Reviewer in Credit Transactions Complete

REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS
NOTES BY: HECTOR DE LEON COLLEGE OF LAW

LECTURE BY: ATTY. VERGARA
CREDIT TRANSACTIONS  The element if intent to possess and control in bailment
distinguishes a bailment from custody. This element is absent
 Include all transactions involving the loan of money, and goods in custody.
or the purchase or delivery of goods and services in the present,
with a promise to pay or deliver in the future KINDS OF CONTRACTUAL BAILMENTS
TWO TERMS OF SECURITY IN CREDIT TRANSACTIONS A. ORDINARY BAILMENTS
1. SECURED TRANSACTIONS A.1. 4 TYPES OF ORDINARY BAILMENTS
 Those supported by a collateral or encumbrance of property or 1. THOSE FOR THE SOLE BENEFIT OF THE BAILOR
some other security intended to secure the fulfillment of the
principal obligation  This kind belongs to gratuitous deposit and mutuum bailor
derives the entire benefit, the bailee is liable for damages to the
2. UNSECURED TRANSACTIONS goods in his possession only in cases of gross negligence. The
bailee is required to use slight care and is liable only for gross
 Those fulfillment of which by the principal debtor is secured or negligence
supported only by a promise to pay the personal commitment
of the debtor 2. THOSE FOR THE SOLE BENEFIT OF THE BAILEE
SECURITY  This kind belongs to commodatum and simple loan or

mutuum. The bailee is liable for damages, even in cases he is
 Something given, deposited, or serving as a means to ensure guilty only of simple negligence since he derives the sole
the fulfillment or enforcement of an obligation benefit. The bailee is required to use great cate.
ELEMENTS OF BAILMENT 3. THOSE FOR THE BENEFIT OF BOTH PARTIES
1. Bailor retains the title of the personal property  Bailments of mere keeping
2. The possession or temporary control of the property is  Bailments of carriage
delivered or transferred  Bailments of goods delivered to another to do work upon
3. The bailee accepts possession of the property  Bailements of goods delivered to another to work with
4. The possession of the bailee is for specific purposes  Bailments for security
5. The parties intend that identical property will be returned to the  Bailments of vendor in possession after sale
bailor at the end of the bailment unless the bailor directs that it
be given to another person or its disposal by the bailee  This kind includes deposit for a compensation including
voluntary or necessary deposit, pledge, and bailments for hire.
BAILMENT VS CUSTODY These bailments are known as “mutual-benefit bailments”. It
said that the bailee is required to use ordinary care, and is
1
DAVP
therefore liable for ordinary negligence. The rule applied is the the same for a certain time and return it, in which case the contract is
diligence expected of a good father of a family. It is the called a commodatum; or money or other consumable thing, upon
same as ordinary diligence or care that a reasonably
prudent person customarily takes with respect to his own
property.
4. FORTUITOUS EVENT
 This includes miserable deposit.
B. EXTRAORDINARY
BAILMENTS KINDS OF
COMMODATUM
1. ORDINARY
 The possession of the bailee is more secure for he has the

right to retain the thing loaned until the expiration of the
period agreed upon or the accomplishment of the use for
which the commodatum has been constituted
2. BASED ON PURPOSE (Art. 1942)
 Even if there is no stipulated time to return the thing loaned but

as long as the purpose the thing loaned is achieved, it is
necessary that the thing must be returned.
C. PRECARIUM
 One whereby the bailor demand(absolute) the thing loaned at

will
Not absolute: The actual act of returning the thing.
Art. 1933. By the contract of loan, one of the parties delivers to

another, either something not consumable so that the latter may use
the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or
mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing

loaned, while in simple loan, ownership passes to the borrower.
(1740a)
KINDS OF LOAN
1. COMMODATUM
 The bailor delivers to the bailee a non-consummable things

so that the latter may use it for a certain time and return
the identical thing.
 It is loan of use, because there is a transfer of the use of the
thing borrowed
2. SIMPLE LOAN OR MUTUUM
 Where the lender delivers to the borrower money or other

consummable thing upon the condition that the latter shall
pay the same amount of the same kind and quality
 It is a loan of consumption, because there is a transfer of
the ownership of the thing, which is generally received for
consumption.
COMMODATUM VS MUTUUM
Not consummable Consummable
Ownership of the thing loaned Ownership is transferred or delivered
is retained by the lender
Gratuitous Maybe gratuitous or onerous
The borrower must return the The borrower need only oay tge same  The contract ceases to be a commodatum if any compensation
identical thing amount of the same kind and quality is to be paid by the borrower who acquires the use. In such
case, there arises a lease contract.
Involve real or personal Refers to personal property only
property  If the consideration is the rendering of some service an
Loan of use Loan of consumption innominate contract will result.
Bailor may demand the Bailor may not demand its return
return of the thing loaned before the lapse of the term  No required foem for a commodatum. Since commodatum is a
before the expiration of the real contract, delivery of the thing perfects the contract. Until
term, in case of urgent need delivery, there is no contract of commodatum.
Loss of the subject matter is Loss of the subject matter is suffered by  Commodatum may be made orally or in writing. In thus regard,
suffered by the bailor since the borrower even if caused exclusively commodatum, being gratuitous is not of tye cornerstone of
he is the owner by a fortuitous event and he is not commercial life, it usually occurs between friends, relatives
therefore, discharge from his duty to and neighbors.
pay.
NOTE: The bailor need not be owner of the thing loaned. It is
sufficient that the bailor gas the right to allow the use of the thing by
Art. 1934. An accepted promise to deliver something by way of the bailee. Thus a usufructuary or a lessee can enter into a contract of
commodatum or simple loan is binding upon parties, but the commodatum.
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract. (n)
EXTINGUISHMENT OF THE CONTRACT OF
COMMODATUM
 The fact that the commodatum and mutuum are real contracts
which require the delivery of the subject matter thereof for
their perfection. Delivery is necessary in view of the purpose 1. Expiration of the stipulated period or accomplishment of the
of the contract which is transfer either thr use or ownership use
of the thing loaned. 2. Return by the bailee of the thing after demand by the bailor,
in the event that the bailor has urgent need of the thing
3. Return in case of precarium or in the event the bailee
COMMODATUM commits ingratitude
4. Loss of the thing
Art. 1935. The bailee in commodatum acquires the used of the thing 5. The death of either the bailor or the bailee
loaned but not its fruits; if any compensation is to be paid by him who
acquires the use, the contract ceases to be a commodatum. (1941a) Art. 1936. Consumable goods may be the subject of commodatum if
the purpose of the contract is not the consumption of the object, as
 In general, a commodatum covers things that are not when it is merely for exhibition. (n)
consummable. If the thing is consummable, then the bailee will
not be able to comply with the obligation to return the thing.
Illustration: OBLIGATIONS OF THE BAILEE
When a person allowed another to build a warehouse on the Art. 1941. The bailee is obliged to pay for the ordinary expenses for
former’s house so that the latter may use the property for a certain the use and preservation of the thing loaned. (1743a)
period without any payment of rentals. If rental is paid, the contract
would be one of lease. PRINCIPAL OBLIGATIONS OF THE BAILEE:
A lends to B an oversized bottle of wine to be used as a sample or 6. To take good care of the thing with the diligence of a good
for advertisement. If the intention of the parties is to have the father of the family
consummable goods loaned returned at the end of the peroos agreed
upon, the loan is commodatum not mutuum. 6. Use the thing loaned only for the purpose for which it was
loaned and for no other purpose
Art. 1937. Movable or immovable property may be the object of
commodatum. (n) 6. Pay ordinary expenses for the use and preservation of the
thing and a portion of extraordinary expenses arising from
Art. 1938. The bailor in commodatum need not be the owner of the the actual use of the thing
thing loaned. (n)
6. Return and not to retained the thing loaned except under
 The bailor need not be owner of the thing loaned since certain circumstances.
ownership does not pass to the borrower in commodatum. It is
sufficient if the bailor has such possessory interest in the Art. 1942. The bailee is liable for the loss of the thing, even if it
subject matter or right to its use which he may assert against should be through a fortuitous event:
the bailee and third person although not against the rightful
owner. Hence a mere lessee of the thing of the thing or the
usufructuary may lend but the borrower or bailee himself may (1) If he devotes the thing to any purpose different from that for
not lend nor lease the thing loaned to him to a third person. which it has been loaned;
Art. 1939. Commodatum is purely personal in character. (2) If he keeps it longer than the period stipulated, or after the
Consequently: accomplishment of the use for which the commodatum has been
constituted;
(1) The death of either the bailor or the bailee extinguishes the (3) If the thing loaned has been delivered with appraisal of its value,
contract; unless there is a stipulation exemption the bailee from responsibility
in case of a fortuitous event; (NOTE: It must be express)
(2) The bailee can neither lend nor lease the object of the contract to
a third person. However, the members of the bailee's household may
make use of the thing loaned, unless there is a stipulation to the (4) If he lends or leases the thing to a third person, who is not a
member of his household;
contrary, or unless the nature of the thing forbids such use. (n)
(5) If, being able to save either the thing borrowed or his own thing, Art. 1951. The bailor who, knowing the flaws of the thing loaned, does
he chose to save the latter. (1744a and 1745) not advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof. (1752)
 Manifestation on ingratitude
LIABILITY TO PAY DAMAGES FOR KNOWN HIDDEN
FLAWS
OBLIGATIONS OF THE BAILOR
1. There is flaw or defect in the thing loaned
Art. 1946. The bailor cannot demand the return of the thing loaned 2. The flaw or defect is hidden
till after the expiration of the period stipulated, or after the 3. The bailor is aware
accomplishment of the use for which the commodatum has been 4. He does not advise the bailee
constituted. However, if in the meantime, he should have urgent need 5. The bailee suffers damages by reason of said flaw or defect
of the thing, he may demand its return or temporary use.
 The bailor is made liable in bad faith. The bailee is given the
In case of temporary use by the bailor, the contract of commodatum is right to retention until he is paid damages. The same
suspended while the thing is in the possession of the bailor. (1749a) responsibility of a bailor in commodatum is imposed on a
pledger. When the defect is unknown to the bailor, he is not
liable because commodatum is gratuitous.
Art. 1949. The bailor shall refund the extraordinary expenses during
the contract for the preservation of the thing loaned, provided the Art. 1952. The bailor cannot exempt himself from the payment of
bailee brings the same to the knowledge of the bailor before incurring expenses or damages by abandoning the thing to the bailee. (n)
them, except when they are so urgent that the reply to the notification
cannot be awaited without danger.  The expense and damages may exceed the value of the thing
loaned and it would be unfair to allow the bailor to just
If the extraordinary expenses arise on the occasion of the actual abandon the thing instead of paying for said expenses or
use of the thing by the bailee, even though he acted without fault, damage
they shall be borne equally by both the bailor and the bailee, unless 
there is a stipulation to the contrary. (1751a)
SIMPLE LOAN OR MUTUUM
SUMMARY OF RULES ON EXPENSES
Art. 1953. A person who receives a loan of money or any other
BAILEE BAILOR fungible thing acquires the ownership thereof, and is bound to pay
Ordinary expenses for the use of extraordinary expenses for the use to the creditor an equal amount of the same kind and quality. (1753a)
the thing of the thing
Ordinary expenses for the extraordinary expenses farising CONTRACT OF LOAN VS CONTRACT LEASE
preservation of the thing from the actual use of the thing
Other expenses foor the use of the CONTRACT OF LOAN CONTRACT F LEASE
thing The delivery of money or other One party delivers to another
consumable thing to another with some non-consummable thing in
promise to repay of the same kind order that the latter may use it
and quality but not to a promise to during certain period and return it
return the same thing loaned to the former. He does not lose Art. 1955. The obligation of a person who borrows money shall be
the ownership but loses the governed by the provisions of Articles 1249 and 1250 of this Code.
control over the property.
Obligor-obligee relationship Landlord-tenant relationship If what was loaned is a fungible thing other than money, the debtor
Creditor receives “payment” for Owner of the property receives owes another thing of the same kind, quantity and quality, even if it
his loan “compensation” or “price” in should change in value. In case it is impossible to deliver the same
either in money, provisions, kind, its value at the time of the perfection of the loan shall be paid.
chattels or labor (1754a)
 Art. 1250. In case an extraordinary inflation or deflation of
FUNGIBLE VS CONSUMMABLE the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation shall
 Whether the thing is consumable or not depends upon its nature be the basis of payment, unless there is an agreement to the
and whether it is fungible or not depends upon the intention of contrary. (n)
the parties.  If the thing loaned is money, payment should be made in the
currency stipulated. If the agreement is silent on the currency,
Art. 1954. A contract whereby one person transfers the ownership of then payment must be made in the currency in which the
non-fungible things to another with the obligation on the part of the money was delivered, based on the principle that the borrower
latter to give things of the same kind, quantity, and quality shall be must pay “the same amount of the same kind and quality”. If it
considered a barter. (n) is not possible to deliver in the relevant currency, payment
must be made in the currency which is the legal tender in the
MUTUUM VS COMMODATUM VS BARTER Philippines
MUTUUM Art. 1956. No interest shall be due unless it has been expressly
stipulated in writing. (1755a)
 The subject matter is money or any other fungible things
 It may be gratuitous or onerous ESCALATION CLAUSE, is a stipulation allowing a \n increase in
the interest rate originally agreed upon by the parties.
COMMODATUM
 Any increase in the rate of interest made pursuant to an
 The bailee is bound to return the identical things borrowed escalation clause must be the result of an agreement between
when the time has expired or the purpose has been served the parties.
 It is always gratuitous
Art. 1957. Contract and stipulations, under the cloak or device
BARTER whatever, intended to circumvent the laws against usury shall be void.
The borrower may recover in accordance with laws on usury.
 The subject matter is non-fungible things
 The equivalent thing is given in return for what has been  It is only the stipulation on usurious interest which should be
received treated as void so that the loan becomes without stipulation to
 It is an onerous contract pay interest.
 It is really a mutual sale
 Interest no longer subject to ceiling. The rate will depend on ESSENTIAL REQUISITES OF CONTRACT
the agreement of the parties, subject to the power of the courts 1. Consent of the contracting paries
to temper the interest rate if they are found unconscionable o
iniquitous considering the circumstances of each case. 2. Object certain which is the subject matter of the contract
 The parties are now free to stipulate the interest to be paid on 3. Cause of th obligation which established
monetary obligations and absent any evidence of fraud, undue
influence or any vice of consent exercised by one party against NOTE: Deliver of the thing is also an essentialrequisite of the
the other, the interest rate agreed upon is binding upon them. contract. The delivery by the depositor of the thing to the depositary.
Art. 1960. If the borrower pays interest when there has been no Transfers possession of the thing in he concept of a depost. Wihout
stipulation therefor, the provisions of this Code concerning solutio delivery, the depositary will not be able to comply with its obligation
indebiti, or natural obligations, shall be applied, as the case may of safely keeping the thing and returning it. The delivery need to
be. (n) consist of an actual delivery of the thing. The delivery must place the
thing within the power of the depositary; the depositary cannot keep
 This article simply means that if unstipulated interest is paid by
mistake, the debtor may recover as this would be a case of and return a thing that wasnot delivered.
solutio indebiti or undue payment. But where the
unstipulated interest or interest stipulated, there being a OBJECT OF THE CONTRACT
stipulation but it is not in writing, is obliged paid voluntarily  Only movable things capable of being delivered may be the
because the debtor feels morally obliged to do so, there can be object of a deposit. There may be a contract for the custody
no recovery as in the case of natural obligations. and safekeeping of immovable property, but that contract
DEPOSIT would not be deemed a contract of deposit unde Article 1962.
Art. 1962. A deposit is constituted from the moment a person receives

a thing belonging to another, with the obligation of safely keeping it CAUSE OF THE CONTRACT
and of returning the same. If the safekeeping of the thing delivered is  A deposit is essential gratuitous. However, a deposit is an
not the principal purpose of the contract, there is no deposit but some onerous contract when the depositrt is oaud fess or when the
other contract. (1758a) * it can be a mutuum depositary is engaged in the business of sorting goods,
CONTRACT OF DEPOSIT Illustraion: No contract of deposit

 Has been defined as principal, real, unilateral or bilateral,
gratuitous or onerous contract, whereby a person delivers to FACT: M obtained a P7.3 million loan from the DBP for the
another a thing for safekeeping and custody, with the latter construction of a hotel. M entered into a building construction contract
having the obligation to return the thing when claimed with BMCI. M purchased various construction materials and
equipment in Mnila. MCBI, in turn, deposited them in the warehouse
of C. The deposit wasfree of charge. MCBI failed to finish the
construction of the hotel at the stipulated time. An action for recission
and damages against MCBI. Decision rescinding the contract between failed to prove that there were construction materials and equipment in
MCBI and M, and awarding to the latter P445,000 as actual, moral, petitioners’ warehouse at the time he made a demnd for their return. C
and liquidated damages; P20,000 representing the increase of the has. No corresponding obligtion or libility to M with respect to those
construction materials; and P35,000 as attorney’s fees. MCBI construction materials
interposed aan appal to the court of Appeals but the same was
dismissed. MCBI elevated the case to the Supreme Court via a petition EXTINGUISHMENT OF DEPOSIT
for review on certiorari. Meanwhile during the pendency of the case,  A deposit is extinguished upon the loss or destruction of the
M ordered C to return to M the construction materials and equipment thing deposited.
which MCBI deposited in C’s warehouse. C, however, told M that  In case of gratuitous deposit, upon the death of either the
MCBI withrew those construction materils in 1977. M filed with the depositor or depositary.
Regionl Tril Court, Brnch 160, Psig City, an ction for damages with an  The deposit is also extinguish by the return of the thing by the
application for a writ of preliminry attchment aginst C. depositary
ISSUE: Whether M has the right to demand the release of the DEPOSIT VS MUTUUM
materials and the equipment or to claim damages against C? DEPOSIT MUTUUM
The principal purpose is The consumption of the subject
HELD: 1. contract is binding only upon the parties. Contracts are safekeeping or mere custody matter
binding upon the parties who execute them. When there is no privity The depositor can demand the The lender must wait until the
of contract, there is likewise no obligation or liability to speak about return of the thing at will expiration of the period granted
and thus no cause of action arises. The burdenis on the plaintiff to to the debtor
prove the bailment or deposit and the performance of conditions Both movable or immovable Only money or other
precedent to the right of action. Depositary is obliged to return the may be the object consumable thing may be the
thing to the depositor, or to his heirs or successors, or to the person object
who my have been designated in the contract. DEPOSIT VS COMMODATUM
2. CONTRACT OF DEPOSIT NOT PROVEN

There was indeed a contract of deposit between C and MCBI, it is
still incumbent upon M to prove its existence and ht it was
executed in his favior, M miserably filed to do so. The only pieces
of evience M presented to prove the conract of deposit were the
delivey receipts. They are usigned nd not duly receive authenticated by
either MCBI, C or M. Or any of their representatives. Delivery receipts
have. No probative val at all. Every cause of action excontrctu must
be founde upon a cntract, oral or written, express or implied. M also
DEPOSIT COMMODATUM
The principal purpose is It is the transfer of use
safekeeping or mere custody
Deposit may be gratuitous It is essentially and always
gratuitous
In extrjudicial deposit, only Both movable and immovable
movable things may be the property may be the object
object
Art. 1963. An agreement to constitute a deposit is binding, but the VOLUNTARY VS NECESSARY
deposit itself is not perfected until the delivery of the thing.  The chief difference between a voluntary deposit and a
necessary deposit is that in voluntary, the depositor has
 A deposit is a real contract and is, therefore, perfected only complete freedom in choosing the depositary, whereas in
upon delivery of the object of the contract. Where there has necessary, there is a lack of free choice in the depositor.
been no delivery, there is merely an agreement to deposit
which, however, is binding and enforceable upon the parties Art. 1969. A contract of deposit may be entered into orally or in
 A contract of future deposit is consensual writing
 There is no required form for deposit. A deposit may be
Art. 1964. A deposit may be constituted judicially or extrajudicial entered into orally or in writing. Since deposit is a real
NOTE: In a deposit, it is essential that the depositorary is not the contract, delivery of the thing perfects the contract. Prior to
owner of the thing deposited. delivery, there may be an agreement to constitute a deposit,
which is nevertheless binding upon parties.
KINDS OF DEPOSIT
1. Judicial or one that takes place when an attachment or seizure Art. 1970. If a person having capacity to contract accepts a deposit
of. Property in litigation is ordered made by one who is incapacitated, the former shall be subject to all
2. Extrajudicial the obligations of a depositary, and may be compelled to return the
a. Voluntary or one wherein the delivery is made by the thing by the guardian, or administrator of the person who made
will of the depositor or by two or more persons each of the deposit, or by the latter himself if he should acquire capacity.
whom believes himself entitled to the thing deposited
b. Necessary or one made in compliance with a legal
obligation, or on occasion of calamity, or by WHERE DEPOSITARY CAPACITATED AND DEPOSITOR
travellers in hotels and inns or by travellers with INCAPACITATED
common carrier.  If the depositary is capacitated, he is suject to all the
obligations of a depositary whether or not the depositor is
VOLUNTARY DEPOSIT capacitated. The depositary must return the property to the
Art. 1968. A voluntary deposit is that wherein the delivery is made legal representative of the incapacitated or to the depositor
by the will of the depositor. A deposit may also be made by two or himself if he should acquire capacity.
more persons each of whom believes himself entitled to the thing  The depositary may be compelled to return the thing by the
deposited with a third person who shall deliver it in a proper case to depositor if the depositor should acquire capacity this implies
the one to whom it belongs. that the depositor cannot be compelled by the incapacitated
depositor to return the thing to such depositor. If the depositary
learns that the depositor is incapacitated, it is best for the
depositor to contact the depositor’s guardian or administrator in subject to the right of any third person who acquired the
relatio to the return of the thing. thing good faith.
STATUS OF CONTRACT Illustration: A deposited a watch with B, a minor who

1. Where one of the parties to the contract of deposit is sold it to C. If C acted in bad faith, A may recover te
incapacitated to give consent to te contract. Applying the watch from him. But if C acted in good faih, A’s only
general provisions of contract of law, such contract is recourse is against b to compel him to return the price
voidable. received for the watch or the amount by which he may
2. Where both parties are incapable of giving consent to a have benefited himself.
contract, the contract is unenforceable. In this regard, express
or implied ratification by the parent or guardian, as the case OBLIGATIONS OF THE DEPOSITORY
may be, of one of the contracting parties will give the contract
the same effect as if one of them were incapacitated. If Art. 1972. The depositary is obliged to keep the thing safely and
ratification is made by the parents or guardians, as the case return it, when required, to the depositor, or to his heirs and
may be, of both contracting parties, the contract shall be successors, or to the person who may have been designated in the
validated from its inception. contract. His responsibility, with reagrd to the safekeeping and the loss
of the thing, shall be governed by the provisions of Title I of this
Art. 1971. If the deposit has been made by a capacitated person with Book.
another who is not, the depositor shall only have an action to recover
the thing deposited while it is till in possession of the depositary, or If the deposit is gratuitous, this fact shall be taken into account in
to compel the latter to pay him the amount by which he may be determining the degree of care that te depositary must observe.
enriched or benefited himself with the thing or its price. However,
if a third person who acquired the thing acted in bad faith, the EXCEPTION: If the thing deposited is hazardous or perishable
depositor may bring an action against him for its recovery. EXCEPTION TO THE EXCEPTION: The fact of good being
perishable is not communicated to depositary
WHERE DEPOSITARY IS INCAPACITATED AND
DEPOSITOR CAPACITATED PRINCIPAL OBLIGATIONS OF THE DEPOSITARY:
 The incapacitated depositary(minor or an insane person) does 1. To keep the thing
not incur obligation of a depositary. However, he is liable; 2. To not use the thing
1. To retur the thing deposited while still in his possession 3. To return the thing (upon demand, upon the expiration of
2. If the thing deposited is no longer in his possessio, to agreed period)
pay the depositor the amount by which he may have  The depositary may return the thing if it is making a
been benefited himself with the thing or its price burdensome
IN RELATION TO THE OBLIGATION TO KEEP THE THING, 3. The depositary is only custodian who acts in the exclusive
THE DEPOSITARY HAS THE FOLLOWING RELATED interest of the depositor and must therefore e willing at all
OBLIGATIONS: times tomake the delivery to the depositor. The depositary
1. To keep the thing safely must, as a rule, return the thing deposited upon demand.
2. To not deposit the thing with a third person 4. As a rule, the depositary must return the thing t the place
3. To not change the way of the deposit designated for its return. In the absence of stipulation, at the
4. To collect interest on certificates when they become due and place where the thing deposited might be even if it should be
preserve not the same place where the original deposit es made provided
5. To not commingle grain and other articles of the same kind the transfer was accomplished without malice on the part of the
and quality if there is a stipulation to the contrary. depositary
IN RELATION TO THE OBLIGATION TO RETURN THE
THING, THE DEPOSITARY HAS THE FOLLOWING Art. 1973. Unless there is a stipulation to the contrary, the depositary
RELATED OBLIGATIONS: cannot deposit the thing with a third person. If deposit with a
1. To return the thing with all its products, accessories and third person is allowed, the depositary is liable for the loss if he
accessions deposited the thing with a person who is manifestly careless or
2. To return the thing closed and sealed if delivered in such unfit. The depositary is responsible for the negligence of his
condition. employees. (n)
 In rgent cases, the depositary may deposit the thing with a tird
OBLIGATIONS TO RETURN person if such is necessary for the preservation of the thing. If
1. The depositary must return the thing received, together with all the depositary urgently needs to deposit the thing with a third
its products, accessories and accessions person in order to preserve the thing and there is no more time
 If the depositary y force majeure loses the thing and receives to otain the depositor’s consent, the depositary should
money or another thing in its place, he must deliver the sum of generally not e liabble for the transfer of deposit, unless the
money or other thing received to the depositor third person is manifestly unfit or careless.
 If the depositary’s heir sells the thing sold in good faith, he is
only ound to return the price he may received.
 If the thing deteriorates while in the custody of the depositary, Art. 1977. The depositary cannot make use of the thing deposited
the depositary will return the thing to the depositor in the without the express permission of the depositor. Otherwise, he shall
deteriorated state. In the asence of fault on the part of the be liable for damages. However, when the preservation of the thing
depositary, the depositary cannot e held iale for the deposited requires its use, it must be used but only for that
deterioration suffered by the thing. purpose. (1767a)
2. As a rule, the depositary must return the thing to the depositor,
or to his heirs and successors, or to the person designated in the  Unauthorized use by the depositary would make him liale for
contract. damages. But the depositary may make use of the thing
deposited even without the express permission of the depositer ISSUE: Was the contract entered into by the parties
where such use is necessary for its preservation, but the use is a deposit or loan?
limited for that purpose only.
HELD: A real loan. Notwithstanding that in the
Art. 1978. When the depositary has permission to use the thing original document it was called deposit. They did not
deposited, the contract loses the concept of a deposit and becomes engaged to return the same money received. For this
a loan or commodatum, except where safekeeping is still the reason, the debtors were lawfully authorized to make us
principal purpose of the contract. of the amount deposited, and susequently sked for an
extension of thetime for the return thereof, is
1. If the thing deposited is non-consumable acknowleding that they have sujected C, as their
 If the thing deposited is non-consummable and the creditor. Such conduct of A and unquestionaly showed
depositary has permission to use the thing, the contract that the transaction was not a deposit but a real contract
loses the character of a deposit and acquires that of a of loan.
commodatum. Unless safekeeping is still the principal
purpose of the contract. The permission shall not be presumed, and its existence must be
2. If the thing deposited id money or other consumable thing proved. (1768a)
 If the thing deposited is money or other consummable
and the depositary has permission to use the thing, it Art. 1979. The depositary is liable for the loss of the thing through
will result in its consumption nd converts the contract a fortuitous event:
in a simple loan or mutuum. Unless safekeeping is still
the principal purpose of the contract. (1) If it is so stipulated;
Illustration: (2) If he uses the thing without the depositor's permission;
FACTS: A and B received from C: (3) If he delays its return;

“As a deposit withou interest, the dum of P2,600,
which they will return, jointly and severally, on (4) If he allows others to use it, even though he himself may
January 20, 1898” have been authorized to use the same. (n)
When the obligation became due, A and B begged C for
an extension of time for the payment thereof, binding  The owner of the thing deposited generally suffers the risk of
themselves to pay interest at the rate of 15% of the loss through a fortuitous event. Thus, the depositary is not liale
amount of their indetedness, to which C acceded. for loss through a fortuitous event without his fault.
Art. 1981. When the thing deposited is delivered closed and sealed,  The young of an animal which was deposited shall be returned
the depositary must return it in the same condition, and he shall to the depositor.
be liable for damages should the seal or lock be broken through
his fault. Art. 1984. The depositary cannot demand that the depositor prove
his ownership of the thing deposited.
Fault on the part of the depositary is presumed, unless there is proof
to the contrary. Nevertheless, should he discover that the thing has been stolen and
who its true owner is, he must advise the latter of the deposit.
As regards the value of the thing deposited, the statement of the
depositor shall be accepted, when the forcible opening is imputable to If the owner, in spite of such information, does not claim it within the
the depositary, should there be no proof to the contrary. However, the period of one month, the depositary shall be relieved of all
courts may pass upon the credibility of the depositor with respect responsibility by returning the thing deposited to the depositor.
to the value claimed by him.
If the depositary has reasonable grounds to believe that the thing has
When the seal or lock is broken, with or without the depositary's not been lawfully acquired by the depositor, the former may return the
fault, he shall keep the secret of the deposit. (1769a) same. (1771a)
 It involves envelope  The depositary cannot require that the depositor prove his
 It absolute not to open the closed and sealed thing ownership over the thing.
deposited. An exception is Art. 1982  To constitute a deposit, it is not essential that the depositor e
the owner of the thing deposited, and to acquire proof of
Art. 1982. When it becomes necessary to open a locked box or ownership may open the door to fraud and ad faith, for the
receptacle, the depositary is presumed authorized to do so, if the depositary, on the pretense of requiring proof of ownership
key has been delivered to him; or when the instructions of the may be able to retain the thing
depositor as regards the deposit cannot be executed without opening
the box or receptacle. (n) Art. 1985. When there are two or more depositors, if they are not
solidary, and the thing admits of division, each one cannot demand
 Exception to art. 1981 more than his share.
Art. 1983. The thing deposited shall be returned with all its When there is solidarity or the thing does not admit of division, the
products, accessories and accessions. 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,
Should the deposit consist of money, the provisions relative to agents the depositary shall return it only to the person designated. (1772a)
in article 1896 shall be applied to the depositary. (1770)
OBLIGATIONS OF DEPOSITOR (2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary. (n)
Art. 1992. If the deposit is gratuitous, the depositor is obliged to
reimburse the depositary for the expenses he may have incurred for the  The deposit is also extinguish upon the:
preservation of the thing deposited. (1779a) 1. loss or destruction;
 It rest on equity 2. in case of gratuitous deposit, upon the death of either the
 Without the duty to reimbursement imposed by the article, the depositary;
depositor would be enriching himself at the expense of the 3. The return of the thing by the depositary;
depositary. 4. The conversion of a deposit into another contract if the
 The right to reimbursement covers all expenses for deposit allows the depositary to use the thing
preservation, whether ordinary or extraordinary. The law refers
to necessary expenses NOTE: compensation as a mode of extinguishment of obligations is
 Useful expenses and expenses for pure luxury and mere not applicale to deposit. Under art. 1287, compensation is not proper
pleasure are not covered when one of the debts arises from a deposit or from the obligations of
a depositary or of a ailee in commodatum
Art. 1993. The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, unless at the time of NECESSARY DEPOSIT
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 Art. 1996. A deposit is necessary:
notified the depositary of the same, or the latter was aware of it
without advice from the depositor. (n) (1) When it is made in compliance with a legal obligation;
Art. 1994. The depositary may retain the thing in pledge until the full (2) When it takes place on the occasion of any calamity, such
payment of what may be due him by reason of the deposit. (1780) as fire, storm, flood, pillage, shipwreck, or other similar events.
(1781a)
 It will include the expenses incurred under Article 1992, the
indemnification for any loss suffered pursuant to Art. 1993,  The more immedite object is to save the property rather than its
and any agreed remuneration in case of onerous deposits safekeeping.
Art. 1995. A deposit its extinguished: Illustration: Thus if X saves Y’s television in case of fire, X is
supposed to be its depositary
(1) Upon the loss or destruction of the thing deposited
Art. 1997. The deposit referred to in No. 1 of the preceding article employees as well as by strangers, provided that notice has
shall be governed by the provisions of the law establishing it, and in been given and proper precautions taken
case of its deficiency, by the rules on voluntary deposit.  Hotel-keeper is liable if the loss caused by the act of thief or
robber done without the use of arms and irresistable force, in
The deposit mentioned in No. 2 of the preceding article shall be this case, the hotel-keeper is negligent
regulated by the provisions concerning voluntary deposit and by
Article 2168. (1782) Art. 2002. The hotel-keeper is not liable for compensation if the loss is
due to the acts of the guest, his family, servants or visitors, or if the
Art. 1998. The deposit of effects made by the travellers in hotels or loss arises from the character of the things brought into the hotel. (n)
inns shall also be regarded as necessary. The keepers of hotels or
inns shall be responsible for them as depositaries, provided that Art. 2003. The hotel-keeper cannot free himself from responsibility by
notice was given to them, or to their employees, of the effects posting notices to the effect that he is not liable for the articles brought
brought by the guests and that, on the part of the latter, they take by the guest. Any stipulation between the hotel-keeper and the guest
the precautions which said hotel-keepers or their substitutes whereby the responsibility of the former as set forth in articles 1998 to
advised relative to the care and vigilance of their effects. (1783) 2001 is suppressed or diminished shall be void. (n)
Art. 1999. The hotel-keeper is liable for the vehicles, animals and Art. 2004. The hotel-keeper has a right to retain the things brought
articles which have been introduced or placed in the annexes of the into the hotel by the guest, as a security for credits on account of
hotel. (n) lodging, and supplies usually furnished to hotel guests. (n)
Art. 2000. The responsibility referred to in the two preceding articles

shall include the loss of, or injury to the personal property of the guests SEQUESTRATION OR JUDICIAL DEPOSIT
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 Art. 2005. A judicial deposit or sequestration takes place when an
majeure. The fact that travellers are constrained to rely on the attachment or seizure of property in litigation is ordered. (1785)
vigilance of the keeper of the hotels or inns shall be considered in
determining the degree of care required of him. (1784a) Art. 2006. Movable as well as immovable property may be the object
of sequestration. (1786)
Art. 2001. The act of a thief or robber, who has entered the hotel is
not deemed force majeure, unless it is done with the use of arms or Art. 2007. The depositary of property or objects sequestrated cannot
through an irresistible force. (n) be relieved of his responsibility until the controversy which gave rise
thereto has come to an end, unless the court so orders. (1787a)
 Hotel-keeper is liale provided that the losss or injury to the
personal property of te guests is caused y his servants or
Art. 2008. The depositary of property sequestrated is bound to  The person who caused the storage of goods with the
comply, with respect to the same, with all the obligations of a good warehouseman or otherwise claims to be the person
father of a family. (1788) entitled to the delivery of goods while being in
possession of a warehouse receipt.
BANK DEPOSIT
NO PARTICULAR FORM REQUIRED
 Bank deposits consist of money placed into banking Terms Included:
institutions for safekeeping. These deposits are made to Location of the warehouse
deposit accounts such as savings accounts, checking
accounts and money market accounts. The account holder has Date of Issue
the right to withdraw deposited funds, as set forth in the
terms and conditions governing the account agreement. Receipt Number
WAREHOUSE RECEIPTS Statement whether the goods shall
be delivered to BEARER, to a
ACT NO. 2137 – THE WAREHOUSE RECEIPTS LAW SPECIFIED PERSON, or to a
SPECIFIED PERSON OR HIS ORDER
What is a Warehouse Receipt? Rate of Storage Charges
 A document issued by the warehouseman in favor of
the owner of goods stored or caused to be stored in a Description of GOODS or the
warehouse as proof of ownership of said goods and as PACKAGE containing them
proof of storage.
Signature of the Warehouseman or
his agent
Warehouseman
Other Terms:
 The person who is in charge of managing and/or Fact of ownership by Warehouseman of
maintaining the warehouse in which goods are goods, if that is the case
stored. Statement of advances made and of
 The person who keeps the goods stored in a warehouse. liabilities incurred for which the
 A person engaged in the warehouse business – storing warehouseman claims a lien, IF ANY
goods for profit.
Function of Terms:
Owner 1.Identifies the LOCATION where the goods are stored
2.Sets the date from which the storage started  General Rule: The WAREHOUSEMAN is liable for
3.Identifies the PARTIES to the storage loss or damage to the owner’s goods. (A warehouse
transaction; 4.Identifies the PARTIES liable on the transaction is similar to an onerous deposit – the
document 5.Identifies the GOODS stored or the warehouseman has the obligation to SAFEKEEP the
PACKAGEcontaining them goods stored.)
6. Sets the COST storage
 The extent of liability of the warehouseman is
defined by LAW but may be limited by the
POINTS TO REMEMBER: agreement of the parties, but in no case shall
the warehouseman be allowed to exercise a
IDENTITY OF GOODS degree of diligence less than ordinary diligence.
 General Rule: The OWNER MUST DECLARE the  Exceptions:
identity of the goods 1.The OWNER misdeclared the identity of his goods.
 Exception: The owner may DECLINE from 2.The OWNER was negligent in the packaging of his
identifying his goods but he must IDENTIFY the goods.
CONTAINER or the PACKAGE in which his goods 3.The loss or damage is PURELY due to a fortuitous
are stored event.
4.The loss or damage was done by authority of law.
EFFECT OF NON-DECLARATION: The warehouseman
will not be liable for deterioration of the goods, loss, damage POINTS TO REMEMBER:
or substitution by third persons for as long as due diligence
is observed. The warehouseman will not be liable for WAREHOUSEMAN’S LIEN
violation of law in case the goods stored are  General Rule: The OWNER must pay the
CONTRABAND. warehouseman his FEES and the expenses of
storage, BEFORE the goods may be released.
POINTS TO REMEMBER:  If the owner refuses to pay storage fees and
expenses, the warehouseman may REFUSE
LOSS OR DAMAGE TO GOODS to release the goods. Fees and expensesshall be
constituted as a LIEN on the goods.
delivered to the bearer or to the order of any person named
in the receipt. (Section 5, WRL)
 A negotiable receipt shall NOT be marked “non-
POINTS TO REMEMBER: negotiable.”
Query: When is a warehouse receipt non-negotiable?
NEGOTIABILITY OF A WAREHOUSE RECEIPT Answer: A warehouse receipt is non-negotiable when it
states that the goods received by the warehouseman will be
Query: Is a warehouse receipt a negotiable instrument? delivered to the depositor or a specified person. (Section 4,
Answer: Under Act No. 2031 (Negotiable Instruments WRL)
Law), a warehouse receipt is NOT a negotiable  A non-negotiable receipt shall be marked “non-
instrument because it does not contain a promise or negotiable” otherwise the holder for value may treat
order to pay a sum certain in money. it as negotiabl
Under Act No. 2137 (Warehouse Receipts Law), a POINTS TO REMEMBER:

warehouse receipt is considered a negotiable instrument
provided it has satisfied the requirements for it to be NEGOTIABILITY OF A WAREHOUSE RECEIPT
capable of negotiation.
Query: How may a negotiable receipt be negotiated?
POINTS TO REMEMBER: Answer: By SIMPLE DELIVERY or by INDORSEMENT
WITH DELIVERY
NEGOTIABILITY OF A WAREHOUSE RECEIPT
BY SIMPLE DELIVERY
Query: What determines the negotiability of a warehouse  Where by the terms of the receipt, the warehouseman
receipt? undertakes to deliver the goods to the bearer of the
Answer: The terms (tenor) of the receipt determines receipt; OR
whether a warehouse receipt is negotiable or non-  Where by the terms of the receipt, the warehouseman
negotiable. undertakes to deliver the goods to the order of a
specified person AND such specified person indorsed
Query: When is a warehouse receipt negotiable? the receipt in blank or INDORSED IT TO
Answer: A warehouse receipt is negotiable when it states BEARER (e.g. “pay to bearer”)
that the goods received by the warehouseman will be
 If the receipt, DELIVERABLE TO BEARER is observed. In such case the contract is called a suretyship. (1822a)
indorsed and negotiated, the receipt may be
FURTHER NEGOTIATED ONLY BY
INDORSEMENT WITH DELIVERY.
POINTS TO REMEMBER:
NEGOTIABILITY OF A WAREHOUSE RECEIPT
Query: How may a negotiable receipt be negotiated?
Answer: By SIMPLE DELIVERY or by INDORSEMENT

WITH DELIVERY
BY INDORSEMENT WITH DELIVERY

 Where the goods are deliverable to the bearer of
the receipt and it indorsed (e.g. ordered by the
bearer to be deliverable to a specified person)
 The indorsement may be an INDORSEMENT IN
BLANK, an INDORSEMENT TO BEARER or
an INDORSEMENT TO A SPECIFIED
PERSON.
GUARANTY AND SURETYSHIP
Art. 2047. By guaranty a person, called the guarantor, binds himself to

the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the

provisions of Section 4, Chapter 3, Title I of this Book shall be
 In its broader sense, the guaranty includes pledge and
mortgage because the purpose of guaranty may be
accomplished not only by securing the fulfillment of an
obligation contracted by the principal debtor through the
personal guaranty of a third person but also by furnishing to
the creditor for his security, property with auhority to collect
the debt from proceeds of the same in case of default
CHARACTERISTICS OF THE CONTRACT
1. It is a consensual contract, because it is perfected by mere

consent subjec to Statute of Fraud
2. It is generally unilateral contract
2.1. It give rise only to a duty on the part of the guarantor in

relation to the creditor and not vice versa although after its
fulfillment, the principal debtor becomes liable to indemnify the
guarantor but this is merely an incident of the cotnract.
2.2. It may be entered into even without the intervention of the

principal debtor
3. It is an accessory contract, because it is dependent for its

existence upon the principal obligation guaranteed by it. It is also
subsidiary and conditional because it takes effect only when the
principal debtor fails in his obligation, subject to certain limitations.
4. It is formal contract, because it is governed by the Statute of Frauds
5. It is generally a gratuitous contract but it may be an onerous

contract.
SOURCE OF THE GUARANTOR’S OBLIGATIONS

 As a rule, the obligations of the guarantor arise from the SURETYSHIP
contract entered into y the creditor and the guarantor. In
addition, the guarantor’s obligations may arise from a contract  A relaion which exists where one person has undertaken an
entered into by the debtor and the guarantor, in which the obligation and another person (surety) is also under a direct and
guarantor binds himself to fulfill the debtor’s obligation if the primary obligation or other duty to a third person (obligee),
latter should fail to do so. who is entitled to but one performance, and as between the two
 The creditor may demand its fulfillment provided the creditor who are bound, the one rather than the other should perform
communicated his acceptance to the guarantor before its  Surety is a contractual relation resulting from an
revocation. agreement whereby one person, the surety, engages to be
answerable to a third person, the obligee/creditor, for the
SCOPE OF GUARANTEE debt, default, or miscarriage of another known as the
principal or obligor/debtor
1) The principal obligations of the debtor  It invovlves two(2) relationship; the principal relationship
2) The accessory obligations pertaining to the principal between the obligee and the obligor, and the accessory
obligations relationship between the principal and the surety
3) The obligations that arise as a matter of law from the
guaranteed obligations, such as the payment of interest in case LAW APPLICABLE TO CONTRACT OF SURETYSHIP
of delay
4) The obligation to pay judicial costs incurred after the guarantor 1) If a person binds himself solidarily with the principal debtor,
has been judicially required to pay. the contract is called suretyship and the guarantor is called a
surety. In a suretyship agreement, the surety guarantees
PAYMENT BY THE GUARANTOR the performance by the principal obligor of n obligation or
undertaking in favor of the obligee.
 The guarantor must pay in the a mnner provided in the 2) The Supreme Court has applied the following provisions on
principal contract. In the absence of any express provision in guarantee to a suretyship:
the principal contract or in the contract of guarantee, payment a. Art. 2066. The guarantor who pays for a debtor must be
must be made as follows: indemnified by the latter.
The indemnity comprises:
A. Place of payment, in the absence of an express (1) The total amount of the debt;
stipulation on place of payment, the place of payment (2) The legal interests thereon from the time the
must be at the domicile of the debtor payment was made known to the debtor, even though it
B. Time of payment, in general, the guarantor must pay did not earn interest for the creditor;
as soon the creditor was unsuccessful in exhausting the
properties of the debtor.
(3) The expenses incurred by the guarantor after having WHERE PARTY BINDS HIMSELF SOLIDARILY WITH
notified the debtor that payment had been demanded of PRINCIPAL DEBTOR
him;
(4) Damages, if they are due. (1838a)  GUARANTOR WITH SOLIDARY LIABILITY
 Since guaranty consists in an undertaking to secure the
b. Art. 2067. The guarantor who pays is subrogated by fulfillment of an obligation contracted by another in case the
virtue thereof to all the rights which the creditor had
latter should fail to do so, it is quite possible for a guarantor to
against the debtor.
bind himself solidarily with the principal debtor
If the guarantor has compromised with the creditor, he  CHARACTER AND RIGHTS AS GUARANTOR
cannot demand of the debtor more than what he has REMAIN
really paid. (1839)  If his intention is not to convert himself into a principal debtor
c. Art. 2079. An extension granted to the debtor by the but merely to constitute himself as guarantor although binding
creditor without the consent of the guarantor himself solidarily with him, action may be brought against him
extinguishes the guaranty. The mere failure on the part
outright by reason of the said solidarily but he retains his
of the creditor to demand payment after the debt has
become due does not of itself constitute any extention character as a guarantor and all the rights inherent in a
of time referred to herein. (1851a guarantor by reason of payment by him
3) On the hand, the Supreme Court has ruled that the following
provisions on guarantee do not apply to a suretyship: NATURE OF SURETY’S UNDERTAKING
a. Art. 2058. The guarantor cannot be compelled to pay the
 LIABILITY IS CONTRACTUAL AND ACCESSORY
creditor unless the latter has exhausted all the property of
BUT DIRECT
the debtor, and has resorted to all the legal remedies against
 Suretyship is a contractual relation. The surety’s obligation is
the debtor. (1830a)
not an original and direct one for the performance of his act,
b. Art. 2063. A compromise between the creditor and the
but merely accessory or collateral or secondary to the
principal debtor benefits the guarantor but does not
obligation contracted by the principal.
prejudice him. That which is entered into between the
a. His liability to the creditor or promisee of the principal is said
guarantor and the creditor benefits but does not prejudice
to be direct, immediate, primary, and absolute. He is
the principal debtor. (1835a)
directly, primarily, and equally bound with the principal as
c. Art. 2080. The guarantors, even though they be solidary,
original promisor although he possesses no direct or personal
are released from their obligation whenever by some act of
interest over the latter’s obligations nor does he receive any
the creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter. (1852
benefit therefrom and regardless of whether the principal suretyship as well as the conditions stated in the bond. It cannot
debtor is financially capable to fulfill his obligations. be extended by implication beyond the terms of the contract.
b. A surety is considered in law as being the same party as the b. A surety is not released by a change in the contract which does
debtor in relation to whatever is adjudged touching the not have the effect of making its obligation more onerous
obligation and their liabilities are interwoven and
3. LIABILITY ARISES ONLY IF PRINCIPAL DEBTOR IS
dependent as to be inseparable.
HELD LIABLE
c. In a suretyship, there is but one contract, and the surety is
bound by the same agreement which binds the principal. A  A surety contract is made principally for the benefit of the
surety is usually bound with the principal by the same creditor-obligee and his ensured by the solidary nature of the
instrument, executed at the same time and upon the same surety undertaking. In other words, if the principal debtor and
consideration. Without reference to the solvency of the the surety are held liable, their liability to pay the creditor
principal. The effect is that the creditor is given the right to would be solidary but the nature of the surety’s undertaking is
directly proceed against either the principal debtor or the such that it does not incur liability unless and until the principal
surety. debtor is held liable.
d. It is not for the obligee to see to it that the principal debtor pays a. The surety is bound by a judgment against the principal even
the debt or fulfill the contract, but for the surety to see to it that though he was not a party to the proceedings
the principal debtor pays or performs. b. The creditor may sue, separately or together, the principal
e. The surety does not insure the solvency of the debtor, but debtor and the surety
rather the debt itself.  SURETY IS NOT ENTITLED TO EXHAUSTION
f. The acceptance by the obligee of the surety’s solidary  A surety is not entitled to the exhaustion of the properties of
undertaking to pay if the obligor does not pay, does not the principal debtor. The reason is that a surety assumes a
change in any material way the obligee’s relationship with solidary liability for the fulfillment of the principal obligation
the principal obligor nor does it make the surety an adverse as an original promissor and debtor from the beginning
party to the principal creditor-debtor relationship. In other
words, the acceptance does not give the surety the right to NOTE: SURETIES DO NOT INSURE THE SOLVENCY OF
intervene in the principal contract THE DEBTOR, BUT RATHER THE DEBT ISELF. THEY ARE
 LIABILITY IS LIMITED BY TERMS OF CONTRACT CONTRACTED PRECISELY TO MITIGATE RISKS OF NON-
a. A contract of surety is not presumed; it cannot extend to PERFORMANCE ON THE PART OF THE OBLIGOR. THIS
more than what is stipulated. The extent of the surety’s RESPONSIBILITY NECESSARILY PLACES A SURETY ON
liability is determined only by the clause of the contract of THE SAME LEVEL AS THAT OF THE PRINCIPAL DEBTOR.
THE EFFECT IS THAT THE CREDITOR IS GIVEN THE GUARANTY DISTINGUISHED FROM SURETYSHIP
RIGHT TO DIRECTLY PROCEED AGAINST EITHER
PRINCIPAL DEBTOR OR SURETY. THIS IS THE REASON
WHY EXCUSSION CANNOT BE INVOKED
BUT WHEN DEMANDED BY THE REQUIREMENTS OF

JUSTICE, THE PRINCIPAL OBLIGOR RATHER THAN THE
SURETY MAY BE REQUIRED TO PAY THE INSURED
OBLIGATION SUC AS WHERE THE FORMER HAS THE
NECESSARY AMOUN IT GOT UNDER T BOND WITH
WHICH TO COMPLY WITH THE TERMS THEREOF.
5.SURETY IS NOT ENTITLED TO NOTICE OF PRINCIPAL’S

DEFAULT
 Demand is not necessary before bringing suit against them,

since the commencement of the suit is a sufficient demand. A
surety is not even entitled, as a matter of right, to be given a
separate notice of the principal’s default.
 The surety is bound to take notice of the principal’s default
and to perform the obligation. He cannot complain that the
creditor has not notified him in the absence of a special
agreement to that effect in the contract of suretyship. The
surety may, in fact, be sued separately or together with the
principal debtor.
6.PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL

NOT REQUIRED
 As soon as the principal is in default, the surety likewise is in

default. The proper remedy of the surety is to pay the debt and
pursue the principal for reimbursement
GUARANTY SURETY
Guarantor is the insurer of the Surety is the insurer of the
insolvency of the debtor and debt, and he obligates himself
thus binds himself to pay if the to pay if the principal does not
principal is unable to pay pay
An undertaking that the debtor An undertaking that the debt
shall pay shall be paid
Liability depends upon an Assumes liability as a regular
independent agreement to pay party to the undertaking
the obligation if the primary
debtor fails to do so
Engagement of the guarantor is A surety is charged as an
a collateral undertaking original promissor and debtor
from the beginning
Secondary or subsidiarily liable It is in essence secondary only
to a valid principal obligation,
his liability to the creditor is
direct, primary and absolute.
The surety undertakes directly
the payment without reference
to the solvency of the principal,
and is so responsible at once if
the latter makes default,
without any demand by the
creditor upon the principal
whatsoever or any notice of
default
A surety is ordinarily, held to
know every default of his
principal, while a guarantor is
not bound to take notice of the
non-performance of his
 If he became a guarantor with theprincipal
knowledge or consent of the debtor, he is “subrogated” by virtue thereof to all the rights which ”the creditor had
Guarantor is debtor
against the often discharged by A surety will not be discharged
the mere indulgence of the either by the mere indulgence
creditor of the principal, and is of the creditor of the principal Art. 2052. A guaranty cannot exist without a valid obligation.
usually not liable unless notified or by want of notice of the
of the default of the principal default of the principal, no Nevertheless, a guaranty may be constituted to guarantee the
matter how much he by mere performance of a voidable or an unenforceable contract. It may also
injured thereby guarantee a natural obligation. (1824a)
Cannot claim release from his
obligation  Guaranty is an accessory contract. It is an indispensable
condition for its existence that there must a principal
Art. 2050. If a guaranty is entered into without the knowledge or
obligation. So, if the principal obligation is void, the guarantee
consent, or against the will of the principal debtor, the provisions of
is also void.
Articles 1236 and 1237 shall apply. (n)
 It exist for the benefit of the creditor and not for the benefit of
Art. 2053. A guaranty may also be given as security for future debts,
the principal debtor who is not usually a party to the contract of the amount of which is not yet known; there can be no claim against
guaranty. The creditor has every right to take all possible the guarantor until the debt is liquidated. A conditional obligation may
measures to secure the payment of his creditor. Hence, it can also be secured. (1825a)
be constituted without the knowledge and even against the will
of the principal debtor.  To secure the payment of a loan at maturity, a surety binds
himself to guarantee the punctual payment of a laon at
maturity and all other obligations or indebtedness which may
become due or owing to the principl by the borrower, together
with any and all expenses which may be incurred by the
principal in collecting such obligations or indebtedness
RIGHTS OF THIRD PERSON WHO PAYS provided that the liability of the surety shall not exceed at any
one time as a specified sum is guaranty of future debts
 A person who pays without the knowledge or against the will  To secure paymet of any debt to be subsequently incurred
of the debtor can recover only insofar as the payment has been  To secure existing unliquidated debt
beneficial to the debtor and he cannot compel the creditor to
subrogate him in his rights, such as those arising from a GUARANY OF CONDITIONAL OBLIGATIONS
mortgage, guaranty or penalty  A conditional obligation may also be secured for its valid
and binding Just like a pure one. If the principal obligation is
subject to a suspensive condition, the guarantor is liable only If it be simple or indefinite, it shall compromise not only the principal
after the fulfillment of the condiion. If it is subject to a obligation, but also all its accessories, including the judicial costs,
resolutory condition, the happening of he condition provided with respect to the latter, that the guarantor shall only be
extinguishes both the principal obligation and the guaranty. liable for those costs incurred after he has been judicially required to
pay. (1827a)
Art. 2054. A guarantor may bind himself for less, but not for more  As a contract, guaranty requires the expression of consent
than the principal debtor, both as regards the amount and the onerous on the part of the guarantor to be bound. It cannot be
nature of the conditions. presumed because of the existence of a contract or principal
obligation.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor. (1826) Art. 2056. One who is obliged to furnish a guarantor shall present
a person who possesses integrity, capacity to bind himself, and
 Inasmuch as a contract of guaranty is only a subsidiary and sufficient property to answer for the obligation which he
accessory contract, the guarantor cannot bind himself for more guarantees. The guarantor shall be subject to the jurisdiction of
than the principal debtor and even if he does, his liability shall the court of the place where this obligation is to be complied with.
(1828a)
be reduced to the limits of that of the debtor. But a guarantor
may bind himself for less than that of the principal. Art. 2057. If the guarantor should be convicted in first instance of a
crime involving dishonesty or should become insolvent, the creditor
PRINCIPAL’S LIABILITY MAY EXCEED GUARANTOR’S
may demand another who has all the qualifications required in the
OBLIGATION preceding article. The case is excepted where the creditor has required
and stipulated that a specified person should be the guarantor. (1829a)
 The measure of the guarantor’s or surety’s obligation is not,
however, the measure of the principal’s obligation. Thus, the QUALIFICATIONS OF GUARANTOR
amount specified in a surety bond as the surety’s obligation
does not limit the extent of the damages that may be recovered  He possesses integrity
from the principal, the latter’s liability being governed by the  He has capacity to bind himself
obligation he assumed under his contract.  He has sufficient property to answer for the obligation which
he guarantees
Art. 2055. A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein.  The qualifications need only be present at the time of the
perfection of the contract. So the subsequent loss or integrity or
property or supervening incapacity of the guarantor would not
operate to exenorate the guarantor of the eventual liability
he
has contracted, and the contract of guaranty cotinues. However, PROBLEM: DOES THE CREDITOR NEEDS TO WAIT FOR
the creditor may demand another guarantor with the proper THE DECISION OF THE COURT?
qualifications. ANSWER: YES. That is the implication
EEFECTS OF GUARANTY Art. 2059. The excussion shall not take place:
Art. 2058. The guarantor cannot be compelled to pay the creditor (1) If the guarantor has expressly renounced it;
unless the latter has exhausted all the property of the debtor, and has
resorted to all the legal remedies against the debtor. (1830a) (2) If he has bound himself solidarily with the debtor;
RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION (3) In case of insolvency of the debtor;

 GUARANTOR ONLY SECONDARILY LIABLE
 The guarantor binds himself to the creditor to fulfill the (4) When he has absconded, or cannot be sued within the
obligation of the principal debtor in case the latter should Philippines unless he has left a manager or
fail to do so and cannot do so. It is the rule that distinguishes representative;
guaranty from suretyship
(5) If it may be presumed that an execution on the
 ALL LEGAL REMEDIES AGAINST DEBTOR TO BE property of the principal debtor would not result in the
FIRST EXHAUSTED satisfaction of the obligation. (1831a)
 The law requires the creditor to first exhaust all legal remedies
agaisnt the debtor including the bringing of actions for the EXCEPTION TO BENEFIT OF EXCUSSION
rescission of fradulent alienations of property made by the
debtor. This is what is otherwise known as the “benefit of  As provided in Art. 2059. The excussion shall not take place:
excussion”
(1) If the guarantor has expressly renounced it;
 PAYMENT PRIOR TO EXHAUSTION
 While a guararantor enjoys the benefit of excussion, nothing (2) If he has bound himself solidarily with the debtor;
prevents him from paying the obligation once demand is made
on him, excussio after all, is a rigt granted to him by law and as (3) In case of insolvency of the debtor;
such he may opt to make use of it or waive it. The law does not
prohibit the payment by a guarantor on his own volition. (4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property was
of the principal debtor would not result in the satisfaction of
the obligation. (1831a)
 If he does not comply with Art. 2060. In order that the
guarantor may make use of the benefit of exclusion, he must
set it up against the creditor upon the latter's demand for
payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient
to cover the amount of the debt. (1832)
 If the guarantor bound himself solidarily with the
principal debtor
 If he is a judicial bondsman and sub-surety
 Where a pledge or mortgage has been given by him as a special
security. Guarantee without any such pledge or mortgage are
governed by Title XV of the Civil Code, whereas pledges and
mortgages fall under Title XVII thereof.
 If he fails to interpose it as a defense before jusgment is
rendered against him.
NOTE: There is no right of excussion in suretyship
Art. 2060. In order that the guarantor may make use of the benefit
of exclusion, he must set it up against the creditor upon the latter's
demand for payment from him, and point out to the creditor
available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt. (1832)
 The demad for payment by the creditor upon the guarantor

can be made only after judgment on the debt for obviously the
“exhaustion of the principal’s property”- the benefit of which
the guarantor claims- cannot even begin to take place before
judgment has been obtained.
 Joining the guarantor in the suit against the principal debtor
is not the demand intended by law. The fact the guarantor
joined in such suit does not necessarily mean that a demand has
already been made upon him.
 The guarantor may invoke the benefit of excussion if the
creditor sues for payment judicially or makes an
extrajudicial demand
CONDITION FOR GUARANTOR TO SET UP BENEFIT

OF EXCSSION
 It should not be used as a pretext to delay or make more

difficult the creditor’s right to collect. It is not enough that
the guarantor claims the benefit of excssion. He must also
point out to the creditor available property of the debtor
witihn the Philippines. The failure of the guarantor to
point out to the creditor the debtor’s property sufficient to
cover his debt forcloses his right to set up the defense of
excussion.
Art. 2061. The guarantor having fulfilled all the conditions

required in the preceding article, the creditor who is negligent
in exhausting the property pointed out shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
resulting from such negligence. (1833a)
 The creditor ust notify the guarantor of the debtor’s

inability to pay
Art. 2062. In every action by the creditor, which must be against

the principal debtor alone, except in the cases mentioned in Article
2059, the former shall ask the court to notify the guarantor of the
action. The guarantor may appear so that he may, if he so desire,
set up such defenses as are granted him by law. The benefit of
excussion mentioned in Article 2058 shall always be unimpaired,
even if judgment should be rendered against the principal debtor
and the guarantor in case of appearance by the latter. (1834a)
PROBLEM: THE COURT NOTIFIED THE GUARANTOR, Art. 2065. Should there be several guarantors of only one debtor and
AND UPON THE DEMAND, THE GUARANTOR MAY NOW for the same debt, the obligation to answer for the same is divided
INVOKE ITS RIGHT OF EXCUSSION. IF THE DEBTOR’S among all. The creditor cannot claim from the guarantors except the
PROPERTY IS INSUFFICIENT, WHO SHALL SHOULDER shares which they are respectively bound to pay, unless solidarity has
THE DEFIENCY? been expressly stipulated.
ANSWER: It shall be the guarantor who will shoulder the defiency. If The benefit of division against the co-guarantors ceases in the same
the creditor does not proceed with the debtor’s property thru creditor’s cases and for the same reasons as the benefit of excussion against the
negligence is not therefore that guarantor’s fault principal debtor. (1837)
Art. 2063. A compromise between the creditor and the principal  It entitles the several guarantors of only one debtor and for
debtor benefits the guarantor but does not prejudice him. That which one debt, even if they are bound solidarily, each with
is entered into between the guarantor and the creditor benefits but does different guarantor, or if there be two or more
not prejudice the principal debtor. (1835a) guarantors of the same debtor but not only for the same
debt.
 If the guaranty is for compensation, the guarantor took the risk  Their liability is only joint that is, the obligation to answer
of the debt. for the debt is divided among all of them. Therefore, the
 The guarantor cannot represent the debtor in compromise, guarantors are not liable to the creditor beyond the
because the guarantor is compromising his own obligation. shares which they are respectively bound to pay.
That is why compensation is paid to the guarantor for taking  The obligation of the guarator with respect to his co-
risk guarantors is not subsidiary, but direct and does not
depend as to its origin on the solvency or insolvency of the
Art. 2064. The guarantor of a guarantor shall enjoy the benefit latter, although afterwards, if one of them should turn
of excussion, both with respect to the guarantor and to the out to be insolvent, his share has to be borne by the
principal debtor. (1836) others.
 A guarantor has the right to demand the exhaustion of the EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND
properties of the principal debtor THE GUARANTOR
 A sub-guarantor enjoys the benefit of excussion not only with
respect to the principal debtor but also with respect to the Art. 2066. The guarantor who pays for a debtor must be
guarantor for the reason that he stands with respect to the indemnified by the latter.
guarantor on the same footing as the latter does with respect
to the principal debtor The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment after having notified the debtor that payment has been
was made known to the debtor, even though it did not demanded of him by the creditor.
earn interest for the creditor;  The debtor is to blame for said expenses for its within him
to free himself from the responsibility by making payment
(3) The expenses incurred by the guarantor after and if he does not do so, then they are attributable to his
having notified the debtor that payment had been fault
demanded of him;
 DAMAGES, IF THEY ARE DUE
(4) Damages, if they are due. (1838a)  The guarantor is entitled to recover damages only if they are
due in accordance with law. Note that the damages suffered by
 TOTAL AMOUNT OF DEBT the guarantor with respect to the payment of money to the
 Guarantor has nor ight to demand reimbursement until he has creditor is compensated by the payment of legal interest to the
actually paid the debt, unless by the terms of the contract, he guarantor.
is given the right before making payment
 LEGAL INTEREST THEREON PROBLEM: IS THE COLLECTION OF DAMAGES IS
 The gurantor is entitled to legal interest form the time notice of ABSOLUTE?
payment of the debt was made known to the debtor. The notice
is, in effet, a demand so that if the debtor does not pay ANSWER: NO. Unless they are due, to be proven by evidence as a
immediately, he incurs in delay and hence, renders him liable fact.
for legal interest, as indemnity, from then on. The liability is
increased not because of the contract but because of the Art. 2067. The guarantor who pays is subrogated by virtue thereof to
defaul and the necessity of judicial decision all the rights which the creditor had against the debtor.
 6% interest per annum – penalty
 12% income- the court will set the 12% If the guarantor has compromised with the creditor, he cannot
 20% interest in usurious demand of the debtor more than what he has really paid. (1839)
Art. 2068. If the guarantor should pay without notifying the debtor,
 EXPENSES INCURRED BY THE GUARANTOR the latter may enforce against him all the defenses which he could
 The expenses referred to are only those that the guarantor has have set up against the creditor at the time the payment was made.
to satisfy in accordance with law as a consequence of the (1840)
guaranty not those which depend upon his will or own acts or
his fault for these are his exclusive personal responsibility and  It assumes that the guarantor may pay the credior without
it is not just that they be shouldered by the debtor. These any notification to the debtor.
espenses are limited to those incurred by the guarantor
 However, if the guarantor should pay without notifying the  The guarantor was prevented by fortuitous event
debtor, the latter may interpose against the guarantor, those to advise the debtor of the payment
defenses which could have set up against the creditor at the  The guaranty is gratuitous
time the payment was made. Thus, if the debtor has already
paid the creditor, when the guarantor pays, the debtor In a gratuitous guaranty, the guarantor receives nothing and it would
can set up against the guarantor the defense of previous be unfair to deny him the right to recover from the principal debtor. If
extinguishment of the obligation by payment. the creditor is insolvent, the guarantor must still recover from him.
Art. 2069. If the debt was for a period and the guarantor paid it before Art. 2071. The guarantor, even before having paid, may proceed
it became due, he cannot demand reimbursement of the debtor against the principal debtor:
until the expiration of the period unless the payment has been
ratified by the debtor. (1841a) (1) When he is sued for the payment;
 Ratification is thru debtor’s payment to the guarantor. (2) In case of insolvency of the principal debtor;
Art. 2070. If the guarantor has paid without notifying the debtor, and (3) When the debtor has bound himself to relieve him from
the latter not being aware of the payment, repeats the payment, the the guaranty within a specified period, and this period has
former has no remedy whatever against the debtor, but only expired;
against the creditor. Nevertheless, in case of a gratuitous guaranty,
if the guarantor was prevented by a fortuitous event from advising (4) When the debt has become demandable, by reason
the debtor of the payment, and the creditor becomes insolvent, the of the expiration of the period for payment;
debtor shall reimburse the guarantor for the amount paid. (1842a)
(5) After the lapse of ten years, when the principal
 As a general rule, before the guarantor pays the creditor, he obligation has no fixed period for its maturity, unless it be
must first notify the debtor. If he fails to give such notice, of such nature that it cannot be extinguished except
and the debtor repeats the payment, the guarantors only within a period longer than ten years;
remedy is to collect from the creditor. If the creditor should
become insolvent, being at fault for not advising the debtor, the (6) If there are reasonable grounds to fear that
guarantor must bear the loss. the principal debtor intends to abscond;
 Expn: the guarantor may still claim reimbursement from the
debtor in spite of lack of notice if the following conditions (7) If the principal debtor is in imminent danger of
are present becoming insolvent.
 The creditor becomes insolvent
In all these cases, the action of the guarantor is to obtain release THE RELEASE OF THE GUARANTOR IMPORTSS AN
from the guaranty, or to demand a security that shall protect him EXTINCTION OF THE GUARANTOR’S
from any proceedings by the creditor and from the danger of OBLIGATION TO THE CREDITOR. IT CONNOTES,
insolvency of the debtor. (1834a THEREFORE EITHER A REMISSION OR NOVATION
 Par.1 , the guarantor cannot claim the benefit excussion and BY SUBROGATION, AND EITHER OPERATION
wishes to protect himself against the possible insolvency of REQUIRES THE CREDITOR’S ASSENT FOR ITS
the debtor VALIDITY. THIS SHOULD BE THE CASE WHERE THE
 As a rule, the guarantor has no cause of action against the PRINCIPAL DEBTOR HAS BECOME INSOLVENT, FOR
debtor until after the former has paid the obligation. THE PURPOSE OF A GUARANTY IS EXACTLY TO
 The. Purpose is to enable the guarantor to take measures for the PROTECT THECREDITOR AGAINST SUCH A
protection of his interest in view of the probability that he CONTINGENCY
would be called upon to pay the debt.  THE DEBTOR MAY BE ABLE TO RELEASE THE
 The guarantor cannot demand reimbursement for GUARANTOR FROM THE GUARANTEE IF THE
indemnity because he has not paid the obligation. DEBTOR PAYS THE CREDITOR OR OBTAINS THE
According to the Civil Code, his remedy is to obtain CONSENT OF THE CREDITOR.
release from the guaranty or to demand a security that  THE RELEASE OF THE GUARANTOR ULTIMATELY
shall protect him from any proceedings by the creditor, DEPENDS ON THE CONSENT OF THE CREDITOR.
and against the danger of insolvency of the debtor. ABSENT THE CREDITOR’S CONSENT, THE
 There are certain cases when the guarantor cannot claim PRINCIPAL DEBTOR MAY ONLY PROCEED TO
the benefit of excussion and in such cases it is but proper PROTECT THE DEMANDING GUARANTOR BY A
that the guarantor be given the right to proceed against the COUNTER BOND OR COUNTER-GUARANTY AS IS
debtor. AUTHORIZED
 The guarantor’s remedies are alternative. He has the ART. 2066 VS ART. 2071
reight to choose the action to bring. However, as explained, Art. 2066. The guarantor who Art. 2071. The guarantor,
the debtor does not have the power to release the pays for a debtor must be even before having paid,
guarantor from the guaranty. indemnified by the latter. may proceed against the
 THE DEBTOR DOES NOT HAVE THE POWER TO principal debtor:
RELEASE THE GUARANTOR FROM THE The indemnity comprises:
GUARANTEE, SINCE THE GUARANTOR IS (1) When he is sued
OBLIGATED TO THE CREDITOR, ONLY THE (1) The total amount of for the payment;
CREDITOR HAS THE POWER TO RELEASE THE the debt;
GUARANTOR FROM THE GUARANTEE. (2) In case of
 THE CREDITOR CANNOT BE COMPELLED, (2) The legal interests insolvency of the
AGAINST HIS WILL TO RELESE THE GUARANTOR. thereon from the time
the payment was made principal debtor; to fear that the
known to the debtor, principal debtor
even though it did not (3) When the intends to abscond;
earn interest for the debtor has bound
creditor; himself to relieve (7) If the principal
him from the debtor is in
(3) The expenses guaranty within a imminent danger of
incurred by the specified period, becoming insolvent
guarantor after having and this period has Provides enforcement of the Provides protection before
notified the debtor that expired; rights of the guarantor against he has paid but after he has
payment had been the debtor after he has paid the become liable.
demanded of him; (4) When the debt debt
has become Gives a right of action after It is a protective remedy
(4) Damages, if they are demandable, by payment before payment
due. (1838a) reason of the It is substantive right Nature of a preliminary
expiration of the remedy
period for
payment; Art. 2072. If one, at the request of another, becomes a guarantor for
the debt of a third person who is not present, the guarantor who
(5) After the lapse satisfies the debt may sue either the person so requesting or the
of ten years, when debtor for reimbursement. (n)
the principal
obligation has no  The guarantor who guarantees the debt of an absentee at
fixed period for its the request of another has a right to claim reimbursement
maturity, unless it after satisfying the debt either from:
be of such nature  The person who requested him to be a guarantor(he is
that it cannot be not a guarantor to the debtor)
extinguished except  The debtor
within a period
longer than ten SECTION 3. - Effects of Guaranty as Between Co-Guarantors
years;
Art. 2073. When there are two or more guarantors of the same debtor
(6) If there are and for the same debt, the one among them who has paid may demand
reasonable
grounds
of each of the others the share which is proportionally owing from  In case of insolvency of the guarantor for whom he bound
him. himself, a sub-guarantor is liable to the co-guarantors in the
same manner as the guarantor whom he guaranteed.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion. EXTINGUISHMENT OF GUARANTY
The provisions of this article shall not be applicable, unless the Art. 2076. The obligation of the guarantor is extinguished at the same
payment has been made by virtue of a judicial demand or unless the time as that of the debtor, and for the same causes as all other
principal debtor is insolvent. (1844a) obligations. (1847)
 Since guaranty is an accessory and subsidiary contract, it is
 The obligation of several guarantors of the same debtor also extinguished when the principal obligation is extinguished
and for the same debt is joint. Each is bound to pay only
his proportionate share MODES OF EXTINGUISHMENT
 IF ANY OF THE GUARANTORS SHOULD BE  DIRECT
INSOLVENT, HIS SHARE SHALL BE BORNE BY THE  Contract of guaranty is extinguished independentl
OTHERS INCLUDING THE PAYING GUARANTOR IN  Consequence: principal obligation may still exist
THE SAME JOINT PROPORTION  INDIRECT
 Contract of guaranty is indirectly extinguished
PROBLEM: A owes B 90 thousand, hence A has 3 guarantors (G1,
G2, G3) G2 and G3 became insolvent, since G1 was left as the sole A GUARANTY MAY BE EXTINGUISHED:
guarantor  PAYMENT OR PERFORMANCE
 DACION EN PAGO
ANSWER: Debtor shall reimburse the sole guarantor  Art. 2077. If the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should
Art. 2074. In the case of the preceding article, the co-guarantors may afterwards lose the same through eviction, the guarantor
set up against the one who paid, the same defenses which would have is released. (1849)
pertained to the principal debtor against the creditor, and which are not  The guarantor is released if the creditor voluntarily accepts
purely personal to the debtor. (1845) immovable or other property in payment of the debt, even is he
should afterwards lose the same through eviction
Art. 2075. A sub-guarantor, in case of the insolvency of the  Caveat: Eviction
guarantor for whom he bound himself, is responsible to the co-  Whether the creditor is evicted or not, the contract of
guarantors in the same terms as the guarantor. (1846) guaranty is extinguished but the principal obligation
is revived
 If the creditor is evicted, the crediot can deman to failure on the part of the creditor to demand payment after the
the principal debtor the payment debt has become due does not of itself constitute any extention of
time referred to herein. (1851a)
Art. 2077. If the creditor voluntarily accepts immovable or other
property in payment of the debt, even if he should afterwards lose  The reason for the rule is the necessity of avoiding
the same through eviction, the guarantor is released. (1849) prejudice to the guarantor. The debtor may become
 The guarantor is released if the creditor voluntarily accepts insolvent during the extension, thus depriving the
immovable or other property in payment of the debt, even is he guaranto of his right to reimbursement
should afterwards lose the same through eviction  The theory behind this article is that an extension of time
 Caveat: Eviction given to the principal debtor by the creditor without the
 Whether the creditor is evicted or not, the contract of surety’s consent would deprive the surety of his to pay the
guaranty is extinguished but the principal obligation creditor and to be immediately subrogted to the
is revived creditor’s remedies against the principal debtor upon the
 If the creditor is evicted, the crediot can deman to original maturity date. The surety is said to be entitled to
the principal debtor the payment protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the
Art. 2078. A release made by the creditor in favor of one of the extended period
guarantors, without the consent of the others, benefits all to the  In co-guarantors, if one is discharged, the rest of the
extent of the share of the guarantor to whom it has been granted. guarantors is also discharge
(1850)
PROBLEM: (When there is no consent): A owes B 1 Million.
PROBLEM: CAN CREDITOR RELEASE THE GUARANTOR Hence a has 10 guarantors, B released the 2 guarantors.
BEFORE MATURITY?
ANSWER: 800 thousand shall remain, borne by the remaining 8
ANSWER: NO. BEFORE MATURITY, THERE IS guarantors having 100 thousand each.
ONLY DEBTOR-CREDITOR RELATIONSHIP
Art. 2080. The guarantors, even though they be solidary, are
PROBLEM: AFTER MATURITY released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and
ANSWER: EITHER THE DEBTOR AND GUARANTOR MAY BE preference of the latter. (1852)
HELD LIABLE
Art. 2081. The guarantor may set up against the creditor all the
Art. 2079. An extension granted to the debtor by the creditor without defenses which pertain to the principal debtor and are inherent in
the consent of the guarantor extinguishes the guaranty. The mere the debt; but not those that are personal to the debtor. (1853)
LEGAL AND JUDICIAL BONDS CONSTITUTED TO SECURE FULFILLMENT OF A
PARTICULAR PRINCIPAL OBLIGATIONS
Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications  Pledge and mortgage are purely accessory contracts
prescribed in Article 2056 and in special laws. (1854a) like guarantee. They cannot exist without a valid
obligation.
Art. 2083. If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a pledge or mortgage It may guarantee:
considered sufficient to cover his obligation shall be admitted in
lieu thereof. (1855) a. Valid, voidable and unenforceable obligations
b. Pure obligations and conditional obligations
Art. 2084. A judicial bondsman cannot demand the exhaustion of c. Present debts and debts to be incurred in the future
the property of the principal debtor.
d. Payment obligations and performance obligations.
A sub-surety in the same case, cannot demand the exhaustion of
the property of the debtor of the surety.
PLEDGE
CONSTITUTED BY THE ABSOLUTE OWNER
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:  It is essential that the contract be constituted only by the
absolute owner of the thing pledge or mortgaged or at least by
1. That they be constituted to secure the fulfillment of the pledgor or mortgagor with the authority or consent of the
a principal obligation;
owner of the property pledge or mortgaged.
2. That the pledgor or mortgagor be the absolute owner of
the thing pledged or mortgaged;  Thus, a mortgaged of real property executed by one who is not
3. That the persons constituting the pledge or mortgage an owner thereof at the time of the execution of the mortgaged
have the free disposal of their property, and in the is without legal existence
absence thereof, that they be legally authorized for the  A foreclosure sale, though essentially a forced sale, is still a
purpose. sale under which the mortgagor in default, the forced seller,
becomes obliged to transfer ownership of the thing sold to
Third persons who are not parties to the principal obligation may
the highest bidder, who in turn, is obliged to pay the bid
secure the latter by pledging or mortgaging their own property.
(1857) price in money or its equivalent.
PROPERTY PLEDGE OR MORTGAGE
1. FUTURE PROPERTY The property is delivered to the Delivery is not necessary
 Future property cannot be pledged or mortgaged. However, the pledgee, or by common consent
parties can agree that future properties of the pledge or mortgagor to a third person
will form part of the pledge or mortgage.. When the future property Pledge is not valid against third Mortgaged is not valid against
person unless a description of third person if not registered
come into existence, or can be added to the security through the
the thing pledged and the date
execution of a pledge supplement or mortgage supplement; in case of the pledge appear in a public
of pledge, the property shall also be delivered to the pledge instrument
2. TRANSFER OF MOTOR VEHICLES REGISTERED The pledgor can sell the thing Mortgagor can sell the property
SUBSEQUENTLY with the consent of the pledgee mortgaged even without the
 The fact, however, that the chattel mortgage of a car was consent of the mortgagee
executed on a date earlier than the transfer of the registration
certificate, but after the perfection of the contract sale, does not Art. 2086. The provisions of Article 2052 are applicable to a pledge
render the said mortgage made by the latter in favor of the or mortgage. (n)
seller invalid, because the registration of the transfer of motor
Art. 2087. It is also of the essence of these contracts that when the
vehicle and of the certificate of license for their use merely
principal obligation becomes due, the things in which the pledge or
constitute an administrative proceeding which does not bear mortgage consists may be alienated for the payment to the
any essential relation to the contract entered into between the creditor. (1858)
parties
3. PROPERTY COVERED BY TORRENS TITLE Art. 2088. The creditor cannot appropriate the things given by
 Art. 2085 requires that the mortgagor must have the free way of pledge or mortgage, or dispose of them. Any stipulation to
disposal of the property or at least have legal authority to do the contrary is null and void. (1859a)
so, does not apply where the property is registered under
Art. 2089. A pledge or mortgage is indivisible, even though the
the torrens title. A mortgagee has the right to rely upon debt may be divided among the successors in interest of the debtor
what appears in the certificate of title and does not have to or of the creditor.
inquire further.
Therefore, the debtor's heir who has paid a part of the debt cannot
PLEDGE VS MORTGAGE ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.
PLEDGE MORTGAGE
Movables Immovables
Neither can the creditor's heir who received his share of the debt Art. 2094. All movables which are within commerce may be
return the pledge or cancel the mortgage, to the prejudice of the pledged, provided they are susceptible of possession. (1864)
other heirs who have not been paid.
Art. 2095. Incorporeal rights, evidenced by negotiable
From these provisions is expected the case in which, there being instruments, bills of lading, shares of stock, bonds, warehouse
several things given in mortgage or pledge, each one of them receipts and similar documents may also be pledged. The
guarantees only a determinate portion of the credit. instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed. (n)
The debtor, in this case, shall have a right to the extinguishment of
the pledge or mortgage as the portion of the debt for which each Art. 2096. A pledge shall not take effect against third persons if
thing is specially answerable is satisfied. (1860) a description of the thing pledged and the date of the pledge do
not appear in a public instrument. (1865a)
Art. 2090. The indivisibility of a pledge or mortgage is not affected
by the fact that the debtors are not solidarily liable. (n)  Contract of pledge is not effective against third person unless
in addition to delivery of the thing pledged, it is embodied in a
Art. 2091. The contract of pledge or mortgage may secure all public instrument.
kinds of obligations, be they pure or subject to a suspensive or  If a description of the thing pledge and the date of the pledge
resolutory condition. (1861) do not appear in a public instrument, the pledge is nevertheless
valid and is binding upon the parties to the pledge if all
Art. 2092. A promise to constitute a pledge or mortgage gives rise essential requisites of the contract of pledge is present nd the
only to a personal action between the contracting parties, without subject of te pledge has been delivered by the pledge.
prejudice to the criminal responsibility incurred by him who
defrauds another, by offering in pledge or mortgage as Art. 2097. With the consent of the pledgee, the thing pledged may
unencumbered, things which he knew were subject to some be alienated by the pledgor or owner, subject to the pledge. The
burden, or by misrepresenting himself to be the owner of the ownership of the thing pledged is transmitted to the vendee or
same. (1862) transferee as soon as the pledgee consents to the alienation, but the
latter shall continue in possession. (n
PLEDGE
 The pledgor retins his ownership of the thing pledged. He may,
Art. 2093. In addition to the requisites prescribed in Article 2085, therefore, sell the same provided te pledgee cosents to the sale.
it is necessary, in order to constitute the contract of pledge, that As soon as te pledgee gives his consent, the ownership of the
the thing pledged be placed in the possession of the creditor, or of thing pledged is transeferred to the vendee subject to the rights
a third person by common agreement. (1863) of the pedgee, that the ting sold may be alienated to satisfy the
obligation.
Art. 2098. The contract of pledge gives a right to the creditor to Art. 2101. The pledgor has the same responsibility as a bailor in
retain the thing in his possession or in that of a third person to commodatum in the case under Article 1951. (n)
whom it has been delivered, until the debt is paid. (1866a)
Art. 2102. If the pledge earns or produces fruits, income,
 The possession of the pledgee constitutes his security. Hence, dividends, or interests, the creditor shall compensate what he
the debtor cannot demand for its return until the debt secured receives with those which are owing him; but if none are owing
by it is paid. him, or insofar as the amount may exceed that which is due, he
 The right of retention is limites only to the fulfilment of the shall apply it to the principal. Unless there is a stipulation to the
principal obligation for which the pledge was created. contrary, the pledge shall extend to the interest and earnings of the
right pledged.
Art. 2099. The creditor shall take care of the thing pledged with
the diligence of a good father of a family; he has a right to the In case of a pledge of animals, their offspring shall pertain to the
reimbursement of the expenses made for its preservation, and is pledgor or owner of animals pledged, but shall be subject to the
liable for its loss or deterioration, in conformity with the pledge, if there is no stipulation to the contrary. (1868a)
provisions of this Code. (1867)
 The pledgee has no right to use the thing pledged or to
 Upon fulfillment of the principal obligation, the pledgee must appropte the fruis thereof without the authority of the owner.
return the thing pledged. Having possession of the propery, he But the pledgee can apply the fruits, income, dividends or
has the obligation to take care of the same with the diligence of interest earned or produced by the thing pledge to the payment
a good fatheer of the family. He is, however entitled to of interest, if owing and thereafter to the principal of his credit.
reimbursement of the expenses incurred for its Unless there is stipulation to the contrary, the interest and
preservation earnings of the right pledged and in case of animals, their
 In case of loss or deterioration of the thing pledged due to offspring.
fortuious event, the pledgee cannot be held responsible
but he is liable for loss or deterioration by reason of Ex: if the share of stock earns dividend, the natural fruits
fraud, negligence, delay or violation of the terms of the belongs to the pledgor while other fruits pertain to the creditor.
contract. Apply the fruits for payment of interest then to the principal.
Pledge will be extinguished thru payment.
Art. 2100. The pledgee cannot deposit the thing pledged with a
third person, unless there is a stipulation authorizing him to do so.  If animal produced off spring, it will pertain to the pledgor.
However, it is still form part of the pledge unless stated
The pledgee is responsible for the acts of his agents or employees otherwise. (i.e. The pledgor and the pledgee enter intpo
with respect to the thing pledged. (n) agreement that the off spring will pertain to the
pledgee)
Art. 2103. Unless the thing pledged is expropriated, the debtor Art. 2105. The debtor cannot ask for the return of the thing
continues to be the owner thereof. pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.
Nevertheless, the creditor may bring the actions which pertain to (1871)
the owner of the thing pledged in order to recover it from, or
defend it against a third person. (1869)  He cannot ask the return until said obligation is fully paid
including interest due thereon and expenses incurred for
 What deprives the pledgor? Expropriation its preservation
 Expropriation extinguish pledge
Art. 2106. If through the negligence or wilful act of the pledgee,
Art. 2104. The creditor cannot use the thing pledged, without the the thing pledged is in danger of being lost or impaired, the
authority of the owner, and if he should do so, or should misuse pledgor may require that it be deposited with a third person. (n)
the thing in any other way, the owner may ask that it be judicially
or extrajudicially deposited. When the preservation of the thing  If the thing should be exposed to loss or destrucion through the
pledged requires its use, it must be used by the creditor but only negligent act of the pledgee, the pledgor may demand that it be
for that purpose. (1870a) deposited with a third person
 It is the consequence the fact tha the pledgor in parting with his Art. 2107. If there are reasonable grounds to fear the destruction
property transmits only possession but not ownership or impairment of the thing pledged, without the fault of the
 Commodatum: use pledgee, the pledgor may demand the return of the thing, upon
 Deposit: safe keeping offering another thing in pledge, provided the latter is of the same
 Pledge: security kind as the former and not of inferior quality, and without
Common: they cannot use the thing unless using is necessary prejudice to the right of the pledgee under the provisions of the
for its preservation (i.e. Bus, machines, printing press) following article.
 In deposit: the use of the thing deposited is an exception when
it is necessary The pledgee is bound to advise the pledgor, without delay, of any
 In pledge: the use is prohibited unless there is consent danger to the thing pledged. (n)
 In deposit: it may require the return of the thing
 In pledge: the use is allowed provided there is consent. If REMEDIES GRANTED UNDER ARTICLE 2107:
misused, the return cannot be demanded but instead, the
remedy is to judicially or extrajudicially deposit the thing in 1. The right to demand the return of the thing pledged upon
which the pledgor is entitled to the right to select its depositary offering another thing in pledge
2. The right to cause the same to e sold at a public sale
Art. 2108. If, without the fault of the pledgee, there is danger of  The pledge is extinguished if the object is returned by the
destruction, impairment, or diminution in value of the thing pledgee, and this is true notwithstanding any stipulation that
pledged, he may cause the same to be sold at a public sale. The the pkedge would continue although the pledge is no longer in
proceeds of the auction shall be a security for the principal possession
obligation in the same manner as the thing originally pledged. (n)  The possession of the debtor of the thing pledge subsequent to
the perfection of the pledge is a prima facie presumption that
 The sale must be a public sale. The pledgee shall keep the thing pledge has been returned and therefore the pledge has
the proceeds of the sale as security for the fulfillment of been extinguished.
the principal obligation.
Art. 2111. A statement in writing by the pledgee that he renounces
Art. 2109. If the creditor is deceived on the substance or quality of or abandons the pledge is sufficient to extinguish the pledge. For
the thing pledged, he may either claim another thing in its stead, this purpose, neither the acceptance by the pledgor or owner, nor
or demand immediate payment of the principal obligation. (n) the return of the thing pledged is necessary, the pledgee becoming
a depositary. (n)
RIGHT OF THE PLEDGEE
 Renunciation, abandonmen must be in writing to extinguish
1. Claim another thing in pledge the pledge, and such renunciation is not conditioned upon the
2. Demand immediate payment of the principal obligation acceptance by the pledgor nor upon the return o the thing
pledge. The waiver transform the pledg into a depositary
The remedieas are in alternative, he is privilege to choose only one with rights and obligations of one.
and not both
Art. 2112. The creditor to whom the credit has not been satisfied
Art. 2110. If the thing pledged is returned by the pledgee to the in due time, may proceed before a Notary Public to the sale of the
pledgor or owner, the pledge is extinguished. Any stipulation thing pledged. This sale shall be made at a public auction, and
to the contrary shall be void. with notification to the debtor and the owner of the thing pledged
in a proper case, stating the amount for which the public sale is to
If subsequent to the perfection of the pledge, the thing is in the be held. If at the first auction the thing is not sold, a second one
possession of the pledgor or owner, there is a prima facie with the same formalities shall be held; and if at the second
presumption that the same has been returned by the pledgee. This auction there is no sale either, the creditor may appropriate the
same presumption exists if the thing pledged is in the possession of thing pledged. In this case he shall be obliged to give an
a third person who has received it from the pledgor or owner after acquittance for his entire claim. (1872a)
the constitution of the pledge. (n)
 One of the essential requisites of pledge is that the object may rule is just considering that all the things belongs to him. To
be alienated for the payment to the creditor when the principal avoid fraud the pledgee is not allowed to avquire the thing
obligation becomes due pledged is he is only the bidder
FORMALITIES OF THE SALE: Art. 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the pledgee is
1. The debt is due and unpaid deemed to have been received the purchase price, as far as the
2. The sale must be at public auction pledgor or owner is concerned. (n)
3. The must be notice to the pledgor, stating the amount due
4. The sale must be made with the intervention of the  All bids including that of the pledgor must be for cash. If the
notary public pledgee accepts a bid other than for cash, the pledgor or
owner has the rigt to consider that the pledgee has received the
This article does not require posting of the notice of sale and purchase price in cash.
publication. Notification to the pledgor is sufficient. Only notary
public can conduct a public auction after proper notice is sent to Art. 2115. The sale of the thing pledged shall extinguish the
the pledgor. The sale is extrajudicial in character. principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
The pledgee may appropriate the thing pledged if after the first expenses in a proper case. If the price of the sale is more than said
and second auction,the thing is not sold. It is an exception to amount, the debtor shall not be entitled to the excess, unless it is
pactum commisorium. otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any
The debtor is not entitled to the excess in case the value of the stipulation to the contrary. (n)
thing pledge is more than the prncipal obligation.
 As a general rule, the debtor is not entitle dto the excess unless
Art. 2113. At the public auction, the pledgor or owner may bid. He there is an agreement to the contrary. This s obviously to
shall, moreover, have a better right if he should offer the same compensate the creditor for his risk of not being able to
terms as the highest bidder. recover deficiency in case the pledge is sold below the amount
of the principal obligation. The rule is nevertheless unfair since
The pledgee may also bid, but his offer shall not be valid if he is the obligation I fully satisfied. In effect it would result to a
the only bidder. (n) pacto commisoriu which is prohibited.
 Under the Chattel Mortgage Law, the mortgagor is entitled to
 If the debt is not paid and a public sale takes place, both the recover the excess of the proceeds of the sale in foreclosure
pledgor and the pledgee may bid. The pledgor shall be proceedings.
preffered if he offers the same terms as the highest biddr, the
 Right of redemption applies only to real property and Art. 2120. If a third party secures an obligation by pledging his
not personal property own movable property under the provisions of Article 2085 he
shall have the same rights as a guarantor under Articles 2066 to
Art. 2116. After the public auction, the pledgee shall promptly 2070, and Articles 2077 to 2081. He is not prejudiced by any
advise the pledgor or owner of the result thereof. (n) waiver of defense by the principal obligor. (n)
Art. 2117. Any third person who has any right in or to the thing  A third person who is not a party to the principal
pledged may satisfy the principal obligation as soon as the obligation may secure the latter by pleding his own
latter becomes due and demandable.(n) property. The law grants him the same rights as a
guarantor and he cannot be prejudiced by any
 As a general rule, the creditor is not bound to accept payment waiver defense by the principal debtor.
or performance by a third person who has no interest in the
fulfillment of the obligation. Art. 2121. Pledges created by operation of law, such as those
referred to in Articles 546, 1731, and 1994, are governed by the
Art. 2118. If a credit which has been pledged becomes due before foregoing articles on the possession, care and sale of the thing as
it is redeemed, the pledgee may collect and receive the amount well as on the termination of the pledge. However, after payment
due. He shall apply the same to the payment of his claim, and of the debt and expenses, the remainder of the price of the sale
deliver the surplus, should there be any, to the pledgor. (n) shall be delivered to the obligor. (n)
 It is not obligatory for the pledgee to collect and receive the Art. 2122. A thing under a pledge by operation of law may be sold
amount due on the credit pledge. He is merely given the right only after demand of the amount for which the thing is retained.
to do so. The public auction shall take place within one month after such
demand. If, without just grounds, the creditor does not cause the
Art. 2119. If two or more things are pledged, the pledgee may public sale to be held within such period, the debtor may require
choose which he will cause to be sold, unless there is a stipulation the return of the thing. (n)
to the contrary. He may demand the sale of only as many of the
things as are necessary for the payment of the debt. (n) Art. 2123. With regard to pawnshops and other establishments,
which are engaged in making loans secured by pledges, the special
 The right of choice given to the pledgee as to which of the laws and regulations concerning them shall be observed, and
thing pledge he shall cause to be sold is limited only by subsidiarily, the provisions of this Title. (1873a)
stipulation. After sufficient property has been sold to satisfly
the obligation plus interest and expenses, no more shall be
sold.
as a security for an existing debt, and contains nothing
impossible or contary to the law.
Art. 1602. The contract shall be presumed to be an equitable

MORTGAGE mortgage, in any of the following cases:
Art. 2124. Only the following property may be the object of a 1. When the price of a sale with right to repurchase
contract of mortgage: is unusually inadequate;
2. When the vendor remains in possession as lessee
(1) Immovables; or otherwise;
(2) Alienable real rights in accordance with the 3. When upon or after the expiration of the right to
laws, imposed upon immovables. repurchase another instrument extending the period of
redemption or granting a new period is executed;
Nevertheless, movables may be the object of a chattel mortgage. 4. When the purchaser retains for himself a part of
(1874a) the purchase price;
REAL MORTGAGE
 Is a contract whereby the debtor secures to the creditor the 5. When the vendor binds himself to pay the taxes on the
fulfillment of a principal obligation, specially subjecting to thing sold;
such scurity immovable property or real rights over immovable 6. In any other case where it may be fairly inferred that
property which obligation shall be satisfied with the proceeds the real intention of the parties is that the transaction
of the sale of said property or ights in case the said obligation shall secure the payment of a debt or the performance of
is not complied with at the time stipulated any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to
KINDS OF MORTGAGE
1. VOLUNTARY- one which is agrred to between the parties or be received by the vendee as rent or otherwise shall be considered
constituted by the will of the owner of the property on which as interest which shall be subject to the usury laws. (n)
it is created
2. LEGAL- one reqired by law to be executed n favor of CHARACTERISTIC OF MORTGAGE
certain person  It is an accessor and subsidiary contract. It is also unilateral
3. EQUITABLE- one which, lacks the proper formalities, because it creates only an obligation on the part of the
words, or other requisites of a mortgage required by law, creditor who must free the property from the encumbrances
nevertheless the intention of the parties to burden real once the obligation is fulfilled. A mortgage is also a nominate
property contract.
PARTIES TO THE CONTRACT
 The mortgagor and the mortgagee is the parties to the contract. MORTGAGED OF CO-OWNED PROPERTY
The mortgagor need not be the debtor. However, the mortgagor  A co-owner has the full ownership of his part and of the fruits
must be the absolute owner of the thing mortgaged. The and benefits pertaining thereto, and he may therefore mortgage
mortgagor must also have free disposal of their property nd in his part, except when personal rights are involved. The effect
the absence thereof, the mortgagor be legally authorized for the of mortgage, with respect to the co-owners, is limited to the
pupose portion which may be alloted to him in the division upon
the termination of the co-ownership
CONSENT OF THE PARTIES  The partition of a thing owned in common will not
 Consent must be given by parties have capacity to give consent prejudice third person who shall rain the rights of
mortgage, servitude, or any other real rights belonging
CAUSE OR CONSIDERATION IN MORTGAGE to hem before the division was made. Personal rights
 Being an accessory contract, ts validity would depend on pertaining to third person against the co-ownership shall
the validity of the debt sucured by it, and its enforcement also remain in fore, notwithsatnding the partition
will depend on whether or not there has been a violation of
the principal obligation. POSSESSION OF PROPERTY MORTGAGED
 Mortgagor retains the possession of the property
FUTURE PROPERTY CANNOT BE OBJECT OF MORTGAGE mortgaged, because by the mortgage, the debtor merely
 Mortgagor cannot legally mortgage any property he did not yet subjects the property to a lien but ownership thereof is not
own. parted with.
 The parties may agree that the mortgage will extend to future  It is not however, an essential requisite of the contract of
properties of the mortgagor but such will only constitute an mortgage that the property mortgaged remains in the possesson
agreement to mortagage the future properties. As the property of te mortgagor. Hence, th mortgagor may deliver said
does not yet exist at the time the mortgage agreement was property without altering the nature of the contract of the
signed and registered, no mortgage lien is created. In order to mortgage
bring future property within the coverage of the mortgage, the
mortgagor must execute a mortgage supplement after the RIGHTS AND OBLIGATION OF MORTGAGEE IN
mortgagor acquires ownership of the proerties or after those POSSESSION
properties come into existence. The mortgage supplement  He is entitled to retain such possessio until the indebtedness is
must also be registered with the relevant Register of Deeds. satisfied and the property redeemed.
 The mortgage extends to the improvements of the property  A mortgagor in possession of mortgaged property who
mortgaged. Thus, as practical matter, there is no need to introduces improvements thereon is not entitled to
execute mortgage supplements to cover improvements reimbursement for the value thereof upon the redemption of
subsequently installed on property already mortgaged the mortgage
PAYMENT OF INTEREST ON MORTAGAGE CREDIT
 I is also an essenial requisite of the contract of mortgage that proper form prescribed does not render the acts or contracts
the principal of the mortgage credit bears interest, orvthat invalid.
the interest as compensation for the use of the principal and 2. PRIVATE DOCUMENT- No valid mortgaged is constituted
enjoyment of its fruits be in the form of a certain percent where te alleged deed of mortgaged is a mere private document
thereof. and therefre is not registered. If the mortgage is a puely
 But if expressly. Agreed that the creditor shall apply the private document, the creditor may recover loan, although
fruits of the property. “To the payment of interest if owing, the mortgage document evidencing the loan was non-
and thereafter to the principal of his credit” the contract is a registrable being a purely private document. He has the
true antichresis right to compel the debtor to execute a contract of
mortgage in a public document.
3. WHERE MORTGAGE IS NOT REGISTERED- if the
instrument is not registered, the mortgaged I nevertheless
MORTGAGED EXECUTED BY AN AGENT binding between parties. In other words, registration only
 A mortgaged executed by an authorized agent who signed operates s a notice of the mortgage too others but neither adds
in his own name without specifying that he acted for and on to its validity nor converts an invalid mortgage into a valid
behalf of his principal binds only the agent and not the one. An order for foreclosure cannot be refused on the
principal. ground tht the mortgage had not been registered
Art. 2125. In addition to the requisites stated in Article 2085, it is DOCTRINE OF MORTGAGEE IN GOOD FAITH
indispensable, in order that a mortgage may be validly constituted,
that the document in which it appears be recorded in the Registry  The mortgagee has a right to rely in good faith on what
of Property. If the instrument is not recorded, the mortgage is appears on the certificate of itle of the mortgagor to the
nevertheless binding between the parties. property given as security nd in the absence of anything to
excite suspicion, he is under no obligation to to look beyond
The persons in whose favor the law establishes a mortgage have no the certificate and investigate the titleof the mortgagor
other right than to demand the execution and the recording of the appearing on the face of the certificate. The public interest in
document in which the mortgage is formalized. (1875a) upholding the indefeasibility of a certificate of title, a s
evidence of lawful ownership of the land or of any
ESSENTIAL REQUISITE OF MORTGAGE encubrances, protects a buyer who, in good faitj, relied
upon what appears on the face of the certificate of title.
1. PUBLIC DOCUMENT- acts and contracts which have for  The right or lien of an innocent purchaser in value shall be
their object the creation of real rigts over immovable respected and protected even if the mortgagor obtained his tile
property must appear in a public document. Failure to through fraud. The remedy of the persons prejudiced is to
observe the bring an action for damages against the person who
caused
the fraud and if the later is insolvent, an action against d) The due diligence required of banks extends even to persons
the treasurer of th philippines may be filed for the regularly engaged in the business of lending money secured
recovery of damages against the assurance fund by real estate mortgage
 This doctrine does not apply to a situation where the title is still
in the name of the rightful owner and morgtgagor is a different RIGHT IN CASE OF LEGAL MORTGAGE
person pretending to be the owner. Ins uch case, the mortgagee
is not an innocent ortgagee for value and the registered owner  Contracting parties has the right to comepl each other to
will generally lose his title. observe the form required by law like the execution of a
 A mortgageee who deliberately ignores significant facts or document or other special forms provided the contrat between
ciorcumstances that would create suspicion in an them is a valid and enforceable
otherwise reasonable person cannot be considered a
mortgagee n good faith for value. REGISTRATION OF MORTGAGE
 While a creditor may be a mortgagee in good faith, the
creditor may not be a purchaser in good faith at the time te REGISTRATION is the ministerial act by which a deed, contract or
creditor foreclosed the mortgage and later consolidated instrument is inscribed in the record of the Office of the Register of
ownership over the mortgaged property in its favor. Thus a Deeds and nnotated on the back of the Transfer of Certificate of Title
mortagagee in good faith is not a purchaser in good faith covering the registered land subject of the deed, contract or instrument.
where the relevant certificate of title already bore a notice It is the act of registration which creates a constructive notice to the
of lis pendens. whole world nd bind third person.
 Banks are required to exert a higher degree of diligence,
care and prudence than individuals in handling real estate 1. Mortgagee is entitled to registration of mortgage as a
transactions. matter of right- once mortgage has been signed in due form,
a) A mortgagee-bank is not relieved of his responsibility simpyly the mortgagee is entitled to its registration as a matter of right.
because the title offered as security is, on its face, free of any The mortgagor is understood to have given his consent to its
encumbrances or lien registration,a nd he cannot be permitted to revoke it
b) It is a matter of judicial notice that before a bank grants a loan unilaterally. The validity or compliance of contracts cannot be
on the security of land, it first undertakes a careful left to the will of one of the parties
examination of the itle of the applicant to verify its genuiness, 2. Proceedings of the registration do not determine the
to determine the real owner as well as a physical and on the validity of the mortage- it is not a declaration that such
spot investigation instrument is valid. It does not stop any party from setting
c) A bank failed to observe due diligence cannot be accorded up that it has no force and effect.
the status of a bona fide mortgagee 3. Registration without prejudice to better right of third
parties- a registered mortgage right over previously sold is
inferior to the buyer’s unregistered right. The unrecorded
sale
is preffered for the reason that if the original owner had parted property or the consideration of the contract is simulated)
with his ownership and free disposal of the thing so as to be the principal obligationwhich it guarantees is not rendered null
able to mortgage it. A registered mortgage, however, is and void.
superior to a contract to sell, subject to any liabilities the 2. Mortgage deeds remains as evidence of a personal
owner may have incurred in favor of the buyer by mortgaging obligation- in case of nullity, the mortgage deed remains as
the propery despite his commitment under the contract o sell. evidence or proof of a personal obligation of the debtor and the
In a. Contract to sell, title is retained by the vendor until full amount due to the creditor may be enforced in an ordinary
payment of the price. action.
4. Registrability of encumbrance acquired subsequent to the
mortgage- where the mortgage deed has been duly Art. 2126. The mortgage directly and immediately subjects the
registered, said dedd forms part of the record for the property upon which it is imposed, whoever the possessor may be,
registration of the property. So in a proceeding for the to the fulfillment of the obligation for whose security it was
annotation of an encumbrance over the same property constituted. (1876)
subsequently acquired, which annotation is opposed by the
mortgagee, the latter need not introduce the mortgage deed in EFFECT OF MORTGAGE
evidence to prove its existence
5. Registrability of mortgage by surving spise of his/her 1. CREATES REAL RIGHT- It means that a registered
undivided share of conjugal property- the mortgage by the mortgage creates right in rem, a real right , a lien inseperable
wife, after the death of her husband, of her rights, interest, and from the property mortagaged, which is enforceable against the
participation in an undivided one-half share of the conjugal whole world. All subsequent purchaser of the property must
partnership s legal and valid and should be registered, respect the mortgage.
registratio beig may be validly constituted. Registration will 2. CREATES MERELY AN ENCUMBRANCE- a mortgage
in no way affect the rights of the deceased husbnd’s creditors, is an accessory undertaking. It is merely a security for a debt,
if any, or of his heirs for their interest is limited to the an encumbrance upon the property and dies not affect much
husbnd’s half of the estate not covered by the mortgage. less extinguish the title or ownership of te mortgagor who does
6. Subsequent registration of an adverse claim- subsequent not lose his principal attribute as owner, that is the right to di
annotation of an adverse claim cannot defeat the rights of dispose
the moartgagee or the purchaser at the auction sale whose a) A mortgage does not involve a transfer, cession or conveyance
rights were derived from a prior mortgage validly registered. of property but only constitutes lien
b) The right of a mortgage in case of non-payment of a debt
EFFECT OF INVALIDITY OF MORTGAGE secured by mortgage would be To foreclose the mortgage and
have the encumbered property sold to satisfy the outstanding
1. Principal obligation remains valid- where a mortgage is not indebtedness. Mortgagors’ default does not operate to vest in
valid. (i.e. It is executed by one who is not the owner of the the mortgagee the ownership of the encumbered property.
His
failurevto redeem the property does not automatically vest EXTENT OF MORTGAGE
ownership to the mortgagee.
c) By mortgaging his property, a debtor merely subbjects it to a  A real estate mortgage constituted on immovable property is
lien but ownership is not parted with not limited to the property itself but also extends to all its
d) Upon payment of the mortgage debt, there is no more mortgage accessions, improvements, growing fruits and rents or income
and therefore there is no more basis or reason for the as well as to the proceeds of insurance should be the property
mortgagee’s refusal to return the certificate of title be destroyed, or the expropriation value of the property should
it be expropriated. To exclude them, it is necessary hat there be
OWNERSHIP RIGHTS OF MORTGAGOR an express stipulation to that effect. It is prediacted on the
presumption that the ownership of accessions and accessories
1. RIGHT TO SELL- the mortgagor may sell the property, also belongs to the mortgagor as the owner of the principal.
a stipulation forbidding the owner from alienating the
immovable property is void THE FOLLOWING ARE GENERALLY DEEMED INCLUDED
2. RIGHT OF POSSESSION- a mere mortgagee has no right to IN A MORTGAGE OF REAL PROPERTY
eject an occupant of the property mortgaged. A mortgage does
not give a mortgagee a right to the possession of the property 1. New plantins
unless the mortgage should contain some provision to that 2. Fruits except unapid ents as well as those which should have to
efgect be paid while te credit remains wholly unsatisfied
3. RIGHT TO MORTGAGE- a mortgagor is allowed to take a 3. Buildings, machinery, and sccessories belonging to
second or subsequent mortgage on the property already the mortgage debtor installed on a mortgage
mortgaged subject to the prior rights of the previous 4. Improvement constructed by the mortgagor on the parcel
mortgagee. Asubsequent mortgage is recognized as valid by of land
law and by commercial practice. 5. All objects permanently attached to a mortgaged land or
building, although they may have been placed there after
Art. 2127. The mortgage extends to the natural accessions, to the the execution
improvements, growing fruits, and the rents or income not yet 6. A more costly building ereced in. Place of the mortgaged
received when the obligation becomes due, and to the amount of building which was torn down by the debtor
the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation MORTGAGE WITH “DRAGNET” CLAUSE TO SECURE
for public use, with the declarations, amplifications and FUTURE ADVANCEMENT
limitations established by law, whether the estate remains in the
possession of the mortgagor, or it passes into the hands of a third  As a general rule, an action to foreclosea mortgage must be
person. (1877) limited to the amount mentioned in the mortgage. But the
amounnamed as a consideration in a contract of mortgage do
not limit the amount for which the mortgaged may stand as may
security, if from the four corner of the insrument the intent to
secure future loans or advancements and other indebtedness in
addition to those already obtained or specified in the contract,
can be gathered
 For example, “for the payment of loan of P20,000 and such
aother loans or other advances already obtained or still to be
obtained by the mortgagors as makers”which clearly means
that the mortgage is not limited to just the fixed amount but
also covers other credit accommodations in excess thereof.
 A mortgage given to secure future advancement or loans
enables the parties to provide continuous dealings, the nature
or extent of which may not be known or annticipated at the
time and they avoid the expense and inconvinience of
executing a new security on each new transaction
 “Dragnet clause” operates as a convinience and accomodation
to the borrowers as it makes available additional funds
without their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees.
 Mortgage gien to secure future advancements is a continuing
security and is not discharge by the repayment of the
amount named in the mortgage, until the full amount of all
loans or advancements obtained are paid.
Art. 2128. The mortgage credit may be alienated or assigned to a

third person, in whole or in part, with the formalities required
by law. (1878)
 The mortgage credit is a real right and directly and

immediately subjects the mortgaged property to the
fulfillment of the principal obligaton. Such real right may be
alienated or assigned to a thurd person, in whole or in part, by
the mortgagee who is the owner of said right and the asignee
foreclose the mortgage in case of nonpayment of the mortgage
indebtedness.
 Alienation or assigment is valid even if it is not
registered. Registration is only necessary to affect third
person
Art. 2129. The creditor may claim from a third person in

possession of the mortgaged property, the payment of the part
of the credit secured by the property which said third person
possesses, in the terms and with the formalities which the law
establishes. (1879)
 The fact that the mortgagor has transferred the mortgaged

property to a third person does not relieve him from his
obligation the debt to the mortgage creditor in the
absence of novation.
 A recorded real estate mortgage is merly an accessory
contract. It is inseparable from the property subject thereto
regardless of who its owner may subsequently be.
 The mortgaged credit being a real right which follows the
property, the creditor may demand from any possessor the
payment only of the part of the credit secured by said
property. It is necessary however, that prior demand for
payment must have been made on the debtor and the latter
failed to pay.
Art. 2130. A stipulation forbidding the owner from alienating

the immovable mortgaged shall be void. (n)
 The law considers void any stipulation forbidding the

owner from alienating the mortgaged property. However, if
the mortgagor alienates the property, the transferee is
bound to respect the encumbrance because being a real
right, the property remains subject to the fulfillment of the
obligation for whose guaranty it was constituted.
STIPULATION REQUIRING MORTGAGEE’S CONSENT  It is valid only when the debtor is in default in the payment of
BEFORE ALIENATION his obligation. Foreclosre cannot exercised by any person other
than the creditor-mortgagee or his assigns
 A stipulation prohibiting the mortgagor from selling his  Demand is important before foreclosure
mortgaged property ithout consent of the mortgagee violates
Art.2130 of the NCC. For all intents and purposes, the
stipulation practically gives the mortgagee the sole prerogative
to prevent any sale of the mortgaged property to a third person. 1. A mortgage contract may contain an acceleration clause
The mortgagee can simply withhold its consent and thereby, which is a stipulation stating that, on the occasion of the
prevent the mortgagor from selling the property. However, the mortgagor’s default, the whole sum remaining unpaid
mortgagor-owner’s sale of the property does not affect the automatically becomes due and payable. Failure to pay triggers
right of the registered mortgagee to foreclose on person who is the activation of the acceleration clause.
bound by the registered mortgage 2. The power to foreclose reside in the mortgagee.
3. Once the proceeds have been applied to the payment of the
STIPULATION GRANTING RIGHT OF FIRST REFUSAL obligation, the debtor cannot anymore be required to pay
unless there is deficiency
 Mortgagor has the obligation under the right if first refusal to
to notify the mortgagee of his intention to sell the property and KINDS OF FORECLOSURE
give him priority over other buyers. A sale made in violation of
the mortgagee/s contractual right of first refusal is rescibble. 1. Judicial
2. Extrajudicial
Art. 2131. The form, extent and consequences of a mortgage, both
as to its constitution, modification and extinguishment, and as to JUDICIAL FORECLOSURE
other matters not included in this Chapter, shall be governed by
the provisions of the Mortgage Law and of the Land Registration 1. A mortgage may be forclosed judicially by bringing an action
Law. (1880a) for that purpose, in the proper court which has jurisdiction over
the area wherein the property is located
FORECLOSURE 2. If the court finds the complaint is well founded, it shall order
the mortgagor to pay the amount due upon the mortgage debt
 It is the remedy available to the mortgagee by which he or obligation with interest and other charges within a period of
subjects the mortgaged property to the satisfaction of the not less than 90 days nor more than 120 days from the entry of
obligation to secure which the mortgage was given, where judgment
the mortgagor is in default in the payment of said obligation
3. If the mortgagor fails to pay at the time directed in the order, 3. Notice and hearing for a moton for confimation of sale is is
the court, upon motion shall order the property to be sold to essential to the validity of the order of confirmation to
the highest bidder inform of the time when right of redemption will be cut off
4. The sale when confirmed by an order of the court, also upon
motion shall operate to divest the rights of all parties to the NATURE: Quasi in rem
action and to vest their rights in the purchaser subject to
such right of redemption as may be allowed by law EXTRJUDICIAL FORECLOSURE
5. No judgment rendered in an action for foreclosure or
mortgage can be executed otherwise than in the manne 1. Express authority to sell given to mortgagee-
prescribed by law. It has been held that the remedy to seek a) Procedings for the extrajudicial forclosure of mortgage are
reversal of judgment in anction for foreclosure of real estate commenced not by the filing of a complaint but by submitting
mortgage is not a petition for annulment of judgment but an an application before an executive judge who in turn, receives
appeal from the judgment itself the same neither in a judicial capacity nor on behalf of the
6. The proceeds of the sale shall be applied to the payment of: court
a) Cost of the sale 2. Authority not extinguished by death of mortgagor or
b) The amount due the mortagage mortgagee- it is an essential and inseparable part of a bilateral
c) Claims of junior encumbrances agreement. A mortgage may be foreclose extrajudicially
d) The balance if any where there is inserted clause giving the mortgagee the power,
7. In judicial foreclosure, it is not complete until the sheriff’s upon default of the debtor to foreclose the mortgage by
certificate is executed, acknowledge and recorded. In the extrajudicial mortgage
absence of the certificate, no title passes by the 3. Publication of notice of auction sale
foreclosure proceedings to the vendee. a) Publication is mandatory- failure to comply will render
juridictional defect which invalidates the sale or shall be
CONFIRMATION BY COURT OF AUCTION SALE IN rendered voidable. The purpose s to inform all interested
JUDICIAL FORECLOSURE prties of the date, time , and place of the foreclosre sale of the
real property
1. In judicial foreclosure Of real estate mortgage, the general b) Contents of notice- notice of the sheriff sale to be valid, must
rule is that the mortgagor cannot exercise his right of contain the correct number of the certificate title ad the
redemption after the sale is confired correct technical description of the real property to be sold
2. A foreclosure sale is not complete until it is confirmed and c) Object of notice- publication in a newspaper of general
before such confirmation, the court retains control of the circulation is required to achieve a “reasonably wide publicity”
proceedings by exercising sound discretion in regard to it of the auction sale
either granting or withholding confirmation as the rihts and d) Personal notice to mortgagor not generall required- lack of
interest of the parties and the ends of justice may require personal notice is not a ground to set aside a foreclosure sale.
Publication by newspaper and notice in three public places is cannot raise the defense that no actual cash was received
sufficient compliance
e) Notice to executing to mortgagee-creditor not provided by law-
no provision in the law on extrajudicial foreclosure of real
esatet mortgage that otice be given to the executing mortgagee
creditor who causes the mortgaged property to be sold
f) Posting of notice on mortgaged property not required- it merely
requiress that the notice of sale be postedin at least three public
places in the city or municipality where the property is situated,
and not ecessarily in a specific bulletin board
g) Cerificate of posting is not required
h) Burden of proving non-compliance with publication and
notice-posting requirement upon mortgagor- in the absence or
failure to prove, the sheriff is presumed to have performed his
official duty of posting and notice of sale in the reglementary
period
i) Formalities of levy is not required- levy, means the essential
act or acts by which an officer set aparts or appropriates a part
or the whole of the property of the judgment debtor for
purposes of the propspective execution sale.
j) Notice to all bidder is not require
4. Public sale after proper notice
5. Public sale at different places/different dates- the
indivisibility of the a eal estate mortgage is not violated by
conducting two separate foreclosure proceedings on
mortgaged properties located in different cities and
municipalities as long as each parcel of land is answerable for
the entire debt
6. Number of bidders- requires at least two bidders to have
a valid auction
7. Payment by cash by the highest bidder
8. Surplus proceeds from the foreclosure- the mortgagee must
account for the proceeds as if the price were paid in cash, and
in action against the mortgagee to recover the surplus, the latter
a) Surplus my be applied to several liens upon the sale is to be
property in the order of their priority
b) Return the excess of the bid price to the mortgagor
9. Redemption of property sold- the debtor has the right
to redeem the property within one year from and after
the date of the sale. If the mortgagor is a juridical
person and the mortgagee is a bank institution, they
have righ to redeem the property until, but not after the
registration of the certificate of foreclosure sale which
in no case shall be more than 3 months after
foreclosure
10. Remedy of the aggrieved party- the debtor may in
the proceedings in which the possessioon is
requested, petition that sale:
a) Petition to set aside
b) Writ of possession be cancelled
c) Annullment; 1) fraud 2) the sale had not been fairly and
regulary conducted 3) the price was inadequate and
inadequacy was so great to shock the conscience of the
court
11. Republication- it is necessary for the validity of the
postponed extrajudicial foreclosure. Another
publication is required in case the auction sale is
rescheduled, absence of such invalidates the foreclosure
sale
NATURE OF POWER OF
FORECLOSURE OF EXTRAJUDICIAL
SALE
 Where the mortgagee has a clear right to extrajudicial

foreclosure in case of default by the mortgagee, the
issuance of writ of preliminary injuction which would
enjoin the foreclosure is improper.
 An extrajudicial foreclosure of a real estate mortgage is
initiated by filing a petition not with any court of justice
but with the office of sheriff of the province where the
made. Extrajudicial foreclosure are not judicial proceedings, defendant mortgagor to extinguish the mortgage and retain
actions, or suits. ownership of the property by paing the secured debt within the
prescribed period after judgment becomes final in accordance
with Rule 68 or even after the foreclosure sle but prior to its
confirmation. In a judicial foreclosure of mortgages under Rule
REMEDY IN CASE MORTGAGOR REFUSES TO 68 of the Rules of Court, there is only the equity of redemption
SURRENDER MORTGAGED PROPERTY in favor of the mortgagor consisting in the right to redeem the
property within the 90-day to 120-day period from entry of
 In case of refusal ti surrender, he must bring a civil action judgment
either to recover possession as a preliminary step to the sale
or to obtain judicial foreclosure LEVY OF EQUITY OF REDEMPTION
INJUNCTION TO PREVENT FORECLOSURE  It is not necessary for the sheriff to take physical possession of
the mortgaged property. Levying upon the property is
 Where the parties have stiuplated in their agreement that the distinguishable from levying n the morgagor’s interest in it.
mortgagee is authorized to foreclose the mortgage upon the  The mortgagor’s equity of redemption can be levied upon by
mortgagor’s default, the mortgagee has a clear right to the means of a writ of execution, with the result that this interest
foreclosure in case of the mortgagor’s default. Thus, the will pas to the purchaser at the execution sale.
issuance of writ of preliminary injuction is proper. 2. Right of redemption- or right of the mortgagor in case of
extrajudicial foreclosure to redeem the mortgaged property
REDEMPTION within a certain period from and after it was sold for the
satisfaction of the mortgage debt. It is generally available only
 It is a transaction by which the mortgagor reacquires or buys in case of an extrajudicial foreclosure of real estate mortgage,
back the property which may have passed under the mortgage the right of redemption is is only when the lw provides. The
or divest the property of the lien which the mortgage may have mortgagor may redeem the property at any time within he term
created of one year from and after the date of the sale. The sheriff’s
sale of registered and unregistered lands does not affect as a
KINDS OF REDEMPTION consequence or bind the land until the sale is registered in the
Register of Deeds. If no redemption was made within the
1. Equity of redemption- or the right of the mortgagor in case of period prescribed, the purchaser becomes the absolute owner
judicial foreclosure to redeem the mortgaged property after his of the property. The one year peiod for the exercise of the right
default in the performance of the coditions of the mortgage but of redemption is subject to the prvision of special laws.
before the confirmation of the sale of the mortgaged property.
This applies to banking institutions. It is simply the right of the REQUISITES OF A VALID REDEMPTION
1. The redemption must be made within one year from the date of 2. It is a formal contract because I must be in a specified form to
the registration of the certificate of sale, not from the date of be valid
foreclosure 3. It I is a consensual contract because the Civil Code does not
2. Payment of the purchase price of the property plus 1% require delivery of the immovable to the creditor
interest per onth together wih the taxes thereon 4. The amount of the principal and of the interest must
3. Written notice of the rdemption must be served on the officer be specified in writing
who made the sale and duplicate must be filed with the
proper Register of Deeds Antichresisi only require the delivery by the debtor of the
4. In judicial foreclosure, the general rule is that the mortgagor of property given as security to the creditor. But such delivery is
real estate can no longer exercise his right of redemption after required only in order that the creditor may receive the fruits and
the sale is confirmed by the court not that the contract shall be binding. The contract does not cover
the immovable but only its fruits
WRIT OF POSSESSION
OBLIGATION TO PAY INTEREST NOT ESSENTIAL
 Is generally understood to be an order by a court whereby the  The obligation to pay interest is not the essence of the contract
sheriff is commanded to place in possession of real or personal of antichresis, any more than it is indispensable in a contract of
property the person entitled thereto such as when the property loan.
is extrajudicially foreclosed, either within the one year period  The words “if owing” (interest) reveal that it is not essential
for redemption upon the filing of a bond or after the lapse of that the loan should ear interest in orer tht it can be
the redemption period without a need of a bond or a separate guaranteed with a contract of antichresis, there being nothing
and independent action in the Code to show that antichresis is Ionly applicable to
securing the payment of interest-bearing loans. Antichresisis
ANTICHRESIS susceptible of guaranteeing all kinds of obligations, pure or
conditiona
Art. 2132. By the contract of antichresis the creditor acquires the
right to receive the fruits of an immovable of his debtor, with the ANTICHRESIS VS PLEDGE
obligation to apply them to the payment of the interest, if owing, ANTICHRESIS PLEDGE
and thereafter to the principal of his credit. (1881) Refers to fruits of real property Personal property
Perfected by mere consent Perfected by delivery oft the
(provided that the contract is in thing pledge
written form)
CHARACTERISTIC OF THE CONTRACT Consensual contract Real contract
1. It is an accessory contract because it secures the performance
of a principal obligation ANTICHRESIS VS MORTGAGE
ANTICHRESIS MORTGAGE
The property is delivered to the The debtor usually retains the interest, if any, and
creditor possession of the property
The creditor only acquires the The creditor does not acquire the
right to receive fruits of the right to receive fruits but
property, hence it does not mortgage creates real rights over
produce real right the property which is
enforceable against the whole
world
The creditor, unless there is There is no such obligation
stipulation to the contray has to
pay the taxes ang charges upon
the estate
It is expressly stipulated that the There is no such obligation
creditor given the possession of
the propertyshall apply its fruits
to the payment of interest
thereafter to the principal
Both are similar in that he subject matter is real property. Like

pledge and mortgage, antichresis gives a real and not merely a
persoal rights if its is registered in the Registry of Property
APPLICATION OF THE FRUITS TO INTEREST AND THEN

TO PRINCIPAL
 To be antichresis, it must be expressly agreed between creditor
and debtor that the former, having been given possession of the
properties given as security, is to apply their fruits to the
payment of interest , if owing, and thereafter to the principal of
his credit so that if a contract of loan with security does not
stipulate the payment of interest but provides for delivery to
the creditor by debtor of the real property constituted as
security for the payment, in order that the crediot may
administer the same and avail himself of its fruits, without
stating that said fruits are to be applied to thepayment of the
afterwards to that of the principal of the credit, the contract
sahll be considered to be one of mortgage and not
antichresis
TO CONSTITUTE CONTRACT OF MORTGAGE

1. The agreement that the full amount of the
indebtednessmust be returned to the lenders before the
borowers could demand the return of the property
2. The use of the term “ortgage” in various parts of the contract
3. The agreement that the lenders are not to pay rentals on
the property in consideration of the fact that the borrowers
do not pay interest on the sum which they obtained as a
loan
Art. 2133. The actual market value of the fruits at the time of
the application thereof to the interest and principal shall be the
measure of such application. (n)
 The fruits of immovable which is the object of the

antichresis must be appraised at their actual market value at
the time of the application
Art. 2134. The amount of the principal and of the interest shall
be specified in writing; otherwise, the contract of antichresis
shall be void. (n)
Art. 2135. The creditor, unless there is a stipulation to the

contrary, is obliged to pay the taxes and charges upon the
estate.
He is also bound to bear the expenses necessary for its

preservation and repair.
The creditor acquires by virtue of the contract of antichresis

the right to enjoy the fruits of the property delivered to him
The sums spent for the purposes stated in this article shall be Every stipulation to the contrary shall be void. But the creditor
deducted from the fruits. (1882) may petition the court for the payment of the debt or the sale of
the real property. In this case, the Rules of Court on the
1. Payment of taxes and charges upon the estate- if he does not foreclosure of mortgages shall apply. (1884a)
pay the taxes and charges he is by law requires to pay damages
to the debtor. Whre the debtor have paid the taxes and charges REMEDY OF THE DEBTOR IN CASE OF NONPAYMENT OF
which the creditor should have paid, the amount is to be THE DEBT
applied to the payment of the debt, and the debtor is entitled to
the return of the property free from all encumbrances if he he  It is clear enough that the creditor does not acquire ownership
in effect by advancing the taxes, had already discharge the debt of the real estate since what was transferred is not ownership ut
2. Application of the fruits of the estate- apply the fruits, after merely the right to receive the fruits. A stipulation authorizing
receiving them, to the interest, if owing, and thereafter to the he antichretic creditor to appropriate the property upon the
principal. The sum spent by the crediotor shall be charge to nonpayment of the debt within the period agreed upon is void.
the fruits of the property 1. To bring an ction for specific performance
2. To petition for the sale of the real property as in a foreclosure
Art. 2136. The debtor cannot reacquire the enjoyment of the of mortgage under Rule 68 of the Rules of Court. The parties
immovable without first having totally paid what he owes the may however, agree on an extrajudicial foreclosure in the
creditor. same manner as they are llowed in contracts of mortgage and
pledg
But the latter, in order to exempt himself from the obligations
imposed upon him by the preceding article, may always compel ACQUISITION BY CREDITOR OF PROPERTY BY
the debtor to enter again upon the enjoyment of the property, PRESCRIPTION
except when there is a stipulation to the contrary. (1883)
 The creditor in antichresis and his successor-in-interest cannot
 The debtor cannot demand its return until the debt is totally ordinarily acquire by prescription the land given to him, sny
paid. However, if the creditor does not want to pay the taxes greement to the contrary being void. He cannot acquire
and incur the expenses necessary for the preservation and ownership of the real estate unless he repudiates his status as
repair of the property he may compel the debtor to reacquire an antichretic creditor
the enjoyment of the same except when there is contray to he
stipulation. Art. 2138. The contracting parties may stipulate that the interest
upon the debt be compensated with the fruits of the property
Art. 2137. The creditor does not acquire the ownership of the real which is the object of the antichresis, provided that if the value of
estate for non-payment of the debt within the period agreed upon. the fruits should exceed the amount of interest allowed by the laws
against usury, the excess shall be applied to the principal. (1885a)
Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 3. The mortgagor must have free disposal of the property
2091 are applicable to this contract. (1886a) mortgaged and in the absence thereof, that the mortgagor
be legally authorized for the purpose
CHATTEL MORTGAGE
Unlike in the pledge, a chattel mortgage is not a real contract,.
Art. 2140. By a chattel mortgage, personal property is recorded in Hence, the delivery of the property mortgaged to the mortgagee is
the Chattel Mortgage Register as a security for the performance of not requires for the perfection of the contract
an obligation. If the movable, instead of being recorded, is PLEDGE VS CHATTEL MORTGAGE
delivered to the creditor or a third person, the contract is a pledge CHATTEL MORTGAGE PLEDGE
and not a chattel mortgage. (n) The delivery of the personal Delivery is necessary
property to the mortgagee is not
necessary
Registration in the Chattel mortgae Registration in the Registry
CHATTEL MORTGAGE register is required of Property is not necessary
 It is a contract by virtue of which the property is recorded in If the property is forclosed, the If the property is sold, the
the Chattel Mortgage Register as a security for the excess over the amount due goes to debtor is not entitled to
performance of an obligation. the debtor theexcess unles otherwise
agreed or except in the case
CHARACTERISTIC OF CHATTEL MORTGAGE of a legal pledge
1. It is an accessory contract because it is for the purpose of If the property is foreclosed and If the property is sold, and
securing the performance of a principal obligation there is defiency, te creditor is there is deficiency, the
2. It is a formal contract because for its invalidity, registartion in entitled to recover the deficiency creditor is not entitled to
the Chattel Mortgage Register is indispensable from the debtor recover the deficiency
notwithstanding any
The mortgagor must be the absolute owner of the thing mortgaged stipulation to the contrary
and must also have free disposal of their property and in the SIMILARITIES BETWEEN CHATTEL MORTGAGE AND
absence thereof, the mortgagor be legally authorized for the PLEDGE
purpose. 1. Both are executed to secure performance of a principal
obligations
ESSENTIAL REQUISITES OF CHATTEL MOARTGAGE 2. Both are constituted only on personal property
1. It must constitued to secure the fulfillment of a principal 3. Both are indivisible
obligation 4. In both cases, the creditor cannot appropriate the property to
2. The mortgagor must be the absolute owner of the himself in payment of the debt
thing mortgaged
5. In both cases, when the debtor defaults, the property must mortgagedor any person to identify the same after a reasonable
be sold for the payment of the deb investigation and inquiry, otherwise the mortagaged is invalid
6. Both are extinguished by the fulfillment of the principal
obligation or by the destruction of the property pledged or A pledge, real estate mortgage or antichresis may secure after-
mortgaged incurred obligations as long as these future debts are accurately
described. A chattel mortgage however, can only cover obligations
Art. 2141. The provisions of thisCode on pledge, insofar as they existing at the time the mortgage is constituted.
are not in conflict with the Chattel Mortgage Law shall be
applicable to chattel mortgages. (n) If the property is situated in a different province from that in
which the mortgagor resides, the registration must be in
SUBJECT MATTER OF CHATTEL MORTGAGE both registers
1. Shares of stock in a corporation- if the owner of the shares is RECORDING AS A REQUIREMNT FOR VALIDITY
not domiciled in the same province where the corporation is
domiciled, the registration must be made in both provinces 1. RECORDING REQUIRED- recording is required for validity
2. Machinery treated by the parties as personal property based on the Civil Code definition of chattel mortgage- “by
3. Vessels vhattel mortgaged, personal propery os recorded in the Chattel
4. Motor vehicle- a mortgage of any motor vehicle in order to Mortgage Register as a security for the performance of an
affect third persons should not only be registered in the Chattel obligation”
Mortgage Registry, but the same should also be recorded in 2. RECORDING NOT REQUIRED- unregistered
the LTO as required by said law. The failure of the mortgagee mortgage will stil be binding upon the parties but will not
to report the mortage executed in his favor has the effect of be binding upon third person
making said mortgage ineffective against a purchaser in good
faith who registered his purchase of the same vehicle in LTO The law does not provide any specific time withing which the
5. House of mixed materials chattel mortgage should be recorded in the Chattel Mortgag
6. House intended to be demolished Register
7. House built on rented land- it did not form part of the land,
for it is settled that an object placed on land by one who had AFFIDAVIT OF GOOD FAITH
only a temporary right to the same, such as the lessee or
usufructuary does not ecome immonilized by the attachment  It is an oath in a contract of chattel mortgage wherein the
8. House of strong material parties severally swear that the mortgage is made for the
purpose of secuing the obligation specified in the conditiond
Under Chattel Mortgaged Law, it requires that the description of thereof and for no other purposes and that the same is a just
the mortgaged property be such as to be enable the parties to the and valid obligation and one not entered into for the prupose of
fraud. Absence of it vitiates a mortgage only as agaisnt third judgment or
person without notice like creditors and subsequent
encumbrance
EQUITY OF ENCUMBRANCE
1. When the condition of a chattel mortgage is broken the

following may redeem
a) the mortgagor
b) A person holding a subsequent mortgage
c) subsequent attaching creditor
2. An attaching creditor who redeems shall be subrogated to the
rights of the mortgagee and entitled to foreclose the
mortgage in the same manner that the mortgage could
foreclose it
3. The redemption is made by paying or delivering to the
mortgagee the amount due on such mortgage and the costs
and expenses incurred by such breach of condition before the
sale thereof. Redemptioner may only be allowed to redeem
the property only before the sale.
4. Redemptioner may only be allowed to redeem the property
only before the sale to clear it from encumbrance
RIGHT ACQUIRED BY SECOND MORTGAGEE AND

SUBSEQUENT PURCHASER
1. Before payment of debt- as between the first and second

mortgagees, the latter can only recover the property from
the former by paying him the mortgage debt.
2. After payment of debt- if the only leviable or attachable
interest of a chattel mortgagor in a chattel mortgaged
property is his right of redemption, it follows that the
attaching creditor who purchased the property at the
execution sale could not acquire anything except such
right of redemption. He is not entitled to the actual
possession and delivery of the property without first
paying the mortgage debt
RIGHT OF MORTGAGEE TO POSSESSION
1. After default- the creditor desires to foreclose, the right

of the creditor to take the mortgaged property is clearly
implied from the provison which gives him right to sell
2. Before default- a chattel mortgaged is not entitled to the
possession of the property upon the execution of the
chattel mortgaged otherwise the contract becomes a
pledge and ceases to be a chattel morgaged
3. Where mortgagor refuses to surrender possession-
the creditor may institute an action either to effect
judicial foreclosure or to secure possession as
preliminary to the sale
a) The creditor cannot lawfully take the property by force
against the will of the debtor
b) Sheriff has no authority to seize the mortgaged
property, the creditor must proceed along the usual
channels by action in court
4. Where third-party claims title- he must make an affidavit
showing that he has a title thereto or right to the possession
thereof. Chattel mortgage is merely a security for loan and
does not transfer title to the property mortgaged to the
chattel mortgagee
FORECLOSURE OF CHATTEL MORTGAGE

1. Public sale- if the mortgagor defaults in the payment of the preference over the mortgage chattels for the satisfaction of the
secured debt, the creditor has no right to appropriate to himself credit. By instituting civil action, the mortgagee abandons his
the personal property because he is only permitted to recover mortgage lien on the mortgage chattel
proceeds of the sale of the property at public auction throug a
public officer. It allows the mortgagee to have the property ORDINARY ACTION TO RECOVER POSSESSION OF
mortgaged old in the same manner as that allowed in the CHATTEL
extrajudicial foreclosure of real estate mortgaged. The mere  In case of refusal of the mortgagor to surrender the
fact that the mortgagee was the sole bidder for the mortgaged possession of the mortgaged chattel sold by the sheriff, the
property on the public sale does not warrant that the remedy of the purchaser is to bring an ordinary action for
trensaction was attended with fraud. recovery of possession instead of merely asking for a writ of
2. Private sale- there is nothing illegal, immoral, or against possession.
public order in a n agreement for the private sale of the
personal property covered by chattel mortgage ACTION FOR REPLEVIN AS A REMEDY
PERIOD TO FORECLOSE MORTGAGE REPLEVIN, it is both a form of principal remedy and of a provisional
relief. It may refer either to the action itself or to the provisional
 The mortgagee may, after 30 dyas from the time of the remedy that would allow the plaintiff to retain the thing during the
condition broken, cause the mortgaged property to be sold at pendency of the action and hold it pendente lite
public auction by a public officer. The 30-day period to
foreclose a chattel mortgage is the minimum period after 1. Where the mortgage authorizes the mortgagee to take
violation of the mortgage condition for the mortgage creditor possession of the property on default, he may maintain an
to cause the sale at public auction of the mortgaged chattel with action to recover possession of the mortgaged chattels from
at least 10-day notice to the mortgagor and posting of public mortgagor or from any person in whose hands he may find
notice of time, place and purpose of such sale. After the sale of them
the chattel at public auction, the right of redemption is no
RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY
longer available to the mortgagor
1. The creditor may maintain ana action for the
CIVIL ACTION TO RECOVER CREDIT
deficiency although Chattel Mortgage Law is silent on
 To obliged the mortgagee to file a civil action to recover this point
his credit defeat the purpose of chattel mortgage to give 2. If the chattel mortgage is constituted for the purchase of
him personal property payable on installment, no deficiency
judgment can be asked and any agreement to the contray
shall
be void
3. The chattel mortgagee is entitled to deficiency judgment in an
action for specific performance where the mortgaged
property is subsequently attached and sold.
APPLICATION OF PROCEEDS OF SALE
1. Costs and expenses of keeping and sale

2. Payment of the obligation secured by the mortgage
3. Claims of persons holding subsequent mortgages in their order
4. The balance, if any, shall be paid to the mortgagor
RIGHT OF MORTGAGOR TO BALANCE OF PROCESS
 Chattel Mortgage Law entitles the mortgagor to the balance of

the proceeds upon satisfaction of the principal obligation.
Since the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds, there is a
corollary obligation on the part of the debtor to pay the
deficiency in case of a reduction in the price at public auction

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REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS

NOTES BY: HECTOR DE LEON COLLEGE OF LAW

TWO TERMS OF SECURITY IN CREDIT TRANSACTIONS A. ORDINARY BAILMENTS

1. SECURED TRANSACTIONS A.1. 4 TYPES OF ORDINARY BAILMENTS

SECURITY  This kind belongs to commodatum and simple loan or

ELEMENTS OF BAILMENT 3. THOSE FOR THE BENEFIT OF BOTH PARTIES

 This includes miserable deposit.

 The possession of the bailee is more secure for he has the

2. BASED ON PURPOSE (Art. 1942)

 Even if there is no stipulated time to return the thing loaned but

 One whereby the bailor demand(absolute) the thing loaned at

Not absolute: The actual act of returning the thing.

Art. 1933. By the contract of loan, one of the parties delivers to

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing

 The bailor delivers to the bailee a non-consummable things

2. SIMPLE LOAN OR MUTUUM

 Where the lender delivers to the borrower money or other

Art. 1962. A deposit is constituted from the moment a person receives

CONTRACT OF DEPOSIT Illustraion: No contract of deposit

2. CONTRACT OF DEPOSIT NOT PROVEN

STATUS OF CONTRACT Illustration: A deposited a watch with B, a minor who

Illustration: (2) If he uses the thing without the depositor's permission;

FACTS: A and B received from C: (3) If he delays its return;

Art. 2000. The responsibility referred to in the two preceding articles

Under Act No. 2137 (Warehouse Receipts Law), a POINTS TO REMEMBER:

NEGOTIABILITY OF A WAREHOUSE RECEIPT

Query: How may a negotiable receipt be negotiated?

Answer: By SIMPLE DELIVERY or by INDORSEMENT

BY INDORSEMENT WITH DELIVERY

GUARANTY AND SURETYSHIP

Art. 2047. By guaranty a person, called the guarantor, binds himself to

If a person binds himself solidarily with the principal debtor, the

CHARACTERISTICS OF THE CONTRACT

1. It is a consensual contract, because it is perfected by mere

2. It is generally unilateral contract

2.1. It give rise only to a duty on the part of the guarantor in

2.2. It may be entered into even without the intervention of the

3. It is an accessory contract, because it is dependent for its

4. It is formal contract, because it is governed by the Statute of Frauds

5. It is generally a gratuitous contract but it may be an onerous

SOURCE OF THE GUARANTOR’S OBLIGATIONS

BUT WHEN DEMANDED BY THE REQUIREMENTS OF

5.SURETY IS NOT ENTITLED TO NOTICE OF PRINCIPAL’S

 Demand is not necessary before bringing suit against them,

6.PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL

 As soon as the principal is in default, the surety likewise is in

RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION (3) In case of insolvency of the debtor;

NOTE: There is no right of excussion in suretyship

 The demad for payment by the creditor upon the guarantor

CONDITION FOR GUARANTOR TO SET UP BENEFIT

 It should not be used as a pretext to delay or make more

Art. 2061. The guarantor having fulfilled all the conditions

 The creditor ust notify the guarantor of the debtor’s

Art. 2062. In every action by the creditor, which must be against

Art. 1602. The contract shall be presumed to be an equitable

Art. 2128. The mortgage credit may be alienated or assigned to a

 The mortgage credit is a real right and directly and

Art. 2129. The creditor may claim from a third person in

 The fact that the mortgagor has transferred the mortgaged

Art. 2130. A stipulation forbidding the owner from alienating