LOAN

A loan is a real contract, not consensual, and as such, it is perfected upon delivery of
the object of the contract. Thus, there is no perfected contract of loan when a
prospective lender issues a check to a prospective borrower and there is no evidence
of encashment. The delivery of bills of exchange and mercantile documents such as
checks shall produce the effect of payment only when they have been cashed. It is
only after the checks have produced the effect of payment that the contract of loan
may be deemed perfected.
1. Commodatum - one of the parties delivers to another something not
consumable so that the latter may use it for a certain time and return it.
2. Mutuum - one of the parties delivers to another money or other consumable
thing, upon the condition that the same amount of the same kind and quality
shall be paid.
Commodatum Mutuum
Commodatum is essentially gratuitous Mutuum may be gratuitous or with
stipulation to pay interest
The thing loaned is not consumable The thing loaned is money or other
consumable thing
The bailee does not acquire ownership The borrower acquires ownership over
of the non-consumable thing the money or thing loaned
The bailee has the obligation to return The borrower has no obligation to return
the same thing loaned the same money or thing loaned, but he
has the duty to pay the same amount of
the same kind and quality.

An accepted promise to deliver something by way of commodatum or simple loan is

binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract.
Thus, the perfected consensual contract under the first clause can give rise to an
action for damages in case of breach. However, said contract does not constitute the
real contract of loan which requires the delivery of the object of the contract for its
perfection. The remedy in case of non-delivery of the object of the contract is to file
an action for damages, not an action to compel delivery of the object.

COMMODATUM.
A. Parties
1. Bailor or lender
2. Bailee or borrower
The bailor in commodatum need not be the owner of the thing loaned because the
contract does not involve the transmission of ownership. It is sufficient that the bailor
has possessory interest in the property (as in the case of a lessee or usufructuary) as
will entitle him to assert his interest against the world except the rightful owner.
B. Subject Matter. Movable or immovable property may be the object of
commodatum. As a general rule, only non-consumable things may be the subject
matter of a commodatum. Consumable goods, however, may be the subject of
commodatum if the purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.
Thus, the loan involving money was classified as commodatum instead of mutuum
because the lender agreed to deposit his money in the savings account of the
borrower specifically for the purpose of making it appear that the latter had sufficient
capitalization for incorporation, with the promise that the amount shall not be
removed and shall be returned within a specified period.
C. Rights in respect of the subject matter.
1. The bailor retains ownership of the thing loaned because the very same thing
must be returned to him.
2. The bailee acquires the use of the thing loaned but not its fruits. In the
absence of the right to use the thing, the contract would be a deposit. A
stipulation that the bailee may make use of the fruits of the thing loaned is
valid. But without such stipulation, the bailee has no right to make use of the
fruits. Thus distinguishes commodatum from usufruct. In usufruct, the
usufructuary acquires the right to use the thing and is also entitled to the fruits.
D. Gratuitous character. Commodatum is essentially gratuitous. If any
compensation is to be paid by him who acquires the use, the contract ceases to be a
commodatum. Thus, if Pajuyo permitted Guevarra to reside in the house and lot free
of rent, but Guevarra was under obligation to maintain the premises in good
condition, the contract was not commodatum. According to the SC, the imposition of
the obligation to maintain the premises in good condition makes the contract different
from a commodatum. [CONTRA: It is the obligation of the bailee in commodatum to
preserve the thing loaned. Thus, the imposition of the obligation is a mere superfluity
and may not, therefore, be considered as a consideration. As such, the contract may
still be regarded as gratuitous and one of commodatum.]
E. Personal character of the contract. Commodatum is purely personal in
character. Consequently:
1. The death of either the bailor or the bailee extinguishes the contract;
2. The bailee can neither lend nor lease the object of the contract to a third
person. However, the members of the bailee’s household may make use of
the thing loaned, unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use.
F. Rights and Obligations of the parties. Commodatum is a unilateral contract.
The obligations that arise from commodatum bind the bailee to the bailor but not the
bailor to the bailee. When there are two or more bailees to whom a thing is loaned in
the same contract, they are liable solidarily.

1. Rights and Obligations of the bailee.

a. The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned.
b. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event:
i. If he devotes the thing to any purpose different from that for which it
has been loaned;
ii. If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted;
iii. If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility
in case of a fortuitous event;
iv. If he lends or leases the thing to a third person, who is not a
member of his household; and
v. If, being able to save either the thing borrowed or his own thing, he
chose to save the latter.
c. The bailee does not answer for the deterioration of the thing loaned due to
the use thereof and without his fault.

2. Rights and Obligations of the bailor.

a. The bailor shall refund the extraordinary expenses incurred by the bailee
for the preservation of the thing loaned, provided the bailee brings the
same to the knowledge of the bailor before incurring them, except when
they are so urgent that the reply to the notice cannot be awaited without
danger. If the extraordinary expenses arise during the actual use of the
thing by the bailee, even though he acted without fault, the expenses shall
be equally borne by the parties, unless there is a stipulation to the
contrary.
b. The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of the use
for which the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he may demand its
return or temporary use. In case of temporary use by the bailor, the
contract of commodatum is suspended while the thing is in the possession
of the bailor.
c. The bailor who, knowing the flaws of the thing loaned, does not advise the
bailee of the same, shall be liable to the latter for the damages which he
may suffer by reason thereof. The bailor shall not be liable for damages if
he is not aware of such flaws or if the same is patent.
 d. The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee.
G. Return of the thing loaned. As a general rule, the bailor cannot demand the
return of the thing loaned till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been constituted.
However, if in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use. In case of temporary use by the bailor, the
contract of commodatum is suspended while the thing is in the possession of the
bailor.
* Precarium. The bailor may demand the thing at will, and the contractual relation is
called a precarium, in the following cases:
a. If neither the duration of the contract nor the use to which the thing
loaned should be devoted, has been stipulated; or
b. If the use of the thing is merely tolerated by the owner.
The bailor may demand the immediate return of the thing if the bailee commits any of
the following acts of ingratitude:
1. If the bailee should commit some offense against the person, the honor or the
property of the bailor, or of his wife or children under his parental authority;
2. If the bailee imputes to the bailor any criminal offense, or any act involving
moral turpitude, even though he should prove it, unless the crime or the act
has been committed against the bailee himself, his wife or children under his
authority;
3. If he unduly refuses him support when the bailee is legally or morally bound to
give support to the bailor.
H. Right of bailee to retain the thing loaned. The general rule is that the bailor can
demand the return of the thing loaned after the expiration of the period stipulated or
after the accomplishment of the use for which the commodatum was constituted. On
the part of the bailee cannot retain the thing loaned on the ground that the bailor
owes him something, even though it may be by reason of expenses.
However, the bailee has a right of retention for damages if the bailor is liable to him
by reason of the damages he suffered from the flaws of the thing loaned which were
known to the bailor but were not made known to him.

Mutuum.
In a contract of mutuum or simple loan, ownership passes to the borrower.
Cash Advance. An employee who availed of cash advances may not be held liable
for estafa for failure to liquidate the same, because such employee has no obligation
to return the same money which he had received. A cash advance is in the nature of
simple loan, where ownership over the money passes to the employee, hence, no
fiduciary relationship is created.
Money Market Transactions. A money market transaction is in the nature of a loan.
In this transaction, the investor is a lender who loans his money to a borrower
through a dealer.
Bank Deposits. When a depositor invested his money on time and savings deposits
with a bank, the contract that was perfected was a contract of mutuum and not a
contract of deposit. Hence, the relationship between the depositor and the bank is
that of creditor and debtor; consequently, the ownership of the amount deposited was
transmitted to the bank upon the perfection of the contract and it can make use of the
amount deposited for its banking operations.
While the bank has the obligation to return the amount deposited, it has, however, no
obligation to return the same money that was deposited. And, the failure of the bank
to return the amount deposited will not constitute estafa, but will only give rise to civil
liability.
A. Obligations of the borrower. Mutuum is a unilateral contract. The lender, once
he has delivered the subject matter to the borrower, does not assume any duty
towards the latter. The contract gives rise to obligations only on the part of the
borrower, because the delivery of the object of the contract is not an obligation of the
lender arising from the contract of loan but it is that which makes the contract
perfected.
A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same
kind and quality.
If what was loaned is a fungible thing other than money, the debtor owes another
thing of the same kind, quantity and quality, even if it should change in value. In case
it is impossible to deliver the same kind, its value at the time of the perfection of the
loan shall be paid.
B. Payment of interest. No interest shall be due unless it has been expressly
stipulated in writing. However, the debtor shall be responsible for legal interest as
indemnity if he incurs in delay or default, pursuant to the law on damages.
If the borrower pays interest when there has been no stipulation therefor, the
provisions of this Code concerning solutio indebiti, or natural obligations, shall be
applied, as the case may be. Thus, if the payment is by mistake, it is a case of solutio
indebiti and the debtor may demand the return of the interest paid. But if the payment
was made voluntarily, it is a case of natural obligation and the creditor is authorized
to retain the interest paid.
Kinds of interest.
a. Monetary interest – refers to interest paid as compensation for the use of
money under Article 1956. This is the interest that is required to be stipulated
in writing.
b. Compensatory interest – refers to interest paid as indemnity for damages or
penalty under Article 2209. This is not required to be in writing.
c. Penalty apart from monetary interest – the Civil Code permits an agreement
upon a penalty apart from the monetary interest. If the parties stipulate this
kind of agreement, the penalty does not include the monetary interest, and as
such the two are different and distinct from each other and may be demanded
separately. Such a stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned under Article
2209.
Interest on interest due and unpaid. As a rule, interest due and unpaid (accrued
interest or compound) shall not earn interest.
Exceptions:
1. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point; or
2. The contracting parties may be stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.
The receipt of the principal by the creditor, without reservation with respect to the
interest, shall give rise to the presumption that said interest has been paid. This
presumption, however, may be rebutted by evidence to the contrary.
If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered. This rule is obligatory upon the
debtor. But the provision is not mandatory in the sense that the creditor may agree
on the application of the payment to the principal prior to the payment of the interest.
Rate of Interest on Monetary Interest. The Usury Law was suspended by the
BSP. Hence, the parties to a loan agreement are given wide latitude to agree on any
interest rate. However, the suspension of the Usury Law does not give the lender
carte blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
Notwithstanding the suspension of the Usury Law, if the stipulated interest rate is
excessive, such interest rate is void. However, the principal obligation subsists
despite the nullity of the stipulated interest. In such a case, the court will merely
reduce or correct the interest rate.
Rate of Interest on Compensatory interest. As a general rule, when an obligation,
regardless of its source, is breached, the contravenor can be held liable for damages.
The provisions on “Damages” will govern in determining the measure of recoverable
damages.
The SC laid down the guidelines regarding the computation of legal interest in the
case of Eastern Shipping v. CA but it was subsequently modified in the case of Dario
Nakar v. Gallery Frames. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 116923 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made. The actual base for
the computation of legal interest shall, in any case, be on the amount
finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

DEPOSIT
A deposit is constituted from the moment a person receives a thing belonging to
another, with the obligation of safely keeping it and of returning the same. If the
safekeeping of the thing delivered is not the principal purpose of the contract, there is
no deposit but some other contract. The parties are the depositor or the depositante
and the depositary or depositario.
Nature and characteristics.
a. The principal purpose of the contract is safekeeping
 b. It generally involves corporeal movable property
c. It is generally gratuitous
d. It is generally a unilateral contract
e. It is a real contract
Principal purpose. The principal purpose of a contract of deposit is safekeeping. If
the safekeeping of the thing delivered is not the principal purpose, there is no deposit
but some other contract.
Deposit distinguished from commodatum and lease. The contract of deposit may
authorize the depositary to make use of the thing deposited upon the express
permission of the depositor, but if the principal purpose of the contract is still the
safekeeping of the thing delivered, the contract remains to be a deposit and not
commodatum. But if the principal purpose is the use of the thing delivered, the
contract is commodatum, if gratuitous, or lease of things, if there is a price paid as
consideration.
Subject matter of a deposit. Only movable things may be the object of an
extrajudicial deposit. Necessarily, the movable thing must be corporeal or tangible. In
judicial deposit, movable and immovable things may be the object of the contract.
Deposit as a real contract. An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the thing. Thus, when there is an
agreement to constitute a deposit, such agreement shall give rise to an obligation to
do and to an action for damages in case of breach.
Compensation. A deposit is a gratuitous contract, except when there is an
agreement to the contrary, or unless the depositary is engaged in the business of
storing goods.
If the deposit is gratuitous, then it is a unilateral contract because all the obligations
devolve upon the depositary and none on the depositor. If for compensation, the
deposit becomes a bilateral contract.
Kinds of Deposit. A deposit may be constituted judicially or extrajudicially.
Judicial deposit Extrajudicial deposit
Takes place when an attachment or It is the will of the parties that gives rise
seizure of property in litigation is to this kind of deposit
ordered.
The purpose is to secure and to remove The purpose is principally the
the thing from the dominion of its actual safekeeping of the thing
possessor in order to guarantee the
result of a litigation
The object may either be movable or Only movable things may be the object
immovable property thereof
Always for a compensation May be gratuitous or for a compensation
The sequestrator possesses the thing in The depositary holds the thing by the
virtual representation of the person who will of the depositor
by the decision of the court should turn
out to be its owner and proprietor