CREDIT

TRANSACTIONS
 Credit transactions include all transactions
involving the purchase or loan of goods,
services, or m oney in the present with a
prom ise to pay or deliver in the future.
TWO TYPES OF CREDIT TRANSACTIONS/
CONTRACTS OF SECURITY

1. Secured transactions or contracts of real

security – supported by a collateral or an
encum brance of property
2. Unsecured transactions or contracts of
personal security – fulfillment by the debtor is
supported only by a prom ise to pay or the
personal com m itm ent of another
SECURITY
 Something given, deposited, or serving as
means to ensure the fulfillment or
enforcement of an obligation or of protecting
some interest in property.
KINDS OF SECURITY
1. Personal Security - when an individual
becomes a surety or a guarantor
2. Property or Real Security – when a mortgage,
pledge, antichresis, charge, or lien or other
device used to have property held, out of which
the person to be m ade secure can be com
pensated for loss.
BAILMENT
The delivery of property of one person to
another in trust for a specific purpose, with a
contract, that the trust shall be faithfully
executed, and the property returned or duly
accounted for when the special purpose is
accomplished or kept until the bailor reclaims
it.
PARTIES IN BAILMENT
1. Bailor – the giver; the one who delivers the
possession of the thing bailed
2. Bailee – the recipient; the one who receives
the possession or custody of the thing
delivered
KINDS OF BAILMENT
1 . For the sole benefit of the bailor
2 . For the sole benefit of the bailee
3 . For the benefit of both parties
LOAN: GENERAL PROVISIONS
(Articles 1933-1961)
Article 1933 - By the contract of loan, one of the parties
delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in
which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous. Simple loan may be

gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownerships of the thing

loaned, while in simple loan, ownership passes to the borrower.
LOAN
is a contract whereby a thing owned
by one person is delivered to
another, with the obligation that the
latter should return it.
 Characteristics of
the Contract of Loan

1. A real contract – the delivery of the thing

loaned is necessary for the perfection of the
contract

2. A unilateral contract – once the subject matter

has been delivered, it creates obligations on the
part of only one of the parties (the borrower)
Essential Elements of a Contract In the Context of Loan

Consent of the Parties Lender (Bailor) and Borrower

(Bailee)

Object Property

Cause or Consideration For the Lender: the right to demand

the return of the thing or its
equivalent
For the borrower: the acquisition of
the thing
LOANS DISTINGUISHED FROM CREDIT
LOAN CREDIT

the delivery by one party means the ability of an

and the receipt by the individual to borrow
other party of a given money or things by
sum of money or other virtue of the confidence
consumable thing upon or trust reposed by a
an agreement to repay lender that he will pay
the same amount of the what he may promise
same kind and quality, within a specified
with or without interest. period.
Kinds of Loan

COMMUDATUM
Commodore , meaning lend

MUTUUM (Simple Loan)

Mutuus, meaning “borrow;”
Mutare, meaning “change”
Commodatum
– the bailor delivers to the bailee a non-
consumable thing so that the latter may use it
for a certain time and return the identical thing

Kinds of Commodatum
(1) ordinary commodatum - use by the bailee
of the thing is for a certain period of time
(2) precarium — one whereby the bailor may
demand the thing loaned at will.
(Art. 1947.)
Mutuum (Simple Loan)
– where the bailor delivers to the bailee money or
other consumable thing upon the condition that
the latter shall pay the same amount of the
same kind and quality
Kinds of Loan Compared
Commodatum Mutuum
Thing delivered Non-consumable, Money or
or Subject Matter in general Consumable
Ownership Retained by the Transferred to the
lender borrower
Effect of contract Borrower may use Borrower may
the thing (contract consume the thing
of use) (contract of
consumption)
Borrower’s Return the Pay the same kind
obligation identical thing or quality, or the
value of the thing
Kinds of Loan Compared
Commodatum Mutuum
Nature Gratuitous General rule is that it
is gratuitous BUT the
parties may stipulate
interest, in which
case, it becomes
onerous
Kind of Property Real or Personal Personal Only
When Lender Lender may demand Lender may not
May Demand return of the thing demand return of
before the the thing before the
expiration lapse of the term
of the term in case agreed upon
Kinds of Loan Compared

Commodatum Mutuum
Loss of the Thing Suffered by the Suffered by the
lender borrower even if
through fortuitous
event
Article 1934 - An accepted promise to deliver
something by way of commodatum or simple
loan is binding upon the parties, but the
commodatum or simple loan itself shall not
be perfected until the delivery of the object of
the contract.
Contract to loan vs. Perfected Contract of loan

An accepted promise to However, the contract of

deliver something by way loan of either
of commodatum is thus a commodatum or mutuum
contract to loan, which is is a real contract. This
consensual—that is, means that a contract of
perfected by mere commodatum or mutuum
consent. Therefore, a is perfected only upon
contract to loan is delivery of the subject
enforceable. matter.
CELESTINA T. NAGUIAT v. CA, GR No. 118375
Facts:
Aurora Queaño obtained a loan amounting to 200,000 due on
September 11, 1980, evidenced by a promissory note from
Celestina Naguiat which is secured by a real estate mortgage. The
loan proceeds was endorsed by Naguiat through two checks
amounting 95,000. On maturity date, the check was dishonored
for insufficiency of funds. Queaño received a letter from Naguiat’s
lawyer, demanding settlement of the loan. Shortly thereafter,
Queaño and Ruby Ruebenfeldt met with Naguiat. At the meeting,
Queaño told Naguiat that she did not receive the proceeds of the
loan, adding that the checks were retained by Ruebenfeldt, who
purportedly was Naguiat’s agent. Naguiat applied for the
extrajudicial foreclosure of the mortgage. Queaño filed the case
before the RTC, seeking the annulment of the mortgage deed. RTC
declared the Deed of Real Estate Mortgage null and void which the
CA affirmed.
Issue:
Whether Queaño had actually received the loan
proceeds which were supposed to be covered
by the two checks Naguiat had issued or
indorsed.
Ruling:
No. No evidence was submitted by Naguiat that the checks she issued or
endorsed were actually encashed or deposited. The mere issuance of the
checks did not result in the perfection of the contract of loan. The Civil Code
provides that the delivery of bills of exchange and mercantile documents such
as checks shall produce the effect of payment only when they have been
cashed. It is only after the checks have produced the effect of payment that
the contract of loan may be deemed perfected. Art. 1934 of the Civil Code
provides: "An accepted promise to deliver something by way of commodatum
or simple loan is binding upon the parties, but the commodatum or simple
loan itself shall not be perfected until the delivery of the object of the
contract." A loan contract is a real contract, not consensual, and, as such, is
perfected only upon the delivery of the object of the contract. In this case, the
objects of the contract are the loan proceeds which Queaño would enjoy only
upon the encashment of the checks signed or indorsed by Naguiat. If indeed
the checks were encashed or deposited, Naguiat would have certainly
presented the corresponding documentary evidence, such as the returned
checks and the pertinent bank records. Since Naguiat presented no such
proof, it follows that the checks were not encashed or credited to Queaño’s
account. That being the case, it follows that the mortgage which is supposed
to secure the loan is null and... void.
BPI Investment Corporation-vs-CA GR No. 133632
Facts:
Ayala Investment and Development Corporation (AIDC), the predecessor of petitioner
BPIIC, granted a loan to Frank Roa for the construction of a house on his lot in
Muntinlupa for 500,000 with an interest of 16.25%. Roa executed a mortgaged over said
property to secure said loan. Subsequently, in 1980 the said property was sold to ALS
Management and Development Corporation and Antonio Litonjua for 850,000. Buyers of
the property assumed the 500,000 and paid cash of 350,000 to Frank Roa. However,
AIDC is not amenable to extend the same terms to ALS and Litonjua, instead a new loan
of 500,000 at 20% interest with monthly amortization of 9,996.58 for ten years. In
March 1981, private respondents executed a mortgage deed to effect the new
stipulations with the amortization to start on 01 May 1981. On August 13, 1982, ALS
and Litonjua paid Roa’s arrearages by paying 190,601.35. Outstanding balance from the
old loan was reduced to 457,204.90, and applying the new loan of ALS and Litonjua,
BPIIC returned 7,146.87 pertaining to the excess of the proceeds of their loan against
the balance of Roa’s loan. In June 1984, BPIIC moved for the foreclosure of the
mortgage on the grounds that respondents failed to pay from May 1, 1981 to June 30,
1984, amounted to P475,585.31. On 28 February 1985, ALS and Litonjua filed a case
against BPIIC, alleging that they were not in arrears, maintaining that they should not
have been made to answer for the amortization (Roa’s arrearages) before the actual
release of their loan in August and September 1982. Further they alleged that they only
received 464,351.77 out of their 500,000, hence applying legal compensation, the
balance of 35,648.23 should be applied on the initial monthly amortization. RTC ruled
in favor of ALS and Litonjua. CA affirmed the decision of RTC.
Issue:
Whether a contract of loan is a consensual
contract
Ruling:
No. A loan contract is not a consensual contract but a real contract. It is perfected
only upon the delivery of the object of the contract (Art 1934). In the present case,
the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other,
was perfected only on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private respondents’ obligation to
pay commenced only on October 13, 1982, a month after the perfection of the
contract. We also agree with private respondents that a contract of loan involves a
reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other. As averred by private respondents, the promise
of BPIIC to extend and deliver the loan is upon the consideration that ALS and
Litonjua shall pay the monthly amortization commencing on May 1, 1981, one
month after the supposed release of the loan. It is a basic principle in reciprocal
obligations that neither party incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. Only when a
party has performed his part of the contract can he demand that the other party also
fulfills his own obligation and if the latter fails, default sets in. Consequently,
petitioner could only demand for the payment of the monthly amortization after
September 13, 1982 for it was only then when it complied with its obligation under
the loan contract. Therefore, in computing the amount due as of the date when BPIIC
extrajudicially caused the foreclosure of the mortgage, the starting date is October
13, 1982 and not May 1, 1981.
SAURA IMPORT and EXPORT CO., INC. vs DBP G.R. No. L-24968
FACTS:

Saura, Inc. applied to the Rehabilitation Finance Corp. (RFC), for an

industrial loan of P500,000.00 which approved by the latter and to be
secured by a mortgage. Loan documents were executed: the promissory
note and the corresponding deed of mortgage, which was duly registered.
Subsequently in a meeting of RFC board to which the President of Saura,
Inc. was present, the loan was reduced to 300,000. Saura Inc. did not agree
to it, thus exerted efforts to regain the signature of the withdrawal
guarantor which was successfully made. RFC accepted and approved the
loan application subject to some conditions which Saura admitted it could
not comply with. Correspondence and negotiations came to a halt and
Saura, Inc. did not pursue further and instead requested the cancellation of
mortgage and was delivered to the President of Saura, Inc. Almost nine
years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging
failure of RFC (DBP) to comply with its obligation to release the proceeds of
the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in
connection with its jute mill project.
Issue:
Whether there was a perfected consensual
contract?
Ruling:
Yes. There was indeed a perfected consensual contract, as
recognized in Article 1934 of the Civil Code, which provides: An
accepted promise to deliver something, by way of commodatum or
simple loan is binding upon the parties, but the commodatum or
simple loan itself shall not be perfected until the delivery of the
object of the contract. There was undoubtedly offer and acceptance
in this case: the application of Saura, Inc. for a loan of P500,000.00
was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls short
of resolving the basic claim that the defendant failed to fulfill its
obligation and the plaintiff is therefore entitled to recover damages.
PRODUCERS BANK OF THE PHIL V CA AND VIVES
Facts:
Sanchez asked Franklin Vives to deposit in a bank a certain amount of money in the bank
account of Sterela Marketing and Services for purposes of its incorporation, the
corporation was owned by Doronilla. Sanchez assured Vives that he could withdraw the
money from the account of Sterela a month’s time. Thereafter, relying on the assurances
and representations of Sanchez and Doronilla, Vives issued a check in favor of Sterela.
The check was deposited to the newly opened savings account of Sterela Marketing and
Services in the Producers Bank of the Philippines. The passbook, given to the wife of
Vives, had an instruction that no withdrawals/deposits will be allowed unless the
passbook is presented. The authorized signatories of said account were Mrs. Vives
and/or Sanchez. Subsequently, Vives learned that Sterela was no longer holding office in
the address previously given to him. Alarmed, he and his wife went to the Producers to
verify if their money was still intact. They were informed that part of the money in
account had been withdrawn by Doronilla and could not withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla. Vives tried to
get in touch with Doronilla through Sanchez. He received a letter from Doronilla, assuring
him that his money was intact and would be returned to him. Doronilla issued a
postdated check in favor Vives. However, upon presentment to the drawee bank, the
check was dishonored. Vives filed an action for recovery of sum of money in the RTC
against Doronilla, Sanchez, Dumagpi and Producers. The RTC ruled in favor of the private
respondent.
Issue:
Whether the transaction between Vives and
Doronilla is a simple loan (mutuum)
Ruling:
No. A circumspect examination of the records reveals that the transaction between them was a
commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans.
Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to
pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.” The rule is that the intention of the parties
thereto shall be accorded primordial consideration in determining the actual character of a
contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination. As correctly pointed out by both the Court of Appeals and the
trial court, the evidence shows that private respondent agreed to deposit his money in the
savings account of Sterela specifically for the purpose of making it appear "that said firm had
sufficient capitalization for incorporation, with the promise that the amount shall be returned
within 30 days. Vives merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterela’s savings account and would be
returned to private respondent after thirty (30) days. Doronilla’s attempts to return to private
respondent the amount of P200,000.00 which the latter deposited in Sterela’s account together
with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert
the transaction from a commodatum into a mutuum because such was not the intent of the
parties and because the additional P12,000.00 corresponds to the fruits of the lending of the
P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum
acquires the use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to
remit to private respondent the interest accruing to the latter’s money deposited with petitioner.
The assailed decision and resolution of the Court of Appeals are affirmed.
Republic v Grijaldo, G.R. No. L-20240
Facts:

Grijaldo obtained 5 loans from the Bank of Taiwan, Ltd evidenced by 5

promissory notes. All notes are without due dates, but because the loans
were due one year after they were incurred. As a security the appellant
executed a chattel mortgage on the standing crops on his land. The
assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. These assets, including the loans in
question, were subsequently transferred to the Republic of the
Philippines. The Republic of the Philippines made a written extrajudicial
demand upon the appellant for the payment of the loans. The record
shows that the appellant had received the written demand for payment,
but he failed to pay. The appellee filed a complaint in to collect from the
appellant the unpaid account in question. The Justice of the Peace Of
Hinigaran, dismissed the case on the ground that the action had
prescribed.
Issues:
Whether the obligation to pay is extinguished.
Ruling:

No. The obligation of Grijaldo was to pay a generic thing — the amount of
money representing the total sum of the five loans, with interest not to deliver a
determinate thing namely, the crops to be harvested from his land, or the value
of the crops that would be harvested from his land. The transaction between the
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple
loan of sums of money. "By a contract of (simple) loan, one of the parties
delivers to another ... money or other consumable thing upon the condition that
the same amount of the same kind and quality shall be paid." (Article 1933, Civil
Code) The obligation of the appellant under the five promissory notes
evidencing the loans in questions is to pay the value thereof; that is, to deliver a
sum of money — a clear case of an obligation to deliver, a generic thing.

The chattel mortgage on the crops growing on appellant's land simply stood as
a security for the fulfillment of appellant's obligation covered by the five
promissory notes, and the loss of the crops did not extinguish his obligation to
pay, because the account could still be paid from other sources aside from the
mortgaged crops. Art 1953: A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality.
 COMMODATUM
 Nature of Commodatum
 Obligation of the Bailee
Nature of Commodatum
Article 1935-1940
Nature of Commodatum

ART. 1935. The bailee in commodatum

acquires the use of the thing loaned but not its
fruits; if any compensation is to be paid by him
who acquires the use, the contract ceases to be
a commodatum.

 The right to use is limited to the thing loaned but not to

its fruits unless there is a stipulation to the contrary. As
owner of the thing loaned , the bailor is naturally
entitled to its fruits.
Nature of Commodatum

ART. 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.

 Consumable goods may be the object of commodatum.

Nature of Commodatum

ART. 1937. Movable or immovable property

may be the object of commodatum.

 The object in a contract of commodatum may involve

either movable or immovable property; consumable
goods.
Nature of Commodatum

ART. 1938. The bailor in commodatum need

not be the owner of the thing loaned.

 The bailor need not be the owner of the thing loaned

since by the loan, ownership does not pass to the
borrower.
Nature of Commodatum

ART. 1939. Commodatum is purely personal in

character. Consequently:

(1) The death of either the bailor or the bailee

extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the
contract to a third person. However, the members of
the bailee’s household may make use of the thing
loaned, unless there is a stipulation to the contrary, or
unless the nature of the thing forbids such use.

 In commodatum, bailor retains ownership.

Nature of Commodatum

ART. 1940. A stipulation that the bailee may

make use of the fruits of the thing loaned is
valid.

 This article allows a stipulation to be made whereby

the bailee may make use of the fruits of the thing
loaned.
Obligations of the Bailee
Article 1941-1945
Obligations of the Bailee

ART. 1941. The bailee is obliged to pay for the

ordinary expenses for the use and preservation
of the thing loaned.

 Obligation of the bailee is to preserve the thing.

Obligations of the Bailee

ART. 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;
Obligations of the Bailee

(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.
Obligations of the Bailee

 The bailee shall also be bound by a natural obligation to

answer for the loss of the thing.

 As a general rule, the bailee is not liable for loss or

damage due to a fortuitous event. However, Article 1942
specifies the instances when the bailee is liable even for a
loss due to a fortuitous event.

 Breaches of contract under the first two (2) enumerations

as well as the fourth and fifth enumerations.
Obligations of the Bailee

ART. 1943. The bailee does not answer for the

deterioration of the thing loaned due only to
the use thereof and without his fault.

 The bailee need not answer the for the deterioration

of the thing loaned.

 The bailee is liable if he is guilty of fault or negligence

or if he devotes the thing to any purpose different from
that for which it has been loaned.
Obligations of the Bailee

ART. 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.

 Except for a claim for damages suffered because of the

flaws of the thing loaned (Art. 1951.), the borrower has no
right to retain the thing loaned as security for claims he has
against the lender, even though they may be by reason of
extraordinary expenses.
Obligations of the Bailee

ART. 1945. When there are two or more bailees

to whom a thing is loaned in the same contract,
they are liable solidarily.

 Two or more bailees shall be liable solidarily incase

of loss of the thing.
Section 3 – 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.
 Under this article, the return may be only
temporary or it may be permanent because the
law uses “its return” (meaning permanent) or
“temporary use.” In case of temporary use of
the thing by the bailor, the rights and duties of
the parties are likewise temporarily suspended.
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.
Precarium defined
Precarium is a kind of commodatum where
the bailor may demand the thing at will. It has
been defined as a “contract by which the owner
of a thing, at the request of another person,
gives the latter the thing for use as long as the
owner shall please.”
ILLUSTRATIVE CASE:
Gratuitous use of furniture was subject to the condition that
lessee would return them upon lessor’s demand but
notwithstanding such demand, former continued to use
furniture until expiration of lease.
Facts: A was a tenant of B with respect to a house. Upon the
novation of the contract of lease, B gratuitously granted to A
the use of the furniture described in the contract, subject to the
condition that A would return them to B upon the latter’s
demand.
B later sold the property to C, and they notified A of the
conveyance, giving him 60 days to vacate the premises.
Thereafter, B required A to return all the furniture transferred to
him for his use. A wrote B reiterating that B may call for them in
the house where they are found.
ILLUSTRATIVE CASE:
Another letter was written to B informing her that
A could not give up the 3 gas heaters and the 4
electric lamps because he would use them until
the 15th of the month when the lease was due to
expire.
B refused to get the furniture in view of the fact
that A had declined to make delivery of all of
them.
On the 15th of the month, A deposited all the
furniture in a warehouse in the custody of the
sheriff.
Issues: (1) Has A complied with his obligation to
return the furniture upon B’s demand?

Held: No. The contract entered into between the

parties is one of commodatum because under it,
B gratuitously granted the use of the furniture to
A reserving for himself the ownership thereof. By
this contract, A bound himself to return the
furniture to B upon demand. A did not comply
with his obligation when he merely placed them
at the disposal of B, retaining for his benefi t the
3 gas heaters. The obligation assumed by A to
return the furniture means that he should return
all of them to B at the latter’s residence or house.
Issues: (2) Is B bound to bear the
deposit fees thereof?
Held: No. As A had voluntarily undertaken to
return all the furniture to B upon the latter’s
demand, the court could not legally compel B to
bear the expenses occasioned by the deposit.
A, as bailee, was not entitled to place the
furniture on deposit; nor was B under a duty to
accept the offer because A wanted to retain the
3 gas heaters and the 4 electric lamps.
Issues: (3) Is B entitled to the costs of
litigation?
Held: Yes. The costs in both instances should
be borne by A because B is the prevailing party.
A was the one who breached the contract of
commodatum and without any reason he
refused to return and deliver all the furniture
upon demand. In these circumstances, it is just
and equitable that he pay the legal expenses
and other judicial costs which B could not have
otherwise defrayed.
Article 1948
The bailor may demand the immediate return
of the thing if the bailee commits any acts of
ingratitude specified in Article 765.
Based on Article 765 of the Civil Code, any of
the following constitutes act of ingratitude:
(1) If the bailee should commit some offenses 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; and
(3) If the bailee unduly refuses the bailor support
when the bailee is legally or morally bound to give
support to the bailor.
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
notifi cation 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.
Extraordinary expenses for the
preservation of the thing loaned
Such expenses shall be borne by the bailor (e.g.,
expenses for repairing borrowed house damaged
by a typhoon). The reason is that it is the bailor
who profits by said expenses. If they are incurred
by the bailee, the bailor must refund them
provided the bailee brings the same to the
knowledge of the bailor before incurring them. As
a rule, notice is required because it is possible that
the bailor may not want to incur the extraordinary
expenses at all. He should be given discretion as
to what must be done with his property.
Extraordinary expenses arising from
actual use of the thing loaned
Such expenses (caused by fortuitous event)
arising on the occasion of the actual use of the
thing loaned (e.g., expenses for repairing a
borrowed jeep damaged in a collision) shall be
borne by the bailor and bailee alike on a 50-50
basis.
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.
 All expenses other than those referred to in
Articles 1941 and 1949 “for the purpose of
making use of the thing” (e.g., borrower buys
extra tire to be used as a reserve on a trip) that
is, not necessary for the use and preservation of
the thing, must be shouldered by the borrower.
This is only proper since he makes use of the
thing. Expenses for ostentation are to be borne
by the bailee because they are not necessary for
the preservation of 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.
The following are the requisites which must
concur for the application of the above article:
(1) There is flaw or defect in the thing loaned;
(2) The flaw or defect is hidden;
(3) The bailor is aware thereof;
(4) He does not advise the bailee of the same;
and
(5) The bailee suffers damages by reason of
said flaw or defect.
Article 1952
The bailor cannot exempt himself from the
payment of expenses or damages by
abandoning the thing to the bailee.
 The reason for the above rule is that the
expenses and/or damages may exceed the
value of the thing loaned, and it would,
therefore, be unfair to allow the bailor to just
abandon the thing instead of paying for said
expenses and/or damages.
Chapter 2 – SIMPLE LOAN
OR MUTUUM
Article 1953
A person who receives a loan of money or
any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality.
Simple loan or mutuum defined.
Simple loan or mutuum is a contract whereby
one of the parties delivers to another money or
other consumable thing with the understanding
that the same amount of the same kind and
quality shall be paid.
It involves the return of the equivalent only
and not the identical thing because the
borrower acquires ownership thereof. A loan of
money, however, may be payable in kind.
No criminal liability for failure to pay
In simple loan or mutuum, as contrasted to
commodatum, the borrower acquires ownership
of the money, goods, or personal property
borrrowed. Being the owner, the borrower can
dispose of the thing borrowed and his act will
not be considered misappropriation thereof.
No estafa is committed by a person who
refuses to pay his debt or denies its existence.
Meaning of fungible things
Fungible things, are those which are usually
dealt with by number, weight, or measure such
as rice, oil, sugar, etc. so that any given unit or
portion is treated as the equivalent of any other
unit or portion.
For example, one cavan of “wagwag” rice of a
particular quality is, to all intents and purposes,
the same as any other portion of the same kind,
quality, and quantity.
Article 1954
A contract whereby one person transfers the
ownership of non-fungible things to another
with the obligation on the part of the latter to
give things of the same kind, quantity, and
quality shall be considered a barter.
Mutuum and commodatum distinguished
from barter
By the contract of barter or exchange, one of the parties binds
himself to give one thing in consideration of the other’s
promise to give another thing.
(1) The distinction between mutuum and barter lies in the
subject matter. In the former, it is money or any other fungible
things; in the latter, non-fungible (non-consumable) things.
(2) In commodatum, the bailee is bound to return the identical
thing borrowed when the time has expired or the purpose has
been served. In barter, the equivalent thing is given in return
for what has been received.
(3) Mutuum may be gratuitous and commodatum is always
gratuitous. Barter, on the other hand, is an onerous contract. It
is really a mutual sale.
Article 1955
The obligation of a person who borrows
money shall be governed by the provisions of
Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other
than money, the debtor owes another thing of
the same kind, quantity and quality, even if it
should change in value. In case it is impossible
to deliver the same kind, its value at the time of
the perfection of the loan shall be paid.
Article 1249 - The payment of debts in money
shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents
shall produce the effect of payment only when they
have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the
original obligation shall be held in the abeyance.
Article 1250 - In case an extraordinary inflation
or deflation of the currency stipulated should
supervene, the value of the currency at the time
of the establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary.
Interest
Art. 1956-1961
Art. 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)

Interest may be paid either as compensation for the use of money (monetary interest)
referred in this article or imposed by law or by courts as penalty or indemnity for
damages (compensatory interest)
Kinds of interest:

1. Simple interest

2. Compound Interest

3. Legal interest

4. Lawful Interest

5. Unlawful or usurious interest

Requisites to recover interest:

1. The payment interest must be expressly stipulated

1. Payment expressly stipulated in writing
2. Stipulation inferred from documents in which
interest payment are stated

2. The agreement to pay interest must be in writing

3. The interest must be lawful.

Liability for interest even in the absence of stipulation:

1. Indemnity for damages

2. Interest accruing from unpaid interest

Art. 1957. Contracts and stipulations, under
any cloak or device whatever, intended to
circumvent the laws against usury shall be
void. The borrower may recover in
accordance with the laws on usury. (n
Art. 1958. 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. (n)
Art. 1959. 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)
Art. 1960. If the borrower pays interest when
there has been no stipulation therefor, the
provisions of this Code concerning solutio
indebiti, or natural obligations, shall be
applied, as the case may be. (n)
Art. 1961. Usurious contracts shall be
governed by the Usury Law and other
special laws, so far as they are not
inconsistent with this Code.
Thank you!!