Several transactions covered:

❖ Contract of loan
❖ Contract of mortgage (whether chattel or real)
❖ Contract of antichresis
❖ Contract of guarantee
❖ Contract of suretyship

Credit transaction
- include all transactions pertaining to purchase or loan of goods or services or money
with a promise to pat or to deliver such goods or render such services in the future.
- Also known as “Contract of Bailments” referring to subjects such as usury, guarantees,
suretyship, mortgages, antichresis and concurrence as well as preferences of credits

2 kinds/types of credit transactions

1. Secured transaction
- Supported by securities or with collaterals
2. Unsecured transaction
- Without any security or collateral that they are merely supported by a promise to
pay

Parties in Contract of Bailment

➢ “Bailment” is derived from the French word ‘Bailer’ which means ‘To deliver’.
○ Bailor or “Comodatario”
- Giver
- The party who delivers to the possession or custody of a thing build
○ Bailee or “Comodante”
- Recipient
- The party who will receive the possession or custody of things thats
delivered

● CONTRACT OF LOAN
- It is a REAL CONTRACT - there must be delivery of the thing loan because it is
essential for the perfection of that particular contract
Classification of the Contract of Loan
1. Mutuum (Simple loan) *utang*
- Contact by virtue of which one of the contracting parties will deliver to others
what we call as money or consumable or fungible objects subject to the
condition that the same amount of the same kind and quality must be paid or
returned.
2. Commodatum *hiram*
- Contract by virtue of which one of the contracting parties delivers to the other
and nonconsumable object or non-fungible object, whoever receives the same is
obligated to return the same object for a certain time and after certain period of
time

COMMODATUM v. MUTUUM

COMMODATUM (Hiram) MUTUUM (Utang)

1. Essentially gratuitous (if there is 1. May be gratuitous or onerous (with interest).

compensation, it ceases to be 2. Refers to personal property only.
commodatum) 3. Transfer of ownership
2. May involve real and personal property 4. Ownership goes to borrower or bailee
3. Transfer its use 5. May not be returned until the end of the term
4. Ownership retained by the lender or
bailor
5. May be returned before the end of the
term in case of urgent need.

Notes:
Commodatum
*1. Always for free
Payment is charge for the delivery of that non-fungible or non-consumable object, the
obligation is no longer be considered as commodatum because there is a compensation
demanded or given
*2. Subject matter is the non-fungible or non-consumable object (eg. Building, House and lot,
Car)
There is transfer of use or possession

Mutuum
*1. If they did not agree as to the payment of interest, it is simply call as gratuitous (for free)
*2. Subject matter is always a personal property mostly it is a legal tender
 There is transfer of ownership, once delivered of the subject matter the ownership is
transferred to the borrower and will return only an object of the similar kind, quantity and
quality

Kinds of Commodatum
1. Ordinary Commodatum
2. Precarium
- Contract of commodatum whereby the bailor or lender has the right to demand
for the return of the thing which is the object of the contract at will.
- Two instances/cases whereby the precarium is present:
If the duration of the contract or use of the subject matter has not been
agreed upon by the parties
The use of the thing is merely tolerated

Parties in Commodatum
● Bailor (Lender)
● Bailee (Borrower)

Nature of the Contract of Commodatum

● Essentially gratuitous
- Commodatum is for free; There is no consideration being demanded that will ask
for the payment of consideration
● Real contract
- There must be delivery of the subject matter of that commodatum
- Commodatum is not perfected only by mere consent
● Purely personal contract
- The borrower or the bailee cannot generally lend or lease the object to a third
person

Object or Subject Matter

● Movable
● Immovable

Obligations of the Bailee

1. To preserve the thing loan and to take care of it with the proper diligence of a good
father of a family
2. To pay for the ordinary expenses incident to the use and preservation of the thing
loan
3. To return the thing loaned at the expiration of the contract
Rule in Case of Loss
● General rule: Res Perit Domino (bailor’s loss because the ownership is retained)
● Exceptions:
○ If he devoted the thing loaned to any purpose different from that for which it
has been loaned
○ If he keeps it longer than the period stipulated or after the accomplishment
of the use for which the commodatum has been consummated.
○ If the thing loaned has been delivered with appraisal of its value unless
there is a stipulation that the bailee shall not be liable in case of loss caused by a
fortuitous event. (Art. 1174 Oblicon)
○ If he lends or leases the thing to a person, who is NOT a member of his
household, and
○ If being able to save either the thing borrowed or his own thing, he chose to
save the latter.

CASE:
Andrew borrowed the Toyota Innova of Ben. During a fire caused by a lightning which
gutted the house of Andrew, the latter had time to save only one vehicle. Andrew decided to
save his own car instead of the car that he borrowed from Ben.

Q. Is he liable for the loss of Ben's car?

A. Yes. In a contract of commodatum the law provides that the bailee (borrower) is
liable for the loss of the thing, even if it should be through a fortuitous event, if
being able to save the thing borrowed or his own thing, he chose to save the latter.
(Art. 1942 (5)

Rule in Case of Deterioration

● Deterioration - refers to a reduction in the value which does not amount to a loss
● General rule: It shall be borne by the bailor
● Exceptions:
○ If the depreciation is caused by the bailee’s negligence

Obligations of the Bailor

1. To refund the extra-ordinary expenses for preservation, and
2. To indemnify the bailee for the damages caused by the flaw in the thing, if he,
the bailor, knew of the flaws, and he did not advise the bailee of the same.
Rights of the Bailor
1. The bailor is entitled to a return of the thing loaned at the expiration of the period
stipulated or after the accomplishment of the use for which the commodatum has been
constituted.
2. To demand the immediate return of the thing loaned if the bailee committed an act of
ingratitude. (Eg. of ingratitude acts: The bailey has imputed to the bailor the commission
of a crime or bailee has committed a crime against the person of the bailor or to the
members of the household of the bailor; undue refusal on the part of the bailor to give
support to the bailor when he has the obligation to do so)
3. To demand the immediate return of the thing loaned in cases precarium.

Modes of Extinguishing Commodatum (EDRID)

1. Expiration of the period
2. Destruction or loss of the thing loaned
3. Return of the thing loaned due to urgent permanent need
4. Ingratitude
5. Death of the bailor or bailee - unless commodatum is transmitted to the heirs

SIMPLE LOAN (Mutuum)

Nature of Mutuum
● Real contract
- There must be delivery of a subject matter which is a personal property in order
to have perfection of the contract
● NOT essentially gratuitous
- NOT for free, there is payment of interest
- It will become gratuitous if there is no payment of interest
- NOTE: Interest can be paid only when there has been expressed stipulation in
writing as to the payment thereof (Art. 1956 of the Civil Code of the Philippines)
Payment of Interest (2:14 - 6:14)
● Eastern Shipping Lines, Inc. v. CA, GR No. 974123, July 12, 1994
- If the contract violated is a contract which involves payment of loan or money
forbearance, the rate of interest to be followed is the rate which is stipulated or
agreed upon by the parties
- The rate of interest will likewise earn the legal rate of interest of 12% from the
time it has been judicially demanded
- In the absence any stipulation as to rate of interest, then it is 12%
● Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr., GR No. 189871, August 13, 2013
- When the obligation has been violated and it involves payment of sum of money
such as loan or forbearance of money, the interest that will be collected is the
rate of interest agreed upon or stipulated upon by the parties
- Interest due shall in itself earn the fixed legal interest of 6% per annum to be
computed from the time there is judicial or extrajudicial demand for payment
● Lara’s Gifts and Decors, Inc. v. Midtown Industrial Sales, Inc., GR No. 225433, August
28, 2019
- When the obligation is breached and it consists in the payment of money such as
loan or forbearance of money, the rate of interest to be followed is the rate
stipulated or agreed upon by the parties provided that it is not excessive and
nonconsumable

Kinds of Interest
1. Monetary Interest
- The compensation that has been agreed upon by the parties for use, forbearance
or loan
- Provision of Art. 1956, interest shall be expressly agreed upon by the parties in
writing
- 6% per annum
2. Compensatory Interest
- Interest that will be assessed or imposed as penalty or indemnity for damages
that will be imposed by the law or courts
- 6% per annum

● Sun Life of Canada (Phils.), Inc. v. Sandra Tan Kit, et al., GR No. 183272, October 15,
2014

CASE:
Andy borrowed from Benny P1M to be paid within a period of one year with an agreed
interest of 1% per month. Considering that Andy and Benny are friends, the contract is not
reduced in writing. On the due date, Benny demanded from Andy the payment of loan and the
accumulated interest, however, Andy refused to pay. In view thereof, Ben filed a case against
Andy for the collection of the principal and the accumulated interest:

Q. Will the action prosper?

A. It depends. As regards the principal of the loan in the amount of P1M, the action will
prosper. However, as regards the payment of the interest of 1%, the same cannot be
collected as it is void, since the law provides that "no interest shall be due unless it has
been expressly stipulated in writing.

Object of the Contract

● Money
● Consumable or fungible things

Capacity of the Parties

1. The bailor must be the owner of the thing loaned
2. He must be capacitated to bind the property.
3. He must have the juridical capacity to act.

CONSIDERATION OF THE CONTRACT

● The liberality of the bailor
● The interest

Formality of the Contract

● General rule: No special form is required
● Exceptions: (In writing)
○ If the contract is to be performed after more than a year
○ If payment of interest has been agreed upon

Obligations of the Borrower:

1. To return another thing of the same kind, quantity and quality
2. To pay interest in case it has been expressly stipulated in writing