, petitioner bank

has not shown how the transaction involving the cashier's check is related to the transaction involving the

dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two

transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr.,

possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto

cannot be considered payment to Rizaldy.

 As to the second explanation, even if we assume that there was such an agreement, the

evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the

amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the

current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-

465-29 was ever credited with the peso equivalent of the US$1,000.00 withdrawn on October 27,

1975 from Dollar Savings Account No. 25-4109.

The arrangement between the bank and Zshoranck is that contract defined under Article 1962,

New Civil Code

-- 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.

Note that the object of the contract between Zshornack and COMTRUST was foreign exchange.

Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign

Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties

entered into the transaction involved in this case. The circular requires all persons to sell to the Central

Bank all foreign exchange received within one business day following such receipt. This was modified by

CB Circular No. 281 which limited the restriction to Philippine residents.

The document and the subsequent acts of the parties show that they intended the bank to

safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a

Philippine resident. The parties did not intend to sell 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 transaction which is not authorized by CB Circular No. 20, it must be

considered as one which falls under the general class of prohibited transactions. Hence, pursuant to

Article 5 of the Civil Code, 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.

We thus rule that Zshornack cannot recover under the second cause of action.

Baron v. David, 51 Phil 1

FACTS:

Prior to January 17,1921, the defendant Pablo David had been engaged in running a rice mill in

the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by the rice

growers of the vicinity and almost constantly running.

On the date stated, a fire occurred that destroyed the mill and its contents, and it was some time

before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first action, is

an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action, is his uncle.

In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the

defendant's mill; and this, in connection with some that she took over from Guillermo Baron, amounted to

1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865

cavans and 43 kilos of palay in the mill.

No compensation has ever been received by Silvestra Baron upon account of the palay thus

placed with the defendant. As against the palay delivered by Guillermo Baron, he has received from the

defendant advancements amounting to P2,800; but apart from this he has not been compensated.

Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to

the defendant; while the defendant, on the other hand, claims that the palay was deposited subject to

future withdrawal by the depositors or subject to some future sale which was never effected. He therefore

supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921, already

mentioned.
 The plaintiffs further say that their palay was delivered to the defendant at his special request,

coupled with a promise on his part to pay for the same at the highest price per cavan at which palay

would sell during the year 1920; and they say that in August of that year the defendant promised to pay

them severally the price of P8.40 per cavan, which was about the top of the market for the season,

provided they would wait for payment until December. A case was filed against the defendant.

CFi/RTC Decision: The court ruled that the alleged promise to pay at the highest price was not made,

but gave judgment in favor of the plaintiffs for the recovery of the sums of P5,238.51 and P5,734.60. Both

parties appealed.

ISSUE:

WoN the deposit of things with the object of allowing the depositary to use them is actually a

loan?

HELD: YES.

It should be stated that the palay in question was placed by the plaintiffs in the defendant's mill

with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his

pleasure. The mill was actively running during the entire season, and as palay was daily coming in from

many customers and as rice was being constantly shipped by the defendant to Manila, or other rice

markets, it was impossible to keep the plaintiffs' palay segregated.

In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the

nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it

is quite certain that all of the plaintiffs' palay, which was put in before June 1,1920, had been milled and

disposed of long prior to the fire of January 17, 1921. 

Furthermore, the proof shows that when the fire occurred there could not have been more than

about 360 cavans of palay in the mill, none of which by any reasonable probability could have been any

part of the palay delivered by the plaintiffs. Considering the fact that the defendant had thus milled and

doubtless sold the plaintiffs' palay prior to the date of the fire, it results that he is bound to account for its

value, and his liability was not extinguished by the occurrence of the fire.
 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, when the depositary 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 connection we wholly reject the defendant's pretense that the palay delivered by the

plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the

defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this

country, persons placing palay with them without special agreement as to price are at liberty to withdraw it

later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though

rarely.

In view of what has been said it becomes necessary to discover the price which the defendant

should be required to pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per

cavan; and although we are not exactly in agreement with him as to the propriety of the method by which

he arrived at this figure, we are nevertheless of the opinion that, all things considered, the result is

approximately correct.

The plaintiffs made demand upon the defendant for settlement in the early part of August; and, so

far as we are able to judge from the proof, the price of P6.15 per cavan, fixed by the trial court, is about

the price at which the defendant should be required to settle as of that date. 

It was the date of the demand of the plaintiffs for settlement that determined the price to

be paid by the defendant, and this is true whether the palay was delivered in the character of sale

with price undetermined or in the character of deposit subject to use by the defendant. It results

that the plaintiffs are respectively entitled to recover the value of the palay which they had placed with the

defendant during the period referred to, with interest from the date of the filing of their several complaints.
 As already stated, the trial court found that at the time of the fire there were about 360 cavans

of palay in the mill and that this palay was destroyed. His Honor assumed that this was part of the palay

delivered by the plaintiffs, and he held that the defendant should be credited with said amount. His

Honor therefore deducted from the claims of the plaintiffs their respective proportionate shares of this

amount of palay. We are unable to see the propriety of this feature of the decision. There were many

customers of the defendant's rice mill who had placed their palay with the defendant under the same

conditions as the plaintiffs, and nothing can be more certain than that the palay which was burned did

not belong to the plaintiffs. That palay without a doubt had long been sold and marketed.

The defendant is, however, entitled to an award for his cross-complaint arising from the

wrongful attachment of his mill by plaintiff Guillermo Baron. The ground used by the plaintiff was clearly

unjustified, and it caused the defendant damages resulting from the closure of his mill for several

months and the loss of good will of his customers.

JOHNS, J., dissenting and concurring:

The plaintiff Silvestra Baron is the aunt of the defendant, and Guillermo Baron, the plaintiff in the
other action, is his uncle. There is no dispute as to the amount of palay which each delivered to the
mill of the defendant. Owing to the fact that they were relatives and that the plaintiffs reposed special
reposed special trust and confidence in the defendant, who was their nephew, they were not as
careful and prudent in their business dealings with him as they should have been. Plaintiffs allege
that their respective palay was delivered to the defendant at his mill with the understanding and
agreement between them that they should receive the highest market price for the palay for that
season, which was P8.50 per cavan. They further allege that about August first they made another
contract in and by which he promised and agreed to pay them P8.40 per cavan for their palay, in
consideration of which they agreed to extend the time for payment to the first of December of that
year. The amount of palay is not in dispute, and the defendant admits that it was delivered to his mill,
but he claims that he kept it on deposit and as bailee without hire for the plaintiffs and at their own
risk, and that the mill was burned down, and that at the time of the fire, plaintiffs' palay was in the
mill. The lower court found as a fact that there was no merit in that defense, and that there was but
little, if any, palay in the mill at the time of the fire and that in truth and in fact that defense was based
upon perjured testimony.

The two cases were tried separately in the court below, but all of the evidence in the case was
substituted and used in the other. Both plaintiffs testified to the making of the respective contracts as
alleged in their complaint; to wit, that they delivered the palay to the defendant with the express
understanding and agreement that he would pay them for the palay the highest market price for the
season, and to the making of the second contract about the first of August, in which they had a
settlement, and that the defendant then agreed to pay them P8.40 per cavan, such payment to be
made on December first. It appears that the highest market price for palay for that season was P8.50
per cavan. The defendant denied the making of either one of those contracts, and offered no other
evidence on that question. That is to say, we have the evidence of both Silvestra Baron and
Guillermo Baron to the making of those contracts, which is denied by the defendant only. Plaintiffs'
evidence is also corroborated by the usual and customary manner in which the growers sell their
palay. That is to say, it is their custom to sell the palay at or about the time it is delivered at the mill
and as soon as it is made ready for market in the form of rice. As stated the lower court found as a
fact that the evidence of the defendants as to plaintiffs' palay being in the mill at the time of the fire
was not worthy of belief, and that in legal effect it was a manufactured defense. Yet, strange as it
may seem, both the lower court and this court have found as a fact that upon the question of the
alleged contracts, the evidence for the defendant is true and entitled to more weight than the
evidence of both plaintiffs which is false.

It appears that the plaintiff Silvestra Baron is an old lady about 80 years of age and the aunt of the
defendant, and Guillermo Baron is the uncle. Under the theory of the lower court and of this court,
both of them at all the time during the high prices held their palay in defendant's mill at their own risk,
and that upon that point the evidence of the defendant, standing alone is entitled to more weight and
is more convincing than the combined evidence of the two plaintiffs. In the very nature of things, if
defendant's evidence upon that point is true, it stands to reason that, following the custom of
growers, the plaintiffs would have sold their palay during the period of high prices, and would not
have waited until it dropped from P8.50 per cavan to P6.15 per cavan about the first of August. Upon
that question, both the weight and the credibility of the evidence is with the plaintiffs, and they should
have judgment for the full amount of their palay on the basis of P8.40 per cavan. For such reason, I
vigorously dissent from the majority opinion.

I frankly concede that the attachment was wrongful, and that it should never have been levied. It
remained in force for a period of one hundred and seventy days at which time it was released on
motion of the plaintiffs. The defendant now claims, and the majority opinion has allowed him,
damages for that full period, exclusive of Sundays, at the rate, of P40 per day, found to be the net
profit for the operation of the rice mill. It further appears, and this court finds, that the defendant was
a responsible man, and that he had ample property out which to satisfy plaintiffs' claim. Assuming
that to be true, there was no valid reason why he could not had given a counter bond and released
the attachment. Upon the theory of the majority opinion, if the plaintiffs had not released the
attachment, they would still be liable to the defendant at the rate of P40 per day up to the present
time. When the mill was attached, if he was in a position to do so, it was the duty of the defendant to
give a counter bond and release the attachment and resume its operation. The majority opinion also
allowed the defendant P1,400 "for injury to the goodwill of his business." The very fact that after a
delay of about four years, both of the plaintiffs were compelled to bring to their respective actions
against the defendant to recover from him on a just and meritorious claim, as found by this court and
the lower court, and the further fact that after such long delay, the defendant has sought to defeat
the actions by a sham and manufactured defense, as found by this and the lower court, would
arouse the suspicion of any customers the defendant ever had, and shake their confidence in his
business honor and integrity, and destroy any goodwill which he ever did have. Under such
conditions, it would be strange that the defendant would have any customers left. He is not entitled
to any compensation for the loss of goodwill, and P5,000 should be the very limit of the amount of
his damages for the wrongful attachment, and upon that point I vigorously dissent. In all other
respects, I agree with the majority opinion.

Delgado v Bonnevie, 23 Phil 308

FACTS:

Pedro Bonnevie and Francisco Arandez formed a regular general partnership for engaging in the

business of threshing paddy. Vicente Delgado undertook to deliver to them paddy for this purpose to be

cleaned and returned to him as rice, with the agreement of paying them 10 centimos for each cavan and

to have returned in rice one-half the amount received as paddy. Receipts were given out to evidence the

transaction.

On February 6, 1909, Vicente Delgado appeared in the Court of First Instance of Ambos

Camarines with said receipts, demanding return of the said 2,003 and a half cavanes of paddy, or in the

absence thereof, of the price of said article at the rate of 3 persons the cavan or 6,009 pesos and 50

centimos, with interest thereon at 6 per cent a year reckoning from November 21, 1905, until complete

payment, and the costs.

The plaintiff asked that the interest run from November 21, 1905, because on that date, his

counsel demanded of the defendants, Bonnevie and Arandez, their partnership having been dissolved,

that they settle the accounts in this matter.

CFI/RTC Decision: The lower court ruled in favor of the plaintiff.

ISSUE:

WoN a deposit which is converted to another contract loses its nature as a deposit?

HELD: NO.

It is true that, according to article 950 of the Code of Commerce, actions arising from bills of

exchange, drafts, notes, checks, securities, dividends, coupons, and the amounts of the amortization of

obligations issued in accordance with said code, shall extinguish three years after they have fallen due;

but it is also true that as the receipts in question are not documents of any of the kinds enumerated in

said article, the actions arising therefrom do not extinguish three years from their date (that, after all, they

do not fall due).

 It is true that paragraph 2 of article 950 also mentions, besides those already stated, "other

instruments of draft or exchange;" but it is also true that the receipts in this case are not documents of

draft or exchange, they are not drafts payable to order, but they are, as the appellants

acknowledge, simple promises to pay, or rather mere documents evidencing the receipt of some

cavanes of paddy for the purpose already stated, which is nothing more than purely for industrial,

and not for mercantile exchange. 

The contract whereby one person receives from another a quantity of unhulled rice to

return it hulled, for a fixed compensation or remuneration, is an industrial, not a commercial act ; it

is, as the appellants say, a hire of services without mercantile character, for there is nothing mercantile

about it, just as there is nothing mercantile about the operation of washing clothes.

Neither are articles 309 of the Code of Commerce and 1955 and 1962 of the Civil Code

applicable. It is acknowledged that the obligation of the appellants arose primarily out of the contract of

deposit, but this deposit was later converted into a contract of hire of services, and this is true. But it is

also true that, after the object of the hire of services had been fulfilled, the rice in every way remained as

a deposit in the possession of the appellants for them to return to the depositor at any time they might be

required to do so, and nothing has relieved them of this obligation; neither the dissolution of the

partnership that united them, nor the revolutionary movement of a political character that seems to have

occurred in 1898, nor the fact that they may at some time have lost possession of the rice.

Under title of deposit or hire of services, the possession of the appellants can in no way amount

to prescription, for the thing received on deposit or for hire of services could not prescribe, since for every

prescription of ownership the possession must be in the capacity of an owner, public, peaceful, and

uninterrupted (Civil Code, 1941); and the appellants could not possess the rice in the capacity of owners,

taking for granted that the depositor or lessor never could have believed that he had transferred to them

ownership of the thing deposited or leased, but merely the care of the thing on deposit and the use or

profit thereof; which is expressed in legal terms by saying that the possession of the depositary or of the
lessee is not adverse to that of the depositor or lessor, who continues to be the owner of the thing which

is merely held in trust by the depositary or lessee.

In strict law, the deposit, when it is of fungible goods received by weight, number, or

measurement, becomes a mutual loan, by reason of the authorization which the depositary may

have from the depositor to make use of the goods deposited. (Civil Code, 1768, and Code of

Commerce, 309.)

But in the present case neither was there authorization of the depositor nor did the depositaries

intend to make use of the rice for their own consumption or profit; they were merely released from the

obligation of returning the same thing and contracted in lieu thereof the obligation of delivering something

similar to the half of it, being bound by no fixed terms, the opposite of what happens in a mutual loan, to

make the delivery or return when and how it might please the depositor.

b. Obligations

Lizares v. Hernaez, 40 Phil 981

FACTS:

The plaintiff, Nicolas Lizares, and the defendant, Rosendo Hernaez, entered into a contract,

whereby the former became the lessee of the two haciendas Panaogao and Matagoy No. 2. Among the

improvements existing upon the hacienda Panaogao, and which the plaintiff was entitled to use, was a

large iron-roofed camarin, containing furnaces, boilers, mills, engines, and other apparatus for the

manufacture of sugar.

At about 7 p. m., on March 16, 1918, a fire of unknown origin occurred at this sugar mill, which

destroyed the camarin and greatly damaged the sugar-milling apparatus. Upon the actual occasion of the

fire in question the plaintiff was absent on business in the city of Iloilo, having left Amando Ereñeta in

charge of the hacienda. The latter had left the camarin at about 5 pm on the date referred to; and when

the fire occurred, he was at the corral where the carabaos were kept, a short distance away from the

camarin. Instead of hastening to the fire at once, after the alarm was given, he remained a little while in

the corral in order to get the animals into a place of safety.

 Felipe Beldua, apparently next in authority to Amando Ereñeta, and who was engaged in the

sugar- boiling department, had left the camarin at about 4 pm in order to get something to eat. As he was

returning to the camarin, and while yet a short distance away, he discerned the flames rising from a pile of

bagasse at the north side of the camarin. He was the first person to see the fire and at once gave alarm. It

should be noted that the fire did not originate in that part of the bagasse which was lying in closest

proximity to the stoking -stands but a little distance away where it was unnoticed by the stokers.

When Felipe Beldua left the camarin, two of his assistants remained on duty, and the evidence

shows that other employees, such as the stokers, machine-cleaners, and sugar boilers, were busy at

work. The stoker Lucas Bendado was on duty at the cabcacan immediately in front of the opening of the

furnaces at the time the fire occurred. Amando Ereneta, who was first in charge of the camarin at the

time, was employed by the plaintiff to look after the animals, and his duties were not such as to require

him to be continually inside the camarin.

Soon after the fire the plaintiff informed the defendant of the calamity and made demand upon

him for the reconstruction of the camarin. The defendant refused to recognize the existence of any

obligation on his part to reconstruct the camarin, insisting that the plaintiff, being the lessee, and not

himself, as lessor, was responsible for the fire and answerable for the damage occasioned thereby.

These antagonistic views presently culminated in the litigation now before us.

A case was filed by the lessee to rescind the contract and to recover a sum of money as

damages by reason of the failure of the defendant to comply with certain obligations incumbent upon him

under the contract.

CFI/RTC Decision: The trial court rescinded the contract, found the lessor liable for damages, and found

the lessee indebted for rent. Further, trial court found that the fire which destroyed the camarin was of

unknown and accidental origin and that no fault or negligence was attributable to the plaintiff in regard

either to the conditions antecedent to the fire or the manner in which the flames were resisted. He was,
therefore, of the opinion that the loss caused by the fire was due to casus fortuitus, for the consequences

of which no one was responsible.

ISSUE:

WoN a loss of a thing under lease which could not have been prevented should be borne by the

lessee. Whether the loss of a thing deposited which could not have been prevented should be borne by

depositary?

HELD: NO.

It must be admitted that when a loss of the leased property occurs, there is a presumption against

the lessee, which makes him responsible, in the absence of proof that the loss happened without his fault.

But the question whether there has been fault on his part must be determined in relation with other

provisions of the Civil Code as well as in the light of the general principles of jurisprudence. Under article

1561 of the Civil Code the lessee of lands is not responsible for a loss resulting from inevitable cause;

and in article 1106 the general rule is declared that, in the absence of express provision to the contrary,

no one is liable for events which cannot be foreseen or which, if foreseen, are inevitable.

As applied to the case before us we are of the opinion that when the trial court found that

reasonable precautions had been taken by the lessee to prevent fires, but that nevertheless fire did occur,

of inscrutable origin, which destroyed, the camarin in spite of all that could be done to prevent it, this is

equivalent to a finding that the lessee was without fault and that the loss was in fact due to an inevitable

cause. In other words the presumpting against the lessee is overcome by proving that the usual and

proper care was used to protect the leased property from fire.

Upon principle the responsibility of the lessee for the property leased is substantially the

same as that of a person who has possession of movable property belonging to another, as in the

case of bailment. It is a well known fact in legal history that the doctrines of English law applicable

to the bailment of chattels are in great part identical with those developed by the civil law of

Rome, of which indeed the English doctrines may be considered mere emanations.
 In bailment ordinary care and diligence are required of the bailee and he is not liable for

the inevitable loss or destruction of the chattel, not attributable to his fault. If while the bailment

continues, the chattel is destroyed, or stolen, or perishes, without negligence on the bailee's part,

the loss, as in other hirings, falls upon the owner, in accordance with the maxim res perit domino.

Upon this point the civil and common law are agreed; and we find nothing to the contrary in  the

Spanish Civil Code. 

Article 1183 declares that when a thing is lost while in the possession of the debtor it shall

be presumed that the loss occurred by his fault and not by fortuitous event in the absence of

proof to the contrary.

But where it is found, and the fact is indisputable, this is equivalent to a finding that the

fire was not attributable to the fault of the defendant and negatives every idea of negligence on its

part with reference to the origin of the fire. This was casus fortuitus such as to exempt the

defendant from liability. 

Article 1183 must be construed in relation with the next preceding article (1182), which

says that the obligation to deliver a thing is extinguished when the thing is destroyed without the

fault of the debtor.

We now pass to the consideration of a special clause found in the contract of lease (paragraph 4,

[b] ), declaring that the lessee shall be obliged, upon his own account and risk, to make all repairs upon

the improvements existing on the haciendas which were the subject of the lease, and to bear the expense

of the same without right to reimbursement.

The obligation fixed upon the lessee by the special provision of the contract is also limited to

repairs (composiciones). From an examination of the two provisions it is evident that the two different

Spanish words used in the sense of repairs (reparaciones, composiciones) are exactly equivalent; and it

is seen that the obligation imposed by the code on the lessor is transferred by the contract to the lessee.

In both cases, however, the obligation is limited to the making of repairs, which is a very different thing
from reconstruction in case of total loss. The Spanish terms "reparaciones" and "composiciones," like the

English word "repairs" in its ordinary acceptation, must be understood to apply to the restoration of things

after injury or partial destruction, without complete loss of identity in the thing repaired. (34 Cyc., 1336,

1337.)

In subsection (d) of paragraph 4 of the contract it is declared to be the duty of the lessee to

maintain the improvements on the haciendas in good condition and to deliver them in the same state to

the lessor upon the termination of the lease. This is merely a statement of the obligation imposed by law

generally upon all lessees; and the duty thus defined is to be understood as subject to the limitations and

exceptions recognized by law. There is nothing in this provision which deprives the lessee of the defense

arising from the destruction of the property without his fault.

It results in our opinion that there was no positive duty on the part of either the lessor or lessee to

reconstruct the camarin after it had been totally destroyed by fire; neither can therefore be held liable to

the other for any damages which may supposedly have resulted from the failure to reconstruct. The

judgment of the trial court must therefore be modified by eliminating the item of P1,736.01, which was

awarded to the plaintiff as damages for the failure of the defendant to promptly reconstruct the camarin.

La Sociedad Dalisay v De los Reyes, 55 Phil 452

FACTS:

The entity known as "Dalisay" is an industrial partnership legally existing, located in the

municipality of Santa Rosa, Laguna, P. I. Prior to May 20, 1923, said partnership received in its

warehouse located at the place mentioned, certain lots of palay belonging to several persons.

Early on the morning of that day, May 20, 1923, a fire broke out in said warehouse which at that

time contained thousands of cavanes of palay, the exact number being disputed, and 568 cavanes

outside. 1,052 cavanes of palay stored in the warehouse were saved, and that the 568 cavanes of palay

outside of the warehouse were all saved.

 Of the 1,052 cavanes saved from the warehouse, 170 were distributed by way of remuneration

among those who helped to save them. The remaining 882 cavanes of palay were hulled and sold,

yielding the net sum of P2,238.98.

On October 3, 1924, Ramon Bartolazo brought an action against the "Sociedad Dalisay" for the

return of 1,158 cavanes of palay and 27 cavanes of rice or the value thereof, amounting to P6,073.50,

plus P1,500 as damages, and the costs. The “Dalisay” denied the charge.

On February 18, 1926, the "Dalisay" brought an action against Januario de los Reyes in the same

court for the return of the goods or, in default thereof, for the payment of their cash value. In this latter

case, Domingo Zavalla filed a third- party claim against the plaintiff entity and the defendant Januario de

los Reyes, praying that the "Dalisay" be ordered to deliver to him the palay belonging to him according to

the books of said entity, or, in lieu thereof, its value at P5 per cavan, with legal interest and that Januario

de los Reyes be ordered to render an account of the palay sold, and to deliver to him the balance

according to the account to be rendered.

CFi/RTC Decision: The trial court failed to find that the fire was intentional, or was caused by the

negligence of the officials of the plaintiff company, and from these findings no appeal proper in form has

been taken, for which reason, they must be accepted as indisputable. Nonetheless, the “Dalisay” was

ordered to deliver to the depositors their proportionate share of the palay which was stored in the

warehouse at the time of the fire.

ISSUE:

WoN a depositary is liable for the loss of the deposit due to fire which broke out without any fault

or negligence on its part?

HELD: No.

It is contended that the appellant has not alleged that the palay burned was destroyed without

negligence on its part. The fact is, the appellant in its special defense alleged that the palay was burned.
There was no need to make such an allegation for the presumption is that every person is deemed

innocent of crime or wrong, and that he takes ordinary care of his own concerns.

As to the trial court not having found the fire in question to be intentional, or the result of

negligence on the appellant's part, the evidence supports the said court's finding, in that it does not show

sufficiently that the fire was intentional or was due to negligence on the part of the "Dalisay" partnership,

or of the manager Perlas.

Wherefore, the judgment appealed from is modified absolving the appellant company from

distributing or returning to the appellees any quantity of palay, or the value thereof, except that saved

from the fire, amounting to P2,238.98, which sum is to be distributed by said company among the

depositors mentioned in the dispositive part of the judgment, in proportion to the amount of palay which

each of them had in the warehouse at the time of the fire; and this distribution shall be made as soon as

Januario de los Reyes delivers to said appellant partnership, without any deduction, the aforesaid sum of

P2,238.98, comprising the net proceeds of the palay saved. In all other respects the judgment appealed

from is affirmed without express pronouncement of costs.

So ordered.

OSTRAND and JOHNS, JJ., dissenting: chanrob1es virtual 1aw library

We dissent. In our opinion the appealed judgment should have been affirmed

Palacio v Sudario, 7 Phil 275

FACTS:

The plaintiff made an arrangement for the pasturing of eighty-one head of cattle, in return for

which she was to give one-half of the calves that might be born and was to pay the defendant one-half

peso for each calf branded. On demand for the whole, forty- eight head of cattle were afterwards returned

to her and this action is brought to recover the remaining thirty-three.

 It is claimed as a defense that the thirty-three cows either died of disease or were drowned in a

flood. As to this point, on which the trial court has made no specific finding, the proof is conflicting in many

particulars and indicates that at least some of these cattle were living at the time of the surrender of the

forty- eight head.

The defendant's witnesses swore that of the cows that perished, six die from overfeeding, and

they failed to make clear the happening of any flood sufficient to destroy the others. The lower court ruled

for the plaintiff.

ISSUE:

WoN the depositary has the burden of explaining the loss of the thing deposited?

HELD: YES.

If we consider the contract as one of deposit, then under article 1183 of the Civil Code, the

burden of explanation of the loss rested upon the depositary and under article 1769 the fault is presumed

to be his. The defendant has not succeeded in showing that the loss occurred either without fault on his

part or by reason of caso fortuito.

If, however, the contract be not one strictly of deposit but one according to local custom for the

pasturing of cattle, the obligations of the parties remain the same.

Roman Catholic Bishop of Jaro v. De la Peña, 26 Phil 144

FACTS:

The plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital,

and Father Agustin de la Peña was the duly authorized representative of the plaintiff to receive the

legacy. The defendant is the administrator of the estate of Father De la Peña. In the year 1898, the books

of Father de la Peña, as trustee, showed that he had on hand as such trustee the sum of P6,641,

collected by him for the charitable purposes aforesaid. In the same year, he deposited in his personal

account P19,000 in the Hongkong and Shanghai Bank at Iloilo.

 Shortly thereafter and during the war of the revolution, Father dela Peña was arrested by the

military authorities as a political prisoner, and while thus detained made an order on said bank in favor of

the United States Army officer under whose charge he then was so for the sum thus deposited in said

bank.

The arrest of Father de la Peña and the confiscation of the funds in the bank were the result of

the claim of the military authorities that he was an insurgent and that the funds thus deposited had been

collected by him for revolutionary purposes.

The money was taken from the bank by the military authorities by virtue of such order, was

confiscated and turned over to the Government. The plaintiff filed this case to recover the confiscated

money from the estate of Fr. de la Peña. 

CFI/RTC Decision: ruled for the plaintiff.

ISSUE:

WoN the depositary is liable for unforeseeable and inevitable events that lead to the loss of the

thing deposited?

HELD: NO.

The branch of the law know in England and America as the law of the trusts had no exact

counterpart in the Roman law and is more has none under the Spanish law, In this jurisdiction, therefore,

Father dela Peña's liability is determined by those portions of the Civil Code which relate to obligations

(Book 4, Title 1.)

Although the Civil Code states that a "person obliged to give something is also bound to preserve

it with the diligence pertaining to a good father of a family" (art.1094), it also provides, following the

principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one

shall be liable for events which could not be foreseen, or which having been foreseen were

inevitable, with the exceptions of the cases expressly mentioned in the law of those in which the

obligation so declares." (Art. 1105).

 By placing the money in the bank and mixing it with his personal funds, De la Peña did not

thereby assume an obligation different from that under which he would have lain if such deposit had not

been made, nor did he thereby make himself liable to repay the money at all hazards. If the money had

been forcibly taken from his pocket or from his house by the military forces of one of the combatants

during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt

from responsibility. The fact that he placed the trust fund in the bank in his personal account does not add

to his responsibility. Such deposit did not make him a debtor who must respond at all the hazards.

We do not enter into a discussion for the purpose of determining whether he acted more or less

negligently by depositing the money in the bank than he would if had left it in his home: or whether he was

more or less negligent by depositing the money in his personal account than he would have been if had

deposited it in a separate account as trustee. We regard such discussion as substantially fruitless,

inasmuch as the precise question is not one of the negligence. There was no law prohibiting him from

depositing it as he did and there was no law which changed his responsibility by reason of the deposit.

While it may be true that one who is under obligation to do or give a things is duty-bound, when

he sees events approaching the results of which will be dangerous to his trust, to take all reasonable

means and measures to escape or, if unavoidable, to temper the effects of those events, we do not feel

constrained to hold that, in choosing between two means equally legal, he is culpably negligent in

selecting one whereas he would not have been if he had selected the other.

TRENT, J., dissenting:

I dissent. Technically speaking, whether Father De la Peña was a trustee or an agent of the plaintiff
his books showed that in 1898 he had in his possession as trustee or agent the sum of P6,641
belonging to the plaintiff as the head of the church. This money was then clothed with all the
immunities and protection with which the law seeks to invest trust funds. But when De la Peña mixed
this trust fund with his own and deposited the whole in the bank to his personal account or credit, he
by this act stamped on the said fund his own private marks and unclothed it of all the protection it
had. If this money had been deposited in the name of De la Peña as trustee or agent of the plaintiff, I
think that it may be presumed that the military authorities would not have confiscated it for the
reason that they were looking for insurgent funds only. Again, the plaintiff had no reason to suppose
that De la Peña would attempt to strip the fund of its identity, nor had he said or done anything which
tended to relieve De la Peña from the legal reponsibility which pertains to the care and custody of
trust funds.
The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), at page
343, said: "Trustees are only bound to exercise the same care and solicitude with regard to the trust
property which they would exercise with regard to their own. Equity will not exact more of them. They
are not liable for a loss by theft without their fault. But this exemption ceases when they mix the
trust-money with their own, whereby it loses its identity, and they become mere debtors."

If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertain no
doubt on this point, the liability of the estate of De la Peña cannot be doubted. But this court in the
majority opinion says: "The fact that he (Agustin de la Peña) placed the trust fund in the bank in his
personal account does not add to his responsibility. Such deposit did not make him a debtor who
must respond at all hazards. . . . There was no law prohibiting him from depositing it as he did, and
there was no law which changed his responsibility, by reason of the deposit."

I assume that the court in using the language which appears in the latter part of the above quotation
meant to say that there was no statutory law regulating the question. Questions of this character are
not usually governed by statutory law. The law is to be found in the very nature of the trust itself,
and, as a general rule, the courts say what facts are necessary to hold the trustee as a debtor.

If De la Peña, after depositing the trust fund in his personal account, had used this money for
speculative purposes, such as the buying and selling of sugar or other products of the country,
thereby becoming a debtor, there would have been no doubt as to the liability of his estate. Whether
he used this money for that purpose the record is silent, but it will be noted that a considerable
length of time intervened from the time of the deposit until the funds were confiscated by the military
authorities. In fact the record shows that De la Peña deposited on June 27, 1898, P5,259, on June
28 of that year P3,280, and on August 5 of the same year P6,000. The record also shows that these
funds were withdrawn and again deposited all together on the 29th of May, 1900, this last deposit
amounting to P18,970. These facts strongly indicate that De la Peña had as a matter of fact been
using the money in violation of the trust imposed in him.  lawph!1.net

If the doctrine announced in the majority opinion be followed in cases hereafter arising in this
jurisdiction trust funds will be placed in precarious condition. The position of the trustee will cease to
be one of trust.

CA Agro-Industrial Dev. Corp v CA, 219 SCRA 426

FACTS:

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and

Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of

land for a consideration of P350,625. 00. Of this amount, P75,725.00 was paid as downpayment while the

balance was covered by three (3) postdated checks.

. Among the terms and conditions of the agreement embodied in a Memorandum of True and

Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon
full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer

Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any

bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner

and the Pugaos upon full payment of the purchase price. 

Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of

private respondent Security Bank and Trust Company, a domestic banking corporation. For this purpose,

both signed a contract of lease which contains the condition that the bank is not a depositary of the

contents of the safe and it has neither the possession nor control of the same and that 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 (2) renter's keys were given to the renters — one 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 (2) 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.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a

price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of

P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the

execution of a deed of sale which necessarily entailed the production of the certificates of title. 

In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on

4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in

the presence of the Bank's representative, the box yielded no such certificates.

Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to

purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit

of P280,500.00. A complaint for damages was filed.

 
CFI/RTC Decision: Dismissed the case.

IAC/CA Decision: Affirmed.

ISSUE:

WoN the rental of a safety deposit box is a contract of deposit?

HELD: YES.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is

not an ordinary contract of lease as defined in Article 1643 of the Civil Code. 

However, We do not fully subscribe to its view that the same is a contract of deposit that is to be

strictly governed by the provisions in the Civil Code on 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 renters — 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, also relied upon by the respondent Court, be invoked as an argument

against the deposit theory. Obviously, the first paragraph of such provision 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.

We observe, however, that the deposit theory itself does not altogether find unanimous support

even in American jurisprudence. We agree with the petitioner that under the latter, 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.

There is, however, some support for the view that the relationship in question might be more

properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested

that it should be characterized as that of licensor and licensee. The relation between a bank, safe- deposit

company, or storage company, and the renter of a safe-deposit box therein, is often described as

contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in

which any rule other than that applicable to bailments governs questions of the liability and rights of the

parties in respect of loss of the contents of safe-deposit boxes.

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it

is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the

General Banking Act pertinently provides that banks may receive in custody funds, documents, and

valuable objects, and rent safety deposit boxes for the safeguarding of such effects. The banks shall

perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as

agents.

Note that the primary function is still found within the parameters of a contract of deposit, i.e., 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

of the Civil Code, 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. 

The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is

governed by Title I, Book IV of the Civil Code. 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.

In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of

lease of the safety deposit box are void as they are contrary to law and public policy. We find Ourselves in

agreement with this proposition for indeed, said 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, to the extent above stated, the foregoing conditions in the contract in question are void and

ineffective.

The petition is, nonetheless, dismissed on grounds quite different from those relied upon by the

Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding

of the Court of Appeals, 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 (1) 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.

2. Necessary Deposit

a. In compliance with a legal obligation

Examples - Art. 538, 586, 2104 NCC

Article 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

Article 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

Article 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.

b. On the occasion of any calamity

see provisions on Quasi-contract

Article 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another. (n)
Article 2143. The provisions for quasi-contracts in this Chapter do not exclude other quasi-contracts
which may come within the purview of the preceding article

c. With Hotels or Inns

Art. 102 RPC

Article 102. Subsidiary civil liability of innkeepers, tavernkeepers and proprietors of

establishments. - In default of the persons criminally liable, innkeepers, tavernkeepers, and any
other persons or corporations shall be civilly liable for crimes committed in their establishments, in all
cases where a violation of municipal ordinances or some general or special police regulation shall
have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within
their houses from guests lodging therein, or for the payment of the value thereof, provided that such
guests shall have notified in advance the innkeeper himself, or the person representing him, of the
deposit of such goods within the inn; and shall furthermore have followed the directions which such
innkeeper or his representative may have given them with respect to the care and vigilance over
such goods. No liability shall attach in case of robbery with violence against or intimidation of
persons unless committed by the innkeeper's employees.

Elcox v. Hill, 98 U.S. 218 (1878)

FACTS:

Elcox and Larter were manufacturing jewelers, doing business at Newark, New Jersey. Larter left

home for a tour through several Western cities, with some $6,300 worth of jewelry which was contained in

2 bags or satchels – one a large leather bag containing $5,300 worth of solid gold jewelry and the other a

small satchel containing $1,000 worth of jewelry. The smaller bag was not locked and had no key.

On arriving at the hotel, Larter asked for a room, but one could not be assigned to him for some

3- 4 hours. During the time he was waiting, he placed his bags in the coat room and received a check

therefore. Between 12-2, a room was assigned to him, and his baggage was taken from the coat room

and carried up to the room.

 When coming down for dinner, Larter gave the key to his room to the bellboy and directed him to

go up and bring down his bags to the coat room again. He then received a coat room check after dinner.

He saw the bags in the coat room 2 or 3 times after that before he went to bed around 10pm. The boy in

charge of the coat room, William Drum, voluntarily told him that his bags were perfectly safe.

The next day, Larter asked for his bags, but only the small one could be found. The jewelry inside

had been stolen. Larter did not inform the hotel of the contents of the bags, and he did not ask to have the

bags placed in the safe. At the top of the page of the register where he wrote his name on entering the

hotel were printed the words:

“Money, jewels, and valuable property must be placed in the safe in the office, otherwise

the proprietor will not be responsible for any loss.” 

On the door of his room and every other room were a printed notice saying that

“All guests of the house are cautioned against leaving money, jewels, or valuables of any

description in their rooms, as the proprietor will not be responsible for them if stolen.

Money or valuables, properly labelled, must be deposited in the safe at the office.”

Furthermore, the statute of the State of Illinois entitled “An Act for the protection of

innkeepers” provides that hotels shall keep notices posted at conspicuous places in the hotel that guests

and customers must leave their money, jewelry, and other valuables with the landlord, agent or clerk for

safekeeping and that hotels that comply with these requirements shall not be liable for the loss of such

money, jewelry or valuables, unless such loss shall occur by the hand or through the negligence of the

landlord, clerk or servant employed by him.

For purpose of safekeeping the valuables of guests, the hotel had a very large vault which was in

plain sight at the counter. The coat room was only intended for the reception of ordinary valises, coats,

umbrellas, and not for valuables or jewelry.

Evidence showing that hotel employee William Drum had stolen the jewelries was objected to and

excluded during the trial.

ISSUE:

WoN a hotel is liable for the loss of valuables which were not made known to it and which were

not properly deposited to it as stated in the notices posted in conspicuous places?

HELD: No.

There can be but little doubt that the goods of the plaintiffs were stolen from them while one of

them was at the hotel of the defendant, in the city of Chicago. They insist thereupon that their loss shall

be made good; but it does not follow, because they met with a loss, that they can recover the amount

from him.

The defendant contends that he is exempt from liability for money, jewels, and the like, unless his

guest who lost them complied with the statute of Illinois on that subject. Where a safe for the keeping of

such articles is provided by the hotelkeeper, and the notice given as required by the statute, a loser failing

to take the benefit of the protection thus furnished him must bear his own loss. To this rule the statute

makes one exception. If the loss occurs 'by the hand or through the negligence of the landlord, or by a

clerk or servant employed by him in such hotel or inn,' the liability remains.

It is settled by the authorities that where the loss is occasioned by the personal negligence of the

guest himself, the liability of the innkeeper does not exist. The court refused to receive evidence that

William Drum had admitted that he had stolen the jewelry in question. If he was guilty of the offence, the

fact should have been established by due proof. If he were on trial himself, his admission would be

competent, but upon no principle could he admit away the rights of another person.

Ippolito v. Hospitality Management, South Carolina C.A. No. 3586, 2003

FACTS:

While traveling from Florida to Connecticut, Mr. and Mrs. Ipppolito stopped in Walterboro, South

Carolina and paid for a room at a Holiday Inn. At the hotel, Mr. Ippolito signed a registration card on which

was written, “The management is not responsible for any valuables not secured in safety deposit

boxes provided at the front office.”

 In addition to the language on the registration card, notice that the hotel had safety deposit boxes

available for guests’ valuables was also printed on the pouch that enclosed the key-card to the Ippolitos’

room.

After bringing their luggage to the room, the Ippolitos walked to a nearby restaurant, and they

returned approximately forty minutes later. Upon their return, they noticed that pieces of their luggage,

which contained jewelry valued at over $500,000 and approximately $8,000 in cash, were missing.

The Ippolitos sued the hotel. At trial, Mrs. Ippolito testified that, prior to the disappearance of their

belongings, she looked around the hotel room for notice of the availability of hotel safety deposit boxes for

her valuables, but saw no such notice. Mr. Ippolito also testified he did not see any notice of the

availability of safety deposit boxes posted in the room; however, he admitted that if such notice was

posted, he may have overlooked it. 

Despite not seeing a notice in the room, Mr. Ippolito testified he was aware that Innkeeper

provided safety deposit boxes, but he chose not to request a box from the Innkeeper because he felt that

the less anybody knew what he had, the better.

The hotel provided the testimony of its employees and a security expert on its security

procedures and its dedication to adhering to those procedures, particularly for providing guests with

notice of the availability of safety deposit boxes.

On cross-examination of the security expert, he was asked about past security problems at

Innkeeper’s hotel in which Innkeeper’s employees spied on guests through peepholes. The expert replied

that he was not aware of those prior incidents.

Jury Decision: awarded the Ippolitos $350,000 in actual damages. However, the jury found that the

Ippolitos were forty percent comparatively negligent, and reduced the award to $210,000.

ISSUE:
 WoN the hotel is liable for losses when the guests were unable to see posted notices that

valuables must be deposited?

HELD: YES.

The Ippolitos testified that neither of them saw any conspicuously posted notice in their room

indicating that the hotel had safety deposit boxes available in which they could store their valuables.

Although testimony from Officer Sadler, as well as several of Innkeeper’s current and former employees,

contradicts this evidence, the existence of conflicting evidence precludes us from finding as a matter of

law that Innkeeper complied with the statute.

The jury implicitly found that Innkeeper failed to comply with the statute’s notice requirements.

Thus, Innkeeper cannot avail itself of the statute’s protection from liability, regardless of whether its

actions contributed to the Ippolitos’ loss.

Because we find the Innkeeper offered evidence concerning the quality of its security, we cannot

say as a matter of law that the trial court erred in admitting evidence contradicting this testimony. We find

no evidence in the record indicating that Innkeeper suffered any prejudice from the Ippolitos’ two

questions concerning Booth’s knowledge of the peephole incidents or his negative responses.

d. With common carriers

Art. 1734 - 1754 NCC

SUBSECTION 2. Vigilance Over Goods

Article 1734. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;
 (5) Order or act of competent public authority.

Article 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the preceding
article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been
at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as
required in article 1733.

Article 1736. The extraordinary responsibility of the common carrier lasts from the time the goods
are unconditionally placed in the possession of, and received by the carrier for transportation until
the same are delivered, actually or constructively, by the carrier to the consignee, or to the person
who has a right to receive them, without prejudice to the provisions of article 1738.

Article 1737. The common carrier's duty to observe extraordinary diligence over the goods remains
in full force and effect even when they are temporarily unloaded or stored in transit, unless the
shipper or owner has made use of the right of stoppage in transitu.

Article 1738. The extraordinary liability of the common carrier continues to be operative even during
the time the goods are stored in a warehouse of the carrier at the place of destination, until the
consignee has been advised of the arrival of the goods and has had reasonable opportunity
thereafter to remove them or otherwise dispose of them.

Article 1739. In order that the common carrier may be exempted from responsibility, the natural
disaster must have been the proximate and only cause of the loss. However, the common carrier
must exercise due diligence to prevent or minimize loss before, during and after the occurrence of
flood, storm or other natural disaster in order that the common carrier may be exempted from liability
for the loss, destruction, or deterioration of the goods. The same duty is incumbent upon the
common carrier in case of an act of the public enemy referred to in article 1734, No. 2.

Article 1740. If the common carrier negligently incurs in delay in transporting the goods, a natural
disaster shall not free such carrier from responsibility.

Article 1741. If the shipper or owner merely contributed to the loss, destruction or deterioration of
the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall
be liable in damages, which however, shall be equitably reduced.

Article 1742. Even if the loss, destruction, or deterioration of the goods should be caused by the
character of the goods, or the faulty nature of the packing or of the containers, the common carrier
must exercise due diligence to forestall or lessen the loss.

Article 1743. If through the order of public authority the goods are seized or destroyed, the common
carrier is not responsible, provided said public authority had power to issue the order.

Article 1744. A stipulation between the common carrier and the shipper or owner limiting the liability
of the former for the loss, destruction, or deterioration of the goods to a degree less than
extraordinary diligence shall be valid, provided it be:

(1) In writing, signed by the shipper or owner;

(2) Supported by a valuable consideration other than the service rendered by the common
carrier; and
 (3) Reasonable, just and not contrary to public policy.

Article 1745. Any of the following or similar stipulations shall be considered unreasonable, unjust
and contrary to public policy:

(1) That the goods are transported at the risk of the owner or shipper;

(2) That the common carrier will not be liable for any loss, destruction, or deterioration of the
goods;

(3) That the common carrier need not observe any diligence in the custody of the goods;

(4) That the common carrier shall exercise a degree of diligence less than that of a good
father of a family, or of a man of ordinary prudence in the vigilance over the movables
transported;

(5) That the common carrier shall not be responsible for the acts or omission of his or its
employees;

(6) That the common carrier's liability for acts committed by thieves, or of robbers who do not
act with grave or irresistible threat, violence or force, is dispensed with or diminished;

(7) That the common carrier is not responsible for the loss, destruction, or deterioration of
goods on account of the defective condition of the car, vehicle, ship, airplane or other
equipment used in the contract of carriage.

Article 1746. An agreement limiting the common carrier's liability may be annulled by the shipper or
owner if the common carrier refused to carry the goods unless the former agreed to such stipulation.

Article 1747. If the common carrier, without just cause, delays the transportation of the goods or
changes the stipulated or usual route, the contract limiting the common carrier's liability cannot be
availed of in case of the loss, destruction, or deterioration of the goods.

Article 1748. An agreement limiting the common carrier's liability for delay on account of strikes or
riots is valid.

Article 1749. A stipulation that the common carrier's liability is limited to the value of the goods
appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.

Article 1750. A contract fixing the sum that may be recovered. by the owner or shipper for the loss,
destruction, or deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon.

Article 1751. The fact that the common carrier has no competitor along the line or route, or a part
thereof, to which the contract refers shall be taken into consideration on the question of whether or
not a stipulation limiting the common carrier's liability is reasonable, just and in consonance with
public policy.

Article 1752. Even when there is an agreement limiting the liability of the common carrier in the
vigilance over the goods, the common carrier is disputably presumed to have been negligent in case
of their loss, destruction or deterioration.
Article 1753. The law of the country to which the goods are to be transported shall govern the
liability of the common carrier for their loss, destruction or deterioration.

Article 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.

3. Judicial Deposit or Sequestration

NPC v. De Veyra, 3 SCRA, 646

FACTS:

On March 31, 1959, the Court of First Instance of Manila, in its Civil Case No. 36525, rendered a

decision ordering the City of Baguio to pay the National Power Corporation various sums of money

totalling P240,000.00 representing the unpaid electric charges, and rentals for the lease of two electric

generators, etc. 

The aforesaid decision having become final, the court of Manila granted on June 4, 1959, the

National Power Corporation's motion for execution. A writ was issued, addressed to the Sheriff of Baguio

City to levy execution on the property of above respondent Baguio City to satisfy the judgment. Such

Sheriff, in compliance with the writ, garnished on June 8, 1959, the amount of P239,589.80 out of the

cash deposits of Baguio City in the possession of the Baguio Branch of the Philippine National Bank.

Whereupon on June 12, 1959, Baguio City filed against herein petitioner National Power

Corporation, the Philippine National Bank and the said Sheriff, in the Court of First Instance of Baguio

City, a complaint (Civil Case No.

 
praying that all the acts of said defendants relative to the garnishment of the cash deposits with the

defendant Philippine National Bank, be declared illegal, that said defendants be permanently restrained

from performing acts in furtherance of the said garnishment, and that they be ordered to pay damages. 
 866)   On the same date, June 12, 1959, above respondent court of Baguio City issued a

preliminary mandatory injunction ordering above petitioner corporation, the Philippine National Bank, the

Sheriff and others acting in their behalf to restore and maintain the status quo of respondent corporation's

bank deposits. Petition for certiorari was filed.

ISSUE:

WoN property which has been levied upon in a  garnishment proceedings by one court, may be

subject to the jurisdiction of another court in an independent suit impugning the legality of said

garnishment?

HELD: NO.

The garnishment of property to satisfy a writ of execution "operates as an attachment and fastens

upon the property a lien by which the property is brought under the jurisdiction of the court issuing the

writ." It is brought into custodia legis, under the sole control of such court. Property is in the custody of the

court when it has been seized by an officer either under a writ of attachment on mesne process or under

a writ of execution. A court which has control of such property, exercises exclusive jurisdiction over same.

No court, except one having a supervisory control or superior jurisdiction in the premises, has a right to

interfere with and change that possession.

We have followed and applied this principle of procedure. Thereby conflict of power is avoided

between different courts of coordinate jurisdiction. We have invariably held that no court has authority to

interfere by injunction with the judgments or decrees of a court of concurrent or coordinate jurisdiction

having equal power to grant the relief sought by injunction.

The property involved in Civil Case No. 866, is property in custodia legis of the Court of First

Instance of Manila, it having been garnished to satisfy a writ of execution duly issued by the said court.

Respondent Baguio court should not have interfered with the Manila court's jurisdiction by issuing the writ

of preliminary injunction and assuming cognizance of the complaint presented before it.
 The reason advanced by the respondent court of Baguio City that it should grant relief when

"there is apparently an illegal service of the writ" (the property garnished being allegedly exempt from

execution) may not be upheld, there being a better procedure to follow, i.e., a resort to the Manila court,

wherein the remedy may be obtained, it being the court under whose authority the illegal levy had been

made.

Needless to say, an effective ordering of legal relationships in civil society is possible only when

each court is granted exclusive jurisdiction over the property brought to it. To allow coordinate courts to

interfere with each other's judgments or decrees by injunctions, would obviously lead to confusion and

might seriously hinder the proper administration of justice.