UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

I. Loan stipulated interest

Contract of Loan vs. Contract to Loan Borrower must return Borrower need only
the same thing pay an equal amount
Contract of Loan Contract to Loan loaned [Art.1933] of the same kind and
quality [Art. 1953]
Real Contract: Consensual Contract:
perfected, not by perfected by mere May involve real or Refers only to
mere consent, but by consent. personal property personal property
delivery of the object [Art.1937]
An accepted promise
of the contract.
to deliver something
by way of Loan for permissive or Loan for consumption
commodatum or temporary use
[Art.1935]
simple loan is binding
upon the parties [Art. Bailor may demand Lender may not
1934] the return of the thing demand its return
loaned before the before the lapse of the
expiration of the term term agreed upon
Contracts Of Loan in case of urgent need
(1) Commodatum – a contract where one [Art.1946]
party delivers to another something not
consumable so that the latter may use Bailor suffers the loss Borrower suffers the
the same for a certain time and return it. of the subject matter loss even if caused
[Art. 1933] since he is the owner exclusively by a
[Art.1942; Art.1174] fortuitous event and
(2) Mutuum (Simple Loan) – a contract where he is not, therefore,
one party delivers to another, money or discharged from his
other consumable thing, upon the duty to pay
condition that the same amount of the
same kind and quality shall be paid. [Art. Purely personal in Not purely personal in
1933] character [Art 1939] character

Both are reciprocal obligations

Commodatum Vs. Mutuum
Commodatum Mutuum
A. COMMODATUM
Ordinarily involves Involves money or Commodatum – an essentially gratuitous
something not other consumable contract where one party (bailor) delivers to
consumable thing another (bailee) something not consumable
[Art.1936] so that the latter may use the same for a
Consumable - cannot
Exception: be used in a manner certain time and return it. [Art. 1933]
consumable goods for appropriate to their
exhibition nature without their
being consumed. A.1. KINDS OF COMMODATUM
[Art. 418] (1) Ordinary commodatum – the use of the
thing by the bailee is for a certain period
Ownership of the Ownership is of time [Art. 1933]
thing loaned is transferred to the
retained by lender borrower (2) Precarium – the bailor may demand the
[Art.1933] thing loaned at will; if any one of the
following is present
Essentially gratuitous May be gratuitous or (a) The duration and purpose of the
[Art.1933] onerous, i.e. with contract is not stipulated, or
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(b) The use of the thing is merely
tolerated by the owner [Art. 1947]
A.2. PARTIES
Bailor: creditor
Bailee: debtor
Who may be a bailor in commodatum?
Anyone. The bailor in commodatum need not
be the owner of the thing loaned [Art. 1938],
but as against the bailee, the bailor retains
ownership of the thing loaned.
A.3. USE BY THE BAILEE
General rule: the bailee acquires permissive
use of the thing loaned only for himself. He
may not lend nor lease the thing loaned to
him to a third person.
Exception: the members of the bailee’s
household may make use of the thing loaned
Exception to the exception: if there is a
stipulation to the contrary, or the nature of
the thing forbids such use. [Art. 1939(2)]
A.4. OBLIGATIONS OF THE BAILEE
(1) Obligation to take care of it with the
proper diligence of a good father of a
family. [Art. 1163]
(2) Obligation to use the thing loaned only
for the purpose for which it was loaned
and not for any other purpose. [Art. 1935,
1939(2), 1942 [1]]
(3) Obligation to not lend the thing to a third
person who is not a member of his
household. [Art. 1942 (4)]
(4) Obligation to return the thing upon the
expiration of the period stipulated or after
the accomplishment of the use for which
it has been constituted. [Art. 1944, 1946]
Exception:
Bailee has right of retention for damages
when the bailor who, knowing the flaws
of the thing loaned, does not advise the
bailee of the same. [Arts. 1946, 1944]
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(5) Obligation to pay for the ordinary
expenses for the use and preservation of
the thing loaned. [Art. 1941]
(6) Obligation to bear equally (with the
bailor) the extraordinary expenses arising
on the occasion of actual use of the thing
by the bailee even though he acted
without fault. [Art. 1949]
Exception: Contrary stipulation
(7) Obligation to be solidarily liable when
there are two or more bailees to whom a
thing is loaned in the same contract. [Art.
1945]
(8) No obligation to answer for deterioration
of the thing loaned due only to the use
thereof and without his fault [Art. 1943]
NOTE: If, for the purpose of making use of the
thing loaned, the bailee incurs ordinary or
extraordinary expenses which are neither for
the use nor the preservation of the thing, he is
not entitled to reimbursement. [Art. 1950]
A.5. OBLIGATIONS OF THE BAILOR
(1) Obligation not to demand the return of
the thing until the expiration of the term
or after the accomplishment of the use
[Art. 1946]
Exceptions:
(a) When bailor has urgent need of the
thing, he may demand its return
(extinguish commodatum) or its
temporary use (suspend
commodatum) [Art. 1946]
(b) Precarium [Art. 1947]
(c) If bailee commits any acts of
ingratitude in Art. 765: [Art. 1948]
(i) Bailee committed some offense
against the person, honor or
property of the bailor, or of his
wife or children under his
parental authority;
(ii) Bailee imputes to bailor any
criminal offense, or any act
involving moral turpitude, even
though he should prove it, unless
the crime or act has been
committed against the bailee
UP LAW BOC CREDIT TRANSACTIONS
himself, his wife or children under
his authority; or
(iii) Bailee unduly refuses bailor
support when bailee is legally or
morally bound to give support the
bailor.
(2) Obligation to refund the extraordinary
expenses during the contract for the
preservation of the thing loaned. [Art.
1949]
Provided that: Bailee brings the same to
the knowledge of the bailor before
incurring them, except when they are so
urgent that the reply cannot be awaited
without danger.
(3) Obligation to bear equally (with the
bailee) the extraordinary expenses arising
on the occasion of actual use of the thing
by the bailee. [Art. 1949]
Exception: Contrary stipulation
(4) Obligation to pay damages to the bailee
for hidden flaws known to the bailor. [Art.
1951]
NOTE: Bailor has no right of abandonment;
he cannot exempt himself from payment of
expenses or damages to the bailee by
abandoning the thing to the latter. [Art. 1952]
A.6. LIABILITY FOR DETERIORATION
General rule: the bailee is liable for the
deterioration of the thing loaned.
Exception: when the deterioration of the thing
is due only to the use thereof and without his
fault. [Art. 1943]
A.7. LIABILITY FOR LOSS
General Rule: The Bailee is not liable for loss
of the thing due to fortuitous event. [Art. 1174]
Exceptions: Bailee is liable for loss of the
thing, even if it is through a fortuitous event:
(1) If he devotes the thing to any purpose
different from that for which it has been
loaned;
(2) If he keeps it longer than the period
stipulated, or after the accomplishment
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of the use for which the commodatum
has been constituted;
(3) 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;
(4) If he lends or leases the thing to a third
person, who is not a member of his
household;
(5) If, being able to save either the thing
borrowed or his own thing, he chose to
save the latter. [Art. 1942]
A.8. RIGHT OF RETENTION
General Rule: the bailee has no right of
retention of the thing loaned on the ground
that the bailor owes him something, even
though it may be by reason of expenses. [Art.
1944]
Exception: the bailee has the right of
retention for damages arising from hidden
flaws. [Art. 1944, 1951]
A.9. EXTINGUISHMENT
(1) Death of either the bailor or the bailee
[Art. 1939]
(2) Expiration of term or accomplishment of
purpose [Art. 1946]
(3) Bailor demands the return in case the
bailee committed acts of ingratitude
(4) Upon demand in case of precarium
(5) Bailor demands the return in case he has
urgent need of the thing loaned
B. MUTUUM
Mutuum – a contract where one of the parties
(creditor) delivers to another
(debtor/borrower) money or other
consumable thing upon the condition that
the same amount of the same kind and
quality shall be paid.
B.1. OBLIGATIONS OF THE BORROWER
UP LAW BOC CREDIT TRANSACTIONS
(1) Obligation to pay to the creditor an equal
amount of the same kind and quality.
[Art. 1953] If impossible to deliver the
same kind, pay value at the time of
perfection of loan. [Art. 1955]
(2) If stipulated, the borrower has the
obligation to pay interest. [Art. 1956]
B.2. INTEREST AND SUSPENSION OF
USURY LAW
Interest– the compensation allowed by law or
fixed by the parties for the loan or
forbearance of money, goods or credits
(conventional interest), or the amount
imposed by law or by courts as penalty or
indemnity for damages (compensatory
interest)
(1) Simple interest – Paid for the principal at
a certain rate fixed or stipulated by the
parties.
(2) Compound Interest – that which is
imposed upon interest due and unpaid.
Compound interest is allowed:
(a) When there is an express written
stipulation to that effect [Art.1956]
(b) Upon judicial demand. However,
debtor is not liable to pay compound
interest even after judicial demand
when there is no stipulation for
payment of interest. [Art.2212]
(3) Legal Interest – that which the law directs
to be charged in the absence of any
agreement as to the rate between the
parties.
(4) Lawful Interest – that which the laws
allow or do not prohibit.
(5) Unlawful or Usurious Interest – paid or
stipulated to be paid beyond the
maximum fixed by law.
B.3. REQUISITES FOR INTEREST TO BE
CHARGEABLE
(1) Must be expressly stipulated [Art. 1956]
Exceptions:
(a) The debtor in delay is liable to pay
legal interest (6% per annum) as
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indemnity for damages [Art.2209]
(b) Interest accruing from unpaid interest
– Interest demanded shall earn
interest from the time it is judicially
demanded [Art.2212] or where there
is an express stipulation [Art.1959]
(2) Agreement must be in writing [Art.1956]
(3) Must be lawful
Rules for award of interest in the concept of
actual and compensatory damages [Nacar v.
Gallery Frames, G.R. No. 189871 (2013)
modifying Eastern Shipping Lines vs. CA, G.R.
No. 97412 (1994) in light of BSP-MB Circular
No. 799]
(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,
(a) The interest due should be that which
may have been stipulated in writing.
(b) The interest due shall itself earn legal
interest from the time it is judicially
demanded.
(c) 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 1169 of the Civil Code.
(2) When an obligation, not constituting a
loan or forbearance of money, is breached
(a) An interest on the amount of
damages awarded may be imposed
at the discretion of the court at the
rate of 6% per annum.
(b) No interest, however, shall be
adjudged on unliquidated claims or
damages, except when or until the
demand can be established with
reasonable certainty.
(c) Where the demand is established
with reasonable certainty, the interest
shall begin to run from the time the
claim is made judicially or
extrajudicially [Art. 1169, Civil Code]
(d) When such certainty cannot be so
reasonably established at the time
UP LAW BOC CREDIT TRANSACTIONS
the demand is made, the interest
shall begin to run only from the date
the judgment of the court is made [at
which time the quantification of
damages may be deemed to have
been reasonably ascertained].
(e) 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.
The Usury Law [Act No.2566] – an act fixing
rates of interests upon loans and declaring
the effect of receiving or taking usurious rates
and for other purposes. [Arevalo v. Dimayuga,
G.R. No. 26218 (1927)]
CB Circular No. 905 abolished interest rate
ceilings. With the promulgation of such
circular, usury has become “legally inexistent”
as the parties can now legally agree on any
interest that may be charged on the loan.
B.4. ELEMENTS OF USURY
(a) A loan or forbearance of money
(b) An understanding between parties that
the loan shall and may be returned
(c) An unlawful intent to take more than the
legal rate for the use of money or its
equivalent
(d) The taking or agreeing to take for the use
of the loan of something in excess of
what is allowed by law.
Note: A usurious loan transaction is not a
complete nullity but defective only with
respect to the agreed interest. [Carpo v. Chua,
G.R. Nos. 150773 and 153599 (2005)]
Although usury is legally inexistent, courts
will not hesitate to declare void “excessive,
iniquitous, unconscionable, exorbitant”
interest. [Gomez-Somera in re: Carpo v. Chua]
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II. 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. [Art. 1962]
OBJECT OF DEPOSIT
Art. 1966 provides that only movable things
may be the object of a deposit. However, Art.
2006 provides that movable as well as
immovable property may be the object of
sequestration or judicial deposit.
PRINCIPAL PURPOSE
Safekeeping of the thing; if safekeeping is
NOT the principal purpose, or is only an
accessory obligation, there is NO DEPOSIT
but some other contract. [Art. 1962]
CONSIDERATION
A deposit is generally gratuitous, except:
(1) If there is an agreement to the contrary
(2) When the depositary is engaged in the
business of storing goods [Art. 1965]
PARTIES
Depositor: the person who delivers, or
formally transfers, gives, or yields possession
or control of the movable property
Depositary: the person who receives it
KINDS OF DEPOSIT
(1) Extrajudicial
(a) Voluntary – obligation arises as a
consequence of contract;
(b) Necessary – obligation arises as a
consequence of law or quasi-contract
(2) Judicial – obligation arises as a
consequence of a law allowing the
issuance of a judicial order constituting a
deposit
A. VOLUNTARY DEPOSIT
UP LAW BOC CREDIT TRANSACTIONS
Voluntary deposit –the deposit itself is a real
contract, as it is not perfected until the
delivery of the thing. [Art. 1968] A contract to
deposit, or an agreement to constitute a
deposit, is consensual and binding.
A deposit may be made by two or more
persons (who believe that they are entitled to
the thing deposited with a third person). The
third person is to deliver the thing to the one
to whom it belongs. [Art. 1968]
How Entered Into: Orally or in writing [Art.
1969]
How Perfected: The deposit is perfected upon
delivery, which is made by the will of the
depositor. [Arts. 1963, 1968]
A.1. EXTINGUISHMENT
(1) Loss or destruction of thing deposited, or
(2) In case of a gratuitous deposit, upon the
death of either the depositor or
depositary [Art. 1995]. The depositary is
not obliged to continue with the contract
of deposit
(3) By other modes provided in the Civil
Code, e.g. novation, merger, etc. [See
Art.1231]
A.2. OBLIGATIONS OF A DEPOSITARY
(1) Depositary is obliged to keep the thing
safely and
(2) Depositary is obliged to return it to the
depositor, heirs, successors or person
designated in the contract, when required
[Art. 1972], together with all its products,
accessories and accessions. [Art. 1983] at
the place designated when deposit was
made. Otherwise, where the thing may be
[Art. 1987]
Exception to return on demand: when the
thing is judicially attached while in the
depositary’s possession, or when
depositary is notified of the opposition of
a third person [Art. 1988]
Depositary NOT LIABLE FOR LOSS
General rule: The depositary is not liable in
the event of loss. The required degree of care
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however, is greater if the deposit is for
compensation.
Exceptions:
(1) Loss is through his fault or negligence
[Art. 1170], even if the thing was insured
[Art. 2207];
(2) Loss while in his possession, ordinarily
raises presumption of fault on his part.
[See Art. 1265]
(3) Loss is through a fortuitous event if
(a) It is stipulated that depositary will be
liable;
(b) Depositary uses the thing without
Depositor’s permission;
(c) Depositary delays its return;
(d) Depositary allows others to use it.
[Art 1979]
(4) Loss when depositary deposits the thing
with a third person
Exception: if deposit with a third person is
allowed
Exception to the exception: if such third
person is manifestly careless or unfit [Art.
1973];
(5) Depositary also liable for negligence of
employee [Ibid.];
(6) Loss when depositary uses the thing
Exception: use with permission or for
preservation
(7) Even if the depositary is not liable, if the
he receives money/replacement, he must
deliver such to the depositor [Art. 1990]
A.3. AUTHORITY OF DEPOSITARY
(1) Depositary may change way of deposit if
he may reasonably presume that the
depositor would consent if he knew the
situation. He is to notify the depositor
thereof and wait for the latter’s decision,
unless delay would cause danger. [Art.
1974]
(2) Depositary can collect on interest earned
by certificates, bonds, securities and
instruments when it becomes due. [Art
1975]
UP LAW BOC CREDIT TRANSACTIONS
(3) Depositary cannot make use of the thing
deposited unless with depositor’s consent
or its preservation requires its use. [Art
1977]
(4) If there is justifiable reason not to keep
the thing, depositary may return it to the
depositor even before the time
designated
Exception: when the deposit is for
valuable consideration [Art. 1989]
A.4. OBLIGATIONS OF A DEPOSITOR
(1) Gratuitous deposit: depositor is obliged
to reimburse the depositary for expenses
incurred for preservation. [Art.1992]
(2) Depositor is obliged to pay losses
incurred due to character of thing
deposited. [Art. 1993]
Exceptions:
(a) Depositor was not aware of the
danger;
(b) Depositor was not expected to know
the dangerous character of the thing;
(c) Depositor notified the depositary of
such dangerous character;
(d) Depositary was aware of the danger
without advice from the depositor.
[Ibid.]
A.5. AUTHORITY OF DEPOSITOR
(1) When there are two or more depositors
and they are not solidary and the thing
admits of division, one cannot demand
more than his share [Art. 1985].
(2) If he should lose his capacity to contract
after having made the deposit, the thing
cannot be returned except to persons
who may have administration of his
property and rights. [Art. 1986].
A.6. RIGHT OF RETENTION
The depositary may retain the thing until the
full payment of what may be due him by
reason of the deposit [Art. 1994]
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B. NECESSARY DEPOSIT
Made in compliance with a legal obligation,
or on the occasion of any calamity, or by
travelers with common carriers [Arts.1734-
1735], or by travelers in hotels and inns
[Arts.1996-2004]
B.1. KINDS OF NECESSARY DEPOSIT
(1) It is made in compliance with a legal
obligation, in which case it is governed by
the law establishing it, and in case of
deficiency, the rules on voluntary deposit,
e.g., Arts. 538, 586 and 2104
(2) It takes place on the occasion of any
calamity, such as fire, storm, flood,
pillage, shipwreck, or other similar
events. There must be a causal relation
between the calamity and the
constitution of the deposit. In this case
the deposit is governed by the rules on
voluntary deposit. [Art. 2168]
(3) Made by passengers with common
carriers. [Art.1754]
(4) Made by travelers in hotels or inns. [Art.
1998]
B.2. DEPOSIT BY TRAVELERS IN HOTELS
AND INNS
Before keepers of hotels or inns may be held
responsible as depositaries with regard to the
effects of their guests, the following must
concur:
(1) Keepers or their employees have
previously been informed about the
effects brought by the guests; and
(2) The latter have taken the precautions
prescribed regarding their safekeeping.
B.3. EXTENT OF LIABILITY UNDER
ART.1998
(a) Those in hotel rooms which come under
the term “baggage” or articles such as
clothing as are ordinarily used by
travelers
UP LAW BOC CREDIT TRANSACTIONS
(b) Include those lost or damaged in hotel
annexes such as vehicles in the hotel’s
garage.
B.4. WHEN HOTEL-KEEPER LIABLE
Regardless of the amount of care exercised,
the hotel-keeper is liable when—
(a) The loss or injury to personal property is
caused by his servants or employees as
well as by strangers [Art. 2000].
(b) The loss is caused by the act of a thief or
robber done without the use of arms and
irresistible force. [Art. 2001]
B.5. WHEN HOTEL-KEEPER NOT LIABLE
(a) The loss or injury is caused by force
majeure, like flood, fire, [Art.2000] theft
or robbery by a stranger—not the hotel-
keeper’s servant or employee—with the
use of firearms or irresistible force
[Art.2001]
Exception: Hotel-keeper is guilty of fault
or negligence in failing to provide
against the loss or injury from his cause.
[Arts.1170 and 1174]
(b) The loss is due to the acts of the guests,
his family, servants, visitors [Art.2002]
(c) The loss arises from the character of the
things brought into the hotel [Art. 2002]
The hotel-keeper cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the guest. Such kind of stipulation shall be
void. [Art. 2003]
B.6. HOTEL-KEEPER’S RIGHT TO
RETENTION
The hotel-keeper has a right to retain the
things brought into the hotel by the guest, as
a security for credits on account of—
(a) lodging,
(b) supplies usually furnished to hotel guests
[Art. 2004]
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The right of retention recognized in this
article is in the nature of a pledge created by
operation of law.
C. JUDICIAL DEPOSIT OR
SEQUESTRATION
Takes place when an attachment or seizure of
property in litigation is ordered [Arts. 2005-
2009] It is the only type of deposit that may
involve immovable property.
C.1. NATURE AND PURPOSE
It is auxiliary to a case pending in court. The
purpose is to maintain the status quo during
pendency of the litigation or to insure the
right of the parties to the property in case of a
favorable judgment.
C.2. DEPOSITARY OF SEQUESTERED
PROPERTY
A person is appointed by the court [Art. 2007]
with the obligations—
(a) To take care of the property with the
diligence of a good father of the family.
[Art. 2008]
(b) To continue in his responsibility until the
controversy which give rise thereto is
ended unless the court so orders. [Art.
2007]
C.3. APPLICABLE LAW
Judicial deposit law is remedial or procedural.
The Rules of Court shall govern matters not
provided for in the Civil Code. [Art. 2009]
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

Guaranty Surety
III. Guaranty and
not bound to take
Suretyship notice of its non-
performance
Guaranty – a contract whereby a person
(guarantor) binds himself to the creditor to A guarantor is often A surety will not be
fulfill the obligation of the principal debtor in discharged by the discharged, either by
case the latter should fail to do so. [Art. 2047] mere indulgence of the mere indulgence
the creditor to the of the creditor to the
Suretyship – a relation which exists where principal, and is principal, or by want
one person [principal] has undertaken an usually not liable of notice of the
obligation and another person (surety) is also unless notified of the default of the
under a direct and primary obligation or other default of the principal, no matter
duty to a third person (obligee), who is principal how much he may be
entitled to but one performance, and as
injured thereby
between the two who are bound, the one
rather than the other should perform.
A guarantor is the A surety is the insurer
While a surety undertakes to pay if the insurer of the of the debt, and he
principal does not pay, the guarantor only solvency of the obligates himself to
binds himself to pay if the principal is unable debtor and thus pay if the principal
to pay. [See benefit of excussion, Art. 2058] binds himself to pay does not pay
if the principal is
unable to pay
Guaranty distinguished from Suretyship
[Zobel, Inc. vs. CA, G.R. No. 113931 (1998)]
Guaranty Surety A. NATURE AND EXTENT OF
GUARANTY
A collateral An accessory promise
undertaking to pay by which a person General rule: Guaranty is gratuitous
the debt of another binds himself for Exception: When there is a stipulation to the
in case the latter is another already contrary [Art. 2048]
unable to pay the bound, and agrees
debt. with the creditor to
satisfy the obligation On the cause of a guaranty contract
if the debtor does not
A guarantor or surety is bound by the same
The contract of A surety is usually consideration that makes the contract
guaranty is the bound with his effective between the principal parties
guarantor's own principal by the same thereto. [Severino v. Severino, et al., G.R. No.
separate instrument, executed 34642 (1931)]
undertaking, in which at the same time, and
Guaranty or surety agreement is regarded
the principal does on the same
valid despite the absence of any direct
not join. It is usually consideration. He is
consideration received by the guarantor or
entered into before an original promissor
surety, such consideration need not pass
or after that of the and debtor from the
directly to the guarantor or surety; a
principal, and is beginning, and is
consideration moving to the principal will
often supported on a held, ordinarily, to
suffice.
separate know every default of
consideration from his principal.
that supporting the
General Rule: A married woman who is a
contract of the
guarantor binds only her separate property
principal. The
[Art. 2049]
original contract of
his principal is not his Exceptions:
contract, and he is
Page 441 of 599
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(a) With her husband’s consent, bind the
community or conjugal partnership
property
(b) Without husband’s consent, in cases
provided by law, such as when the
guaranty has redounded to the benefit of
the family.
A guaranty need not be undertaken with the
knowledge of the debtor [Art. 2050]
Guaranty is unilateral. It exists for the benefit
of the creditor and not for the benefit of the
principal debtor
Creditor has every right to take all possible
measures to secure payment of his credit—
guaranty can be constituted even against the
will of the principal debtor
However, as regards payment made by a third
person—
(a) If payment is without the knowledge or
against the will of the debtor—
(i) Guarantor can recover only insofar as
the payment has been beneficial to
the debtor [Art. 1236]
(ii) Guarantor cannot compel the creditor
to subrogate him in his rights [Art.
1237]
(b) If payment is with knowledge or consent
of the debtor: Subrogated to all the
rights which the creditor had against the
debtor
The guaranty must be founded on a valid
principal obligation [Art. 2052 (1)]
Guaranty is an accessory contract: It is an
indispensable condition for its existence that
there must be a principal obligation. Hence, if
the principal obligation is void, it is also void.
A guaranty may secure the performance of a
voidable, unenforceable, and natural
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CIVIL LAW
obligation [Art. 2052(2)]
A guaranty may secure the performance of a:
(1) Voidable contract – such contract is
binding, unless it is annulled by a proper
court action
(2) Unenforceable contract – because such
contract is not void
(3) Natural obligation – the creditor may
proceed against the guarantor although
he has no right of action against the
principal debtor for the reason that the
latter’s obligation is not civilly
enforceable. When the debtor himself
offers a guaranty for his natural
obligation, he impliedly recognizes his
liability, thereby transforming the
obligation from a natural into a civil one.
A guaranty may secure a future debt [Art.
2053]
Continuing Guaranty
(1) Not limited to a single transaction but
which contemplates a future course of
dealings, covering a series of transactions
generally for an indefinite time or until
revoked.
(2) It is prospective in its operation and is
generally intended to provide security
with respect to future transactions.
(3) Future debts, even if the amount is not
yet known, may be guaranteed but there
can be no claim against the guarantor
until the amount of the debt is
ascertained or fixed and demandable.
Rationale: A contract of guaranty is subsidiary
(1) To secure the payment of a loan at
maturity – surety binds himself to
guarantee the punctual payment of a
loan at maturity and all other obligations
of indebtedness which may become due
or owing to the principal by the borrower.
(2) To secure payment of any debt to be
subsequently incurred – a guaranty shall
be construed as continuing when by the
terms thereof it is evident that the object
is to give a standing credit to the principal
debtor to be used from time to time either
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

indefinitely or until a certain period, the bond.

especially if the right to recall the
Interest runs from:
guaranty is expressly reserved.
(i) Filing of the complaint (upon judicial
(3) To secure existing unliquidated debts –
demand); or
refers to debts existing at the time of the
constitution of the guaranty but the (ii) The time demand was made upon the
amount thereof is unknown and not to surety until the principal obligation is
debts not yet incurred and existing at that fully paid (upon extra-judicial demand)
time.
(4) The surety agreement itself is valid and
Rationale: Surety is made to pay, not by
binding even before the principal
reason of the contract, but by reason of
obligation intended to be secured thereby
the debtor’s failure to pay when
is born; for example, those securing
demanded and for having compelled the
obligations subject to a condition
creditor to resort to the courts to obtain
precedent are valid and binding before
payment.
the occurrence of the condition
precedent. (b) Penalty may be provided – a surety may
be held liable for the penalty provided for
in a bond for violation of the condition
A guaranty may secure the performance of a therein.
conditional obligation [Art. 2053]
(1) Principal obligation subject to a
Principal’s liability may exceed guarantor’s
suspensive condition – the guarantor is
obligations [Art. 2054]
liable only after the fulfillment of the
condition. The amount specified in a surety bond as the
surety’s obligation does not limit the extent of
(2) Principal obligation subject to a
the damages that may be recovered from the
resolutory condition – the happening of
principal, the latter’s liability being governed
the condition extinguishes both the
by the obligations he assumed under his
principal obligation and the guaranty
contract

A guarantor’s liability cannot exceed the

principal obligation [Art. 2054]
General rule: Guaranty is a subsidiary and
accessory contract – guarantor cannot bind
himself for more than the principal debtor
and even if he does, his liability shall be
reduced to the limits of that of the debtor.
But the guarantor may bind himself for less
than that of the principal.
Exceptions:
(a) Interest, judicial costs, and attorney’s
fees as part of damages may be
recovered – creditors suing on a
suretyship bond may recover from the
surety as part of their damages, interest
at the legal rate, judicial costs, and
attorney’s fees when appropriate, even
without stipulation and even if the surety
would thereby become liable to pay
more than the total amount stipulated in
Page 443 of 599
The existence of a guaranty is not presumed
[Art. 2055]
Guaranty requires the expression of consent
on the part of the guarantor to be bound. It
cannot be presumed because of the existence
of a contract or principal obligation.
Rationale:
(1) There be assurance that the guarantor
had the true intention to bind himself;
(2) To make certain that on making it, the
guarantor proceeded with consciousness
of what he was doing.
Contract of guaranty is covered by the Statute
of Frauds [See Art. 1403 (2) (b)]
Guaranty must not only be expressed but
must so be reduced into writing. Hence, it
shall be unenforceable by action, unless the
UP LAW BOC CREDIT TRANSACTIONS
same or some note or memorandum thereof
be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore,
of the agreement cannot be received without
the writing, or a secondary evidence of its
contents. However, it need not appear in a
public document.
B. NATURE AND EXTENT OF
SURETYSHIP
Liability is contractual and accessory but
direct. Liability is limited by the terms of the
contract. Liability arises only if principal
debtor is held liable
(1) In the absence of collusion, the surety is
bound by a judgment against the
principal even though he was not a party
to the proceedings;
(2) The creditor may sue, separately or
together, the principal debtor and the
surety;
(3) A demand or notice of default is not
required to fix the surety’s liability
Exception: Where required by the
provisions of the contract of suretyship
(4) A surety bond is void where there is no
principal debtor because such an
undertaking presupposes that the
obligation is to be enforceable against
someone else besides the surety, and the
latter can always claim that it was never
his intention to be the sole person
obligated thereby.
Note: A surety is NOT entitled to the
benefit of excussion.
The undertaking is to the creditor, not the
debtor
The surety makes no covenant or agreement
with the principal that it will fulfill the
obligation guaranteed for the benefit of the
principal. The surety’s undertaking is that the
principal shall fulfill his obligation and that
the surety shall be relieved of liability when
the obligation secured is performed; unless
otherwise expressly provided.
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CIVIL LAW
The stipulation in the indemnity agreement
allowing the surety to recover even before it
paid the creditor is enforceable. In
accordance therewith, the surety may
demand from the indemnitors even before
paying the creditors. [Mercantile Insurance
Company v. Ysmael, G.R. No. L-43862 (1989)]
Note: Prior demand by the creditor upon the
principal is not required. The surety is not
exonerated by neglect of the creditor to sue
the principal.
Strictissimi juris rule is applicable ONLY to
accommodation surety.
Rationale: An accommodation surety acts
without motive of pecuniary gain and hence,
should be protected against unjust pecuniary
impoverishment by imposing on the principal,
duties akin to those of a fiduciary.
C. EFFECT OF GUARANTY
C.1. EFFECTS OF GUARANTY BETWEEN
THE GUARANTOR AND THE CREDITOR
A. The guarantor has the right to benefit
from excussion/ exhaustion [Art. 2058]
The guarantor cannot be compelled to
pay the creditor unless the latter has:
(a) Exhausted all of the property of the
debtor; and
(b) Resorted to all the legal remedies
against the debtor.
Exceptions to benefit of excussion
(1) As provided in Art. 2059:
(a) If the guarantor has expressly
renounced it.
(b) If he has bound himself solidarily with
the debtor - here, the liability
assumed is that of a surety. The
guarantor becomes primarily liable as
a solidary co- debtor. In effect, he
renounces in the contract itself the
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

benefit of exhaustion. excussion of property located

abroad would be a lengthy and
(c) In case of insolvency of the debtor –
extremely difficult proceeding
the guarantor guarantees the
and would not conform with the
solvency of the debtor. If the debtor
purpose of the guaranty to
becomes insolvent, the liability of the
provide the creditor with the
guarantor arises as the debtor cannot
means of obtaining the
fulfill his obligation
fulfillment of the obligation.
(d) When the debtor has absconded, or
(iii) Sufficient to cover the amount of
cannot be sued within the Philippines
the debt
– the creditor is not required to go
after a debtor who is hiding or cannot (3) If he is a judicial bondsman and sub-
be sued in our courts, and to incur the surety [Art. 2084]
delays and expenses incident thereto.
(4) Where a pledge or mortgage has been
Exception: When the debtor has left a given by him as a special security
manager or representative
(5) If he fails to interpose it as a defense
(e) If it may be presumed that an before judgment is rendered against him.
execution on the property of the
principal debtor would not result in
the satisfaction of the obligation – if B. The creditor has the right to secure a
such judicial action including judgment against the guarantor prior to
execution would not satisfy the the excussion
obligation, the guarantor can no
General rule: An ordinary personal
longer require the creditor to resort to
guarantor (NOT a pledgor/mortgagor),
all such remedies against the debtor
may demand exhaustion of all the
as the same would be but a useless
property of the debtor before he can be
formality. It is not necessary that the
compelled to pay.
debtor be judicially declared
insolvent. Exception: The creditor may, prior
thereto, secure a judgment against the
guarantor, who shall be entitled,
The right of guarantors…to demand however, to a deferment of the execution
exhaustion of the property of the of said judgment against him, until after
principal debtor, exists only when a the properties of the principal debtor
pledge or a mortgage has not been given shall have been exhausted, to satisfy the
as special security for the payment of the latter’s obligation.
principal obligation. [Southern Motors, Inc.
v. Barbosa, G.R. No. L-9306 (1956)]
C. The creditor has the duty to make prior
(2) If he does not comply with Art. 2060: demand for payment from the guarantor
In order that the guarantor may make use [Art. 2060]
of the benefit of excussion, he must:
The demand is to be made only after
(a) Set it up against the creditor upon the judgment on the debt.
latter’s demand for payment from
him;
D. The guarantor has the duty to set up the
(b) Point out to the creditor:
benefit of excussion [Art. 2060]
(i) Available property of the debtor –
As soon as he is required to pay,
the guarantor should facilitate
guarantor must also point out to the
the realization of the excussion
creditor available property (not in
since he is the most interested in
litigation or encumbered) of the debtor
its benefit.
within the Philippines.
(ii) Within the Philippine territory –
Page 445 of 599
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

Exception:
E. The creditor has the duty to resort to all (1) Liability will be solidary if it has been
legal remedies [Arts. 2058, 2061] expressly stipulated.
After the guarantor has fulfilled the (2) Also, the circumstances enumerated
conditions required for making use of the in Art. 2059 will preclude application
benefit of excussion, it becomes the duty of the benefit of division.
of the creditor to:
(1) Exhaust all the property of the debtor
C.2. EFFECTS OF GUARANTY BETWEEN
pointed out by the guarantor;
THE DEBTOR AND THE GUARANTOR
(2) If he fails to do so, he shall suffer the
A. The guarantor who pays has the right to
loss for the insolvency of the debtor,
be subrogated to the rights of the creditor
but only to the extent of the value of
[Art. 2067]
the said property
A guarantor who pays the debt is entitled
to every remedy which the creditor has
F. The creditor has the duty to notify the against the principal debtor, to enforce
guarantor in the action against the debtor every security and all means of payments;
[Art. 2062] to stand in the place of the creditor not
only through the medium of the contract,
Notice to the guarantor is mandatory in
but even by means of the securities
the action against the principal debtor.
entered into without the knowledge of
The guarantor, however, is not duty
the surety; having the right to have those
bound to appear in the case, and his non-
securities transferred to him though there
appearance shall not constitute default,
was no stipulation for it, and to avail
w/ its consequential effects.
himself of all securities against the
Rationale: To give the guarantor the debtor.
opportunity to allege and substantiate
However, if a guarantor has compromised
whatever defenses he may have against
with the creditor for the payment of the
the principal obligation, and chances to
obligation, then the guarantor cannot
set up such defenses as are afforded him
demand more than what he has really
by law
paid.

G. A compromise shall not prejudice the

B. The guarantor has the duty to notify the
person not party to it [Art. 2063]
A compromise between creditor and
principal debtor benefits the guarantor
but does not prejudice him.
A compromise between guarantor and
the creditor benefits but does not
prejudice the principal debtor.
H. Co-guarantors are entitled to the benefit
of division [Art. 2065]
General Rule: The benefit of division
applies only when there are several
guarantors and one debtor for a single
C. The
debt. A co-guarantor is liable only to the
extent of his share in the obligation as
divided among all the co-guarantors.
Page 446 of 599
debtor before paying the creditor [Art.
2068; see also Arts. 1236 and 1237]
Should payment be made without
notification, and supposing the debtor
has already made a prior payment, the
debtor would be justified in setting up the
defense that the obligation has already
been extinguished by the time the
guarantor made the payment. The
guarantor will then lose the right of
reimbursement and consequently the
right of subrogation.
guarantor cannot demand
reimbursement for payment made by him
before the obligation has become due
[Art. 2069]
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

General rule: Since a contract of guaranty take measures for the protection of his
is only subsidiary, the guarantor cannot interest in view of the probability that he
be liable for the obligation before the would be called upon to pay the debt. As
period on which the debtor’s liability will such, he may, in the alternative, obtain
accrue. Any payment made by the release from the guaranty; or demand
guarantor before the obligation is due security that shall protect him from any
cannot be indemnified by the debtor. proceeding by the creditor, and against
the insolvency of the debtor.
Exception: Prior consent or subsequent
ratification by the debtor
Art. 2066 and 2071 Distinguished
D. The guarantor may proceed against the Art. 2066 Art. 2071
debtor even before payment has been
Provides for the Provides for the
made [Art. 2071]
enforcement of the protection before
General rule: Guarantor has no cause of guaranty/surety he has paid but
action against the debtor until after the against the debtor after he has
former has paid the obligation. after he has paid the become liable, but
Exceptions [Art. 2071]: debt before payment of
the debt
(a) When he is sued for the payment;
Gives a right of action Protective remedy
(b) In case of insolvency of the principal after payment before payment
debtor;
Substantive Right Preliminary remedy
(c) When the debtor has bound himself
to relieve him from the guaranty
within a specified period, and this C.3. EFFECTS OF GUARANTY AS BETWEEN
period has expired; CO-GUARANTORS
(d) When the debt has become (a) The one who pays may demand from
demandable, by reason of the each of the others the share
expiration of the period for payment; proportionally owing to him
(e) After the lapse of 10 years, when the (b) If any of the guarantors is insolvent, his
principal obligation has no fixed share shall be borne by the others,
period for its maturity, unless it be of including the payer, in the same
such nature that it cannot be proportion [Art. 2073]
extinguished except within a period
longer than 10 years;
(f) If there are reasonable grounds to Requisites for the applicability of Art. 2073
fear that the principal debtor intends (1) Payment has been made by one
to abscond; guarantor;
(g) If the principal debtor is in imminent (2) The payment was made because
danger of becoming insolvent.
(a) Of the insolvency of the debtor, or
(b) By judicial demand
When any of these grounds for exceptions
are present, then the guarantor may (1) (3) The paying guarantor seeks to be
obtain release from the guaranty, or (2) indemnified only to the extent of his
demand a security that shall protect him proportionate share in the total
from any proceedings by the creditor and obligation.
from the danger of insolvency of the
debtor.
For purposes of proportionate
Rationale: To enable the guarantor to reimbursement, the other guarantors may
Page 447 of 599
UP LAW BOC CREDIT TRANSACTIONS
interpose such defenses against the paying
guarantor as are available to the debtor
against the creditor, except those that are
personal to the debtor [Art. 2074]
D. EXTINGUISHMENT OF GUARANTY
Once the obligation of the debtor is
extinguished in any manner provided in the
Civil Code, the obligation of the guarantor is
also extinguished [Art. 2076].
However, there may be instances when, after
the extinguishment of the guarantor’s
obligation (as in the case of a release from
the guaranty), the obligation of the debtor
still subsists.
Although the guarantor generally has to
make payment in money, any other thing of
value, if accepted by the creditor, is valid
payment and therefore releases the
guarantor (dacion en pago) [Art. 2077].
If one guarantor is released without the
consent of the others, the release would
benefit the co-guarantors to the extent of the
proportionate share of the guarantor
released [Art. 2078].
A guarantor is released if the creditor,
without the guarantor’s consent, extends the
time within which the debtor may perform his
obligation [Art. 2079]. This is to protect the
interest of the guarantor should the debtor
be insolvent during the period of extension
and deprive the guarantor of his right to
reimbursement.
The guarantors are released if by some act of
the creditor they cannot be subrogated to the
rights, mortgages and preferences of the
latter. [Art. 2080]
In order to constitute an extension
discharging the surety, it should appear that
the extension was for:
(1) a definite period,
Page 448 of 599
CIVIL LAW
(2) pursuant to an enforceable agreement
between the principal and the creditor,
and
(3) that it was made without the consent of
the surety or with a reservation of rights
with respect to him. [Filipinas Textile Mills
v. CA, G.R. No. 119800 (2003)]
E. LEGAL AND JUDICIAL BONDS
Bond – an undertaking that is sufficiently
secured, and not cash or currency.
Bondsman – a surety offered in virtue of a
provision of law or a judicial order.
Qualifications of personal bondsman [Art.
2082 in relation to Art. 2056]
(1) He possesses integrity;
(2) He has capacity to bind himself;
(3) He has sufficient property to answer for
the obligation which he guarantees.
Pledge or mortgage in lieu of bond [Art. 2083]
Guaranty or suretyship is a personal security.
Pledge or mortgage is a property or real
security. If the person required to give a legal
or judicial bond should not be able to do so, a
pledge or mortgage sufficient to cover the
obligation shall be admitted in lieu thereof.
Bondsman not entitled to excussion [Art.
2084]
A judicial bondsman and the sub-surety are
not entitled to the benefit of excussion.
Reason: They are not mere guarantors, but
sureties whose liability is primary and
solidary.
Effect of negligence of creditor
Mere negligence on the part of the creditor in
collecting from the debtor will not relieve the
surety from liability.
UP LAW BOC CREDIT TRANSACTIONS
IV. Pledge
Pledge – is a contract constituted to secure
the fulfillment of a principal obligation where
the thing pledged, which may be a movable,
or an incorporeal right evidenced by a
document, is placed in the possession of the
creditor or a third person by common
agreement. [Art. 2093 in relation to Art.
2085]
The pledgor must be the absolute owner of
the thing pledged, and he must have the free
disposal of the property, and in the absence
thereof, that he be legally authorized for the
purpose. [Art. 2085 (2) and (3)]
A. CHARACTERISTICS
(1) Real – perfected upon the delivery of the
thing pledged [Art. 1316]
(2) Accessory – cannot exist independently
(i.e., without a principal obligation)
(3) Unilateral – obligation on the part of the
creditor to return the thing pledged upon
the fulfillment of the principal obligation
(4) Subsidiary– obligation incurred does not
arise until the fulfillment of the secured
principal obligation
B. KINDS
(1) Voluntary or Conventional – created by
agreement of the parties.
(2) Legal – created by operation of law.
B.1. LEGAL PLEDGE / PLEDGE BY
OPERATION OF LAW [ARTS. 2121-2122]
(1) Necessary expenses shall be refunded to
every possessor, but only a possessor in
good faith may retain the thing until he
has been reimbursed.
Useful expenses shall be refunded only to
the possessor in good faith with the same
right of retention, the person who has
defeated him in the possession having
the option of refunding the amount of the
expenses or of paying the increase in
Page 449 of 599
CIVIL LAW
value which the thing may have acquired
and by reason thereof [Art. 546]
(2) He who has executed work upon a
movable has a right to retain it by way of
pledge until he is paid. This is called the
mechanic’s lien. [Art. 1731]
(3) The agent may retain the things which
are the objects of agency until the
principal effects the reimbursement and
pays the indemnity. This is called the
agent’s lien. [Art. 1914]
(4) The laborer’s wages shall be a lien on the
goods manufactured or the work done.
[Art. 1707]
NOTE:
(1) In legal pledges, the remainder of the
price of the sale shall be delivered to the
obligor. [Art. 2121]
(2) Public auction of legal pledges may only
be executed after demand of the amount
for which the thing is retained. It shall
take place within one month after the
demand, otherwise the pledgor may
demand the return of the thing pledged,
provided s/he is able to show that the
creditor did not cause the public sale
without justifiable grounds. [Art. 2122]
C. ESSENTIAL REQUISITES
C.1. PROVISIONS COMMON TO PLEDGE
AND MORTGAGE [ART. 2085]
(1) Constituted to secure the fulfillment of a
principal obligation.
(2) Pledgor or mortgagor must be the
absolute owner of the thing pledged or
mortgaged.
(3) The persons constituting the pledge or
mortgage have the free disposal of their
property, and in the absence thereof, that
they be legally authorized for the
purpose.
Note: Third persons who are not parties
to the principal obligation may secure the
latter by pledging or mortgaging their
own property. [Art. 2085]
UP LAW BOC CREDIT TRANSACTIONS
(4) Cannot exist without a valid obligation,
but may be constituted to guarantee the
performance of a voidable or
unenforceable contract. [Art. 2052]
(5) Debtor retains the ownership of the thing
given as a security.
(6) When the principal obligation becomes
due, the thing pledged or mortgaged may
be alienated for the payment to the
creditor. [Art. 2087]
C.2. PROVISIONS APPLICABLE ONLY TO
PLEDGE
(1) Transfer of possession to the creditor or
to third person by common agreement is
essential [Art. 2093].
(2) All movables within the commerce of
man may be pledged as long as they are
susceptible of possession [Art. 2094].
(3) Incorporeal rights may be pledged. The
instruments representing the pledged
rights shall be delivered to the creditor; if
negotiable, must be indorsed [Art. 2095].
(4) Pledge shall take effect against 3rd
persons only if the following appear in a
public instrument:
(a) Description of the thing pledged.
(b) Date of the pledge [Art. 2096].
(5) The thing pledged may be alienated by
the pledgor or owner only with the
consent of the pledgee. Ownership of the
thing pledged is transmitted to the
vendee or transferee as soon as the
pledgee consents to the alienation, but
the latter shall continue to have
possession [Art. 2097].
(6) Creditor has the right to retain the thing
in his possession or in that of a third
person to whom it has been delivered,
until the debt is paid [Art. 2098].
(7) Special laws apply to pawnshops and
establishments engaged in making loans
secured by pledges. Provisions of the Civil
Code shall apply subsidiarily to them.
[Art. 2123]
In case of doubt as to whether a transaction is
Page 450 of 599
CIVIL LAW
a pledge or a dation in payment, the
presumption is in favor of pledge, the latter
being the lesser transmission of rights and
interests. [Manila Banking Corp. v. Teodoro,
G.R. No. 53955 (1989)]
D. REQUISITES FOR PERFECTION
(1) For the pledge to take effect between the
parties, the thing pledged is placed in the
possession of the creditor or a third
person [Art. 2093]
(2) For the pledge to take effect as against
third persons, a description of the thing
pledged and the date of the pledge
should appear in a public instrument [Art.
2096]
E. OBLIGATIONS OF PLEDGEE
(1) The pledgee cannot deposit the thing
pledged with a 3rd person, unless there is
a contrary stipulation [Art. 2100 (1)].
(2) Pledgee is responsible for the acts of his
agents or employees with respect to the
thing pledged [Art. 2100 (2)].
(3) General Rule: Has no right to use the
thing or to appropriate its fruits without
authority from the owner. If he does so, or
misuses it in any way, the owner may ask
that the thing be judicially or
extrajudicially deposited. [Art. 2104]
Exception: When the preservation of the
thing pledged requires its use, it must be
used by the creditor only for that purpose.
(4) May cause the public sale of the thing
pledged if, without fault on his part, there
is danger of destruction, impairment or
diminution in value of the thing. The
proceeds of the auction shall be a security
for the principal obligation [Art. 2108].
F. RIGHTS OF PLEDGOR
(1) Takes responsibility for the flaws of the
thing pledged [Art. 2101 in relation to Art.
1951].
(2) Cannot ask for the return of the thing
against the will of the creditor, unless and
until he has paid the debt and its interest,
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

with expenses in a proper case [Art. a second one with the same formalities
2105]. shall be held.
(3) Subject to the right of the pledgee under (6) If at the second auction, there is no sale
Article 2108, pledgor is allowed to either, the creditor may appropriate the
substitute the thing which is in danger of thing pledged but he shall give an
destruction or impairment without any acquittance (release) for his entire claim.
fault on the part of the pledgee with
another thing of the same kind and
G.2. EFFECTS OF THE SALE OF THE THING
quality [Art. 2107].
PLEDGED
(4) May require that the thing be deposited
[Art. 2115]
with a 3rd person, if through the
negligence or willful act of the pledgee (1) Extinguishes the principal obligation,
the thing is in danger of being lost or whether the proceeds of the sale is more
impaired [Art. 2106]. or less than the amount due.
(2) General Rule: If the price of sale is more
than amount due, the debtor is not
The pledgee can temporarily entrust the
entitled to the excess
physical possession of the chattels pledged
to the pledgor without invalidating the Exception: (1) Unless the contrary is
pledge. The pledgor is regarded as holding provided. (2) Legal pledge
the pledged property merely as trustee for
(3) If the price of sale is less, the creditor is
the pledgee. The type of delivery will depend
not entitled to recover the deficiency. A
upon the nature and the peculiar
contrary stipulation is void.
circumstances of each case. [Yuliongsiu v.
PNB, G.R. No. L-19227 (1968)]
A pledgee cannot become the owner of, nor H. PLEDGE AS DISTINGUISHED FROM
appropriate to himself, the thing given in CHATTEL MORTGAGE [ARTS. 2140,
pledge. If by the contract of pledge the 1484]
pledgor continues to be the owner of the
thing pledged during the pendency of the Pledge Chattel Mortgage
obligation, it stands to reason that in case of Delivery of Personal Property
loss of the property, the loss should be borne
by the pledgor. [PNB v. Atendido, G.R. No. L- Delivery is required Not required
6342 (1954)] for validity
Registration in the Chattel Mortgage Register
G. FORECLOSURE Not necessary; Necessary for validity
of the CM against
Public document is
third persons
enough to bind third
G.1. REQUIREMENTS IN SALE OF THE persons
THING PLEDGED BY A CREDITOR, IF
CREDIT IS NOT PAID ON TIME Right to Excess of Proceeds of Sale
[Art. 2112] The excess goes to The excess goes to the
the debtor/ mortgagor
(1) Debt is due and unpaid. pledgee/creditor,
(2) Sale must be at a public auction. unless otherwise
stipulated
(3) Notice to the pledgor and owner, stating
the amount due. Note: In legal
pledge, the excess
(4) Sale must be made with the intervention goes to the debtor
of a notary public. [Art. 2121]
(5) If at the first auction the thing is not sold,
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Right to Recover Deficiency

V. Chattel Mortgage
Creditor/ mortgagee Creditor/ mortgagee
is not entitled to can recover from the
recover any debtor/ mortgagor, Chattel mortgage – a contract whereby
deficiency after the except if covered by personal property is recorded in the Chattel
property is sold, Recto Law Mortgage Register as a security for the
notwithstanding performance of an obligation. [Art. 2140] The
contrary stipulation Civil Code has repealed the definition in Act
1508 or the Chattel Mortgage Law. [Gomez-
Somera]
The provisions of the Civil Code on pledge,
insofar as they are not in conflict with the
Chattel Mortgage Law shall be applicable to A. FORM OF CHATTEL MORTGAGE
chattel mortgages [Art. 2141]
The Chattel Mortgage Law prescribes a
specific format for a chattel mortgage. It
I. PACTUM COMMISSORIUM must be written and subscribed to by the
parties in the presence of 2 witnesses. The
I.1. ELEMENTS: law also requires it to contain specific terms.
(1) There is property pledged by way of
security for the payment of the principal
obligation A.1. RECORDING REQUIRED
(2) There is a stipulation for automatic General rule: the chattel mortgage shall not
appropriation by the creditor in case of be valid against any person unless the
non-payment of the principal obligation mortgage is recorded in the office of the
within the stipulated period register of deeds
Exception: it shall be valid between the
parties
I.2. EFFECT ON PLEDGE
WHERE
The nullity of the pactum commissorium does
not affect the validity of the contract of The mortgage must be recorded in the office
pledge. The creditor may recover the credit of the register of deeds of the province in
from the proceeds of a foreclosure sale which the mortgagor resides at the time of
effected in accordance with law [Gomez- making the same. If the province in which the
Somera]. property is situated and the province of the
mortgagor’s place of residence are different,
the mortgage shall be recorded in both
J. EQUITABLE MORTGAGE provinces. If the mortgagor resides outside
the Philippines, the mortgage shall be
It is a contract that reveals the intention of recorded in the province in which the property
the parties to charge property as security for is situated. [Sec. 5]
a debt, but contains nothing impossible or
contrary to law [Gomez-Somera].
A.2. CONTENTS OF AN AFFIDAVIT OF
GOOD FAITH
(1) That chattel mortgage is made solely for
J.1. ESSENTIAL REQUISITES the purpose of securing the obligation
(1) Parties entered into a contract specified therein
denominated as a contract of sale (2) That such principal obligation is just and
(2) The true intention is to secure an existing valid, not entered into for the purpose of
debt by way of mortgage fraud

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UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

B. OBLIGATIONS SECURED There is no statute that vests the right of

A chattel mortgage cannot secure after-
incurred obligations or future debts. [Gomez-
Somera]
C. OBJECTS OF CHATTEL MORTGAGE
All personal property shall be subject to
mortgage, agreeably to the provisions of this
Act, and a mortgage executed in pursuance
thereof shall be termed chattel mortgage.
[Sec. 2]
C.1. REASONABLE DESCRIPTION RULE
The mortgaged property must be so
described in the document such as to enable
the parties or any other person, after
reasonable inquiry and investigation, to
identify the mortgaged property. [Sec. 7]
C.2. AFTER ACQUIRED PROPERTIES
General rule: after acquired properties cannot
be described in the chattel mortgage, so it
cannot be covered by the same
Exception: stocks in retail stores [Gomez-
Somera citing Torres v. Limjap, G.R. No.
34385 (1931)]
redemption over personal property. [Gomez-
Somera]
E.3. RIGHT TO POSSESSION
A mortgagee, unlike a pledgee, is generally
not in possession of the collateral unless and
until the principal debtor defaults and the
mortgagee seeks to foreclose. [Gomez-
Somera]
E.4. RIGHT TO SURPLUS OR DEFICIENCY
ORDER OF APPLICATION OF PROCEEDS:
(1) Costs and expenses of keeping and sale
(2) Obligation secured
(3) Subsequent mortgagees
SURPLUS
The surplus shall be paid to the mortgagor.
DEFICIENCY
Although the law is silent on the matter,
there is a corollary obligation for the
mortgagor to pay the deficiency. [Gomez-
Somera citing PAMECA Wood Treatment Plant,
Inc. v. Court of Appeals, G.R. No. 106435
(1999)]

D. MORTGAGOR’S RIGHT TO ALIENATE

THE COLLATERAL
The mortgagor must have the written consent
of the mortgagee to sell or pledge personal
property already pledged. [Art. 319, Revised
Penal Code]

E. FORECLOSURE

E.1. EQUITY IN REDEMPTION

A mortgagor in default may prevent the
foreclosure sale of the mortgaged property by
paying the amount due on the mortgage and
the reasonable costs and expenses before the
sale. [Sec. 13]

E.2. NO RIGHT OF REDEMPTION

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VI. Real Mortgage
Real mortgage – a contract whereby the
debtor secures to the creditor the fulfillment
of a principal obligation (real security
transaction), immediately making immovable
property or real rights answerable to the
principal obligation in case it is not complied
with at the time stipulated.
A. OBJECTS OF REAL MORTGAGE
[Art. 2124]
1. Immovables
2. Alienable real rights over immovables.
Future property CANNOT be an object of
mortgage; however:
(a) A stipulation subjecting to the mortgage
improvements which the mortgagor may
subsequently acquire, install or use in
connection with real property already
mortgaged belonging to the mortgagor is
valid.
(b) A stipulation in a registered (or recorded)
real estate mortgage that all property
taken in exchange or replacement by the
mortgagor (after-acquired property) shall
be come subject to the mortgage is
binding. [Gomez-Somera]
B. OBLIGATIONS SECURED
General Rule: A real estate mortgage is
limited to the principal obligations
mentioned in the contract (within its four
corners). [Lim Julian v. Lutero, G.R. No. L-
25235 (1926)]
Exception: A real estate mortgage may
contain a dragnet or blanket mortgage clause
which subsumes all debts, whether past or
future. [Philippine Bank of Communications v.
CA, G.R. No. 118552 (1996)]
Note: This clause will be strictly construed
and its inclusion makes the mortgage a
continuing security, not to be discharged by
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CIVIL LAW
repayment of the amount named but by
payment of the full amount of the principal
obligation. [Gomez-Somera]
C. CHARACTERISTICS
C.1. CHARACTERISTICS OF THE
COLLATERAL
As a general rule, the mortgagor retains
possession of the property. He may deliver
said property to the mortgagee without
altering the nature of the contract of
mortgage.
Mortgage creates an encumbrance over the
property, but ownership of the property is not
parted with. It merely restricts the
mortgagor’s jus disponendi over the property.
The mortgagor may still sell the property,
and any stipulation to the contrary (pactum
de non alienando) is void [Art. 2130]
However, a stipulation prohibiting the
mortgagor from entering into second or
subsequent mortgages is valid since there is
no law prohibiting it. [Litonjua et al. v. L&R
Corporation, et al., G.R. No. 130722 (1999),
citing Philippine Industrial Co. v. El Hogar &
Vallejo, G.R. No. L-20482 (1923)]
C.2. CHARACTERISTICS OF THE
MORTGAGE
A registered real estate mortgage is a right in
rem, a lien that a creditor has on the property;
therefore, it is inseparable from the collateral
and until discharged, it follows the property.
[Gomez-Somera]
A real estate mortgage that is unregistered
binds the parties to the contract and it only
gives the mortgagee the right to demand the
execution and recording of the mortgage. To
bind third parties, a real estate mortgage
must be recorded in the Registry of Property.
It is not an essential requisite that the
principal of the credit bears interest, or that
the interest as compensation for the use of
the principal and the enjoyment of its fruits
be in the form of a certain percentage
UP LAW BOC CREDIT TRANSACTIONS
thereof.
Mortgage extends to the natural accessions,
to the improvements of growing fruits and
the rents or income not yet received when the
obligation becomes due, including indemnity
from insurance, and/or amount received from
expropriation for public use [Art. 2127]
(a) Applies only when the accessions and
accessories subsequently introduced
belongs to the mortgagor.
(b) To exclude them, there must be an
express stipulation, or the fruits must be
collected before the obligation becomes
due.
(c) Third persons who introduce
improvements upon the mortgaged
property may remove them at any time
The right to alienate the real estate mortgage
credit is the right of the mortgagee to assign
its rights under the principal obligation
secured. Although the mortgagee does not
become the owner of the collateral, it owns
the real estate mortgage and may alienate
the same. [Art. 2128; Gomez-Somera]
Alienation or assignment of mortgage credit
is valid even if it is not registered.
D. KINDS
(1) Voluntary – constituted by the will of the
owner of the property on which it is
created
(2) Legal – required by law to be executed in
favor of certain persons:
(a) Persons in whose favor the law
establishes a mortgage have no other
right than to demand the execution
and recording of the document in
which the mortgage is formalized
[Art. 2125]
(b) The bondsman who is to be offered in
virtue of a provision of law or of a
judicial order shall have the
qualifications prescribed in Art 2056
[integrity, capacity to bind himself,
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CIVIL LAW
and sufficient property to answer for
the obligation], and in other laws
[Art. 2082]
(c) If the person bound to give a bond
should not be able to do so, a pledge
or mortgage considered sufficient to
recover his obligation shall be
admitted in lieu thereof [Art. 2083]
(3) Equitable – One which, although lacking
the proper formalities of a mortgage,
shows the intention of the parties to
make the property a security for the debt.
(a) Lien created by equitable mortgage
ought not to be defeated by requiring
compliance with formalities
necessary to the validity of voluntary
real estate mortgage. Ex.: Pacto de
retro
(b) Provisions governing equitable
mortgage: Arts. 1365, 1450, 1454,
1602, 1603, 1604 and 1607.
E. PRINCIPLE OF INDIVISIBILITY OF
PLEDGE/MORTGAGE
[Arts. 2089 to 2090]
A mortgage directly and immediately
subjects the property upon which it is
imposed. It is indivisible even though the debt
may be divided, and such indivisibility is
likewise unaffected by the fact that the
debtors are not solidarity liable. [Dayrit v. CA,
G.R. No. L-29388 (1970)]
Where only a portion of the loan is released,
the mortgage becomes enforceable only as to
the proportionate value of the loan. [Central
Bank v. CA, G.R. No. L-45710 (1985)]
Indivisibility applies only as to
pledgors/mortgagors who are themselves
debtors in the principal obligation, and NOT
to accommodation pledgors/ mortgagors.
When several things are pledged or
mortgaged, each thing for a determinate
portion of the debt, the pledges or mortgage,
are considered separate from each other. But
when the several things are given to secure
the same debt in its entirety, all of them are
liable for the debt, and the creditor does not
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

have to divide his action by distributing the (1) Judicial Foreclosure

debt among the various things pledged or
(2) Extrajudicial Foreclosure
mortgaged. Even when only a part of the debt
remains unpaid, all the things are still liable
for such balance. [Tolentino]
Judicial Foreclosure vs. Extrajudicial
The question is whether or not the written Foreclosure
instrument in controversy was a mortgage or
Judicial Extrajudicial
a conditional sale. The correct test, where it
can be applied, is the continued existence of Court intervenes No court intervention
a debt or liability between the parties. If such
There is equity of There is right of
exists, the conveyance may be held to be
redemption – period redemption – period
merely a security for the debt or an indemnity
starts from the start from date of
against the liability. [Reyes v. Sierra, G.R. No.
finality of the registration of
L-28658 (1979), citing Cuyugan v. Santos,
judgment until order certificate of sale
G.R. No. L-10265 (1916)]
of confirmation
Decisions are Not appealable
F. RECORDING REQUIRED appealable
The real estate mortgage must be recorded in No need for a special Special power of
the Registry of Property in order to be validly power of attorney in attorney in favor of
constituted. [Art. 2125] the contract of the mortgagee is
Note: The mortgage would still be binding mortgage required in the
between the parties even if the instrument is contract
not recorded. [Art. 2125]
G.1. JUDICIAL FORECLOSURE
G. FORECLOSURE OF MORTGAGE [Rule 68, Rules of Court]
Foreclosure – is the remedy available to the (1) May be availed of by bringing an action in
mortgagee by which he subjects the the proper court which has jurisdiction
mortgaged property to the satisfaction of the over the area wherein the real property
obligation secured by the mortgage. involved or a portion thereof is situated
In general, an action for foreclosure of a (2) If the court finds the complaint to be
mortgage is limited to the amount mentioned well- founded, it shall order the
in the mortgage, except when the mortgage mortgagor to pay the amount due with
contract intends to secure future loans or interest and other charges within a period
advancements. of not less than 90 days nor more than
120 days from the entry of judgment
Note: The mortgagor may exercise the
Mortgage may be used as a “continuing
equity of redemption during this period of
security” which secures future advancements
grace in order to extinguish the mortgage
and is not discharged by the repayment of the
and retain ownership of the collateral by
amount in the mortgage.
paying the mortgage obligation. [Top
Rate International Services, Inc. v. IAC,
G.R. Nos. L-67496 and L-68257 (1986)]
Acceleration clause allowed
It is this equity of redemption that is
Acceleration clause, or the stipulation stating
conferred on the mortgagor’s successors-
that on the occasion of the mortgagor’s
in-interest or on third persons acquiring
default, the whole sum remaining unpaid
rights over the collateral from the
automatically becomes due and demandable,
is ALLOWED. mortgage subsequent.

Kinds of foreclosure
Page 456 of 599
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Although these subsequent or junior lien-
holders acquire the equity of redemption,
this right is strictly subordinate to the
superior lien of the first mortgagee.
[Gomez-Somera]
(3) If the mortgagor fails to pay at time
directed, the court, upon motion, shall
order the property to be sold to the
highest bidder at a public auction.
(4) Upon confirmation of the sale by the
court, also upon motion, it shall operate
to divest the rights of all parties to the
action and to vest their rights to the
purchaser subject to such rights of
redemption as may be allowed by law.
Note: A foreclosure sale is not complete
until it is confirmed. Thus, after the
foreclosure sale but before its
confirmation, the court may grant the
judgment debtor or mortgagor the equity
of redemption.
(5) Before the confirmation, the court retains
control of the proceedings; execution on
judgment
(6) The proceeds of the sale shall be applied
to the payment of the:
(a) costs of the sale;
(b) amount due the mortgagee;
(c) claims of junior encumbrancers or
persons holding subsequent
mortgages in the order of their
priority; and
(d) the balance, if any shall be paid to
the mortgagor
(7) Sheriff’s certificate is executed,
acknowledged and recorded to complete
the foreclosure
Nature of judicial foreclosure proceedings
(1) Quasi in rem action. Hence, jurisdiction
may be acquired through publication.
(2) Foreclosure is only the result or incident
of the failure to pay debt.
(3) Survives death of mortgagor.
G.2. EXTRAJUDICIAL FORECLOSURE
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CIVIL LAW
A real estate mortgage may be extrajudicially
foreclosed only if there is a special power
inserted or attached to the document in
which the real estate mortgage appears and
only in accordance with the provisions of Act
No. 3135. [Gomez-Somera]
[Act No. 3135]
(1) Applies to mortgages where the authority
to foreclose is granted to the mortgagee.
(2) Authority is not extinguished by death of
mortgagor or mortgagee. This is an
agency coupled with interest.
(3) Public sale should be made after proper
notice to the public; otherwise, it is a
jurisdictional defect which could render
the sale voidable.
General Rule: Statutory provisions
governing posting of notice must be
strictly complied with and even slight
deviations will invalidate the notice.
Exception: If the objectives are attained,
immaterial errors and mistakes may not
affect the sufficiency of the notice.
[Metropolitan Bank and Trust Company v.
Wong, G.R. No. 120859 (2001) discussing
Olizon v. CA, G.R. No. 107075 (1994)]
(4) There is no need to notify the mortgagor,
where there is no contractual stipulation
therefor.
Proper notice consists of:
(a) posting notice in three public places
and/or
(b) publication in newspaper of general
circulation
Purpose of notice is to obtain the best bid
for the foreclosed property
(5) Surplus proceeds of foreclosure sale
belong to the mortgagor.
(6) Debtor (who must be a natural person)
has the right to redeem the property sold
within 1 year from and after the date of
sale.
(a) If the mortgagee is a bank, quasi-bank
or trust entity and the debtor is a
juridical person, then there is no right
of redemption. However, juridical
UP LAW BOC CREDIT TRANSACTIONS
mortgagors may redeem the property
before the registration of the TCT to
the buyer, which is similar to the
equity of redemption. The TCT must
be registered within three months
after the foreclosure.
(b) The mortgagor can only legally
transfer the right to redeem and the
use of the property during the period
of redemption.
(7) Remedy of party aggrieved by foreclosure
is a petition to set aside sale and the
cancellation of writ of possession.
However, if the mortgagee is a bank, the
mortgagor is required to post a bond
equal to the value of the mortgagee’s
claim.
(8) Republication of the notice of sale is
necessary for the validity of the
postponed extrajudicial sale
(9) In foreclosure of real estate mortgage
under Act 3135, the buyer at auction may
petition the land registration court for a
writ of possession pending the one-year
period of redemption of the foreclosed
property.
G.3. NATURE OF POWER OF
FORECLOSURE BY EXTRAJUDICIAL SALE
(1) Conferred for mortgagee’s protection.
(2) An ancillary stipulation.
(3) A prerogative of the mortgagee.
Note:
(a) Both should be distinguished from
execution sale governed by Rule 39, ROC.
(b) Foreclosure retroacts to the date of
registration of mortgage.
(c) A stipulation of upset price, or the
minimum price at which the property
shall be sold to become operative in the
event of a foreclosure sale at public
auction, is null and void.
G.4. RIGHT TO SURPLUS OR DEFICIENCY
Right of the Mortgagor
The mortgagor is entitled to the surplus, if
any, after payment of the proceeds of the sale.
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CIVIL LAW
Right of the Mortgagee
(1) Mortgagee is entitled to recover
deficiency. This extends to judicial
foreclosure of mortgage arising out of the
settlement of estate.
(2) If the deficiency is embodied in a
judgment, it is referred to as deficiency
judgment.
(3) Action for recovery of deficiency may be
filed even during redemption period.
(4) Action to recover prescribes after 10 years
from the time the right of action accrues.
G.5. EFFECT OF INADEQUACY OF PRICE IN
FORECLOSURE SALE
(1) Where there is right to redeem,
inadequacy of price is immaterial because
the judgment debtor may redeem the
property.
Exception: Where the price is so
inadequate as to shock the conscience of
the court, taking into consideration the
peculiar circumstances.
(2) Property may be sold for less than its fair
market value, upon the theory that the
lesser the price the easier it is for the
owner to redeem.
(3) The value of the mortgaged property has
no bearing on the bid price at the public
auction, provided that the public auction
was regularly and honestly conducted.
A suit for the recovery of the deficiency after
the foreclosure of a mortgage is in the nature
of a mortgage action because its purpose is
precisely to enforce the mortgage contract.
[Caltex v. IAC, G.R. No. 74730 (1989)]
H. WAIVER OF SECURITY BY CREDITOR
(1) Mortgagee may waive the right to
foreclose his mortgage and maintain a
personal action for recovery of the
indebtedness.
(2) Mortgagee cannot have both remedies.
This is because he only has one cause of
action, the non-payment of the mortgage
debt.
UP LAW BOC CREDIT TRANSACTIONS CIVIL LAW

Note: There is no right of redemption in

pledge and chattel mortgage.
I. REDEMPTION
It is a transaction by which the mortgagor
reacquires the property which may have Requisites for a Valid Redemption:
passed under the mortgage or divests the (1) Redemption must be made within 12
property of the lien which the mortgage may months from the date of the registration
have created of the sale in the Office of the Register of
Deeds
I.1. KINDS (a) For natural persons: one year from
the registration of the TCT
(1) Equity of redemption – in judicial
foreclosure of real estate mortgage under (b) For juridical persons: three months
the ROC, it is the right of the mortgagor from foreclosure (before registration)
to redeem the mortgaged property by (2) Payment of the purchase price of the
paying the secured debt within the 120 collateral involved, plus 1% interest per
day period from entry of judgment or month, together with the amount of any
after the foreclosure sale, but before the assessments or taxes if any, paid by the
sale of the mortgaged property or purchaser after the sale
confirmation of sale
Note: Under RA 8791, the amount is the
A formal offer to redeem preserves the amount due under the mortgage deed
right of redemption, e.g., by filing an
action to enforce the right to redeem (3) Written notice of the redemption must be
served on the officer who made the sale
(2) Right of redemption – in extrajudicial and a duplicate filed with the Register of
foreclosure of real estate mortgage, the Deeds of the province.
right of the mortgagor to redeem the
property within a certain period after it
was sold for the satisfaction of the debt. Equity of Redemption Right of Redemption
(If the mortgagee is a bank, the
redemption period expires after Sec. 3, Rule 68 Act No. 3135
registration of the sale.) Right to redeem the Right to redeem the
(a) For natural persons – one year from property after default property within 1 year
the registration of the TCT in the performance of from the date or
the obligation but registration of the
(b) For juridical persons – three months before the certificate of sale
from the foreclosure foreclosure sale
(c) Formal offer to redeem must be with
Applies to judicial Applies to
tender of redemption price to
foreclosure of real extrajudicial
preserve right of redemption
estate and chattel foreclosure of real
mortgage estate mortgage
In a judicial foreclosure sale, the right of
redemption must be allowed by law.
The rule up to now is that the right of a
The references in Rule 68 and Rule 39 to the purchaser at a foreclosure sale is merely
right of redemption are not grants of this inchoate until after the period of redemption
statutory prerogative. To claim a right of has expired without the right being exercised.
redemption in judicial foreclosure, there must The title to land sold under mortgage
be a specific law that allows it. foreclosure remains, in the mortgagor or his
grantee until the expiration of the redemption
Example: RA 8791 (General Banking Law of
period and conveyance by the master's deed.
2000)
[Medida v. CA, G.R. No. 98334 (1992)]

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VII. Antichresis D. AS DISTINGUISHED FROM OTHER

CONTRACTS
Antichresis Pledge
Antichresis – a real security transaction that Kind of property
arises by contract, where the antichretic
creditor acquires the right to receive the fruits Real property Personal property
of an immovable of the antichretic debtor,
Perfection
with the obligation to apply them to the
payment of the interest, if owing, and Mere consent Delivery of thing
thereafter to the principal. [Art. 2132, NCC] pledged

A. CHARACTERISTICS Antichresis Real mortgage

(1) Accessory contract – it secures the Possession
performance of a principal obligation
Delivered to creditor Retained by debtor
(2) Formal contract – it must be in a specified
Right to the fruits
form to be valid [Art. 2134, NCC]
Creditor acquires only Creditor does not
Note: The obligation to pay interest is not the
the right to receive have the right to
essence of the contract of antichresis;
fruits receive fruits, but a
antichresis is only applicable to securing the
real right over the
payment of interest-bearing loans. It is
property is created
susceptible of guaranteeing all kinds of
obligations, pure or conditional. Payment of taxes and charges
Creditor is generally Creditor has no
obliged to pay obligation to pay
B. FORMAL REQUISITES
The amount of the principal and the interest Application of fruits
must be specified in writing; otherwise, the First applied to the Mortgagee has no
contract of antichresis shall be void [Art. payment of interest, such obligation
2134, NCC] and then to principal
There must be an express agreement that the
debtor will give possession of the property to
creditor and that the latter will apply the E. OBLIGATIONS OF ANTICHRETIC
fruits to the interest, if any, then to the CREDITOR
principal of his credit. (1) To pay taxes and charges on the estate,
including necessary expenses [Art. 2135,
NCC]
C. OBJECT OF THE CONTRACT
Note: The creditor may avoid said
An antichresis can cover only the fruits of an obligation by:
immovable property.
(a) Compelling the debtor to reacquire
Delivery of the immovable is necessary for the enjoyment of the property
creditor to receive the fruits, not to make the
contract binding. (b) By stipulation to the contrary
(2) To apply all the fruits, after receiving
them, to the payment of interest, if owing,
and thereafter to the principal
(3) To render an account of the fruits to the
debtor

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UP LAW BOC CREDIT TRANSACTIONS
(4) To bear the expenses necessary for its
preservation and repair
F. REMEDIES OF CREDITOR IN CASE OF
NON-PAYMENT OF DEBT
(1) Action for specific performance
(2) Petition for the sale of the real property
as in a foreclosure of mortgage under
Rule 68 of the Rules of Court [Art. 2137,
NCC]
(a) The parties, however, may agree on
an extrajudicial foreclosure in the
same manner as they are allowed in
contracts of mortgage and pledge
[Tavera v. El Hogar Filipino, Inc., G.R.
45963 (1939)]
(b) A stipulation authorizing the
antichretic creditor to appropriate the
property upon the non-payment of
the debt within the agreed period is
void [Art. 2088, NCC]
There is a right of retention in favor of the
creditor, which is used as a means of
extinguishing the obligation. The debtor
cannot reacquire enjoyment of the
immovable until he pays what he owes to the
creditor. [Ortiz v. Kayanan, et al., G.R. No. L-
32974 (1979)]
Because of the right of the creditor to
judicially foreclose, antichresis is generally
viewed as a species of real estate mortgage,
in which the mortgagee retains possession of
the collateral and takes the fruits of the
property in lieu of interest on the debt.
[Gomez-Somera]
Page 461 of 599
CIVIL LAW
VIII. Quasi-Contracts
A quasi-contract is that juridical relation
resulting from a lawful, voluntary and
unilateral act, and which has for its purpose
the payment of indemnity to the end that no
one shall be unjustly enriched or benefited at
the expense of another [Art. 2142]
A. NEGOTIORUM GESTIO
(UNAUTHORIZED MANAGEMENT)
Negotiorum gestio – takes place when a
person voluntarily takes charge of another’s
abandoned business or property without the
owner’s authority [Art. 2144]. As a rule,
reimbursement must be made to the gestor
(i.e., one who carried out the business) for
necessary and useful expenses.
The obligation does not arise:
(1) When the property or business is not
neglected or abandoned;
(2) If in fact the manager has been tacitly
authorized by the owner.
In the first case, the provisions of Articles
1317, 1403, No. 1, and 1404 regarding
unauthorized contracts shall govern.
In the second case, the rules on agency in
Title X of this Book shall be applicable. [Art.
2144]
A.1. OBLIGATIONS OF A GESTOR
(1) Perform his duties with all the diligence
of a good father of a family
(2) Pay the damages which through his fault
and negligence may be suffered by the
owner of the property/business under his
management [Art. 2145]
(3) Be liable for the acts of the persons to
whom he delegated all or some of his
duties. This is without prejudice to the
direct obligation of the delegate to the
owner of the business. [Art. 2146]