2013 CONTRACT OF LOAN

Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure payment,
Lito executed a chattel mortgage on a Toyota Avanza and a real estate mortgage on a 200-square
meter piece of property.

(A) Would it be legally significant - from the point of view of validity and enforceability
- if the loan and the mortgages were in public or private instruments? (6%)

SUGGESTED ANSWER:

As regards the loan, it is valid and enforceable whether it is in a public or a private instrument,
but the same is not true if the contract involves mortgages.

The laws do not require a contract of loan to be executed in a public instrument for its validity
and enforceability. A contract of loan, once constituted, is binding between the parties.

However, a mortgage on a personal property (in this case, the car) is required to be in a public
instrument to bind third persons, not for it to be valid and enforceable.

On the other hand, a real estate mortgage (in this case, the land) must be in a public instrument
for its validity and enforceability by virtue of Article 1358 of the New Civil Code.

Under the law, if the contract involves creation, transmission, modification or extinguishment of
real rights over immovable, it must appear in a public instrument. Thus, a chattel mortgage is
still valid and enforceable even if it is in a private instrument, but a real estate mortgage is
validly constituted only if it is in a public instrument.

Article 2125 of the New Civil Code provides that it is indispensable, that the document in which
the mortgage appears be recorded in the Registry of Property. If the instrument is not recorded,
the mortgage is nevertheless binding between the parties. The article further provides that the
persons in whose favor the law establishes a mortgage have no other right than to demand the
execution and the recording of the document in which the mortgage is formalized.

Thus, unlike a simple loan or mutuum or a chattel mortgage, a contract of real estate mortgage,
to be valid and enforceable, must be executed in a public instrument and must be recorded in the
Registry of Property.
2005 Bar Examination
COMMUDATUM
QUESTION:
Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito, with the
understanding that the latter could use it for one year for his personal or family use while Pedro
works in Riyadh.

He did not tell Tito that the brakes of the van were faulty. Tito had the van tuned up and the
brakes repaired. He spent a total amount of P15, 000.00.

After using the vehicle for two weeks, Tito discovered that it consumed too much fuel. To make
up for the expenses, he leased it to Annabelle.

Two months later, Pedro returned to the Philippines and asked Tito to return the van.
Unfortunately, while being driven by Tito, the van was accidentally damaged by a cargo truck
without his fault.

a) Who shall bear the P15,000.00 spent for the repair of the van? Explain. (2%)

ALTERNATIVE ANSWER:

Tito must be the one to bear the P15, 000.00 expenses for the van.

Under Article 1949 of the Civil Code, bailor generally bears the extraordinary expenses for the
preservation of the thing and should refund the said expenses if made by the bailee; Provided,
The bailee brings the same to the attention of the bailor before incurring them, except only if the
repair is urgent that reply cannot be awaited.

Generally, extraordinary expenses for the preservation of the thing loaned are paid by the bailor,
he being the owner of the thing loaned. In this case however, Tito should bear the expenses
because he incurred the expenses without first informing Pedro about it. Neither was the repair
shown to be urgent. Therefore, Tito must be the one to bear the expenses.

b) Who shall bear the costs for the van's fuel, oil and other materials while it was with Tito?
Explain. (2%)

SUGGESTED ANSWER:

It must be Tito who will also pay for the ordinary expenses for the use and preservation of the
thing loaned.

Under Article 1941 of the Civil Code, the bailee is obliged to pay for the ordinary expenses for
the use and preservation of the thing loaned.

He must pay for the gasoline, oil, greasing and spraying. He cannot ask for reimbursement
because he has the obligation to return the identical thing to the bailor. Therefore, Tito is not
entitled to any reimbursement for the ordinary expenses for the use and preservation of the thing
loaned.

c) Does Pedro have the right to retrieve the van even before the lapse of one year? Explain. (2%)

ALTERNATIVE ANSWER:

No, Pedro does not have the right to retrieve the van before the lapse of one year.

The parties are mutually bound by the terms of the contract. Under the Civil Code, there are only
3 instances when the bailor could validly ask for the return of the thing loaned even before the
expiration of the period. These are when: (1) a precarium contract was entered (Article 1947); (2)
if the bailor urgently needs the thing (Article 1946); and (3) if the bailee commits acts of
ingratitude (Article 1948). Not one of the situations is present in this case.

The fact that Tito had leased the thing loaned to Annabelle would not justify the demand for the
return of the thing loaned before expiration of the period. Under Article 1942 of the Civil Code,
leasing of the thing loaned to a third person not member of the household of the bailee, will only
entitle bailor to hold bailee liable for the loss of the thing loaned.

ALTERNATIVE ANSWER:

As a rule, Pedro does not have the right to retrieve the van before the lapse of one year. Article
1946 of the Code provides that "the bailor cannot demand the return of the thing loaned till after
the expiration of the period stipulated, or after the accomplishment of the use for which the
commodatum has been constituted. However, if in the meantime, he should have urgent need of
the thing, he may demand its return or temporary use." In the given problem, Pedro allowed Tito
to use the van for one year. Thus, he should be bound by the said agreement and he cannot ask
for the return of the car before the expiration of the one year period. However, if Pedro has
urgent need of the van, he may demand for its return or temporary use.

d) Who shall bear the expenses for the accidental damage caused by the cargo truck, granting
that the truck driver and truck owner are insolvent? Explain. (2%)

SUGGESTED ANSWER:

Generally, extraordinary expenses arising on the occasion of the actual use of the thing loaned by
the bailee, even if incurred without fault of the bailee, shall be shouldered equally by the bailor
and the bailee. (Art. 1949 of the Civil Code). However, if Pedro had an urgent need for the
vehicle, Tito would be in delay for failure to immediately return the same, then Tito would be
held liable for the extraordinary expenses.
2013 BAR EXAMINATION

COMMUDATUM

IV. Cruz lent Jose his car until Jose finished his Bar exams.

Soon after Cruz delivered the car, Jose brought it to Mitsubishi Cubao for maintenance check up
and incurred costs of P8,000.

Seeing the car's peeling and faded paint, Jose also had the car repainted for P10,000.

Answer the two questions below based on these common facts.

IV. (1) After the bar exams, Cruz asked for the return of his car. Jose said he would return it as
soon as Cruz has reimbursed him for the car maintenance and repainting costs of P 18,000.

Is Jose's refusal justified? (1%)

(D) No, Jose's refusal is not justified. The expenses he incurred are useful for the
preservation of the thing loaned. It is Jose's obligation to shoulder these useful expenses.

IV. (2) During the bar exam month, Jose lent the car to his girlfriend, Jolie, who parked the car at
the Mall of Asia's open parking lot, with the ignition key inside the car. Car thieves broke into
and took the car.

Is Jose liable to Cruz for the loss of the car due to Jolie's negligence? (1%)

(C) Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie without Cruz's consent,
Jose must bear the consequent loss of the car.
2012 SIMPLE LOAN
Essay VI a)

Siga-an granted a loan to Villanueva in the amount of P 540, 000.00. Such agreement was not
reduced to writing. Siga-an demanded interest which was paid by Villanueva in cash and checks.
The total amount Villanueva paid accumulated to P 1, 200, 000.00. Upon advice of her lawyer,
Villanueva demanded for the return of the excess amount of P 660, 000.00 which was ignored by
Siga-an.
1) Is the payment of interest valid? Explain. (3%)

SUGGESTED ANSWER
No. Under Art 1956, no interest shall be due unless it has been expressly stipulated in writing.
In this case, the agreement was not reduced to writing. Therefore, no interest is due.
2014 BAR EXAMINATION
DEPOSIT

VII.

Due to the continuous heavy rainfall, the major streets in Manila became flooded. This
compelled Cris to check-in at Square One Hotel. As soon as Cris got off from his Toyota Altis,
the Hotel’s parking attendant got the key of his car and gave him a valet parking customer’s
claim stub. The attendant parked his car at the basement of the hotel. Early in the morning, Cris
was informed by the hotel manager that his car was carnapped. (4%)

(A) What contract, if any, was perfected between Cris and the Hotel when Cris
surrendered the key of his car to the Hotel’s parking attendant?

(B) What is the liability, if any, of the Hotel for the loss of Cris’ car?

SUGGESTED ANSWER

A. A contract of deposit.

In Triple-V Food Services Inc. v Filipino Merchandise Insurance Co., the Supreme Court ruled
that when a customer avails of a valet parking, the company is constituted as depositary.

Article 1962 of the Civil Code provides,

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. xxx

Furthermore, Article 1998 of the Civil Code provides,

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.
Hence, a contract of deposit was made between Cris and the hotel.

B. The hotel is liable for the cost of the car as actual damages.

Article 1999 of the Civil Code provides: The hotel-keeper is liable for the vehicles, animals and
articles which have been introduced or placed in the annexes of the hotel
2017 BAR EXAMINATION
GUARANTY & SURETYSHIP

QUESTION:
Kevin signed a loan agreement with ABC Bank. To secure payment, Kevin requested his
girlfriend Rosella to execute a document entitled “Continuing Guaranty Agreement” whereby
she expressly agreed to be solidarily liable for the obligation of Kevin.

Can ABC Bank proceed directly against Rosella upon Kevin’s default even without proceeding
against Kevin first? Explain your answer. (3%)

SUGGESTED ANSWERS:
Yes, ABC Bank may proceed directly against Rosella upon Kevin’s default even without
proceeding against Kevin first because Rosella is a surety after she bound herself solidarily with
the principal debtor.

Notwithstanding the use of the word “guaranty” circumstances may be shown which convert the
contract into one of suretyship. Under the Civil Code, when the guarantor binds himself
solidarily with the principal debtor, the contract becomes one of suretyship and not of guaranty
proper. In a contract of suretyship, the liability of the surety is direct, primary and absolute. He is
directly and equally bound with the principal debtor. Such being the case, a creditor can go
directly against the surety although the principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor. [Basis: Article 2047, Civil Code; Ong v. PCIB, 448
SCRA 705; discussed in pp. 810-812, Vol. 2, Rabuya’s Civil Law Reviewer]

In this case, since Rosella is a surety, ABC Bank can go directly against her even without
proceeding against the principal debtor because the surety insures the debt, regardless of whether
or not the principal debtor is financially capable to fulfil his obligation.
QUESTION WRL

X, warehouseman, sent a text message to Y, to whom X had issued a warehouse receipt for Y's
500 sacks of corn, notifying him of the due date and time to settle the storage fees. The message
stated also that if Y does not settle the warehouse charges within 10 days, he will advertise the
goods for sale at a public auction. When Y ignored the demand, X sold 100 sacks of corn at a
public auction. For X’s failure to comply with the statutory requirement of written notice to
satisfy his lien, the sale of the 100 sacks of corn is

(A) voidable.
(B) rescissible.
(C) unenforceable.
(D) void.

D) The sale is void.

Section 33 of the Warehouse Receipts Law provides for the statutory requisite of written notice
prior to the satisfaction of the lien by sale. Failure to follow such formal requisite renders the sale
void. Thus, in the present case where such requisite was not followed, the sale of the 100 sacks
of corn becomes void.
QUESTION WRL

X, creditor of Y, obtained a judgment in his favor in connection with Y's unpaid loan to him. The
court's sheriff then levied on the goods that Y stored in T's warehouse, for which the latter issued
a warehouse receipt. A month before the levy, however, Z bought the warehouse receipt for
value. Who has a better right over the goods?

(A) T, being the warehouseman with a lien on the goods

(B) Z, being a purchaser for value of the warehouse receipt
(C) X, being Y’s judgment creditor
(D) Y, being the owner of the goods

(B) Z, being a purchaser for value of the warehouse receipt.

Section 49 of the Warehouse Receipts Law states that “Where a negotiable receipt has been
issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any
purchaser for value in good faith to whom such receipt has been negotiated, whether such
negotiation be prior or subsequent to the notification to the warehouseman who issued such
receipt of the seller's claim to a lien or right of stoppage in transitu.” Thus, Z, the purchaser of
the warehouse receipt for value in good faith, has the better right.

2007
Alex deposited goods for which Billy, warehouseman, issued a negotiable warehouse receipt
wherein the goods were deliverable to Alex or order. Alex negotiated the receipt to Caloy.
Thereafter, Dario, a creditor secured judgment against Alex and served notice of levy over the
goods on the warehouseman.

a. To whom should the warehouseman deliver the goods upon demand?

The warehouseman should deliver the goods to Caloy. The goods cannot be attached by garnishment
or otherwise, or levied upon, unless the receipt be first surrendered to the warehouseman, or its
negotiation is enjoined. (Section 25, Warehouse Receipts Law)

b. Would you answer be the same if the warehouseman issued a non-negotiable warehouse
receipt? Reason briefly.
No. The non-negotiable warehouse receipt does not confer upon the transferee the direct obligation
of the warehouseman to hold possession of the goods for him. (Section 42, Warehouse Receipts
Law). In such case, the law provides that when a non-negotiable warehouse receipt is transferred to
Caloy, he only gets such title to the goods as Alex had and also a right to notify the warehouseman to
hold the goods for Caloy’s account. Prior to such notice, Caloy’s claim can be defeated by a levy of
execution upon the goods by a creditor of Alex.

(2009) Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of five million pesos
(P5,000,000.00). To buy a new car, she obtained a loan from the same bank in the amount of P1,200,000.00, payable
in twelve monthly installments. Sarah issued in favor of the bank post-dated checks, each in the amount of
P100,000.00, to cover the twelve monthly installment payments. On the third, fourth and fifth months, the
corresponding checks bounced. The bank then declared the whole obligation due, and proceeded to deduct the
amount of one million pesos (P1,000,000.00) from Sarah’s deposit after notice to her that this is a form of
compensation allowed by law. Is the bank correct? Explain.

SUGGESTED ANSWER: No, the bank is not correct. While the Bank is correct about the applicability of
compensation, it was not correct as to the amount compensated. A bank deposit is a contract of loan, where
the depositor is the creditor and the bank the debtor. Since Sarah is also the debtor of the bank with respect
to the loan, both are mutually principal debtors and creditors of each other. Both obligation are due,
demandable and liquidated but only up to the extent of P300,000.00 (covering the unpaid third, fourth and
fifth monthly installments). The entire one million was not yet due because the loan has no acceleration clause
in case of default. And since there is no retention or controversy commenced by third person and
communicated in due time to the debtor, then all the requisites of legal compensation are present but only up
to the amount of P300,000.00. The bank, therefore, may deduct P300,000.00 from Sarah’s bank deposit by
way of compensation.