CREDIT TRANSACTIONS order for the bailee to

Lecture Notes by Atty. Rachel Castro make use of the fruits.

Onerous Essentially gratuitous
Consensual Real
LOAN Both involve the enjoyment of a person of the property
of another.
Jus fruendi Jus utendi
Article 1933. By the contract of loan, one of the parties
delivers to another, either something not consumable • Unilateral contract
so that the latter may use the same for a certain time o After the delivery of the thing of the bailor
and return it, in which case the contract is called a to the bailee, nothing is to be done by the
commodatum; or money or other consumable thing, bailor.
upon the condition that the same amount of the same • Compared to precarium, the termination of a
kind and quality shall be paid, in which case the commodatum depends on the accomplishment of
contract is simply called a loan or mutuum. its purpose or use. A precarium depends solely
upon the will of the bailor who may demand the
Commodatum is essentially gratuitous. return of the thing at any time.

Simple loan may be gratuitous or with a stipulation to
pay interest.
In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)
Commodatum vs Mutuum
Article 1936. Consumable goods may be the subject of
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for
exhibition. (n)
GR: Subject matter must be a non-consumable
Xpn: Where the purpose of the contract is for exhibition or
display

Commodatum Mutuum Object

Non-consumable things Fungible things, money
or other consumable
things
Essentially gratuitous May be gratuitous or
onerous
Ownership of the thing is Ownership transfers to
not transferred to the the borrower
borrower
Borrower does not bear Borrower bears the risk
the risk of loss of loss
Loan for use Loan for consumption
Article 1937. Movable or immovable property may be the
object of commodatum. (n)
Ownership
Article 1938. The bailor in commodatum need not be the
owner of the thing loaned. (n)
• Commodatum merely transfers the use or
enjoyment

Usufruct vs. Commodatum Article 1939. Commodatum is purely personal in character.

Consequently:
Usufruct Commodatum
Consitituted by law, Created by the parties (1)The death of either the bailor or the bailee extinguishes
testamentary succession, the contract;
or by prescription
Creates real rights over Creates only a purely (2) The bailee can neither lend nor lease the object of the
the fruits of another’s personal right to use contract to a third person. However, the members of the
property someone’s property and bailee’s household may make use of the thing loaned,
requires stipulation in unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use. (n)

DJVM 1

• Personal in nature
o Death extinguishes the contract
o Rights are intransmissible
Article 1940. A stipulation that the bailee may make use of
the fruits of the thing loaned is valid. (n)
• Exception to 1939
• Cannot be presumed
Obligations of the Bailee
Article 1941. The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.
(1743a)
• Nature of commodatum is bound in trust
Article 1942. The bailee is liable for the loss of the thing,
even if it should be 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 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. (1744a and 1745)
GR: The bailee should be held liable for loss of the thing
except when it was due to a fortuitous event
Xpns: Instances enumerated in 1942
1. Guilty of Misuse
2. Kept the thing longer than the period agreed upon
3. Appraisal of the thing loaned
4. Thing lost was used by 3P
5. Bailee saves his property instead of the thing
loaned
Article 1943. The bailee does not answer for the
deterioration of the thing loaned due only to the use
thereof and without his fault. (1746)
• Borrower is not liable for deterioration caused by
the diligent use of the thing or by its own nature or
inherent defect. But he will be liable if he uses the
thing beyond the manner intended or beyond the
period stipulated or when there is negligence on
his part.
Article 1944. The bailee cannot retain the thing loaned on
the ground that the bailor owes him something, even
though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in
article 1951. (1747a)
• Bailor who knowing the flaws of the thing without
telling them to the bailee, should be liable for
damages suffered by reason thereof. (1951)
• His right to retention can only be exercised up to
the time of payment of sum which is chargeable
• Mere failure of return does not mean adverse
possession of the borrower
Article 1945. When there are two or more bailees to whom
a thing is loaned in the same contract, they are liable
solidarily. (1748a)
Obligations of the Bailor
ARTICLE 1946. The bailor cannot demand the return of the
thing loaned till after the expiration of the period
stipulated, or after the accomplishment of the use for
which the commodatum has been constituted. However, if
in the meantime, he should have urgent need of the thing,
he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the
possession of the bailor. (1749a)
• When the contract of commodatum subsists, the
bailor cannot demand the return of the thing
loaned. However, when the bailor has an urgent
need to use it, the bailor may the demand the
return, in which case the contract of commodatum
is deemed suspended while the thing is in the
possession of the bailor.
DJVM 2
 • In. the absence of an agreement as to the period
within which the thing may be returned, the same
may be demanded at will.
Article 1947. The bailor may demand the thing at will, and
the contractual relation is called a precarium, in the
following cases:
(1) If neither the duration of the contract nor the use to
which the thing loaned should be devoted, has been
stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
(1750a)
• “Precarium’. It is a contract where the owner of the
thing lends a thing to another up to the time that
the owner shall please.
• It is a kind of commodatum where the borrower is
bound to return the thing upon the lender’s
demand
• Even if the use or period is not stipulated, if there
is a custom as to said use or period?
Article 1948. The bailor may demand the immediate return
of the thing if the bailee commits any act of ingratitude
specified in article 765. (n)
Acts of Ingratitude
(1) If the bailee should commit some offense against
the person, the honor or the property of the bailor,
or of his wife or children under his parental
authority;
(2) If the bailee imputes to the bailor any criminal
offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the
act has been committed against the bailee himself,
his wife or children under his authority;
(3) If he unduly refuses him support when the bailee is
legally or morally bound to give support to the
donor. (648a)
Article 1949. The bailor shall refund the extraordinary
expenses during the contract for the preservation of the
thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except
when they are so urgent that the reply to the notification
cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the
actual use of the thing by the bailee, even though he acted
without fault, they shall be borne equally by both the bailor
and the bailee, unless there is a stipulation to the contrary.
(1751a)
• Extraordinary expenses in connection with the
preservation of the thing loaned.
• Preservation of the thing loaned, liability falls upon
the bailee exclusively because it is incumbent upon
the bailee to preserve the thing.
• In extraordinary expenses, the bailee and bailor
shall be both liable equally. The bailee must then
notify the bailor unless the repair is so urgent.
Article 1950. If, for the purpose of making use of the thing,
the bailee incurs expenses other than those referred to in
articles 1941 and 1949, he is not entitled to reimbursement.
(n)
• Other unrecoverable expenses of the bailee
• Include those for ostentation and other matter of
expenditures incurred in the use and preservation
of the thing.
Article 1951. The bailor who, knowing the flaws of the
thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suffer
by reason thereof. (1752)
• Bailor’s liability for damages
• The bailor is liable because of bad faith.
Article 1952. The bailor cannot exempt himself from the
payment of expenses or damages by abandoning the thing
to the bailee. (n)
• Abandoning is of the thing is not bad perse as long
as. It is not done in order to evade the
responsibility.
A. MUTUUM
Simple loan or mutuum is contract where one of the parties
deliver to another money or other consumable thing with
the understanding that the same amount of the same kind
and quality shall be paid.
• Involves the payment of the equivalent and not the
identical thing because the borrower acquires
ownership of the thing loaned.
DJVM 3
 • There is no criminal liability for estafa for failure to
pay. Obligation of the borrower to pay interest

Mutuum vs. Commodatum vs Barter • There must be agreement to pay interest and such
interest/ agreement must be expressly stipulated
MUTUUM COMMODATUM BARTER in writing.
As to Subject matter
Money or other Non fungible things Non fungible Article 1956. No interest shall be due unless it has been
consumable things expressly stipulated in writing. (1755a)
thing
As to the obligation of the borrower • Interest rates- price paid for the use of money for a
Return the Return the identical Return the period of time and expressed as a percentage of
equivalent (pay) thing equivalent the total outstanding balance

As to consideration • Kinds of interest

Gratuitous or Always gratuitous Onerous
onerous
As to ownership
Borrower
acquires
ownership
Article 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
provisions concerning simple loan. (n)
Bank deposits are in the nature of mutuum
• Bank is the debtor, and the depositor is the
creditor.
• When a person deposits money to the bank, he is
in effect lending the bank. The bank then shall pay
the deposit upon demand.
Obligation of the borrower to pay
• Article 1249: The payment of debts shall be made
in the currency stipulated or if not possible, that
currency which is legal tender in the PH
• Case of DBP vs. CA, 494 SCRA 25, 2006
• Legal tender- all notes and coins issued by BSP and
guaranteed by the Republic of the Philippines
o 1,5,10 = 1,000
o 1,5,10, 25 centavos = 100
Q: Can a contract of loan be paid by a mercantile document?
A: GR: No. Mercantile documents are not considered legal
tender.
Xpns:
1. If the mercantile document was encashed
2. Paper of document is impaired through the fault of
the creditor
1. Borrowing rate
- Cost of the borrowing money
2. Lending rate
- Fee charged for lending money
MONETARY INTEREST- Interest which
constitutes the price / cost of use of money. Thus,
until the principal sum due is returned to the
creditor, regular interest continues to accrue.
o Requisites:
i. Payment of interest is agreed
upon
ii. Stipulation must be in writing
iii. Rate must be not against the law,
morals, or public policy
Q: Can interest be payable in kind?
A: Yes. Article 1958 provides that in the determination of
the interest, if it is payable in kind, its value shall be
appraised at the current price of the products or goods at
the time and place of payment, hence is allowed
LEGAL INTEREST – Rate of interest fixed by law
that will be followed if there is an agreement that
interest will be paid or the law or rule provide that
interest shall be paid when interest is not
stipulated.
6% per annum under BSP Circular No. 799 s-2013
Accrue from the time it is judicially demanded. In
the absence of stipulation, the rate of interest is
6% per annum to be computed from default.
(Eastern Shipping Inc. vs CA)
Loan/ forbearance of money is described as a
contractual obligation. Whereby a lender has
refrained from requiring the borrower to repay the
loan then due and demandable

DJVM 4
Q: Can there be interest on interest? (Compounding of
interest)
A: GR: No. Article 1959 provides that without prejudice to
the provisions of article 2212, interest due and unpaid shall
not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest. (n)
Xpns:
1. Upon judicial demand
2. When compounding of interest is agreed upon
3. Contracting parties by stipulation the interest
unpaid as an added principal which shall earn new
interest.
Q: What about escalation clause?
A: A party cannot unilaterally increase the rate of interest,
any stipulation to such shall be void. Escalation clauses are
not really wrong or legally objectionable as long as they are
not entirely potestative and are based on reasonable
grounds. The SC held that any modification to agreed rate
of interest must be mutually agreed upon by the parties.
Otherwise, it has no binding effect.
Not valid unless the parties mutually agreed to the
increase in the interest.
If annulled, the principal obligation is subject to the
originally stipulated rate of interest.
Summary of rules on interest
1. A borrower can only be made to pay interest if it
was expressly agreed upon.
2. Rate of interest: Any rate as long as n0t excessive,
iniquitous, unconscionable, or exorbitant. (Usury
law is suspended) If the interest is unconscionable,
the court is allowed to reduce the same.
• Does not stop the borrower from paying
interest. In this case, the rate that should
be paid is legal interest.
Q: What happens if the parties did not agree to the payment
of interest and the borrower pays interest?
A: This is a case of solution indebiti and therefore, the
borrower can recover what he has paid.
Q: What if there was an agreement to pay interest but the
same was not reduced into writing?
A: The agreement is void. However, if the borrower pays
interest despite knowledge that the such is void, then he
cannot recover what he has paid as such is considered as
natural obligation.
DEPOSIT
Article 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract.
Deposit in general
A deposit is a contract whereby a party called the depositor
delivers a thing to another party called the depositary to
keep it, usually without compensation or reward, and to
return it when requested to do so or according to the object
and purpose of the original trust.
Fixed, savings, and current deposits of money in banks and
similar institutions are not true deposits. They are
considered simple loans.
Characteristics of deposit
The contract of deposit is:
(1) It is a real contract like commodatum and
mutuum because it is perfected by the delivery of the
subject matter.
(2) It is generally a unilateral contract. It gives rise to
the principal obligation, on the part of the depositary, to
safely keep the thing and to return it. It is only when the
depositor has agreed to pay remuneration to the
depositary that the contract will become bilateral and
onerous, as the depositor assumes a primary obligation.
(3) It is an informal contract, because no particular
form is required for the contract.
Art. 1969. A contract of deposit may be entered into orally
or in writing.
(4) It is generally gratuitous contract. The depositor
does not pay compensation to the depositary but it can be
an onerous contract (a) when there is an agreement to the
contrary, or (b) unless the depositary is engaged in the
business of storing goods .
Deposit vs. Mutuum
Deposit Mutuum
Purpose Safekeeping Consumption
DJVM 5
 Demand for Depositor can Lender must Effect where safekeeping only an accessory obligation. —
Return demand the wait until the The principal purpose of the contract of deposit is the
thing at will expiration of the safekeeping of the thing delivered so that if safekeeping
period granted is only an accessory or secondary obligation of the recipient
to the debtor of the thing, deposit is not constituted but some other
Subject matter Movable and Money or contract like lease, commodatum, or agency. (Art. 1868.)
immovable fungible thing
(judicial) Kinds of deposit

Deposit vs. Commodatum Deposit is either:

(1) judicial - that made by order of a court in a judicial
Deposit Commodatum proceeding; one which takes place when an attachment or
Use The depositary, The borrower seizure of property in litigation is ordered (Arts. 2005-
in principle, receives the 2008.); or
cannot use the thing precisely (2) extrajudicial (Art. 1967.) which may be;
thing but must to use it.
simply keep it (a) voluntary or one wherein the delivery is
Remuneration May be onerous Essentially made by the will of the depositor or by two or more
gratuitous persons each of whom believes himself entitled to
Return The depositary The borrower the thing deposited (Arts. 1968-1995.); or
can always be can use the thing
required to for a period (b) necessary or one made in compliance
return the thing stipulated and with a legal obligation, or on the occasion of any
at any time can be required calamity, or by travellers in hotels and inns (Arts.
to return only in 1996-2004.) or by travellers with common carriers.
case of urgent (Arts. 1734- 1735.)
need.

Art. 1965. A deposit is a gratuitous contract, except when
there is an agreement to the contrary, or unless the
depositary is engaged in the business of storing goods.
Nature
A contract of deposit is generally gratuitous; exceptions:
A. VOLUNTARY DEPOSIT
Art. 1968. A voluntary deposit is that wherein the delivery
is made by the will of the depositor. A deposit may also be
made by two or more persons each of whom believes
himself entitled to the thing deposited with a third person,
who shall deliver it in a proper case to the one to whom it
belongs.

(1) Where there is a contrary stipulation/ agreement. Voluntary deposit in general

(2) Where depositary engaged in business of storing
goods. —If the depositary is engaged in the business of
storing goods (as in the case of a warehouseman) then the
deposit is for compensation and not out of pure
generosity.
(3) Where property is saved from destruction without
the knowledge of the owner. — In involuntary deposit,
where property is saved from destruction during a calamity
by another person without the knowledge of the owner,
the latter is bound to pay the former just compensation.
(see Arts. 1996[2], 1997, par. 2.)
A voluntary deposit is generally constituted by a person
who is the owner of the thing, with the depositary. In
certain instances, a third person is involved when two or
more persons disputing the ownership of the thing may
agree to deliver it to a third person in trust, pending final
determination of their respective rights to the thing
deposited. Deposit is made according to the free will of
the parties concerned.
Voluntary Deposit distinguished from Necessary Deposit

Purpose of deposit A voluntary deposit is one wherein the delivery is made

by the will of the depositor. Ordinarily, there are only two

DJVM 6
persons involved. Sometimes, however, the depositary
may be a third person.
Ownership of the deposit not an essential requisite
It is not essential that the depositor be the lawful owner of
the thing delivered. It is enough that he believes himself
to be entitled thereto. The depositary cannot demand
that the depositor prove his ownership of the thing
deposited. However, the depositary is not bound to keep
the thing as soon as it has come to his knowledge that the
thing deposited with him was stolen.
Legal capacity of the parties
Art. 1970. If a person having capacity to contract accepts a
deposit made by one who is incapacitated, the former shall
be subject to all the obligations of a depositary, and may be
compelled to return the thing by the guardian, or
administrator, of the person who made the deposit, or by
the latter himself if he should acquire capacity.
Depositor under legal incapacity
Where the depositor is a minor incapacitated to contract
and the depository who accepted the thing delivered has
the legal capacity, the contract of deposit remains valid
until annulled. The return of the thing may be demanded
at the instance of the guardian or legal representative of
the minor or the latter himself when his incapacity has
been removed.
Depositary under legal incapacity
benefited himself with the thing or its price. However, if a
third person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its recovery.
Obligations of the depositary (KE3ICUS-LRP)
1. To keep the thing safely and return it
2. Exercise same diligence as he would exercise over
his own property
3. Not to deposit the thing with a 3rd person unless
expressly authorized by stipulation
Note: Depositary is liable for the loss if:
a. He deposits the thing to a 3rd person without
authority, even though the loss is due to fortuitous events
b. Deposits the thing to a 3rd person who is
manifestly careless or unfit although there is authority.
4. If the thing should earn interest:
a. Collect interest as it falls due
b. Take steps to preserve the value and rights
corresponding to it.
5. Not to commingle things if so stipulated
6. GR: Not to make use of the thing deposited
Xpnzs: PA
a. When preservation of thing deposited requires its
use
b. When authorized by depositor

Art. 1971. Where it is depositary that is under legal GR: In such case it is no longer a deposit but a
incapacity and the depositor is capacitated, the depositor contract of loan or commodatum, as the case may
may choose either one of two alternatives: be.

1. To recover the thing from the incapacitated depositary Xpn: Principal reason for the contract is still
if it is still with him; or safekeeping, it is still deposit.

2. To ask for the reimbursement to him of such amount as 7. When the thing deposited is delivered sealed and
the incapacitated depositary has profited himself by the closed: RPSO
deposit. But where the title to the thing given in deposit
has already passed to an innocent third person; the a. Return the thing in the same condition
depositor can no longer recover the same. b. Pay damages if seal be broken through his fault
c. Keep the secret of the deposit when seal is broken
Art. 1971. If the deposit has been made by a capacitated w/ or w/o his fault
person with another who is not, the depositor shall only d. However, the depositary is authorized to open the
have an action to recover the thing deposited while it is still seal or lock when: PN
in the possession of the depositary, or to compel the latter
to pay him the amount by which he may have enriched or a. There is presumed authority

DJVM 7
b. Out of necessity
8. GR: Pay for any loss or damage that may arise due
to his fault
Xpn: Liability of loss through fortuitous event
Xpn to the xpn: Even in case of loss through fortuitous
event, still liable if: SUDA
a. Stipulated
b. he Uses thing w/o depositor’s permission
c. he Delays its return
d. he Allows others to use it (even if he himself is
authorized to use it)
9. Return the thing deposited with all its fruits,
accessions, and accessories
10. Pay interest on sums converted to personal use if
the deposit consists of money
Discussion
1. TO KEEP THE THING SAFELY AND RETURN IT
2. EXERCISE SAME DILIGENCE AS HE WOULD
EXERCISE OVER HIS OWN PROPERTY
Safekeeping as depositary’s primary obligation
In order that the depositary may be able to comply with his
obligation to return the thing, it is his primary duty to keep
it safely, or be held responsible therefore according to
circumstances.
Diligence required of a depositary
As a rule the depositary as the obligor is bound to exercise
the degree of diligence commensurate with the nature
of the obligation to be performed by him. But where the
law or contract does not state the diligence which is to be
observed, it is presumed to be that expected of a good
father of a family.
Note: It is required that he exercise the same degree of
diligence in the safekeeping and preservation of the
deposit as he would do if the thing were his own.
When depositary’s obligation aggravated
The responsibility of the depositary in case of LOSS OR
DAMAGE of the thing deposited is aggravated in any of the
following cases:
1. When there was express or implied agreement of
the parties. Here, the depositary may assume full or
greater responsibility under any or all circumstances.
2. When the depositary has voluntarily offered to
receive the deposit. The offer implies a promise or
assurance to exercise more diligence in the care and
safekeeping of the thing deposited, and this must have
inspired or led the depositor to give greater confidence.
3. When the depositary has received compensation.
4. When the deposit was made for the benefit of the
depositary. Where the depositary receives benefits, the
reaction that can reasonably be expected of him is the
exercise of more care and diligence than is ordinarily
expected, if otherwise.
5. When the return of the thing was delayed. In case
of delay in the return of the thing and such delay is
attributable to the depositary, the latter cannot be free
from blame. It can be presumed that were it not for the
delay, the loss or damage caused may not have occurred at
all.
The depositary is under obligation to restore the things
deposited to the owner upon demand, together with all the
fruits and accessions of the thing deposited, if any, without
any right to retain them even under the pretext of receiving
compensation for other credits or an indemnity for
expenses made for its preservation.
3. NOT TO DEPOSIT THE THING WITH A 3RD
PERSON UNLESS EXPRESSLY AUTHORIZED BY
STIPULATION
Art. 1973. Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositary is
liable for the loss if he deposited the thing with a person
who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees.
Responsibility in case of Loss of Deposit
The depositary, unless allowed, cannot pass the thing
deposited with him to another person; and even if allowed,
he is not free from responsibility in case of loss of the thing
DJVM 8
when the other person chosen proves to be careless and
unfit. The reason for this restriction is that a contract of
deposit imports a personal trust or confidence which
cannot be transferred. The depositary is also responsible
for loss or damage that may be caused by his employee’s
fault or negligence.
Under 1981, the fault on the part of the depositary is
presumed unless there is proof to the contrary.
Art. 1974. The depositary may change the way of the
deposit if under the circumstances he may reasonably
presume that the depositor would consent to the change if
he knew of the facts of the situation. However, before the
depositary may make such change, he shall notify the
depositor thereof and wait for his decision, unless delay
would cause danger
Change of the mode of deposit The depositary in the
exercise of the diligence expected of him as a good father
of a family may find it necessary to change the way of the
deposit. The depositor is entitled to previous notice thereof
under ordinary circumstances.
NOTE: DEPOSITARY IS LIABLE FOR THE LOSS IF:
a. He deposits the thing to a 3rd person without
authority, even though the loss is due to fortuitous events
b. Deposits the thing to a 3rd person who is
manifestly careless or unfit although there is authority.
4. IF THE THING SHOULD EARN INTEREST
a. Collect interest as it falls due
b. Take steps to preserve the value and rights
corresponding to it.
Art. 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound
to collect the latter when it becomes due, and to take such
steps as may be necessary in order that the securities may
preserve their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for the rent
of safety deposit boxes.
5. NOT TO COMMINGLE THINGS IF SO
STIPULATED
Art. 1976. Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of the
same kind and quality, in which case the various depositors
shall own or have a proportionate interest in the mass.
6. AS A GENERAL RULE, NOT TO MAKE USE OF
THE THING DEPOSITED General Rule : Not to
Exceptions:
a. When preservation of thing deposited
requires its use
b. When authorized by depositor
GR: In such case it is no longer a deposit but a contract of
loan or commodatum, as the case may be.
XPN: Principal reason for the contract is still
safekeeping, it is still deposit.
The depositary cannot make use of the thing deposited
without the permission of the depositor; neither can he
dispose of the same for the use of another, especially if the
purpose for which the thing was deposited would be
frustrated by the allowance of its use.
Depositary can make use of the thing deposited only with
express permission of the depositor, but in that event the
contract may change its nature by being converted into
mutuum, if the thing to be used will be consumed thereby,
or commodatum, if it is non-consumable. The only
exception to the rule is where the safekeeping of the thing,
notwithstanding its use, remains to be the primary purpose
of the contract.
Art. 1978. When the depositary has permission to use the
thing deposited, the contract loses the concept of a deposit
and becomes a loan or commodatum, except where
safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its existence
must be proved.
7. WHEN THE THING DELIVERED IS SEALED AND
CLOSED
a. Return the thing in the same condition
b. Pay damages if seal be broken through his fault
c. Keep the secret of the deposit when seal is broken
w/ or w/o his fault
d. However, the depositary is authorized to open the
seal or lock when:
a. There is presumed authority
b. Out of necessity
DJVM 9

8. AS A GENERAL RULE, PAY FOR ANY LOSS OR
DAMAGE THAT MAY ARISE DUE TO HIS FAULT
XPN: Liability of loss through fortuitous event
XPNs to XPN: Even in case of loss through fortuitous
event, still liable if:
a. Stipulated
b. he Uses thing w/o depositor’s permission
c. he Delays its return
d. he Allows others to use it (even if he
himself is authorized to use it)
Art. 1979. The depositary is liable for the loss of the thing
through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself may
have been authorized to use the same.
Exceptions to the Rule of Non-Liability due to fortuitous
event
Basis: Under the first exception, the depositary by
agreeing to the stipulation that he will be responsible for
the loss regardless of fortuitous event that may cause it,
assumes the risk of an insurer of the thing deposited.
By using the thing without the depositor’s permission, the
depositary has already violated the law (art 1977) under
which he is held liable for damages.
Beyond the period fixed for the return of the thing, the
depositary assumes all risk of loss or damage. Reason-
based upon the presumptions that were it not for the delay
the loss would not have occurred.
By allowing someone else to use the thing, the
depositary is guilty of a breach of trust, especially where
he himself could not have used it without the owner’s
permission. But even assuming that the depositary has
been granted the permission to use the thing himself, it
cannot be denied that the trust or confidence reposed in
him is purely personal and this cannot just be transferred
without committing an act of abuse, if not misuse of
another’s property.
Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan.
Money deposited in Bank not governed by law on deposit-
when a person deposits money with a bank, there is
created a relation of creditor and debtor, with the
depositor as the creditor and the bank as the debtor. The
law governing their relation is that of mutuum or simple
loan.
Bank deposit may be set-off indebtedness/compensation
can take place. The depositor may be allowed to set- off his
indebtedness to the bank, or to apply credit with the bank
against the loans he had obtained from his deposit.
9. RETURN THE THING DEPOSITED WITH ALL ITS
FRUITS, ACCESSIONS, AN ACCESSORIES
Art. 1983. The thing deposited shall be returned with all its
products, accessories and accessions.
Should the deposit consist of money, the provisions
relative to agents in article 1896 shall be applied to the
depositary.
What to return: When the thing deposited is returned by
the depositary, the depositor has the right to expect that
all products, accessories and accessions thereof, which by
operation of law belong also to the same owner of the
principal, should likewise be turned over to him.
Art. 1984. The depositary cannot demand that the
depositor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been
stolen and who its true owner is, he must advise the latter
of the deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be
relieved of all responsibility by returning the thing
deposited to the depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the
former may return the same.
Art. 1985. When there are two or more depositors, if they
are not solidary, and the thing admits of division, each one
cannot demand more than his share.
DJVM 10
When there is solidarity or the thing does not admit of
division, the provisions of Articles 1212 and 1214 shall
govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the depositary
shall return it only to the person designated.
Art. 1986. If the depositor should lose his capacity to
contract after having made the deposit, the thing cannot
be returned except to the persons who may have the
administration of his property and rights
Depositor becoming incapacitated
The return of the property to the incapacitated depositor is
not necessarily without effect; it is still valid but only insofar
as the property remaining with or kept by the depositor or
to such an extent as has benefited such depositor.
Art. 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must
take the thing deposited to such place; but the expenses for
transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be
made where the thing deposited may be, even if it should
not be the same place where the deposit was made,
provided that there was no malice on the part of the
depositary.
Art. 1988. The thing deposited must be returned to the
depositor upon demand, even though a specified period or
time for such return may have been fixed.
This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he
have been notified of the opposition of a third person to the
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of
the attachment or opposition.
Return of deposit demandable anytime
As a rule, the period within which the deposit may remain
with the depositary depends not so much upon what has
previously been fixed, but upon the sole disposal by the
depositor.
Period binding upon depositary but not upon depositor
The depositary cannot, when a period has been fixed,
just return the thing at will, for that would be violation
of his obligation under the contract of deposit. If the
depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor,
the law exempts him from continuing with his obligation
to keep the thing; he may return it immediately to the
depositor.
However, where the thing (1) has been judicially attached
while in his possession or (2) that there is an open
opposition to the return of the thing, the depositary is
under obligation to withhold it until duly ordered by
competent authority to do otherwise.
Art. 1989. Unless the deposit is for a valuable
consideration, the depositary who may have justifiable
reasons for not keeping the thing deposited may, even
before the time designated, return it to the depositor; and
if the latter should refuse to receive it, the depositary may
secure its consignation from the court.
Consignation of deposit
If the contract of deposit is gratuitous and the depositary
has justifiable reasons, he may return the thing to the
depositor without waiting for the expiration of the period
fixed, and in case the depositor should refuse to accept it,
the thing may be delivered to the court by way of
consignation.
Art. 1990. If the depositary by force majeure or
government order loses the thing and receives money or
another thing in its place, he shall deliver the sum or other
thing to the depositor.
Art. 1991. The depository's heir who in good faith may have
sold the thing which he did not know was deposited, shall
only be bound to return the price he may have received or
to assign his right of action against the buyer in case the
price has not been paid him.
The responsibility of the depositary’s heir is limited to the
extent that he benefited from the thing deposited. If
instead of selling the thing, he consumed it in the belief
that it is his, he benefits to the extent of its value at the time
it is consumed; so, he must pay such value to the depositor.
But if he destroys the thing in good faith thinking it is
useless, or too expensive to keep, of for any other reason,
he is not liable to the depositor, unless he benefited from
the destruction.
DJVM 11
If the heir uses the thing in such manner that it cannot be
separated without injury to his property to which he has
attached it, he is liable for its price to the depositor.
Thus, where the thing deposited is lumber, and it is used by
the heir in the construction of a house, the depositor
cannot demand the destruction of the house but only to the
price of the lumber.
When the thing has been alienated to a third person who
acquired it in good faith, the depositor cannot recover it
from the transferee, his action being limited to a
recovery of the price.
10. PAY INTEREST ON SUMS CONVERTED TO
PERSONAL USE IF THE DEPOSIT CONSISTS OF MONEY
Obligations of the depositor
1. Payment for necessary expenses for preservation
a. If the deposit is gratuitous – reimburse
depositary
b. With compensation – no need for
reimbursement; expenses borne by depositary
2. GR: Pay losses incurred by depositary due to the
character of the thing deposited.
XPNs: DNA
a. When at the time of deposit, the depositor was not
aware of the dangerous character of the thing or was not
expected to know it;
b. When the depositor notified the depositary; or
c. When the depositary was aware of it without
advice from the depositor.
3. In case of an onerous deposit, to pay the
compensation agreed upon as consideration for the
deposit.
B. NECESSARY DEPOSIT
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or other
similar events.
Deposit when deemed necessary
A deposit is deemed to be necessary when constituted by
reason of law or by the circumstances of a calamity.
Necessary Deposits in Compliance with a legal obligation:
1. The judicial deposit of a thing the
possession of which is being disputed in a litigation
by 2 or more persons.
2. The deposit with a bank or public institution of
public bonds or instruments of credit payable to
order or bearer given in usufruct when the
usufructuary does not gave proper security for
their conservation.
3. The deposit of a thing pledged when the creditor
uses the same without the authority of the owner
or misuses it in any other way.
4. Those required in suits as provided for in the
Rules of Court.
5. Those constituted to guarantee contracts with
the government. In these last cases the deposit
arises from an obligation of a public or
administrative character.
Art. 1997. The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article
shall be regulated by the provisions concerning voluntary
deposit and by Article 2168.
What governs necessary deposit
A deposit made in compliance with the law is to be
governed by the provisions of said law, and in default
thereof by the rules governing voluntary deposit. A deposit
made on the occasion of a calamity, while regulated by the
law on voluntary deposit, imposes upon the owner the
obligation to pay just compensation to the person who
saved it from destruction.
Article 2168 referred to above, provides that: When during
a fire, flood, storm, or other calamity, property is saved
from destruction by another person without the
knowledge of the owner, the latter is bound to pay the
former just compensation.”
DJVM 12
Illustration of deposit made in compliance with legal
obligation.
Under the provision of Section 892 of the Revised
Administrative Code, a person arriving in the Philippines,
having in his possession any firearms or ammunition for
which he has no license, is under obligation to deposit the
same with the Collector of Customs for delivery to the Chief
of Constabulary for safekeeping. This deposit is necessary
to comply with a legal obligation.
Art. 1998. The deposit of effects made by the travelers in
hotels or inns shall also be regarded as necessary. The
keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to
their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.
Guest’s belongings in hotels also regulated as necessary
For the security and protection of travelers who must
necessarily have to deposit their personal effects in hotels
or inns during their temporary accommodation, the law has
included such belongings of theirs within the category of
necessary deposits, and prescribes a distinct set of rules to
govern the same.
Art. 1999. The hotel-keeper is liable for the vehicles,
animals and articles which have been introduced or placed
in the annexes of the hotel.
Liabilit extended to hotel annex
For the purpose of this extended liability of the hotel-
keeper, it is necessary that the guest notify him or his
hotel employee of the things said guest will keep or
place in the hotel annex, and that the same guest take
the necessary precautions given him.
Art. 2000. The responsibility referred to in the two
preceding articles shall include the loss of, or injury to the
personal property of the guests caused by the servants or
employees of the keepers of hotels or inns as well as
strangers; but not that which may proceed from any force
majeure. The fact that travellers are constrained to rely on
the vigilance of the keeper of the hotels or inns shall be
considered in determining the degree of care required of
him.
Non-liability in case of force majeure
While the inn- keeper or hotel-keeper is responsible for the
loss or damage to hotel guest’s belongings, although
caused by the hotel servants or employees, or even
outsiders, it does not cover loss or injury through force
majeure.
Art. 2001. The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with
the use of arms or through an irresistible force.
Reason for special liability
Travelers, who are usually strangers to the place, may be
given the special care and attention that they deserve for
which they are charged. A hotel keeper holds out a general
invitation to travelers to come to his house, and receives
substantial compensation for his hospitality, hence the law
imposes upon him the corresponding duties one of which is
to protect the property of those whom he receives as
guests.
As a rule, he is practically an insurer of the goods of his
guests, but is excused from liability when the loss results
from force majeure or by fault, direct or implied, of the
guest himself.
To hold the hotel-keepers or inn keepers liable for the
effects of their guests, it is not necessary that they be
actually delivered to the inn keepers or their employees.
It is enough that said effects are within the inn or hotel.
Robbery not necessarily constituting force majeure
In order that the act of a thief or robber may constitute
force majeure, and exempt the hotel- keeper from liability,
it is necessary that it be accomplished with the uses of
arms or through an irresistible force.
Example:
If a thief scaled the hotel window while the guest was out
and forced open a locked drawer to get the money of the
guest kept there, there being neither arms nor irresistible
force employed, there was no force majeure and the inn-
keeper is still liable for the loss.
Art. 2002. The hotel-keeper is not liable for compensation
if the loss is due to the acts of the guest, his family, servants
or visitors, or if the loss arises from the character of the
things brought into the hotel.
Loss attributable to guests or his servants
DJVM 13
Where the loss may be attributed to the acts of the guest
himself, or his companions or visitors, or resulted from the
nature of the things brought to the hotel, the inn-keeper is
EXEMPT from responsibility.
Presumptive liability
The hotel-keeper is prima facie liable for the loss or
damage to the goods brought by his guest to the hotel. It
is, therefore, incumbent upon him to show that the goods
were not lost or damaged by reason of his negligence or
fault, but by the acts of the guest, his family, servants or
visitors, or that it was caused by the character of the things
brought into the hotel.
Art. 2003. 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. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to
2001 is suppressed or diminished shall be void.
Hotel Posters Disclaiming any responsibility without effect
The usual notices posted by hotel-keepers in their premises
disclaiming any responsibility of the management for
articles of the guests that may be lost are WITHOUT
FORCE AND EFFECT.
However, the hotel keeper may make such regulations in
the management of his hotel or inn as will more effectively
secure the property of his guests and operate as a
protection to himself. It is incumbent upon the guest, if he
means to hold the inn-keeper liable to his responsibility, to
comply with any regulations that are just and reasonable,
when he is requested to do so.
Art. 2004. 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 lodging, and supplies usually furnished to
hotel guests.
Security for Hotel Charges
The law grants the hotel-keeper a LIEN on the goods and
articles brought in by the guest for unsettled hotel charges.
He may RETAIN them until the account of the guest has
been settled.
In fact, for non-payment of his hotel charges, the hotel
guest may be charged with estafa.
SEQUESTRATION OR JUDICIAL DEPOSIT
Nature and purpose of sequestration
It is a judicial process by which property, real or personal,
as may be subject of conflicting claims of ownership, liens
or other special rights, is taken and kept in legal custody in
order to preserve it during the pendency of the litigation,
subject to further disposition of the court.
Art. 2005. A judicial deposit or sequestration takes place
when an attachment or seizure of property in litigation is
ordered
When sequestration takes place
Upon the issuance of the corresponding writ or order by the
court.
The appointment of a receiver by the court to take charge
of the property involved in litigation has the effect of
seizing the property out of the possession of the
defendant. This is also a form of sequestration or judicial
deposit.
Art. 2006. Movable as well as immovable property may be
the object of sequestration.
Art. 1966 refers to extrajudicial deposits which has subject
matter only movables
Art. 2007. The depositary of property or objects
sequestrated cannot be relieved of his responsibility until
the controversy which gave rise thereto has come to an
end, unless the court so orders.
Responsibility of depositary of sequestered property
For the preservation of the property under judicial deposit,
the depositary is bound to exercise the diligence of a good
father of a family, and unless the court orders otherwise, he
is not relieved of his responsibility until the termination of
the litigation.
Art. 2008. The depositary of property sequestrated is
bound to comply, with respect to the same, with all the
obligations of a good father of a family.
Art. 2009. As to matters not provided for in this Code,
judicial sequestration shall be governed by the Rules of
Court.
DJVM 14

GUARANTY
Article 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a
suretyship. (1822a)
A contract of guaranty is a personal security agreement
where the faithful performance of the obligation by the
principal debtor is secured by the personal commitment of
another who is the guarantor or surety.
Parties to a contract of guaranty
Generally, there are three parties:
1. Creditor
2. Debtor
3. Guarantor
Note: One cannot be both the primary debtor and gurantor
of his own debt. This is inconsistent with the purpose of
guaranty which is for the creditor to proceed against a third
person if the debtor defaults in his obligation. Therefore,
the borrower and the guarantor should be two different
persons
Characteristics of a guaranty
1. Gratuitous
Article 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary. (n)
2. Accessory. A guaranty secures the performance
of a principal obligation hence, it cannot exist
without a principal obligation
Article 2052. A guaranty cannot exist without a valid
obligation.
Nevertheless, a guaranty may be constituted to guarantee
the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.
(1824a)
3. Subsidiary. A guarantor will pay only if the
principal debtor cannot pay and has not properties
to answer for the obligation.
4. Certain conditions must be complied with before
the guarantor can be made liable
*Requirement of exhaustion of property of the
debtor
5. Unilateral. The obligation is only on the part of the
guarantor in favor of the creditor. The debtor need
not even give consent to the contract of guaranty.
6. Express. A guaranty is not presumed. It must be
express and cannot extend to more than what is
stipulated therein.
Note: A contract of guaranty is in writing because it
falls under Statute of Frauds such as “to answer the
debt of another. Therefore for enforceability, it must
be in writing.
Article 2049. A married woman may guarantee an
obligation without the husband's consent, but shall not
thereby bind the conjugal partnership, except in cases
provided by law. (n)
A married woman can be a guarantor even without the
consent of the husband BUT this will only bind his
paraphernal or separate property
Xpns:
a. If the husband consented to the wife being a
guarantor; and
b. Despite the fact that the husband did not give his
consent, the debt redounded to the benefit of the
family.
Article 2050. If a guaranty is entered into without the
knowledge or consent, or against the will of the principal
debtor, the provisions of articles 1236 and 1237 shall apply.
(n)
A contract of a guaranty is between the guarantor and the
creditor. In fact, it can be constituted without the
knowledge and against the will of the debtor. Since its
purpose is to give measures in order to secure payment.
If the contract of guaranty has been entered into without
the knowledge or against the will or consent of the
principal debtor, the effect is it is like a payment made by a
third person. Therefore, the guarantor can only recover
DJVM 15
insofar as the debtor has benefitted and the guarantor
CANNOT COMPEL the creditor to subrogate him to the
creditor’s right.
If the guaranty has been entered into with the consent of
the principal debtor, the guarantor is subrogated to all the
creditor’s rights once after he paid the debtor’s obligation.
Example:
A owes B 100,000 Php, and without the knowledge of A, C
guarantees the obligation. Subsequently, C pays A the
entire amount. C now tries to collect from A. However,
prior to the payment, A already paid 400,000 Php.
In this case, C can only collect 600,000 Php from A since it
is only the extent that A is benefitted.
If the loan is also secured by a mortgage, C the guarantor
cannot foreclose the mortgage if A does not pay him
because he was not subrogated to the right of B.
Kinds of Guaranty
1. Conventional – created by the agreement of the
parties
2. Legal- imposed by law
3. Judicial- constituted by the court
4. Gratuitous/ Onerous
5. Definite (secures only the principal obligation) /
Indefinite (simple guaranty, principal and all its
accessories including its judicial costs.
If it be simple or indefinite, it shall compromise not
only the principal obligation, but also all its
accessories, including the judicial costs, provided
with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has
been judicially required to pay. (1827a)
6. Discrete (specific transaction)/ Continuing (flow
of transaction or future advancements)
A continuing guaranty consists of multiple
transactions which contemplates a series of future
dealings generally for an indefinite time or until
revoked.
A continuing guaranty is prospective in application
as it is intended to secure future transactions.
The contract may state that advances will be made
from time to time or now enforced hereafter
made, any indebtness debt or transaction?
A contract of guaranty/ suretyship is only
prospective application unless otherwise
stipulated by the parties.
Article 2054. A guarantor may bind himself for less, but not
for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor. (1826)
Since a contract of guaranty is subsidiary and only an
accessory contract, the guarantor’s liability cannot exceed
that of the principal debtor.
Note: If the creditor sues the guarantor, the guarantor may
be made to pay costs, attorney’s fees, and even penalties
even if it would exceed that of the principal.
Article 2055. A guaranty is not presumed; it must be
express and cannot extend to more than what is stipulated
therein.
If it be simple or indefinite, it shall compromise not only the
principal obligation, but also all its accessories, including
the judicial costs, provided with respect to the latter, that
the guarantor shall only be liable for those costs incurred
after he has been judicially required to pay. (1827a)
GR: A guaranty is never presumed. It should express.
Reason: Guarantor agrees to pay another’s debt without
any benefit to him. Thus, it has to be certain that he really
intends it.
The guaranty must be in writing in order for it to be
enforceable.
Article 2056. One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the
obligation which he guarantees. The guarantor shall be
subject to the jurisdiction of the court of the place where
this obligation is to be complied with. (1828a
Article 2057. If the guarantor should be convicted in first
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
DJVM 16
excepted where the creditor has required and stipulated
that a specified person should be the guarantor. (1829a)
Qualifications of a guarantor
1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation to
which he guarantees.
Note: The creditor could waive these requirements.
Jurisdiction
Jurisdiction over the guarantor belongs to the court where
the principal obligation is to be fulfilled in accordance
with the rule that the accessory follows the principal.
Q: What happens if there is a subsequent loss of the
qualifications of the guarantor.
A: The qualifications need only be present AT THE TIME OF
THE PERFECTIONS OF THE CONTRACT. The subsequent
loss of the qualifications will not extinguish the liability nor
the contract.
However, the creditor may demand a new guarantor who
possesses the qualifications.
Q: When may the creditor demand another guarantor?
A: The creditor may demand another guarantor in the
following instances:
1. When the guarantor is convicted at first instance of
the crime involving dishonesty because in this
case, the guarantor loses his integrity.
2. In case the guarantor becomes insolvent (no need
for judicial declaration of insolvency of the
guarantor).
Note: The death of the guarantor does not extinguish the
contract of guaranty.
Under 2057, the creditor cannot demand another
guarantor when the creditor has stipulated in the
agreement that specified person is designated as the
guarantor. He is therefore bound by the agreement and he
cannot thereafter deviate from it.
Article 2058. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of
the debtor, and has resorted to all the legal remedies
against the debtor. (1830a)
Rights of the guarantor affecting his liability to the creditor
(Simple guaranty)
1. Benefit of excussion
2. Benefit of division
Benefit of Excussion/ Exhaustion
By the contract of guaranty, the principal guarantor binds
himself to pay only if the principal debtor is unable to pay.
He cannot be compelled to pay unless it is shown that the
debtor is unable to pay. Therefore, no action can be filed
against the guanrantor unless the creditor has exhausted
all legal remedies against the debtor. This means that the
creditor has sued the debtor and exhausted the assets of
the debtor and it is shown that the debtor is still unable to
pay.
The liability of the guarantor is only subsidiary and
accessory. Therefore, in order for the creditor to collect
from the guarantor, the following conditions must be
fulfilled:
1. The creditor should have exhausted all the
properties of the debtor
2. The creditor has resorted to all legal remedies
against the debtor
Note: The right of guarantors to demand exhaustion of the
property of the principal debtor exists only when a pledge
or a mortgage has not been given as security for the
payment of the principal obligation. A mortgagor is not
entitled to the exhaustion of the property of the principal
debtor.
Exceptions to the Benefit of Excussion
Article 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
DJVM 17
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property
of the principal debtor would not result in the satisfaction
of the obligation. (1831a)
Additional exceptions:
6. If the guarantor does not comply with Article 2060
7. if the guarantor is a judicial bondsman and sub-
surety pursuant to Article 2084
8. When a pledge or mortgage had been given as a
special security
9. If a guarantor fails to interpose it as a defense
before judgment is rendered against him.
Article 2060. In order that the guarantor may make use of
the benefit of exclusion, he must set it up against the
creditor upon the latter's demand for payment from him,
and point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover the
amount of the debt. (1832
Requisites to exercise the Benefit of Excussion
1. Require it to the creditor as soon as the creditor
makes a demand on him for payment
2. The guarantor must point out to the creditor
property of the debtor which is sellable in the
Philippines and is sufficient to cover the amount of
the debt
The demand can only be made after a judgment on the
demand against the debtor had been rendered.
Joining the guarantor in the suit against the principal
debtor is not the demand intended by this provision.
Article 2061. The guarantor having fulfilled all the
conditions required in the preceding article, the creditor
who is negligent in exhausting the property pointed out
shall suffer the loss, to the extent of said property, for the
insolvency of the debtor resulting from such negligence.
(1833a)
Article 2062. In every action by the creditor, which must be
against the principal debtor alone, except in the cases
mentioned in article 2059, the former shall ask the court to
notify the guarantor of the action. The guarantor may
appear so that he may, if he so desire, set up such defenses
as are granted him by law. The benefit of excussion
mentioned in article 2058 shall always be unimpaired, even
if judgment should be rendered against the principal
debtor and the guarantor in case of appearance by the
latter. (1834a)
Notice to the guarantor is mandatory in the action
against the principal debtor. The guarantor, however, is
not required to appear in this case. It is up to him if he wants
to appear.
Note: Non-appearance of a guarantor in a case shall not
constitute default.
The purpose of the notification is to give the guarantor the
opportunity to substantiate whatever defenses he may
have against the principal obligation and the chance also to
set up defenses given to him by law if he so desires
Q: What if the creditor joins the debtor and guarantor in
the case.
A: In this case, the creditor may include the guarantor in the
same case he filed against the principal debtor. However,
the benefit of exhaustion shall always be reserved even if
judgment is rendered against both the debtor and the
guarantor. No writ of execution shall be issued to the
guarantor until and unless the assets of the debtor have
been exhausted.
However, even if the benefit of exhaustion is reserved to
the guarantor, to avail himself thereof, he has to comply
with the conditions set forth under the law such as to set up
this defense at the right time and to point out to the
creditor available and sufficient properties of the debtor.
Article 2063. A compromise between the creditor and the
principal debtor benefits the guarantor but does not
prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice
the principal debtor. (1835a)
Example:
If the debtor owes the creditor 100,000 Php and this
obligation is guaranteed by G. Later, the debtor and
creditor compromised such that the obligation has been
DJVM 18
reduced to 60,000 Php. This compromise shall benefit the
guarantor and in case he is made to pay, he shall only be
liable to the amount of 60,000 Php.
Article 2064. The guarantor of a guarantor shall enjoy the
benefit of excussion, both with respect to the guarantor
and to the principal debtor. (1836)
Article 2065. Should there be several guarantors of only
one debtor and for the same debt, the obligation to answer
for the same is divided among all. The creditor cannot claim
from the guarantors except the shares which they are
respectively bound to pay, unless solidarity has been
expressly stipulated.
The benefit of division against the co-guarantors ceases in
the same cases and for the same reasons as the benefit of
excussion against the principal debtor. (1837)
Benefit of Division
This entitles the guarantor to ask for the division of the
liability among his co-guarantors and to pay only his aliquot
part of the debt in case the debtor defaults in the payment
of his obligation.
Example:
In an obligation when the debtor owes the creditor
300,000 Php and this is guaranteed by 3 guarantors when
the debtor cannot pay and he has no properties. Each
guarantor is liable only to his aliquot share in the obligation,
which in this case is 100,000 Php.
Article 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment
was made known to the debtor, even though it did not earn
interest for the creditor;
(3) The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of
him;
(4) Damages, if they are due. (1838a)
Once the guarantor pays the obligation, the principal
debtor must pay him back and this consists of:
1. The total amount of debt
The guarantor has the right to demand
reimbursement only when he has actually paid the
debt. The guarantor can recover from the debtor
only that which he has paid and not more than
what he has paid.
2. Interests
From the time notice of payment of debt was
made known to the debtor. The notice is the
demand from the debtor to pay the guarantor. If
he fails to pay, he is liable to pay for damages in the
form of interest.
3. Expenses
Refer to the expenses that the guarantor has to satisfy
in accordance with law.
4. Damages, only if they are due.
Exceptions to the Right to Indemnity of the Guarantor
1. Where the guaranty is constituted without the
knowledge or against the will of the debtor.
Guarantor in this case can only recover insofar as
payment had been beneficial to the debtor.
2. Payment by a third person who does not intend to
be reimbursed by the debtor is deemed to be a
donation. This requires the debtor’s consent but
the payment is valid with respect to the creditor.
3. In case of waiver on the part of the guarantor.
Article 2067. The guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had
against the debtor.
If the guarantor has compromised with the creditor, he
cannot demand of the debtor more than what he has really
paid. (1839)
When the guarantor pays, he becomes subrogated to all
the rights of the creditor against the debtor. The guarantor
now becomes the creditor and he may foreclose a
DJVM 19
mortgage in case of failure of the debtor to reimburse him
if a mortgage is constituted in the principal obligation.
The right of subrogation is given to the guarantor so that
he can enforce his right to be reimbursed. This
subrogation arises by operation of law upon payment by
the guarantor. The creditor in this case need not formally
cede his rights to the guarantor.
Article 2068. If the guarantor should pay without notifying
the debtor, the latter may enforce against him all the
defenses which he could have set up against the creditor at
the time the payment was made. (1840)
Before the guarantor pays the creditor, the guarantor
should first give notice to the principal debtor.
If he does not give notice, the debtor may enforce all
defenses which he may set up against the creditor at the
time of payment such as that the principal obligation had
already prescribed.
Article 2069. If the debt was for a period and the guarantor
paid it before it became due, he cannot demand
reimbursement of the debtor until the expiration of the
period unless the payment has been ratified by the debtor.
(1841a)
Article 2070. If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatever
against the debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from
advising the debtor of the payment, and the creditor
becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid. (1842a)
This is a case where the guarantor pays before the debtor
pays and subsequently, the debtor pays. The guarantor
here will be the one who will suffer loss because of his
failure to comply with the obligation before paying, which
is to first notify the debtor.
Exception: Guarantor may still claim reimbursement from
the debtor if it is a gratuitous guaranty and the guarantor
was prevented by a fortuitous event from informing the
debtor of the payment and the creditor becomes insolvent.
Article 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity, unless it be
of such nature that it cannot be extinguished except within
a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that
shall protect him from any proceedings by the creditor and
from the danger of insolvency of the debtor. (1834a)
Under these instances, the guarantor has rights against the
debtor before payment such as:
1. Right to be released from the obligation if lender
agrees; and
2. Right to demand security
Purpose: Enable the guarantor to take measures to
preserve his interest in view of the probability of debtor’s
default and that he will be called upon to answer for the
obligation.
Article 2072. If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present,
the guarantor who satisfies the debt may sue either the
person so requesting or the debtor for reimbursement. (n)
Article 2073. When there are two or more guarantors of the
same debtor and for the same debt, the one among them
who has paid may demand of each of the others the share
which is proportionally owing from him.
DJVM 20
If any of the guarantors should be insolvent, his share shall
be borne by the others, including the payer, in the same
proportion.
The provisions of this article shall not be applicable, unless
the payment has been made by virtue of a judicial demand
or unless the principal debtor is insolvent. (1844a)
This provision applies only when there are two or more
guarantors for the same debtor of the same debt and one
of them has paid by virtue of a (a) judicial demand or (b)
when the principal debtor is insolvent. The liability of the
guarantors here is joint. If one of them pays the entire
obligation, he is entitled to be reimbursed of the amount of
the share of the other guarantors.
Like in joint obligations, if one guarantor is insolvent, the
other guarantors must be liable for his share.
Article 2074. In the case of the preceding article, the co-
guarantors may set up against the one who paid, the same
defenses which would have pertained to the principal
debtor against the creditor, and which are not purely
personal to the debtor. (1845)
Article 2075. A sub-guarantor, in case of the insolvency of
the guarantor for whom he bound himself, is responsible to
the co-guarantors in the same terms as the guarantor.
(1846)
Example:
A, B, and C are guarantors of X. D is a guarantor of A. C pays
the entire obligation. A becomes insolvent. C can be
reimbursed from D in this case.
Extinguishment of Guaranty
Article 2076. The obligation of the guarantor is
extinguished at the same time as that of the debtor, and for
the same causes as all other obligations. (1847)
A guaranty is an accessory and subsidiary contract and
therefore, it is extinguished once the principal obligation is
extinguished.
Note: Any agreement between the creditor and the
principal debtor which essentially varies the terms of the
principal contract which is made without the consent of the
guarantor or surety will release the surety from liability.
This is because the alteration will result in the novation of
the principal contract which is consequently extinguished
and is replaced by a new one. Since the old one or principal
contract is extinguished, therefore the accessory contract
of guaranty or surety is likewise extinguished.
Q: When is there a material alteration in the original
obligation?
A: This is when there is a change which imposes a new
obligation or added burden or which takes away some
obligation already imposed which changes the legal effect
of the contract.
Examples:
1. Increase in the principal amount regardless of the
extent of the liability assumed by the guarantor
2. If there is a substitution of the principal debtor
3. When there is an extension or shortening of the
term of the principal debt
In these cases, the guaranty is extinguished.
Note: If there is a decrease in the amount of the
principal obligation, the guaranty will subsist and here,
it will benefit the guarantor and he cannot bind himself
for more than the principal obligation. Therefore, his
liability will be reduced in the amount by which there is
a decrease in the principal obligation.
Article 2077. If the creditor voluntarily accepts immovable
or other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor is
released. (1849)
This is a case of dation in payment. Since dation in payment
extinguishes the principal obligation, the accessory
obligation is extinguished and will not be revived even if the
creditor is subsequently evicted from the property.
Article 2078. A release made by the creditor in favor of one
of the guarantors, without the consent of the others,
benefits all to the extent of the share of the guarantor to
whom it has been granted. (1850)
Article 2079. An extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes
the guaranty. The mere failure on the part of the creditor
to demand payment after the debt has become due does
not of itself constitute any extension of time referred to
herein. (1851a)
DJVM 21
If the creditor grants the debtor an extension of time within
which to comply with the principal obligation, the guaranty
is extinguished.

Reason: The principal debtor could become insolvent

during the extension period and the guarantor may not be
able to ask for reimbursement.

But if the guarantor consents or waives his right under this

provision of the law in advance, the extension will not
extinguish the guaranty.

The extension referred to in this provision of the law must

be based on a new agreement between the guarantor and
the creditor. If the creditor fails to demand on due date, this
is not considered an extension.

Article 2080. The guarantors, even though they be solidary,

are released from their obligation whenever by some act of
the creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter. (1852)

Article 2081. The guarantor may set up against the creditor

all the defenses which pertain to the principal debtor and
are inherent in the debt; but not those that are personal to
the debtor. (1853)

For instance, if the principal debt has already prescribed or

if the principal debt is void.

DJVM 22