CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES

Based on the Lectures of Atty. Sarona

By: 2 Manresa 2015-2016

PRELIM EXAM COVERAGE is given, deposited or served as a means to ensure the

fulfilment or enforcement of an obligation or of protecting
some interest in the property.
November 12, 2015 (1st Hour)
Bailment
Transcribed by: Alona Suzell B. Ruyeras
So, we have here contracts of bailment. Bailment,
PART I: CONCEPT OF CREDIT TRANSACTIONS
meaning, it involves contracts to deliver. Delivery of
We have Credit Transactions. So what are these property of one person to another in trust for a specific
transactions that are involved here? These are transactions purpose with a contract, whether express or implied, that
for purchaser of goods or loan of goods, including services the trust shall be faithfully executed and the property
or money, which (relates to) a purchase or loan at the returned or duly accounted for when the special purpose is
present time with promise to pay or deliver in the future. accomplished or kept until the bailor retains it. So, we have
With these credit transactions, it is now possible for more here contractual relations. Since it involves contractual
exchanges to take place. Because essentially, you get to relations, then we also take into consideration the essential
enjoy the money that you borrow now but you will pay later. elements of a valid contract.
Or you get to enjoy the use of a property now and just
Now, who are the parties in a bailment? We have:
return it later.

So, credit transactions that are involved, we  The Bailor; and

have:  The Bailee

 Bailment Contracts; Bailor, also referred to as the “Commodatario”, is the

giver. The one who delivers possession or custody of the
 Usury Law, but the Usury Law has already been
thing bailed. As you will see when we discuss the different
suspended;
contracts involving bailment, it is NOT required that the
 Contracts of Guarantees and Suretyship;
bailor be the owner of the property that is delivered. What
 Mortgages; is important is that the bailor must have a POSSESSORY
 Antichresis; and INTEREST like that of a lessee, wherein he is not
 Concurrence and Preference of Credits. prohibited to let other persons lease or use the property, as
well as a usufructuary, wherein the person is given the right
Now, in relation to Credit Transactions, we will also to enjoy the property without transfer of ownership. Again,
discuss the two (2) types of security. Security, meaning these persons (i.e. Lessee and Usufructuary) can be
yung collaterals noh. It can be: considered as bailors.
1. Real Security; or And then we have bailees. Bailee is the recipient. It
2. Personal Security. refers to the person who receives the possession or
custody of the thing that is delivered. He is also known as
When we talk about Real Security, we have here:
the “Commodante”. Now, the bailee’s obligation is to
 Contracts of Pledge; restore the subject of the bailment in the same or in an
altered form xxx (NOTE: a few words are inaudible),
 Chattel Mortgage;
therefore.
 Real Estate Mortgage; as well as
 Antichresis. Kinds of Bailment:
With these types of “Secured Transactions” or real 1. For the sole benefit of the bailor wherein we have
security, there is a collateral or an encumbrance upon a a Gratuitous Deposit and Mandatum;
property. 2. For the sole benefit of the bailee. This would
involve contracts of Commodatum as well as
And then we have Personal Security or “Unsecured Gratuitous Simple Loan or Mutuum; and
Transactions” wherein the obligation or the collateral is 3. For the benefit of both parties such as a Contract
essentially supported only by a promise to pay or a of Deposit for compensation, Involuntary Deposit,
personal commitment of a person such as a guarantor or a as well as Pledge.
surety. So with contracts of security, essentially, something
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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

When we say the bailment is “gratuitous”, there is consideration the definition as provided under our laws,
no consideration involved but nevertheless, loan is not just money. Loan as provided under Article
obligations are imposed on the respective parties. 1933, we have two (2) kinds:

When we say “Mutual Benefit Bailments”, the 1. Commodatum; and

third kind that I’ve mentioned, essentially what we 2. Mutuum.
have here are business transactions with
consideration. So these are the two (2) Kinds of Contracts of
Loan. Again, as we go along, we will be able to discuss
Now, we also have “Bailments for Hire”: more of this.

 Hire of Things, we have contracts of Now, first thing that you should consider is that a
lease; Contract of Loan is a REAL CONTRACT, perfected by
 Hire of Service, like that of a contract mere delivery. And essentially, it is considered as a
for piece of work under Article 1467; unilateral contract because obligations are more on the
 Hire for Carriage of Goods, like part of the borrower. But we will see later on that there are
common carrier; and also obligations on the part of the bailee pero very minor
 Hire for Custody for Safekeeping, like nalang siya with regard to this loan.
that which is covered under the
Warehouse Receipts Law. Now, what is the cause or consideration in this
Contract of Loan?

 On the part of the borrower, the

PART II: LOAN (ARTICLES 1933 - 1961) consideration is the acquisition of the
thing;
I. Concept  On the part of the lender, the right to
demand the return or the equivalent
So the first Credit Transaction that we will tackle thereof.
is that of a Contract of Loan. We begin with Article 1933:
Now, when we talk of loan in the common
Article 1933. By the contract of loan, one of the parties acceptance of the term, that is what we call MUTUUM
delivers to another, either something not consumable so wherein there is delivery by one party and the receipt of the
that the latter may use the same for a certain time and other party who becomes the OWNER of that sum that was
return it, in which case the contract is called a given or other consumable thing upon agreement, whether
commodatum; or money or other consumable thing, upon express or implied, with the obligation to repay the same
the condition that the same amount of the same kind and amount of the same kind and quality, with or without
quality shall be paid, in which case the contract is simply interest.
called a loan or mutuum.
Loan vs. Credit:
Commodatum is essentially gratuitous.
When we say loan in its general sense, it is
Simple loan may be gratuitous or with a stipulation different from CREDIT. Because when we talk about credit,
to pay interest. it is the ability to borrow money or things by virtue of the
confidence or trust reposed by a lender that he will pay
In commodatum, the bailor retains ownership of what he has promised within the period specified by the
the thing loaned, while in simple loan, ownership passes to parties. So it is a sum credited on the books of a company
the borrower. who gives credit to a person who appears entitled to it.

LOAN (in its general sense) CREDIT

Delivery by one party and The ability to borrow money
Alright, when we think of loan, the first thing that the receipt of the other party or things by virtue of the
comes into our mind is money, “pera” or “ utang”. Pag who becomes the owner of confidence or trust reposed
sinabing loan, naghiram ka ng pera . But if you take into that sum that was given or by a lender that he will pay

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By: 2 Manresa 2015-2016

other consumable thing what he has promised (e.g. money, rice)

upon agreement, whether within the period specified As to ownership Ownership is Ownership is
express or implied, with the by the parties retained by the transferred to the
obligation to repay the bailor person who
same amount of the same obtained the loan
kind and quality, with or As to cause ESSENTIALLY May be
without interest. Gratuitous (not gratuitous or
just gratuitous) onerous
As to property Involves real or Only involves
Loan vs. Discounting: personal personal
properties properties (e.g.
When we talk about loan, it is different from money or
DISCOUNTING. Now, what happens in discounting? It is a consumable
“mode of loaning money”. Anybody who is familiar with thing)
discounting? A check is issued in your name pero post- As to purpose For temporary For consumption
dated pa. Wala ka naming bank account or kelangan mo use or
pa puntahan sa banko para magpa-encash. So, magpa possession only
discount ka. When we say “magpa-discount”, bawasan As to demand Bailor may The lender/bailor
yung amount, diba? sa check? Which should be demand the may not demand
considered as interest on the part of the person na nagpa- return of the thing its return before
discount. So, essentially, it is really not a loan. In a loaned before the lapse of the
discount, interest is deducted in advance unlike that of a the expiration of term agreed upon
loan in its general term. So you could have a single paper the term in case
discounting, only the signature of the maker appears, in of urgent need as
loan. But if it is discounting, that is considered as double provided for
paper in the sense that you would have two (2) signatures under Article
appearing with both parties liable for the payment. 1946
LOAN DISCOUNTING As to obligation To return the To pay the same
thing loaned amount of the
Interest usually not Interest is deducted in same kind and
deducted in advance. advance. quality that was
loaned to you
One could have a “single Considered as “double As to loss Applying the The borrower
paper discounting” (only the paper discounting” in the principle of Res suffers the loss
signature of the maker sense that you would have Perit Domino, the
appears). two (2) signatures owner/bailor
appearing with both parties As to nature Purely personal Not purely
liable for the payment. personal in
nature

Alright, so what are the two (2) kinds of loan?

So, those are the distinctions between
1. Commodatum; and Commodatum and Mutuum.
2. Mutuum (also known as “Simple Loan”).
Kinds of Commodatum:
What are the distinctions between these two?
1. Ordinary Commodatum; and
COMMODATUM MUTUUM 2. Precarium.
As to object Ordinarily Subject matter is
involves money or other Aside from distinguishing loan from credit, from
something not consumable or discounting, we also take into consideration that a loan is
consumable fungible thing different from a lease.

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Loan vs. Lease:

In lease, one of the parties binds himself to give Also, a loan is different from a barter.
to another the enjoyment or use of a property for a price
certain. Loan vs. Barter:

LOAN (Mutuum) LEASE A barter is onerous. You exchange something for

some quantity, quality or kind.
Delivery by one party and One of the parties binds
the receipt of the other party himself to give to another LOAN BARTER
who becomes the owner of the enjoyment or use of a
that sum that was given or property for a price certain. Commodatum is essentially Onerous
other consumable thing gratuitous, while Mutuum
upon agreement, which is may be onerous or
either express or implied, gratuitous
with the obligation to repay
the same amount of the
same kind and quality, with
Now, let’s go to the specific provisions for a
or without interest.
Commodatum.

Deposit is also different from a loan. II. Commodatum

Loan vs. Deposit: Article 1935. The bailee in commodatum acquires the use
of the thing loaned but not its fruits; if any compensation is
In deposit, you deliver a subject matter but you to be paid by him who acquires the use, the contract
do not authorize the depositary to use the said property. In ceases to be a commodatum.
deposit, the purpose is safekeeping.

LOAN DEPOSIT Okay, So, this emphasizes the purpose of a

commodatum, noh – USE OF THE THING LOANED. Now,
You allow the borrower to You do not authorize the relate it to Article 1933, that the bailee is allowed to make
use. depositary to use the said use of the thing loaned and that commodatum is essentially
property. The purpose is gratuitous. In other words, walay compensation, as to be
safekeeping. distinguished from a Contract of Lease.

What happened in the case of Pajuyo vs. Court

of Appeals?
Usufruct.

Loan vs. Usufruct: Pajuyo vs. Court of Appeals

In usufruct, enjoyment of the fruits is the main Facts:
cause.
Pajuyo was able to acquire rights over a 250 sq. m. lot in
LOAN USUFRUCT
Payatas, Quezon City from one Pedro Perez. Pajuyo made
Temporary possession and Enjoyment of the fruits is a house made of light materials in such lot. He and his
use (Commodatum) and the main cause. family lived there from 1979 to December 7, 1985.
Consumption (Mutuum) can
be the purposes. On December 8, 1985, Pajuyo entered into a Kasunduan
with respondent. Pajuyo, as the owner of the house,
allowed Guevarra to live in the house for free provided that
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the latter will maintain the cleanliness and orderliness of A4: According to the Supreme Court Ma’am, there was NO
the house. Guevarra promised that upon Pajuyo’s demand, commodatum.
the former will vacate the premises.

However, when the time came that Pajuyo demanded him

to vacate, Guevarra refused. This prompted Pajuyo to file Q5: Why not? Isn’t it that he was allowed to use the
an ejectment case against Guevarra. property?

A5: Yes Ma’am but the Court considered the stipulation to

MTC rendered a decision in favour of Pajuyo. RTC affirmed
maintain the cleanliness and the orderliness (of the house)
the same.
as the compensation, Ma’am.
Issue:

W/N the Kasunduan entered into by Guevarra and Pajuyo Q6: So, if their Kasunduan was not a commodatum, what
can be considered a Commodatum kind of contract would that be? It is not commodatum
because there is an obligation imposed on the part of the
Ruling: bailee which will not make the Kasunduan essentially
gratuitous. So if it is not commodatum, then what kind of
The contract cannot be considered a Commodatum contract?
because it is NOT essentially gratuitous. The stipulation
regarding maintaining the cleanliness and orderliness of A6: Contract of Lease, Ma’am??
the house was considered by the Court as a cause or
consideration.

Q7: So was there a stipulation to pay for a price certain?

Q1: Why is there a need to determine whether it was a A7: (NOTE: Ma’am answers her own question) It would be
commodatum or not? similar to a contract of lease but we could not really say
that it would exactly be a contract of lease because there
A1: It is important to determine whether it was a was no payment of a price.
commodatum or not Ma’am because there is a
responsibility on the part of the lender or the bailee to
return the property upon the demand of the property.
Q8: So with that, since the law does not provide a name for
such contract, what do you think that contract would be? Is
the Kasunduan a valid contract?
Q2: So if it is not a commodatum, (Pajuyo) cannot demand
the return of the property? A8: No Ma’am??

A2: Ay, rather Ma’am, it is important to determine whether

it was a commodatum or not because, if it is a
Q9: Oh, so there was no valid contract? There was no
commodatum, then the....
meeting of the minds between the parties??

A9: It is a valid contract Ma’am.

Q3: What was the case filed here?

A3: Ejectment. Unlawful Detainer, Ma’am.

Q4: Okay. So, the issue is with regard to entitlement of

possession. So was there a commodatum?

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Q10: What kind of contract would that be?? It is not But, the difference between donation and
commodatum because it is not essentially gratuitous. It is commodatum is obviously, in donation, there is
not exactly a lease. Ang nakalagay dyan, “akin to a TRANSFER OF OWNERSHIP which is absent in
landlord-tenant relationship”. It is similar to a lease but not Commodatum.
exactly a lease. So san sya mahulog na classification? If
the law does not designate a name for a contract, what Now, as mentioned earlier in Article 1935, the
would that be? purpose (of commodatum) is to make use of the thing itself.
So the use is limited to the thing, the fruits are EXCLUDED
A10: (NOTE: Class answers) Innominate Contract unless otherwise stipulated by the parties.

Why are the fruits excluded in the use? Because

“fruits” is (sic) essentially a right to be enjoyed by the
Q11: Oh, What kind of innominate contract? OWNER. It could be the bailor if he is the owner, it could
be the bailor if he is given the right by the owner to make
A11: Do ut facias. use thereof. But just because the bailee is given the right to
use of the thing, it does not necessarily mean na kasama
ang fruits unless otherwise stipulated.
Q12: Do ut facias which means? Also in Article 1935, it emphasizes the purpose of
a commodatum – USE.
A12: I give so that you may do.
However, if there is compensation, it will not be
Okay, thank you. So, what do we have here? In
considered as a commodatum anymore as it will be
this case, the Supreme Court emphasized the fact that a
considered as a LEASE. So the purpose of commodatum
Commodatum MUST be ESSENTIALLY GRATUTOUS.
is the temporary use of the thing loaned for a certain time.
While it is true that the bailor here was given the right to
use the subject matter, it is not essentially gratuitous If you deliver a thing to another person, but the
because while the Kasunduan did not require Guevarra to bailee is not allowed the use thereof, take into
pay rent, it obligated him to maintain the property in good consideration the purpose which may be safekeeping
condition. So that obligation makes it a contract different wherein it will be considered as a DEPOSIT.
from commodatum.
Q1: So, what is a valid subject matter in a commodatum?
Now, the effects of the Kasunduan are also What would be a subject matter in commodatum? It was
different because here, a case of ejectment is similar to a already mentioned earlier during the distinctions.
lease (NOTE: Ha?? Di ko po ‘to gets? ) However, even if
we assume that we do not have a commodatum, Guevarra A1: Ummm, it ordinarily involves something not
would still have the duty to return, or rather turn-over, the consumable.
possession to Pajuyo, the bailor.

Now, take note here that one of the defenses of

Guevarra was that Pajuyo does not have a valid title over Q2: What do you mean by consumable things?
the property. Now, take note that the defense could not be
used in a contract of commodatum because ownership is A2: It will be consumed Ma’am, in time it will be lesser in
NOT required on the part of the bailor for the perfection of value.
a commodatum.

So, we could say that commodatum is somehow

similar to a donation because a benefit is given to the Q3: You mentioned that the subject matter in a
recipient to make use of the property without any commodatum is a non-consumable thing. Is it possible for
compensation. Now, the presumption here is that when the a commodatum that the subject matter is a consumable
bailor in commodatum has loaned the thing to a bailee, he thing?
has no need for the said property.
A3: Yes Ma’am.

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deposit his money in the savings account of Sterella for the

purpose of making it appear that the said firm has sufficient
Q4: When? capitalization for incorporation with the promise that the
amount shall be returned within thirty (30) days.
A4: When the use of the consumable thing Ma’am would
be for exhibition.
Q6: Why would that matter (Ma’am refers to the issue on
W/N this case is a commodatum)?
Q5: Example?
A6: It would matter Ma’am because it relates to the amount
A5: Rice, for exhibition. to be returned Ma’am.

What happened in the case of Producers Bank Q7: What do you mean by that? So do we have a
vs. Court of Appeals? commodatum here? What is the subject matter?

A7: Yes Ma’am. The P200,000.

Producers Bank vs. Court of Appeals

Facts: Q8: So, that is money?

Franklin Velez was asked by a friend to assist Doronilla in A8: Yes Ma’am. But still, the Supreme Court held that it is
incorporating his business, Sterella. Velez asked that still a commodatum because the P200,000 was used to
P200,000 be deposited in the bank for such purpose and make it appear that Sterella (the business) has an amount
he promised that the same shall be returned and that the that is sufficient for its incorporation. So although it is
same can be withdrawn in a month’s time. The said money, a consumable thing, it is still a commodatum
amount was indeed deposited under the name of Sterella. because it was used for exhibition.

Later on, it was discovered that the office of Sterella is not

anymore in the original location. Also, upon checking with
the bank, only P90,000 of the P200,000 was left. Q9: So what is the effect that it was determined that it was
a commodatum and not a simple loan?
Issue:
A9: It is essential Ma’am that the same amount, the
W/N this is a case of commodatum P200,00, will be given back/returned.

Ruling:
Okay. So, we have in this case a contract of
YES. As provided under Article 1936, “consumable goods
commodatum and not a mutuum even if the subject matter
may be the subject of commodatum if the purpose of the
is money. Now, as provided under Article 1936,
contract is not the consumption of the object as it is merely
“consumable goods may be the subject of commodatum if
for its exhibition.”
the purpose of the contract is not the consumption of the
object as it is merely for its exhibition.” So, a commodatum
The rule here is to determine the intention of the parties.
may have for its subject matter a consumable thing.
The intention of the parties in entering the contract shall be
accorded primordial consideration in determining the actual Article 1936. Consumable goods may be the subject of a
character of a contract. In case of doubt, contemporaneous commodatum if the purpose of the contract is not the
and subsequent acts of the parties shall be considered in consumption of the object, as when it is merely for
such determination. exhibition.
Here, evidence shows that private respondent agreed to

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The rule here is to determine the intention of the it. So the purpose here (in commodatum) if the subject
parties. The intention of the parties, as we all know, in matter is consumable should NOT be consumption. As
determining the contract, shall be accorded primordial mentioned, it is merely for exhibition with the intent to
consideration in determining the actual character of a return the same thing to the bailor.
contract. In case of doubt, as we have learned in the
interpretation of contracts, contemporaneous and Example is yung wine, mag exhibit ka ng mga
subsequent acts of the parties shall be considered in such wines. That could be considered as a commodatum with
determination. Here, evidence shows that private the intention that you would return the exact same thing to
respondent agreed to deposit his money in the savings the bailor.
account of Sterella for the purpose of making it appear that
the said firm has sufficient capitalization for incorporation Now, Article 1937:
with the promise that the amount shall be returned within
thirty (30) days. Private respondent clearly accommodated Article 1937. Movable or immovable property may be the
Doronilla by lending his money without consideration as a object of commodatum.
favour to his friend.

Doronilla’s attempt to return to private Now, we have this case of Mina vs. Pascual:
respondent the amount of P200,000 which the latter
deposited in Sterella’s account together with P12,000,
(which) allegedly represented interest in a contract of Mina vs. Pascual
mutuum, however did not convert the transaction from a
commodatum to mutuum because again, there was no Facts:
intention on the part of the parties. The P12,000 could be
considered not as an interest in a mutuum or simple loan The property involved here is a lot in the center of Laoag,
but rather the fruits to which the bailor should be entitled. Ilocos Norte which was awarded to Francisco Fontanilla,
So it was only proper for Doronilla to remit to private the brother of Andres Fontanilla. Later, Andres Fontanilla,
respondent the P200,000 plus the interest accruing to the with the consent of his brother Francisco, erected a
money deposited with petitioner. warehouse on a part of the said lot.

Now, notice in this case that what we have is After Francisco’s death, he was succeeded by Mina.
somehow unique. Why? Because it was held to be Andres also died and was succeeded by his wife, Roberta
commodatum but the subject is money. And what is Pascual and their children.
expected to be returned, while the same amount of
P200,000, is NOT the exact denomination, the exact serial The controversy arose when Roberta attempted to sell a
number, of the money that is deposited in that account – portion of the lot allegedly corresponding to Andres. This
equivalent lang. Because if we take into consideration a was opposed by Mina.
commodatum noh, you return the EXACT SAME THING.
Dito, what was demanded was the equivalent value. One of the contentions that were raised is that the sale of
the portion of the lot is not valid because she was not the
Although the purpose is similar to that of owner of the same.
commodatum, merely to show that there was sufficient
capitalization in the bank account of the corporation, there Issue:
was no transfer of ownership, similar to a commodatum,
again this is unique in the sense na what is expected to be W/N there was a contract of commodatum between
returned is not the exact denomination of money that was Francisco Fontanilla and Andres Fontanilla
put into that account, but the exact value. Okay? Because
when we talk of commodatum, kung ano yung hiniram mo, Ruling:
yun EXACTLY ang ibalik mo.
Two features of a commodatum:
So, subject matter, as a general rule, in
commodatum is a non-consumable good. So again, when 1. Subject matter is non-consumable;
we talk about “consumable”, it cannot be returned anymore 2. It must be for a certain period of time.
once you use it. Because how do you use it? You consume
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In this case, Francisco, when he allowed Andres to build a Now, an essential feature of a commodatum is
warehouse on a portion of the land, did not stipulate a that the use of the thing belonging to another shall be for a
period of time when he will demand the return of the certain period. But under the facts of this case, Francisco
subject matter. Hence, there can be no valid commodatum. did not fix any period during which Andres could use the
lot. That is what happened for the past thirty (30) years,
noh. Napasa na nga sa kanilang mga heirs.

Q1: So, you agree with that? That ownership is required in So here, it could not be considered a
a valid contract of sale? commodatum as it never entered Francisco’s mind to limit
the period during which his brother was to have the use of
A1: Based on our Law on Sales, Ma’am, NO. Ownership at the lot because he expected that the warehouse will
the time of the perfection of the sale Ma’am is not required. eventually fall into the hands of his son, Fructuoso.
It is only required at the time of delivery or consummation However, this did not happen because Fructuoso died
of the sale. before Andres.

Now, with that, it appears that the intention of the

parties was for Francisco to allow his brother Andres a
Q2: Notwithstanding the status of the sale, what about the surface right with the payment of an annual rent and with
second issue (on W/N there is commodatum) that you the use of the lot. So, we could say that their intention
mentioned? could have been a contract of lease.

A2: There are two features of a commodatum, Ma’am: So therefore, along with the issue as to the sale,
it was necessary to annul the sale of the lot that was made
1. Subject matter is non-consumable; to the third person made by Roberta in representation of
2. It must be within a certain time. her minor children.

In this case, Ma’am, Francisco, when he allowed Andres to Now, Article 1938:
build a warehouse on a portion of the land, did not stipulate
a period of time when he will demand the return of the Article 1938. The bailor in commodatum need not be the
subject matter. owner of the thing loaned.

Because again, there is no transfer of ownership

Q3: What does that mean? in a commodatum. In fact, if you are a lessee, you are
allowed to loan the same subject matter that was leased to
A3: It means, Ma’am that there is no valid commodatum. you if there is no express prohibition. If you are a
usufructuary, wherein you are entitled to the use and fruits
of the property, you can also allow another person to make
Q4: So, if there was no commodatum, what was the use thereof, unless otherwise stipulated. However, as we
arrangement here? What was the intention of the parties if will see in Article 1939, the bailee may not himself lease to
it is not a commodatum? a third person. Please read Article 1939:

A4: The intention of the parties here Ma’am is for lease. Article 1939. Commodatum is purely personal in character.
Consequently:

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

Okay, because it presupposes that the use of the extinguishes the contract;
property was for a valid consideration. Alright, thank you. (2) The bailee can neither lend nor lease the object
So, what we have here is a property that was passed from of the contract to a third person. However, the
generations, noh. So as we already emphasized, a real members of the bailee’s household may make
property can be the subject matter of a commodatum. In use of the thing loaned, unless there is a
this case, a portion of a property was at issue. stipulation to the contrary, or unless the nature of
the thing forbids such use.

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virtue of an obligation are transmissible, if there has been

no stipulation to the contrary.
Okay, so under Article 1939, it emphasizes the
character of commodatum being personal in nature.
So eto (NOTE: Ma’am referring to the
Q1: Jose, let us say, you have a car. You do not want to intransmissible nature of commodatum), exception sya.
use it because you like to commute going to school. Do
you trust Raphael, noh, that you will loan your car (to him) Now, with regard to use, general rule, the
without any compensation? BAILEE cannot lend or lease the object to a third person.
While it is true that the BAILOR is NOT required to be the
A1: *Shakes his head* (Agay, Friendship Over..haha) owner of the subject property as long as he has
possessory interest and not prohibited by the owner
thereof, he can loan the subject matter to another person
and enter into a contract of commodatum, the BAILEE
Q2: What do you take into consideration? Magpahiram ka
himself, as a general rule, cannot lend or lease the object
sa tao ng walang bayad.
to a third person with exceptions under paragraph 2 of
A2: Ummm. Friendship?? Article 1939:

a. Stipulation of the parties; or

b. Members of the bailee’s household may
O, friends daw kayo. (Yiheee..bawi- make use of the thing loaned.
bawi..hahaha) Now, that makes it personal in nature! You
take into consideration the character of this person. Maybe So, pwede, kung same household. So pinahiram
you are friends, pero meron man rin tayong friends na mo ang cellphone, laptop. Pwede yung members (ng same
danghagan (Bitaw Ma’am..haha). So syempre, kahit household) ang mag gamit unless otherwise stipulated by
friends, tapos danghagan sya, di sya marunong mag- the parties. Or, unless the nature of the thing forbids such
drive,kaskasero sya mag-drive, bakit mo ipahiram? Diba? use.
So you take into consideration the character as well as the
For instance, kahit magkasama kayo sa bahay,
credit of a person. That makes is purely personal in nature,
pero ang pinahiram sayo ay damit. Okay? By the nature of
noh. CHARACTER, CREDIT and CONDUCT are taken into
the thing itself, hindi sya yung ipahiram mo nalang basta
consideration.
kanino sa bahay ninyo. Kase bakit? Baka kasya sayo
Now, the general rule here since it is purely tapos ipagpilitan ng kapatid mo na kasya rin sa kanya. So
personal in nature, the death of either party will terminate baka masira lang. Okay?
the contract of commodatum. Why? Because the trust that
So here, when it comes to the members of the
you may repose on the bailor or the bailee is not the same
same household, as a general rule, pwede nila gamitin
trust that you can have with regards to his heirs, noh.
EVEN WITHOUT THE CONSENT OF THE BAILOR,
Saligan nimo sya because he takes care of things, he will
unless otherwise stipulated or when the nature of the thing
take care of the thing that you loaned to him, pero if the
forbids such use.
bailee dies, it does not mean that the same care may be
extended by his heirs. So, the general rule is that the Now, Article 1940:
contract will be terminated. So, it is an INTRANSMISSIBLE
RIGHT. The only exception is, of course, by stipulation of Article 1940. A stipulation that the bailee may make use of
the parties that in case any one of them dies, the the fruits of the thing loaned is valid.
commodatum will not be extinguished.

Now, if there are two (2) or more bailees, the So, eto yung exception sa Article 1935 because
death of one, however, will NOT extinguish the contract the right to USE the subject matter is distinct from the right
unless there is a stipulation to the contrary. So, in relation to USE ITS FRUITS. If the parties stipulated that the bailee
to this, we recall your Article 1178 in Obligations and can use the fruits, then that is VALID, but in the absence of
Contracts: a stipulation, only as to the use of the thing.
Article 1178. Subject to the laws, all rights acquired in
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Now, when we talk of fruits here, the use of the

fruits must only be incidental to the use of the thing.
Because otherwise, if the stipulation provides that the Q3: Okay, so in view of the return of the carabaos, what
bailee can use the fruits as the MAIN cause of the contract, was the liability here on the part of the heirs of the bailee?
it is not commodatum anymore but usufruct.
A3: The Supreme Court held Ma’am that because there
Now, we have here the case of Delos Santos vs. was DELAY in the return of the said carabaos, the heirs
Jarra: would still be liable for the death of the other carabaos (or
the dead carabaos) because they, Jimenea or his heirs,
were not able to return the carabaos on time. So, because
Delos Santos vs. Agustina Jarra of the delay, they are liable for damages, Ma’am plus the
value of the carabaos.
Facts:
Alright, thank you. Now, the case of Delos
This case involves lending of carabaos. On September 1, Santos emphasizes the first obligation of the bailee – to
1906, Felix Delos Santos brought a suit against Agustina return the thing that was loaned, to return the thing subject
Jarra as the administratrix of the estate of Jimenea. of the commodatum. Since it is a commodatum, there was
no transfer of ownership so you, as the bailee, has the
Delos Santos averred that Jimenea borrowed from him ten obligation to return the EXACT same thing that you have
(10) first class carabaos. However, Jimenea never returned borrowed.
the same.
The carabaos given for use, not being returned
Because of Jimenea’s death, the estate of Jimenea was by the defendant upon demand, there is no doubt that
already administered by Agustina Jarra. there is an obligation to indemnify the owner thereof by
paying him the value of the said carabaos. It is the
Issue: imperative duty of the bailee, to return the thing itself to its
What is the contract entered into by Jimenea and Delos owner, or to pay him damages if through the fault of the
Santos? bailee, the thing should have been lost or injured. So, that
was the ruling in this case.
Ruling:
Obligations of the Bailee:
COMMODATUM. From the foregoing, it may be logically
inferred that the carabaos were loaned through a 1. To return the thing that was borrowed;
commodatum to the now deceased Magdaleno Jimenea. 2. To pay for the ordinary expenses for the use and
However, for some reasons, there are now only six (6) preservation of the thing loaned;
surviving carabaos.
Article 1941. The bailee is obliged to pay for the ordinary
Agustina Jarra, being the administratrix of Jimenea’s expenses for the use and preservation of the thing loaned.
estate, has now the responsibility to return the said
carabaos because the contract between Jimenea and
Delos Santos was in the form of a commodatum. Why is it that the bailee shoulders the ordinary
expenses? Because these are ordinary expenses in
relation to USE, which he gets to enjoy. Now, in relation to
Q1: At the time of the demand for the return of the Article 1941, don’t forget the obligation imposed in Article
carabaos, were all of them still alive? 1163. The obligation to take good care of the thing with the
diligence of a good father of a family:
A1: Yes Ma’am.
Article 1163. Every person obliged to give something is
also obliged to take care of it with the proper diligence of a
good father of a family, unless the law or the stipulation of
Q2: Now, at the time of the finality of the case?
the parties requires another standard of care.
A2: No Ma’am.

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So, based on that, you take care of the ordinary

expenses. If what was loaned is car, then you should be Because Bagtas was still not able to return the three (3)
liable for the gas, or the change oil, among others bulls or pay the book value, the Republic of the Philippines
commenced an action praying that he be ordered to return
3. To pay for the loss of the thing even if it is for a fortuitous the three (3) bulls or pay the book value.
event under certain circumstances;
Bagtas contended that due to the bad condition of the
Article 1942. The bailee is liable for the loss of the thing, peace and order of their place, he is not able to return the
even if it should be through a fortuitous event: three (3) bulls.
(1) If he devotes the thing to any purpose different Bagtas later on died and was substituted by his wife. The
from that for which it has been loaned; latter said that the two (2) bulls were already returned.
(2) If he keeps it longer than the period stipulated, or However, one (1) of the bulls was gunshot and died.
after the accomplishment of the use for which the
commodatum has been constituted; According to the spouse, this is considered as force
(3) If the thing loaned has been delivered with majeure and she is therefore relieved from the obligation of
appraisal value, unless there is a stipulation returning the bull.
exempting the bailee from responsibility in case
of a fortuitous event; The Republic, on the other hand, contended that even if
(4) If he lends or leases the thing to a third person, the ownership was retained by it, the wife is still liable.
who is not a member of his household;
(5) If, being able to save either the thing borrowed or Issue:
his own thing, he chose to save the latter. W/N the contract between the Republic and Bagtas is a
commodatum
Okay. While the general rule is that the bailee is
not liable for the loss or damage (of the thing loaned) due Ruling:
to a fortuitous event, again applying the principle of Res NO. A contract of commodatum is essentially gratuitous.
Perit Domino, you have the exceptions under Article 1942. The Supreme Court held that the 10% breeding fee is
considered compensation. As such, it would be considered
In relation to that, we have the case of Republic
a contract of lease wherein the lessee would be subject to
vs. Bagtas:
the responsibilities of a possessor in bad faith.

Even assuming that the contract was commodatum, the

Republic vs. Bagtas
spouse would still be liable under Article 1942 making the
bailee liable even if the loss is through a fortuitous event if
Facts:
he keeps the thing longer than the period stipulated.
Bagtas borrowed from the Bureau of Animal Industry three
(3) bulls for breeding purposes subject to the government
charge/breeding fee of 10%.
Q1: Was there commodatum here? What was the
contention of the government? As to compensation? Was
At the expiration of the period, Bagtas requested for an
there compensation here?
extension of one (1) year. The Secretary of Agriculture
acquiesced but only as to one (1) bull. So, Bagtas offered A1: No Ma’am?
to pay for the value of the three (3) bulls with the deduction
of the yearly depreciation as approved by the Auditor
General.
Q2: Are you sure? What about the breeding fee?10% of
However, the Secretary of Agriculture said that the value of the value of the bulls?
the three (3) bulls cannot be reduced and that they should
be paid their book value or should be returned not later A2: Ay, Yes Ma’am.
than October 1, 1950.
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b. Keeps it longer than the period stipulated, or after

the accomplishment of the use for which the
Q3: If that is compensation, can it be considered commodatum has been constituted;
commodatum?
That would mean DELAY. So we all
A3: No Ma’am because commodatum is essentially know under Article 1169, noh, ay, 1169 ba yun?
gratuitous. Delay? Or 1164? I forgot (NOTE: Article 1170 po
ata Ma’am ) Yun, the effect of delay. When
Q4: Now, considering that the contract could not be there is delay, there is already liability on the part
considered a commodatum, can we say that the spouse of of the debtor, in this case, the bailee.
Bagtas can still be liable for the value of the third bull?
Article 1169. Those obliged to deliver or to do
A4: Yes Ma’am. She would still be liable. something incur delay from the time the oblige
judicially or extrajudicially demands from them
So here, again, a contract of commodatum is the fulfilment of their obligation xxx.
ESSENTIALLY GRATUITOUS. In the agreement between
the parties, the State and Bagtas, there was a breeding fee
to be considered as a compensation. As such, it would be Article 1170. Those who in the performance of
considered a contract of lease wherein the lessee would be their obligations are guilty of fraud, negligence, or
subject to the responsibilities of a possessor in bad faith. delay, and those who in any manner contravene
Why? Because Bagtas, as well as his surviving spouse, the tenor thereof, are liable for damages.
continued possession of the bull after the expiry of the
contract. So with that, he could be held liable. c. The thing loaned has been delivered with
appraisal value, unless there is a stipulation
Even assuming that it was commodatum, the
exempting the bailee from responsibility in case
spouse would still be liable under Article 1942. Why?
of a fortuitous event;
Because of paragraph 2, “If he keeps it longer than the
period stipulated...”
There is the intention here for the
So, regardless of whether it was a lease or a borrower to be made liable. Why? because the
commodatum, the fact remains that the bull that was bailor puts value on the thing subject of
subject of the lease or the loan, whichever is applicable, commodatum. However, this is unless there is a
(was lost) and the surviving spouse or the estate would be stipulation exempting the bailee from
held liable for the bull or the value thereof which has not responsibility in case of a fortuitous event.
been returnedl because it was killed while it was under the
custody of the estate regardless of who is at fault. d. Lends or leases the thing to a third person, who
Regardless kung sino or paano namatay yung bull because is not a member of his household;
there is already DELAY.
Again, let’s go back to the nature of a
Take a look at the exceptions under Article 1942. commodatum being purely personal in nature.
Essentially, these refer to improper acts on the part of the
e. If, being able to save either the thing borrowed or
bailee:
his own thing, he chose to save the latter.
a. Devotes the thing to any purpose different from
that for which it has been loaned; Lastly - Ingratitude. While naturally, we
tend to save our personal things, it would still be
This shows bad faith on the part of the considered ingratitude if we chose to save our
bailee. Kotse, syempre, sa road lang (dapat), own thing over the thing that was loaned to you.
tapos gisadya talaga, gi drive mo nung nagbaha, Why? because remember, it was loaned to you
noh. So, obviously, that is a purpose different “essentially gratuitous”.
from that for which it has been loaned.

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So in relation to that, you take care of the ordinary

expenses. If what you loaned is a car, you should be liable
for the gas, for the change oil, among others.

We have Article 1942.

November 12, 2015 (2nd Hour)

Transcribed by: Zarah Domingo Article 1942: The bailee is liable for the loss of the thing,
To emphasize, the primary obligation on the part of even if it should be through a fortuitous event.
the bailee, to return the thing that was loaned, to return the
thing that was subject of the commodatum. Since it was a (1) If he devotes the thing to any purpose different from
commodatum, there was no transfer of ownership. So you that for which it has been loaned.
as the bailee has the obligation to return the exact same
thing that was borrowed. The carabaos being used, not (2) If he keeps it longer than the period stipulated or
having been returned by the defendant upon demand, after the accomplishment of the use for which the
there is no doubt that she is under obligation to indemnify commodatum has been constituted;
the owner thereof, by paying him the value of the said
carabao. (3) If the thing loaned has been delivered with appraisal
of its value, unless there is a stipulation exempting the
It is the imperative duty of the bailee to return the thing
itself to the owner or to pay him damages if through the bailee from responsibility in case of a fortuitous event;
fault of the bailee, the thing should have been lost of
injured. (4) If he lends or leases the thing to a third person, who
is not a member of his household;
Obligations of the bailee, again to return the thing that
was borrowed. (5) If, being able to save either the thing borrowed or his
own thing, he chose to have the latter.
Article 1941: The bailee is obliged to pay for the
ordinary expenses for the use and preservation of the
thing loaned. While the general rule is that the bailee is not liable for the
loss or damage due to a fortuitous event, again applying
the principle of res perit domino, you have the exceptions
under Article 1942. In relation to that, you have the case of
Why is it that the bailee shoulders these ordinary
the Republic of the Philippines vs Bagtas.
expenses?

It is because, these are ordinary expenses in relation to RP vs Bagtas

use which he gets to enjoy. Now in relation to Article 1941,
don’t forget the obligation imposed in Article 1163, the Facts: Bagtas borrowed from RP 3 bulls for a period of
obligation to take good care of the thing, with the diligence 1 year, subject to breeding fee of 10% of the book
of a good father of the family. value. One of the bulls died due to stray bullets during a
Huk raid and the said bull was in the possession of
Article 1163: Every person obliged to give something Bagtas even after the expiration of the period of the
is also obliged to take care of it with the proper contract.
diligence of a good father of a family, unless the law
or the stipulation of the parties requires another Issue: WON Bagtas was exempt from liability: NO
standard of care.
Ruling: In Art. 1942, bailee is liable for loss through FE
if he keeps it longer than stipulated and the thing loaned
has been delivered with appraisal of its value, unless
there is a stipulation exempting liability in case
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loaned for.

Q1: So here, is there a commodatum or not? 2. If he keeps it longer That is delay. under 1169.
A1: No, there was a breeding fee. than the period stipulated When there is delay, there
or after the is liability on the part of the
Q2: Considering that there was compensation, can you say accomplishment of the debtor, in that case, the
that there is no liability anymore? use for which the bailee.
commodatum has been
Again, a contract of commodatum is essentially constituted
gratuitous. In the agreement here between the State and
Bagtas, there was a breeding fee to be considered as a 3. If the thing loaned has There is an intention for
compensation. As such, it would be considered as a been delivered with the borrower to be held
contract of lease, wherein the lessee would be subject to appraisal of its value, liable. Why? Because you
the responsibilities of a possessor in bad faith. Why? unless there is a put value of the thing that
Because Bagtas, as well as his surviving spouse, stipulation exempting the is subject of
continued possession of the bull after the expiry of the bailee from responsibility commodatum. Take note,
contract. With that, he could be held liable. in case of a fortuitous if there is a stipulation
event; exempting from liability.
Even assuming that it was a contract of commodatum,
the spouse (Bagtas died) would still be liable under Article 4. If he lends or leases the Go back to the ratio of
1942. The bailee is liable for the loss of the thing, even if it thing to a third person, commodatum, personal in
should be through a fortuitous event:xxx who is not a member of nature.
his household
(2) If he keeps it longer than the period stipulated or after
the accomplishment of the use for which the commodatum 5. If, being able to save It is considered ingratitude
has been constituted; either the thing borrowed because remember it was
or his own thing, he chose loaned to you, essentially,
(3) If the thing loaned has been delivered with appraisal
to have the latter gratuitously.
of its value, unless there is a stipulation exempting the
bailee from responsibility in case of a fortuitous event.xxx

So regardless of whether it was a lease or Article 1943: The bailee does not answer for the
commodatum, the fact remains that the bulls that were deterioration of the thing loaned due only to the use
subject of the lease or loan, if applicable, would still mean thereof and without his fault.
that the surviving spouse would be held liable, or rather,
the estate of the deceased will be liable for the value
thereof, which has not been returned because it is still in So, ordinary wear and tear, depreciation, shall be born
the custody of the estate, regardless of who is at fault, by bailor. But bailee can be held liable if: (1) he is at fault,
regardless kung sino or kung paano namatay yung bull or (2) negligent; or (3) uses it for any purpose different.
because there was already delay.

Take a look at the exceptions in 1942 wherein, Article 1944: The bailee cannot retain the thing loaned
essentially, these refer to improper acts on the part of the on the ground that the bailor owes him something,
bailee. even though it may be by reason of expenses.
However, the bailee has a right of retention for
Improper Act Rationale damages mentioned in Article 1951.

1. If he devotes the thing It shows bad faith on the

General rule sa commodatum, the bailee has no right to
to any purpose different part of bailee. Kotse,
retain the thing loaned as security for things he has against
from that for which it has syempre i-drive sa road
the bailor. Si bailee pinahiram ng sasakyan pero si bailee
been loaned. lang otherwise, obviously
nagpahiram din ng pera kay bailor. Si bailor hindi
that is a purpose different
binayaran yung utang kahit due na. The bailee cannot say
from what it has been
na I will not return the car to you unless you have paid your

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monetary obligation to me. So yan ang ibig sabihin sa A3: It is relevant for the determination of acquisitive
1944. The bailee cannot use that as a defense. He, the prescription. If the possession is in bad faith, the period of
bailor can demand the return of the thing. But of course, his possession required is 30 years, but if in good faith, only
obligation to pay his monetary obligation will remain the for 10 years.
same. The only exception we have is when we reach
Article 1951, involving hidden defects.

Q4: In this case, what is the prescriptive period that should

have been applied?

A4: Since there was no just title, what should have been
Catholic Vicar vs CA
applied is the 30-year requirement for extraordinary
prescription.
Facts: Respondents were possessors, with claim of
ownership in good faith, of the lots in question from
1906 to 1951. Petitioner was in possession as borrower
in commodatum up to 1951 when it repudiated the trust Q5: When did adverse possession begin? What is the
and declared the properties in its name for taxation relevance of knowing the prescriptive period required when
purposes. In 1962, Petitioner applied for registration of you do not know when it began?
the said lots claiming that its adverse claim ripened into
title by way of ordinary prescription. A5: The reckoning point is 1951. Until 1951, there was a
recognition of a commodatum. If there is a commodatum,
Issue: WON Petitioner is entitled to register the land in you acknowledge that you are merely a bailee. Thus, you
question by ordinary prescription: NO are in possession of the property, not in the concept of an
owner. So the prescriptive period, whether 10 or 30 years,
Ruling: When Respondents allowed Petitioner’s free will not run. But because in 1951, petitioner declared the
use of the properties in question, they became bailors in properties for taxation purposes, adverse possession
commodatum and the petitioner the bailee. The failure began and thus the prescriptive period began to run.
to return the subject matter of the commodatum did not
mean adverse possession but that bailee only held in
trust the property.
Adverse possession came only in 1951 when it In 1951, Petitioner repudiated the trust by declaring the
declared the lots for taxation purposes. There could be properties in his name for taxation purposes. So if you
no title by way of ordinary acquisitive prescription declare it for taxation purposes, you are now claiming to be
because of the absence of just title. Extraordinary in possession of the property in the concept of an owner.
prescription requires 30 years. In this case, adverse So magiging relevant na yung 10 year or 30 year period.
possession was only for 11 years. Here, obviously he is in bad failth because prior to 1951,
there was an acknowledgement of the existence of a
commodatum—possession only in the concept of a bailee,
acknowledgment that there is another person who owns
Q1: Under the facts of this case, when did the adverse the property.
possession on the part of the Petitioner begin?

A1: In 1951, when properties were declared by petitioners

for taxation purposes Now when Petitioner applied for registration in 1962, he
had been in possession only for 11 years. You do not apply
the 10 year prescriptive period requirement, because the
possession from 1951 was not in good faith. It was in bad
Q2: What do you mean by adverse possession? faith so dapat 30 years ang mag-apply . Ordinary
acquisitive prescription or prescription in good faith
A2: Claim of ownership in the concept of an owner
requires possession for 10 years but needs just title.
Extraordinary prescription requires 30 years.

Q3: Why is adverse possession relevant in this case?

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Now here, while it is true that private respondent never

asked for the return of the house, they became bailors in
commodatum and the petitioner the bailee. The petitioner’s
failure to return the subject matter of commodatum to the
bailor did not mean adverse possession on the part of the
borrower until 1951. The bailee held in trust the property
subject of the commodatum. The adverse claim of SUMMARY: WHAT ARE THE OBLIGATIONS OF THE
petitioner came only in 1951 when it declared the lots for BAILEE?
taxation purposes. So, the action of petitioner by such
adverse claim could not ripen into title by way of ordinary 1.) To return the thing to the bailor
acquisitive prescription because of the absence of just title.
2.) To pay for ordinary expenses
3.) To take good care of the thing with the diligence of
a good father of a family
So here, take note, mere failure to return does not 4.) With regard to expenses, for ostentatious
constitute adverse possession. It does not mean that you decorations, bailor shall be held liable
are already possessing the property in the concept of an
5.) For extraordinary expenses (we get to discuss that
owner. There must be another act, noh, like in this case,
declaring the property in his name for taxation purposes, to in 1949)
show that you have started possessing the property in the 6.) With regard to loss due to a fortuitous event, bailee
concept of an owner. But just because you did not return it, shall not be held liable unless it falls within the
does not mean that the acquisitive prescription period will exceptions under 1942
now run. So that’s 1944. 7.) For deterioration, ordinary wear and tear, bailee will
not be liable unless he is negligent or use property for
Article 1945: When there are two or more bailees to other purpose, or if stipulated by the parties
whom a thing is loaned in the same contract, they are 8.) No right to retain by bailee (exception, when we get
liable solidarily. to 1951)
9.) Solidary liability under 1945
If one of them dies, the contract would still continue. But
with regard to the nature of their liability, they shall be held
solidarily liable. This is to safeguard effectively the rights of
How about on the part of the Bailor?
the lender. It takes into account the personal integrity and
responsibility of all bailees. Article1945 is an exception of
1207 and 1208. Article 1946:
The bailor cannot demand the return of the thing
1207---there is a solidary liability only when the
loaned till after the expiration of the period stipulated,
obligation expressly so states, or when the law or the
or after the accomplishment of the use for which the
nature of the obligation requires solidarity;
commodatum has been constituted. However, if in the
1208--- presumption that an obligation is joint unless meantime, he should have urgent need of the thing,
otherwise stipulated by the parties. 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.
Here, Article 1945 expressly so states that two or more
bailees shall be held solidarily liable.
So here, the obligation of the bailor, to allow the use of
the thing loaned:

1.) till after the expiration of the period stipulated; or

2.) till after the accomplishment of the purpose

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By: 2 Manresa 2015-2016

As we have pointed our earlier, when we talk about

commodatum, ‘use for a certain period of time’. Now, 1946
provides that if the bailor has an urgent need for the
subject of the commodatum, he can seek for the return
thereof, but the return is only temporary. So the effect of Q1: Do we have a commodatum here?
such return or temporary use, is that the commodatum will
be suspended while in the possession of the bailor. A1: Yes with respect to the furniture.

Now, earlier, we mentioned that there are 2 kinds of Q2: What kind of commodatum?
commodatum:
A2: Precarium.
1.) ordinary commodatum

2.) precarium
Q3: Why do you say there was a precarium?
What is a precarium? It is a kind of commodatum where
A3: Their agreement was to return the thing upon the
bailor may demand the thing at will or at any time
demand of the plaintiff

Quintos vs Beck
Q4: So since there was a precarium, what is now the
Facts: Defendant was a tenant of Plaintiff. Upon the liability of the defendant?
novation of the contract of lease, plaintiff gratuitously
granted to the defendant the use of the furniture subject A4: To return the furniture upon demand.
to the condition that defendant would return them upon
the plaintiff’s demand. Plaintiff sold the property to
Lopez. Plaintiff required defendant to return ALL the
furniture but the latter informed the former that it could Q5: Did he return upon demand?
not give up the 3 gas heaters and 4 electric lamps
because he would use them until the expiration of the A5: No. What he did was to merely place them in the
lease. Plaintiff refused to get the furniture in view of the custody of the sheriff.
fact that defendant declined to deliver ALL of them.
Upon the expiration of the lease, defendant deposited
all the furniture in a warehouse in the custody of the
sheriff. Q6: Why was it necessary for him to deposit or consign to
the sheriff?
Issue: (1) WON Defendant complied with his obligation
A6: Because Plaintiff refused to accept them.
to return the furniture upon Plaintiff’s demand: NO
(2) WON Plaintiff should bear the expenses of the
deposit: NO
Q7: Was the deposit of the furniture of the plaintiff proper?
Ruling: The contract entered into is a commodatum
because plaintiff gratuitously granted the use of the A7: No.
furniture to the defendant reserving for himself the
ownership thereof. Defendant bound himself to return
the furniture upon demand but he did not comply with it
when he retained the gas heaters and lamps. The court Q8: Who should bear the cost of such deposit?
could not compel plaintiff to bear the expenses
occasioned by the deposit because the defendant as
bailee, was not entitled to place the furniture on deposit
nor was plaintiff under a duty to accept only part of the 18 | P a g e
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A8: It should be the defendant because he is the one who the plaintiff would not have otherwise defrayed. So that is
has the obligation to return the thing and he did not Article 1947.
properly do so.

So what we have here is a precarium. Obviously, it is a

precarium, even if not expressly stated by the Supreme
Court because of the agreement here: ‘gratuitously granted
to the latter the use of the furniture subject to the condition
that the defendant would return them to the plaintiff upon
the latter’s demand.’ Article 1947: The bailor may demand the thing at will,
and the contractual relation is called a precarium, in
the following cases:
Precarium- a kind of commodatum where the bailor may (1) If neither the duration of the contract nor the use to
demand the thing at will which the thing loaned should be devoted has been
stipulated; or
-a contract by which the owner of a thing, at (2) If the use of the thing is merely tolerated by the
the request of another person, gives the latter, the thing for owner.
use as long as the owner shall please

COMPARE this to ordinary commodatum where

possession of the bailee is more secured for he has the
So in this case, as long as the bailor shall please. Now,
right to retain the thing loaned:
when demand was already made, defendant failed to
return the furniture to the plaintiff. So, as the defendant had 1.) until the expiration of the period stipulated; or
voluntarily undertaken to return all the furniture to the
plaintiff upon the latter’s demand, but failed to do so, the 2.) upon the accomplishment of the use for which the
court could not legally compel her to bear the expenses commodatum has been constituted
occasioned by the deposit of the furniture at the
defendant’s behest. The bailee was not entitled to place
the furniture on deposit, nor was the plaintiff under a duty Article 1948: The bailor may demand immediate
to accept the offer to return the furniture, because the return of the thing if the bailee commits any acts of
defendant wanted to retain the 3 gas heaters and the 4 ingratitude specified in Article 765.
electric lamps. Siya pa ang nagimpose ng condition, dapat
LAHAT kasi yun ang agreement.
So here, sa donation ito. Remember, awhile ago, there
are similarities between commodatum and donation
because they are gratuitous in nature. So the bailee, in the
The costs in both instances would be borne by the case of commodatum would be unworthy of the trust
defendant because the plaintiff is the prevailing party. reposed upon him with his acts of ingratitude.
Remember, under Obligations and Contracts, the creditor
cannot be compelled to accept partial payment of partial
performance. So in this case, the bailor could not be
compelled to accept only a few of the furniture (wherein the So even if it is ordinary commodatum, pwede mag-
defendant retains the heaters and lamps.) demand ng return of the thing if any of the acts under 765
is committed.

The defendant was the one who breached the contract

of commodatum, and without any reason he refused to Under Article 765 in relation to commodatum:
return and deliver all the furniture upon the demand of the
1.) if the bailee should COMMIT some offense against the
bailor. In these circumstances, it is just and equitable that
person, the honor or the property of the bailor, or of his wife
he pays the legal expenses and other judicial costs which
or children under his parental authority;

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2.) if the bailee IMPUTES to the bailor any criminal offense, Now, if it is an extraordinary expense arising from
or any act involving moral turpitude, even though he should ACTUAL USE of the thing loaned, like for example, the
prove it, unless the crime or the act has been committed repair of the car which is damaged due to a collision. The
against the bailee himself, his wife or children under his rule is 50:50, half sa bailee, half sa bailor. Why? Because
authority; here, it was derived from the use of the bailee and you will
also return it to the bailor so it is just fair that they share it
3.) if bailee unduly REFUSES bailor SUPPORT when the equally UNLESS they have stipulated for a different
bailee is legally or morally bound to give support to the sharing.
bailor.

Article 1950: If, for the purpose of making use of the

Article 1949: thing, the bailee incurs expenses other than those
The bailor shall refund the extraordinary expenses referred to in Articles 1941 and 1949, he is not entitled
during the contract for the preservation of the thing to reimbursement.
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
1941---ordinary expenses
notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion 1949—extraordinary expenses
of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne So ano yung covered ng Article 1950? Ito yung
equally by both the bailor and the bailee, unless there ostentatious expenses or expenses for decoration. So
is a stipulation to the contrary. here, it shall be shouldered by the bailor.

This answers the question who shall bear the

EXTRAORDINARY EXPENSES? Consider whether it is: So Article 1951, this is the exception that we mentioned
earlier.
1.) for the PRESERVATION of the thing loaned; or

2.) arises on the occasion of the ACTUAL USE of the thing Article 1951: The bailor who, knowing the flaws of the
loaned. 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.
If the extraordinary expenses were incurred for the
PRESERVATION of the thing loaned, it shall be borne by
the bailor. For example when the property was damaged REQUISITES for applying 1951:
by the interuptee. Why? There is no transfer of ownership.
So the bailor, when he incurs his extraordinary expenses 1.) There must be a flaw or defect on the thing loaned;
for the preservation of the thing loaned, he profits by the
said expenses. 2.) The defect must be hidden or latent;

3.) The bailor must be aware of such defect;

If the bailee was the one who initially incurred these 4.)The bailor does not advise the bailee of the flaw or
expenses, the bailor has the obligation to refund the bailee. defect;
However, as a general rule, for the bailee to be entitled to
reimbursement, he must inform the bailor first before 5.) The bailee suffers damages by reason of the flaw or
incurring these extraordinary expenses. This requirement defect.
of notification can be disregarded if it is urgent.

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By: 2 Manresa 2015-2016

If all of these requisites are present, then (the implication commodatum is essentially good faith and with no
is): gratuitous, wala na man knowledge of the hidden
siyang makukuha diyan, defect
a.) bailor shall be liable to the bailee for the damages unlike than in a contract of
suffered; and sale or even in a contract of
lease where there is a
b.) the bailee is entitled to retain the thing, to hold the thing valuable consideration
subject of commodatum until he will be reimbursed for the
damages he has suffered.

So again this is the exception we mentioned earlier Article 1952: The bailor cannot exempt himself from
under Article 1944. the payment of expenses or damages by abandoning
the thing to the bailee.

So let us say there were expenses incurred for example

General rule: Bailee has NO RIGHT TO RETAIN. arising from the extraordinary expenses for the
preservation of the thing loaned. Na-inform na man si
Exception: If it falls under Article 1951(see requisites). bailor pero hindi niya i-reimburse, sabi niya hindi ko na
lang i-reimburse, sayo na lang yung property.

So, considering that the bailor is in bad faith under the

circumstances in Article 1951, the bailee is given the right
Can he do so? No, Article 1952 provides that he cannot
to retain until the damages are paid. Only the right to hold
do so. Why? Because the expenses for damages may
the property, he cannot sell the property.
even exceed the value of the thing loaned which would not
be fair to the bailee. It would be unfair to allow the bailor to
just abandon the thing instead of paying for said expenses
Like for example, subject of commodatum is a car and for damages.
apparently, there is a hidden defect with regard to the
brakes, the bailor knows it, he did not notify or inform the SUMMARY: WHAT ARE THE OBLIGATIONS OF THE
bailee, then the bailee was involved in an accident and BAILOR?
suffered injuries. So 1951 will be applicable.
1.) The right to demand the return of the thing
General rule: The bailor cannot demand until expiration
Take note: However if the bailee could have known after or accomplishment of the purpose agreed upon by the
inspection, the bailor is not liable. If he could have known parties (of course that refers to ordinary commodatum)
after inspection, then, obviously, hindi siya mahuhulog Exception: Upon urgent need (it is different if precarium
under Article 1951, why, because the defect is not hidden. because it can demand the return of the thing at any
time)
2.) Right to immediate return if the bailee has
If it is not known to the bailor, the bailor may not be held committed acts of ingratitude
liable, why, because commodatum is essentially gratuitous. 3.) General Rule: Liable for extraordinary expenses for
Ito ang difference niya sa sale. preservation of the thing, FULL amount, provided he
has been informed before the bailee incurs the
Commodatum Sale expenses
Exception to the requisite notification: Urgent need
(with regard to hidden defects) 4.) Extraordinary expenses arising from the use of the
thing, 50:50
If bailor was not aware There could be breach of 5.) Liability for damages under Article 1951 for hidden
thereof, he could not be warranty against hidden defects
held liable because defects even if seller is in 6.) No right to abandon for expenses and damages.

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

twice. The dispute arose when Kim allegedly failed to

return P1,230.00 out of the cash advance which he
So, that is commodatum, finish. received under T.O. 2222. For the alleged failure of
petitioner to return such amount, he was charged with
the crime of Estafa under Article 315, par. 1(b) of the
Revised Penal Code in which he was found guilty by the
November 18, 2015 trial court.

Transcribed by: Glorybelle C. Resurreccion ISSUE: WON Kim was guilty of estafa; WON Kim was
under obligation to return the same money (cash
We are done with commodatum. The other type of loan is advance) which he had received
Simple Loan or Mutuum. It’s a contract whereby one of the
parties delivers to another money or other consumable HELD:
thing with the understanding that the same amount, the Kim is NOT guilty of estafa and he has NO obligation to
same kind and quality shall be paid. return the money.

We have: In order that a person can be convicted under Estafa, it

Article 1953. A person who receives a loan of money or must be proven that he had the obligation to deliver or
any other fungible thing acquires the ownership thereof, return the same money, good or personal property that
and is bound to pay to the creditor an equal amount of he had received.
the same kind and quality. (1753a)
Liquidation simply means the settling of an indebtedness.
Notice here, in Art. 1953, it is “bound to pay” not bound to An employee, such as herein petitioner, who liquidates a
return. Why? Because what is involved here is return of the cash advance is in fact paying back his debt in the form
equivalent only and not the identical thing. So, you do not of a loan of money advanced to him by his employer,
really return what you have borrowed. What you return is as per diems and allowances.
something of the “same amount, of the same kind and
quality” that you have already borrowed. The return of the Similarly, as stated in the assailed decision of the lower
equivalent only and not the identical thing because the court, "if the amount of the cash advance he received is
borrower acquires ownership thereof. Recall, this is one of less than the amount he spent for actual travel, he has
the main distinctions between Commodatum and Mutuum. the right to demand reimbursement from his employer
In Commodatum, there is no transfer of ownership unlike the amount he spent coming from his personal funds.
that in Mutuum.
In other words, the money advanced by either party is
actually a loan to the other. Hence, petitioner was under
Yong Chan Kim vs. People no legal obligation to return the same cash or
money, i.e., the bills or coins, which he received from the
Petitioner Yong Chan Kim was employed as a private respondent. Ownership of the money was
Researcher at SEAFDEC. Kim was issued Travel Order transferred to the petitioner. It is a case of a simple loan
No. 2222 which covered his travels to different places in or mutuum.
Luzon from 16 June to 21 July 1982. Under this travel
order, he received P6,438.00 as cash advance to defray Since ownership was transferred to him, no fiduciary
his travel expenses. Kim was issued another travel order, relationship was created. Absent this fiduciary
T.O. 2268, requiring him to travel from the Head Station relationship between petitioner and private respondent,
at Tigbauan, Iloilo to Roxas City from 30 June to 4 July which is an essential element of the crime of estafa by
1982, which he received a cash advance of P495.00. misappropriation or conversion, petitioner could not have
committed estafa.
Later, petitioner presented both travel orders for
liquidation. When the Travel Expense Reports were Additionally, it has been the policy of private respondent
audited, it was discovered that there was an overlap of that all cash advances not liquidated are to be deducted
four (4) days (30 June to 3 July 1982) in the two (2) correspondingly from the salary of the employee
travel orders for which petitioner collected  per diems concerned.

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By: 2 Manresa 2015-2016

liquidates a cash advance is in fact paying back his debt in

Q1: In this case, what were those cash advances for? the form of a loan of money advanced to him by his
A1: For his allowance for his travels. employer. Here, what was the effect?
Pagsobrayungbinigaysakanya, he has to liquidate and pay
Q2: For what period? back the company. It could not be considered as an estafa
A2: First travel was from 16 June to 21 July 1982; and the because when what he has received is less than what he
second from 30 June to 4 July 1982. So, there was an should have used as expenses for his travels, then he has
overlap of four days (June 30 – July 3). the right to demand from the employer. So here, if the
amount of the cash advance received is less than the
Q3: So what was the effect of this overlap? amount he spent for actual travel, he has the right to
A3: A case of estafa was filed against Kim for failure to demand reimbursement from his employer. Hence,
return the allowance he collected twice for those four days. petitioner was under no legal obligation to return the same
cash or money which he received from his employer. Then,
Q4: Specifically, what is the estafa involved here? what we have here is a simple loan. There is a transfer of
A4: That which involves fiduciary relationship ownership to the petitioner. Because of that, there is no
fiduciary relationship created which would hold Kim
Q5: How is it related to our topic mutuum? criminally liable for estafa. Absent this fiduciary
A5: There was in fact no fiduciary relationship involved relationship, which is an essential element of the crime of
here. The SC here defined what liquidation is. Liquidation estafa by misappropriation or conversion, petitioner could
simply means the settling of indebtedness. An employee, not have committed estafa.
such as Kim, who liquidates a cash advance is in fact
paying back his debt in the form of a loan of money Here, as a case of mutuum, the borrower can dispose of
advanced to him by his employer, as per diems and the thing borrowed and his act cannot be considered as a
allowances. Ownership of the money was transferred to misappropriation.
Kim.
Another thing you should not is the distinction between a
Q6: So we have a mutuum here? rent and a loan. A loan signifies delivery of some other
A6: Yes consumable thing to another with the promise to pay and
equivalent amount of the same kind and quality. Rent on
Q7: What is the effect of this in relation to the criminal case the other hand, signifies delivery to another some non-
of Estafa filed against Kim? [What is the basis here in consumable thing in order that the latter may use it during
holding that it was a simple loan and there could be no a certain period and return it to the former for a
liability of estafa?] consideration. Parties in the loan – obligor and obligee
A7: The criminal case must be dismissed. Since ownership while in rent – landlord and tenant. In loan, creditor
of the money (cash advance) was transferred to petitioner, receives payment, rent owner receives compensation or
no fiduciary relationship was created. Absent this fiduciary price either in money or provisions.
relationship between petitioner and private respondent,
which is an essential element of the crime of estafa by Look again in Art. 1953 on the term “fungible thing”. These
misappropriation or conversion, petitioner could not have are things dealt by number and measurement such as rice,
committed estafa. grain, oil, gasoline, so that any given unit or portion is
treated as any other unit or portion. These are those
Q8: Does Kim have no liability at all? belonging to the same genus or several species of the
A8: He has no criminal liability but he is liable to liquidate same kind.
the cash advance. And his failure to do so would result to
salary deduction against him. So, his liability is only civil. Recall the distinction last time as to the subject matter. We
talk about commodatum, it generally involves non-
Atty. Lozare: For a person to be convicted under Article consumable thing. As an exemption, consumable but with
315, par. 1(b) of the Revised Penal Code, he must have purpose of exhibition. On the other hand, we have mutuum
the obligation to return or deliver the same money, goods – money or other consumable thing. Is there a difference
or personal property that he had received. In this case, he between consumable and fungible as used in Art. 1953?
was asked to liquidate which simply means settling of an None. When it comes to mutuum, those two are used
indebtedness. The employee, such as herein Kim, who interchangeably. In the concept that the thing cannot be

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used without being consumed under the old Civil Code is respondents, the promise of BPIIC to extend and deliver
precisely that of the consumable things that are also the loan is upon the consideration that ALS and Litonjua
considered in the contract of loan. shall pay the monthly amortization commencing on May
1, 1981, one month after the supposed release of the
loan. 

BPI vs. CA It is a basic principle in reciprocal obligations that neither

party incurs in delay, if the other does not comply or is
Sometime in 1980, Frank Roa sold a house and lot to not ready to comply in a proper manner with what is
private respondents ALS and Antonio Litonjua incumbent upon him. Only when a party has performed
for P850,000. They paid P350k in cash and assumed his part of the contract can he demand that the other
the P500k balance of Roa’s indebtedness with petitioner party also fulfills his own obligation and if the latter fails,
BPI Investment Corp. (BPIIC).  Said loan was mortgaged default sets in.
with the said house and lot. BPIIC, however, was not
willing to extend the old interest rate (from Roa’s loan) to Consequently, petitioner could only demand for the
private respondents and proposed to grant them a new payment of the monthly amortization after September 13,
loan of P500,000 to be applied to Roa’s debt and 1982 for it was only then when it complied with its
secured by the same property with new interest rate. obligation under the loan contract.

Consequently, private respondents executed a mortgage Therefore, in computing the amount due as of the date
deed containing the above stipulations with the provision when BPIIC extrajudicially caused the foreclosure of the
that payment of the monthly amortization shall mortgage, the starting date is October 13, 1982 and
commence on May 1, 1981. not May 1, 1981.

On September 13, 1982, BPIIC released to private Q1: How is a contract of Mutuum perfected?
respondents P7,146.87, purporting to be what was left of A1: By delivery
their loan after full payment of Roa’s loan.
Q2:For example, there is a loan of money. If I issue a
Later, BPIIC instituted foreclosure proceedings against check in your name and I delivered it to you, is the simple
private respondents on the ground that they failed to pay loan or mutuum already perfected?
the mortgage indebtedness from May 1, 1981 to June A2: Not yet. It would be perfected upon encashment.
30, 1984.
Q3: When was the contract deemed perfected in this case?
Private respondents maintained that they should not be A3: It was deemed perfected on Sept. 13, 1982
made to pay amortization before the actual release of
the P500,000 loan in August and September 1982. Q4: Why was there a need to determine the perfection of
the contract of loan?
ISSUE: When should the payment of the monthly A4: Because it would determine whether or not BPI may
amortization commence? validly foreclose the properties; and if there would already
be an obligation on the part of Litonjua to pay for the
HELD: A month after the release of the loan on Sept. 13, monthly amortization; and when the payment of such
1982. In the present case, the loan contract between BPI should start. In this case, the monthly amortization should
and ALS and Litonjua was perfected only on September start not on May 1, 1981 [as they have stipulated in the
13, 1982, the date of the second release of the loan.  contract] but on Sept. 13, 1982.

Ratio: A loan contract is not a consensual contract but a Atty. Lozare: Here, it emphasizes simple loan is perfected
real contract. It is perfected only upon the delivery of the upon the delivery of the object of the contract and therefore
object of the contract. it is a real contract. The contract here was perfected only
on Sept. 13, 1982 even if the loan contract was signed on
A contract of loan involves a reciprocal obligation, March 31, 1981. It was only on Sept. 13 when the full loan
wherein the obligation or promise of each party is the was released to private respondents. Take note, the court
consideration for that of the other. As averred by private here emphasized that in a loan agreement, you have

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reciprocal obligations from each party where the obligation No written proof of the grant of the loan was executed was
or promise of each party is the consideration of the other credibly explained by respondent when he declared that
party. The consideration for BPI in entering into the loan petitioners son being his godson, he, out of trust and
contract is the promise of private respondents to pay the respect, believed that the crossed check sufficed to prove
monthly amortization. For the private respondents, it is the their transaction.
promise of BPI to deliver the money.
In reciprocal obligations, neither of the parties incurs delay That petitioner Antonio Tan had, an outstanding balance of
if the other has not complied or is not ready to comply in more than P950,000.00 in his account at PBCom did not
the proper manner with what is incumbent upon him. rule out petitioners securing a loan. It is pure naivete to
Therefore, there was no delay when the private believe that if a businessman has such an outstanding
respondents did not pay the monthly amortization on May balance in his bank account, he would have no need to
1, 1981 as it was only on Sept. 13, 1982 when petitioner borrow a lesser amount.
has fully complied with its obligation under the loan
contract.
Q1: How about the allegation here of Antonio Tan that
Again, in mutuum, a loan contract is only perfected upon there could be no reason that he would borrow money
delivery and that it involves reciprocal obligations. because he also has money in the bank?
A1: The same reason is untenable because anybody can
loan money. Corporations enter into contracts of loan even
Sps. Tan vs. Villapaz if they have assets.

Villapaz issued a Philippine Bank of Communications Atty. Lozare: What you have here is a contract of loan and
(PBCom) crossed check in the amount of P250,000.00, it is not required that there may be a separate contract, for
payable to the order of petitioner Antonio Tan. example a promissory note to show that the issuance of
the check was really considered as a simple loan or
Villapaz filed a complaint for collection of sum of money mutuum.
against Sps. Tan alleging that the check he issued was for
a loan to be settled in 6 months but the spouses failed to One of the functions of a negotiable instrument is that the
settle the same. instrument is an evidence of indebtedness. So, there is no
need for a separate promissory note to show that the
Sps. Tan denied. They contended that since the alleged issuance of a check is because of a simple loan or
loan was one with a period payable in six months and mutuum.
where the amount exceeds P 500, it should have been
expressly stipulated upon in writing (under Art. 1358) by A check, the entries of which are no doubt in writing could
the parties but it was not. Hence, the essential requisite for prove a loan transaction. Furthermore, it is not required
the validity and enforceability of a loan is wanting; and the that there must be a separate contract for a contract of loan
check is inadmissible to prove the existence of a loan to be valid and enforceable. Art. 1358 is only for
convenience. And if you look at Statute of Frauds, Art.
Petitioners furthermore maintain that they were financially 1403 (2), walanamangnakalagayd’yan with regard to a
stable,hence, there was no reason for them to borrow contract of loan to be in writing to be enforceable.
money.
Shifting gears…
ISSUE: WON there was a contract of loan Destruction of the thing loaned does not extinguish one’s
obligation to pay. In mutuum, what is your obligation? Your
HELD: Yes. obligation is to pay the money. If the money was lost or you
Sps. Tan’s reliance on Art. 1358 of the Civil Code is became insolvent or you were robbed, will that extinguish
misplaced for the requirement that contracts where the the obligation? No. Genus nunquamperit. Money is a
amount involved exceeds P500.00 must appear in writing generic thing. Therefore, even if the money that you are
is only for convenience.At all events, a check, the entries of supposed to pay the loan for was destroyed, obligation is
which are no doubt in writing, could prove a loan not extinguished in mutuum.
transaction.
Article 1954. A contract whereby one person transfers the

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

ownership of non-fungible things to another with the the currency at the time of the establishment of the
obligation on the part of the latter to give things of the same obligation shall be the basis of payment, unless there is an
kind, quantity, and quality shall be considered a barter. (n) agreement to the contrary. (n)
In here, there is a distinction between mutuum and barter.
As defined in Art. 1638 on barter: If the subject matter is a consumable thing, the obligation is
to deliver the same kind, quality and quantity (KQQ) even if
Article 1638. By the contract of barter or exchange one of it should change in value. If it is impossible, then the value
the parties binds himself to give one thing in consideration of the thing at the time the loan was perfected. Again, this
of the other's promise to give another thing. (1538a) applies only when it is IMPOSSIBLE to deliver the same
KQQ.
Commodatum Mutuum Barter
Subject matter is Subject matter is Non-fungible or Now we look at:
ordinarily non- money or other non-consumable Article 1956. No interest shall be due unless it has been
consumable consumable thing thing expressly stipulated in writing. (1755a)
Bailee is bound Same kind, The equivalent
to return the quality and thing is given in A bulk of our discussion here in mutuum revolves around
identical thing quantity only return for what interest. If you look at Art. 1956, you could say that we
borrowed equivalent has been have therein the requisites for recovery of interest. It must
thereof received be expressly stipulated and second, it must be in writing.
Essentially May be Always onerous Art. 1956 is under this chapter on mutuum. In other words,
gratuitous gratuitious the requirement for interest to be expressly stipulated in
writing is only applicable for simple loan. For other
Article 1955. The obligation of a person who borrows instances, there may be liability for interests, but it is not
money shall be governed by the provisions of articles 1249 required to be expressly stipulated in writing if it’s not a
and 1250 of this Code. loan.

Also, another requisite that is mentioned “there” is that the

If what was loaned is a fungible thing other than money,
interest must be lawful [*personal note: I don’t know where
the debtor owes another thing of the same kind, quantity
is “there” that this requisite has been mentioned. Lo
and quality, even if it should change in value. In case it is
siento!]. But considering that the usury law has already
impossible to deliver the same kind, its value at the time of
been suspended, then you do not simply follow it anymore.
the perfection of the loan shall be paid. (1754a)
What is applied nowadays is that the interest rate must be
If the subject of mutuum is money, apply the principles in
conscionable. Otherwise, if it is unconscionable and
Art. 1249 and Art. 1250.
iniquitous, the courts may reduce it. Also recall in ObliCon,
contracting parties may stipulate freely on any adjustment
Article 1249. The payment of debts in money shall be on the interest rate as one of their stipulations on the loan
made in the currency stipulated, and if it is not possible to or forbearance of money. But the law does not authorize
deliver such currency, then in the currency which is legal increase of interest rate by one party without the other
tender in the Philippines. party’s consent. Any change must be mutually agreed by
the parties as one of the principles emphasized in ObliCon.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce Now, we have the term “forbearance”.
the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been PNB vs. Ibarrola
impaired.
As payments for the purchase of medicines,
In the meantime, the action derived from the original the Province of Isabela issued several checks drawn
obligation shall be held in the abeyance. (1170) against its accounts with petitioner Philippine National
Bank (PNB) in favor of the seller, private respondent
Article 1250. In case an extraordinary inflation or deflation Ibarrola.
of the currency stipulated should supervene, the value of

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Ibarrola failed to receive the full payment, thus she filed an

action for a sum of money and damages against Q2: In this case, do we have a loan or forbearance of
the Province of Isabela and PNB among others. money?
A2:There was none. It was merely a contract of sale
RTC ruled in her favor ordering that she be paid “ with
interest thereon at the legal rate  from the date of the filing Q3: So what is the interest rate that should be imposed?
of the complaint until the entire amount is fully paid”. CA A3: The proper rate of interest is only 6%. However, once
and SC affirmed. However, the three courts did not specify the judgment becomes final and executory, in the interim
whether the legal rate of interest referred to in the judgment period from the finality of judgment awarding a monetary
is 6% or 12%. claim and until payment thereof, the rate of 12% p.a.
should be imposed.
ISSUE: Whether in an action for damages, the legal rate of
interest is 6% as provided by Article 2209of the New Civil Q4: The 12% interest rate will commence at what period?
Code or 12% as provided by CB Circular 416 series of A4: From the time the judgment became final and
1974 executory until fully satisfied.

HELD: Atty. Lozare: So in this case, SC mentioned that the 12%

The case at bench does not involve a loan. When an interest rate referred to in BSP Cir. No. 416 applies only to
obligation arises from a contract of purchase and sale and a loan or forbearance of money. In cases where money is
not from a contract of loan or mutuum, the applicable rate transferred from one person to another and the obligation
is 6% per annum as provided in Article 2209 of the NCC to return the same or the portion thereof is adjudged.
and not the rate of 12% per annum as provided in (CB) Cir.
No. 416. What do you have here? The liability arose from a contract
of sale. It did not involve a loan, forbearance of money or a
The rate of 12% interest referred to in Cir. 416 applies only judgment involving a loan or forbearance of money. That is
to: why the applicable rate is 6% per annum. Again, the
Loan or forbearance of money, or to cases where money is obligation here did not constitute a breach of a loan.
transferred from one person to another and the obligation However, the interim period from the finality of judgment
to return the same or a portion thereof is adjudged. Any awarding a monetary claim and until payment thereof, is
other monetary judgment which does not involve or which deemed to be equivalent to a forbearance of credit wherein
has nothing to do with loans or forbearance of any money, the 12% interest rate should be imposed. So here, the rate
goods or credit does not fall within its coverage  for such shall be 6% per annum from the time the complaint was
imposition is not within the ambit of the authority granted to filed until full payment before finality of judgment. If the
the Central Bank. amount adjudged remains unpaid, interest rate shall be
12% per annum computed from the time the judgment
Therefore, the proper rate of interest referred to in the became final and executory until fully satisfied.
judgment under execution is only 6%. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim Estores vs. Sps. Supangan
and until payment thereof, is deemed to be equivalent to a
forbearance of credit. Thus, the rate of 12% p.a. should be Petitioner HermojinaEstores and respondent-spouses
imposed, and to be computed from the time the judgment Arturo and Laura Supangan entered into a Conditional
became final and executory until fully satisfied. Deed of Sale whereby petitioner offered to sell a parcel of
land.
Q1: How is the term “forbearance” defined in this case?
A1: In this case, forbearance of credit may mean to be or is After almost seven years from the time of the execution of
equivalent to the interim period from the finality of judgment the contract and notwithstanding payment of P3.5 million
awarding a monetary claim until payment thereof on the part of spouses, petitioner still failed to comply with
her obligation as expressly provided in the contract.
[*Forbearance is a refraining from the enforcement of Spouses demanded the return of the amount of P3.5
something (as a debt, right, or obligation) that is million but Estores failed to do so, thus the complaint for
due, as defined by Merriam-Webster ] collection of sum of money.

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A3: No, it cited: Article 2210. Interest may, in the discretion

Estores averred that she is willing to return the principal of the court, be allowed upon damages awarded for breach
amount of P3.5 million but without any interest since the of contract.
Conditional Deed of Sale provided only for the return of the [Therefore, the claim of interest is based on Art. 2210 on
downpayment in case of breach,hence she cannot be held damages awarded for breach of contract since in this case,
liable to pay legal interest as well. there was a breach.]

ISSUE: WON Sps. Supangan are entitled of interest Q4: In this case, you have a conditional deed of sale. So
what is the rate of interest that should be imposed?
HELD: Yes. A4: The 12% rate per annum
Interest may be imposed even in the absence of stipulation
in the contract. Q5: Why not the 6% rate? Isn’t it that this is also a deed of
sale and as decided in Ibarrola case, SC ruled that the rate
Article 2210 of the Civil Code expressly provides that should be 6%?
"[i]nterest may, in the discretion of the court, be allowed A5: Because the rate of 12% per annum is applied when
upon damages awarded for breach of contract." In this the contract is of loan or of forbearance of money. In this
case, there is no question that petitioner is legally obligated case, there was a forbearance of money.
to return the P3.5 million because of her failure to fulfil the
obligation under the Conditional Deed of Sale, despite Q6: Why was it considered as a forbearance of money
demand. She has in fact admitted that the conditions were even if it is based on a contract of sale?
not fulfilled and that she was willing to return the full A6: Because of the lapse of time (7 years), it would fall
amount of P3.5 million but has not actually done so. under forbearance of money. During those times, the seller
Petitioner enjoyed the use of the money from the time it already made use of the buyer’s money.
was given to her until this moment.
Atty. Lozare: Here, it is proper to impose interest
The interest at the rate of 12% is applicable in the instant notwithstanding the absence of stipulation in the contract.
case. The contract involved in this case is admittedly not a In this case, there is no loan or mutuum, so there is no
loan but a Conditional Deed of Sale. However, the contract requirement that it should be expressly stipulated in writing.
provides that the seller must return the payment made by The basis of the interest is Art. 2210.
the buyer if the conditions are not fulfilled, which happened
in this case. Petitioner’s unwarranted withholding of the As a general rule, interest shall be computed in accordance
money which rightfully pertains to respondent-spouses with the stipulation of the parties. Absent such stipulation,
amounts to forbearance of money which can be considered rate of interest shall be 12% per annum when the
as an involuntary loan. Thus, the applicable rate of interest obligation arises out of a loan or forbearance of money,
is 12% per annum. goods, or credits. In other cases, it shall be 6%.

Q1: How is forbearance of money defined here? While the SC recognizes the previous definition of
*A1: Forbearance of money, goods or credits refers to forbearance as "contractual obligation of lender or creditor
arrangements other than loan agreements, where a person to refrain during a given period of time, from requiring the
acquiesces to the temporary use of his money, goods or borrower or debtor to repay a loan or debt then due and
credits pending happening of certain events or fulfilment of payable"; in this case and other subsequent cases, the
certain conditions. definition of forbearance of money, goods, or credit was
expounded. It should now refer to arrangements other than
Q2:Is interest imposable here? loan agreements. Why? The phrase "forbearance of
A2: Yes, even if the contract in this case does not stipulate money, goods or credits" is meant to have a separate
any interest to be imposed. meaning from a loan, otherwise there would have been no
need to add that phrase as a loan is already sufficiently
Q3: In this case, there was no loan. What is then the basis defined in the Civil Code.
of the claim of interest?What article [in NCC] did the SC
cite in its decision? Did it cite Art. 1956? Hence, definition of forbearance of money is… [refer to
*A1]

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By: 2 Manresa 2015-2016

They have therefore allowed or granted forbearance to the deliver the money. As mentioned, in reciprocal obligations,
seller (petitioner) to use their money pending fulfillment of neither party incurs delay if the other does not comply or is
the conditions. They were deprived of the use of their not ready to comply in a proper manner with what is
money for the period pending fulfillment of the conditions incumbent upon him. Here private respondents did not
and when those conditions were breached, they are incur in delay when they did not commence payment for
entitled not only to the return of the principal amount paid, the monthly amortization because it was only on 13
but also to compensation for the use of their money [which September 1982 when BPI fully complied with its obligation
is interest]. in the contract.

And the compensation for the use of their money, absent

any stipulation, should be the same rate of legal interest
We have also discussed those having interests
applicable to a loan since the use or deprivation of funds is
particularly those involving forbearance of money and
similar to a loan.
goods. In the subsequent cases just like in the case of
Estores we mentioned that forbearance has a separate
Petitioner’s unwarranted withholding of the money which meaning with loan. Forbearance is defines as a contractual
rightfully pertains to respondent-spouses amounts to obligation of the lender or creditor to refrain during a given
forbearance of money which can be considered as an period of time, from requiring the borrower or debtor to
involuntary loan. Thus, the applicable rate of interest is repay a loan or debt then due and payable. Forbearance of
12% per annum. money, goods or credits should therefore refer to
arrangements other than loan agreements, where a person
*With regard to these cases we have already discussed, acquiesces to the temporary use of his money, goods or
notice the importance of the distinction – when to apply 6% credits pending the happening of certain events or
or 12%. However, effective July 1, 2013, the legal interest fulfillment of certain conditions.
rate is already 6%. In other words, there is no need to
distinguish anymore. But we still need to discuss this
because for obligations with any interest that is due prior
July 1, 2013, we still have to make the distinction whether As distinguished in the case of Ibarrola, this case
to apply 6% or 12% on the interest rate. does not involve a loan, forbearance of money, or
judgment involving a loan or forbearance of money as it
arose from a contract of sale where Ibarrola did not receive
the full payment for her merchandise. When an obligation
arises not from a contract of loan or forbearance of money
November 19, 2015 but from a contract of sale the applicable rate of interest is
6% per annum as provided under Article 2209 of the NCC.
Transcribed by: Ray Mark C. Gingco

As we all know, the law does not authorize the

In the case of Yong Chan Kim, in order for a increase of the interest rate without the consent of the
person to be convicted of estafa, it must be proven that other contracting party. However, in the case of Pan
there is an obligation to deliver or return money, goods, or Pacific…
personal property. In this case, he is just obligated to
liquidate. Liquidation here is the settling of indebtedness.

PAN PACIFIC vs EQUITABLE PCI BANK

In the case of BPI, a loan, whether it is

commodatum or mutuum, is a real contract and not a
consensual contract. Therefore, it is perfected upon FACTS: Pan Pacific is engaged in contracting mechanical
delivery. The consideration of the BPI here is the promise works on airconditioning system. They entered into a
of private respondent to pay the monthly amortization. On contract of mechanical works with respondent for the total
the part of the private respondent, the promise of BPI to consideration for the whole project was P23,311,410.30.

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The Contract stipulated that Pan Pacific shall be entitled to ISSUE: Whether the CA, in awarding the unpaid balance of
a price adjustment in case of increase in labor costs and the price adjustment, erred in fixing the interest rate at 12%
prices of materials under paragraphs 70.1 and 70.2 of the instead of the 18% bank lending rate. YES
General Conditions for the Construction of PCIB Tower II
Extension. HELD: The CA went beyond the intent of the parties by
requiring respondent to give its consent to the imposition of
Pan Pacific commenced the mechanical works in the interest before petitioners can hold respondent liable for
project site. In 1990, labor costs and prices of materials interest at the current bank lending rate. This is erroneous.
escalated. On 5 April 1991, in accordance with the A review of Section 2.6 of the Agreement and Section
escalation clause, Pan Pacific claimed a price adjustment 60.10 of the General Conditions shows that the consent of
of P5,165,945.52. Respondents asked for a reduction in the respondent is not needed for the imposition of interest
the price adjustment. To show goodwill, Pan Pacific at the current bank lending rate, which occurs
reduced the price adjustment toP4,858,548.67. upon any delay in payment.

Due to the extraordinary increases in the costs of labor and Article 1956 of the Civil Code, which refers to monetary
materials, Pan Pacific’s operational capital was becoming interest, specifically mandates that no interest shall be due
inadequate for the project. However, respondent withheld unless it has been expressly stipulated in writing.
the payment of the price adjustment under the escalation Therefore, payment of monetary interest is allowed only if:
clause despite Pan Pacifics repeated demands.
(1) there was an express stipulation for the payment of
Instead, respondent offered Pan Pacific a loan of P1.8 interest; and
million. Pan Pacific was constrained to execute a
promissory note in the amount of P1.8 million as a (2) the agreement for the payment of interest was reduced
requirement for the loan. Pan Pacific also posted a surety in writing. The concurrence of the two conditions is
bond. The P1.8 million was released directly to laborers required for the payment of monetary interest.
and suppliers and not a single centavo was given to Pan
Pacific. The consent of the respondent is not needed in order to
impose interest at the current bank lending rate.
Pan Pacific made several demands for payment on the
price adjustment but respondent merely kept on promising Under Article 2209 of the Civil Code, the appropriate
to release the same. Meanwhile, the P1.8 measure for damages in case of delay in discharging an
million loan matured and respondent demanded payment obligation consisting of the payment of a sum of money is
plus interest and penalty. Pan Pacific refused to pay the the payment of penalty interest at the rate agreed upon in
loan. Pan Pacific insisted that it would not have incurred the contract of the parties. In the absence of a stipulation of
the loan if respondent released the price adjustment on a particular rate of penalty interest, payment of additional
time. Pan Pacific alleged that the promissory note did not interest at a rate equal to the regular monetary interest
express the true agreement of the parties. Pan Pacific becomes due and payable. Finally, if no regular interest
maintained that the P1.8 million was to be considered as had been agreed upon by the contracting parties, then the
an advance payment on the price adjustment. Therefore, damages payable will consist of payment of legal interest
there was really no consideration for the promissory note; which is 6%, or in the case of loans or forbearances of
hence, it is null and void from the beginning. money, 12% per annum. It is only when the parties to a
contract have failed to fix the rate of interest or when such
Respondent stood firm that it would not release any amount is unwarranted that the Court will apply the 12%
amount of the price adjustment to Pan Pacific but it would interest per annum on a loan or forbearance of money.
offset the price adjustment with Pan Pacifics outstanding
balance of P3,226,186.01, representing the loan, interests, The written agreement entered into between petitioners
penalties and collection charges. and respondent provides for an interest at the current bank
lending rate in case of delay in payment and the
Pan Pacific refused the offsetting but agreed to receive the promissory note charged an interest of 18%.
reduced amount of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial settlement, To prove petitioners entitlement to the 18% bank lending
less P1.8 million and P414,942 as advance payments. rate of interest, petitioners presented the promissory note
prepared by respondent bank itself. This promissory note,

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although declared void by the lower courts because it did meaning of the stipulation governs. Once, the parties agree
not express the real intention of the parties, is substantial on the price adjustment after due consultation in
proof that the bank lending rate at the time of default was compliance with the provisions of the escalation clause, the
18% per annum. Absent any evidence of fraud, undue agreement is in effect an amendment to the original
influence or any vice of consent exercised by petitioners contract, and gives rise to the liability of the respondent to
against the respondent, the interest rate agreed upon is pay the adjusted costs. Upon respondent’s failure to pay
binding on them. within the time provided, then it shall be liable to pay the
stipulated interests. Therefore, the basis is the delay of
EPCI such that its consent is not anymore needed before it
can become liable for the adjusted price.
Q1: What is the proper interest rate that should be
imposed?

A1: The interest rate that should be imposed is 18%. Article 1956, which refers to the monetary
interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing.
Therefore, payment of the monetary interest is allowed only
Q2: Why? if:

A2: “Settled is the rule that the agreement or the

contract between the parties is the formal expression of the
parties’ rights, duties, and obligations. It is the best 1. there was an express stipulation for the payment
evidence of the intention of the parties. Thus, when the of interest; and
terms of an agreement have been reduced in writing it is 2. the agreement for the payment of interest was
considered as containing all the terms agreed upon and reduced in writing. The concurrence of the two
there can be, between the parties and their succesors-in- conditions is required for the payment of the
interest, no evidence of such terms other than the contents monetary interest.
of the written agreement.”
Also, under Article 2209 of the NCC, the
appropriate measure for the damages in the case of delay
Q3: Where was it stipulated? in discharging an obligation consisting of the payment of a
sum of money is the payment of the penalty interest at the
A3: Under the General Conditions Section 60.10, rate agreed upon in the contract of the parties. In the
which provides that the CONTRACTOR may charge absence of a stipulation of a particular rate of penalty
interest at the current bank lending rates. The current bank interest, payment of additional interest at a rate equal to
lending rate is at 18% p.a. the regular monetary interest becomes due and payable.
Finally, if no regular interest had been agreed upon by the
contracting parties, then the damages payable will consist
of payment of legal interest, which is 6%, or in the case of
Q4: But isn’t it that the PN was considered void for loans or forbearance of money, 12% p.a. It is only when
lack of consideration? the parties to a contract have failed to fix the rate of
interest or when such amount is unwarranted that the
A4: The written agreement provides that the interest
Court will apply the 12% interest p.a. on a loan or
be at the current bank lending rate in case there is delay in
forbearance of money.
payment. While it is true that the PN was declared void as
it did not express the real intention of the parties, it was
nevertheless considered as substantial proof that the bank
lending rate at that time of default is 18% p.a. Another thing that you should consider is the
difference between monetary and compensatory interests.

1. Monetary Interest – compensation for the use of

When the terms of the contract are clear and money;
leave no doubt as to the intention of the parties, the literal
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2. Compensatory Interest – penalty or indemnity of amount of P3,526,117.00 plus 4% per month interest from
payment for damages. February 11, 1999 until fully paid.

Petitioners appealed to CA insisting that there was no

Debtor in delay is liable to pay the legal interest express stipulation on the 4% monthly interest. CA favored
as indemnity fro damages even in the absence of respondent but noted that the interest of 4% per month, or
stipulation of payment of interest. Those obliged to deliver 48% per annum, was unreasonable and should be reduced
or to do something incur in delay from the time the oblige to 12% per annum. MR denied hence this petition.
judicially or extrajudicially demands from them the
fulfillment of the obligation. This is in relation to Article ISSUE: Whether the parties agreed to the 4% monthly
1169. interest on the loan. If so, does the rate of interest apply to
the 6-month payment period only or until full payment of
the loan?
We have the case of Prisma…
RULING: Interest due should be stipulated in writing;
otherwise, 12% per annum APPLIES.
PRISMA CONSTRUCTION & DEVELOPMENT
CORPORATION and ROGELIO S. PANTALEON vs
Obligations arising from contracts have the force of law
ARTHUR F. MENCHAVEZ
between the contracting parties and should be complied
with in good faith. When the terms of a contract are clear
FACTS: December 8, 1993, Pantaleon, President and and leave no doubt as to the intention of the contracting
Chairman of the Board of PRISMA, obtained a P1M loan parties, the literal meaning of its stipulations governs.
from the respondent, with monthly interest of P40,000.00 Courts have no authority to alter the contract by
payable for 6 months, or a total obligation of P1,240,000.00 construction or to make a new contract for the parties; a
payable within 6 months. court’s duty is confined to the interpretation of the contract
the parties made for themselves without regard to its
To secure the payment of the loan, Pantaleon issued a wisdom or folly, as the court cannot supply material
promissory. Pantaleon signed the promissory note in his stipulations or read into the contract words the contract
personal capacity and as duly authorized by the Board of does not contain. It is only when the contract is vague and
Directors of PRISMA. The petitioners failed to completely ambiguous that courts are permitted to resort to the
pay the loan within the 6-month period. interpretation of its terms to determine the parties’ intent.
As of January 4, 1997, respondent found that the In the present case, the respondent issued a check for
petitioners still had an outstanding balance of P1M. In turn, Pantaleon, in his personal capacity and as
P1,364,151.00, to which respondent applied a 4% monthly authorized by the Board, executed the promissory note.
interest. Thus, the P1M loan shall be payable within 6 months. The
loan shall earn an interest of P40,000.00 per month, for a
On August 28, 1997, respondent filed a complaint for sum total obligation of P1,240,000.00 for the six-month period.
of money to enforce the unpaid balance, plus 4% monthly We note that this agreed sum can be computed at 4%
interest. The petitioners admitted the loan of interest per month, but no such rate of interest was
P1,240,000.00, but denied the stipulation on the 4% stipulated in the promissory note; rather a fixed sum
monthly interest, arguing that the interest was not provided equivalent to this rate was agreed upon.
in the promissory note. Pantaleon also denied that he
made himself personally liable and that he made The collection of interest without any stipulation in writing is
representations that the loan would be repaid within six (6) prohibited by law.
months.
The interest of P40,000.00 per month corresponds only to
RTC found that the respondent issued a check for P1M in the six-month period of the loan, or from January 8, 1994 to
favor of the petitioners for a loan that would earn an June 8, 1994, as agreed upon by the parties in the
interest of 4% or P40,000.00 per month, or a total of promissory note. Thereafter, the interest on the loan should
P240,000.00 for a 6-month period. RTC ordered the be at the legal interest rate of 12% per annum.
petitioners to jointly and severally pay the respondent the

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have Q2: When is a person liable for interest?
been stipulated in writing. Furthermore, the interest due
A2: He is liable for interest, generally, when he
shall itself earn legal interest from the time it is judicially
borrows money. He is liable for the use of another person’s
demanded. In the absence of stipulation, the rate of
money. It is a form of compensation.
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
Q3: Was there an agreement for interest?
The facts show that the parties agreed to the payment of a
specific sum of money of P40,000.00 per month for six A3: No. The 1M loan shall be payable within 6
months, not to a 4% rate of interest payable within a 6- months. During this period, the loan shall earn an interest
month period. of 40k per month, for a total obligation of 1.24 M for the six-
month period. Note that this agreed sum can be computed
No issue on the excessiveness of the stipulated amount of at 4% interest per month, but no such rate of interest was
P40,000.00 per month was ever put in issue by the stipulated in the PN rather a fixed sum equivalent to this
petitioners; they only assailed the application of a 4% rate was agreed upon.
interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the

parties are bound by the stipulations, clauses, terms and Q4: Why is there a need to determine the interest
conditions they have agreed to, which is the law between rate?
them, the only limitation being that these stipulations,
clauses, terms and conditions are not contrary to law, A4: There is a need to determine the proper interest
morals, public order or public policy. The payment of the rate that must be applied because there was non-payment
specific sum of money of P40,000.00 per month was of the obligation. Going back to the definition of interest, it
voluntarily agreed upon by the petitioners and the is a form of compensation for the use of another person’s
respondent. There is nothing from the records and, in fact, money.
there is no allegation showing that petitioners were victims
of fraud when they entered into the agreement with the
respondent.
Q5: Why 12%?
Therefore, as agreed by the parties, the loan of P1M shall A5: When the obligation is breached, and it consists
earn P40,000.00 per month for a period of 6 months, for a in the payment of a sum of money, i.e., a loan or a
total principal and interest amount of P1,240,000.00. forbearance of money, the interest due should be that
Thereafter, interest at the rate of 12% per annum shall which may have been stipulated in writing. Furthermore,
apply. The amounts already paid by the petitioners during the interest due shall itself earn legal interest from the time
the pendency of the suit, amounting toP1,228,772.00 as of it is judicially demanded. In the absence of stipulation, the
February 12, 1999, should be deducted from the total rate of 12% p.a. to be computed from default, i.e., from
amount due, computed as indicated above. We remand the judicial or extrajudicial demand under and subject to the
case to the trial court for the actual computation of the total provisions of Article 1169 of the NCC.
amount due.

Q1: What do you mean by interest? Applying, Article 1956, which refers to the
monetary interest, specifically mandates that no interest
A1: Interest is the charge for the privilege of shall be due unless it has been expressly stipulated in
borrowing money, typically expressed as annual writing. Therefore, payment of the monetary interest is
percentage rate. allowed only if:

(As defined in the dictionary)

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

1. there was an express stipulation for the payment

of interest; and
2. the agreement for the payment of interest was In relation to that let us take into consideration
reduced in writing. The concurrence of the two the provisions: Article 2209 to Article 2213. This is more in
conditions is required for the payment of the related to torts and damages but these provisions of law
monetary interest. nonetheless deal with interest.

Article 2209.
The Court finds that the interest rate of 40k per
month corresponds only to the 6-month period of the loan If the obligation consists in the payment of a sum of money,
as agreed upon by the parties in the PN. Thereafter, the and the debtor incurs in delay, the indemnity for damages,
interest on the loan should be at 12% p.a. there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent p.a.

WHAT ARE THE TYPES OF INTEREST UNDER THE In 1974 it was at 12& p.a. but starting July 2013 it
PHILIPPINE LAW? was reduced to 6% p.a.

Article 2210.
1. Simple Interest – paid for the principal at a Interest may, in the discretion of the court, be allowed upon
certain rate as stipulated by the parties. damages awarded for breach of contract.
2. Compound Interest – Imposed upon interest due
and unpaid. Accrued interest is the interest Also, we have crimes and quasi delicts.
earned but not yet received. That is the nature of
a compound interest added to the principal sum Article 2211.
and the whole principal and interest is treated as
the new principal upon which the interest for the In crimes and quasi-delicts, interest as part of the damages
next period is stipulated. As a general rule, may, in proper case, be adjudicated in the discretion of the
interest due and unpaid shall not earn interest. court.
So if the parties stipulated an interest, it is
considered simple. It becomes only compound
when there is a stipulation. In other words, a
compound interest cannot be demanded from the Article 2212.
borrower unless there is a stipulation.
3. Legal Interest – That which the law directly Interest due shall earn legal interest from the time it is
charged in the absence of any agreement as to judicially demanded, although the obligation may be silent
liability between the parties. upon this point.
4. Lawful Interest - Interest, which the law allows or
does not prohibit; that which is the maximum
interest allowed by law.
5. Unlawful Interest or Usurious – Interest rate Article 2213.
stipulated that is beyond the maximum rate
allowed by law. Interest cannot be recovered upon unliquidated claims or
damages, except when the demand can be established
with reasonable certainty.
Remember, that since the Usury Law has been
suspended, there is no more maximum interest FOR NOW. Since we already have an idea that the usury law
has been suspended, so what happens of the interest rates
are found to be excessive?

WITH REGARD TO LAWFUL AND UNLAWFUL

INTEREST RATES

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

We have the case of Chua vs. Timan… ISSUE: Whether or not the original stipulated interest rates
of 7% and 5%, equivalent to 84% and 60% per annum, are
unconscionable

CHUA vs. TIMAN RULING: Yes. The stipulated interest rates of 7% and 5%
per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per annum. We
FACTS: In February and March 1999, petitioners Salvador need not unsettle the principle we had affirmed in a
and Violeta Chua granted respondents Rodrigo, Ma. Lynn plethora of cases that stipulated interest rates of 3% per
and Lydia Timan the following loans: a) P100,000; month and higher are excessive, iniquitous,
b) P200,000; c) P150,000; d) P107,000; e) P200,000; and unconscionable and exorbitant. Such stipulations are void
f) P107,000. These loans were evidenced by promissory for being contrary to morals, if not against the law. While
notes with interest of 7% per month, which was later C.B. Circular No. 905-82, which took effect on January 1,
reduced to 5% per month. 1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of
Respondents paid the loans initially at 7% interest rate per maturity,nothing in the said circular could possibly be read
month until September 1999 and then at 5% interest rate as granting carte blanche  authority to lenders to raise
per month from October to December 1999. Sometime in interest rates to levels which would either enslave their
March 2000, respondents offered to pay the principal borrowers or lead to a hemorrhaging of their assets.
amount of the loans through a Philippine National Bank
manager’s check worth P764,000, but petitioners refused Petitioners cannot also raise the defenses of in pari
to accept the same insisting that the principal amount of delicto  and good faith. The defense of in pari delicto was
the loans totalled P864,000. not raised in the RTC, hence, such an issue cannot be
raised for the first time on appeal. The defense of good
On May 3, 2000, respondents deposited P864,000 with the faith must also fail because such an issue is a question of
Clerk of Court of the RTC of Quezon City. Later, they filed factwhich may not be properly raised in a petition for review
a case for consignation and damages which was released under Rule 45 of the Rules of Civil Procedure which allows
to the petitioners. only questions of law.
The RTC rendered a decision in favor of respondents As well set forth in Medel:
which was affirmed by the CA. It ruled that the original
stipulated interest rates of 7% and 5% per month were
excessive. It further ordered petitioners to refund to We agree … that the stipulated rate of interest at
respondents all interest payments in excess of the legal 5.5% per month on the P500,000.00 loan is excessive,
rate of 1% per month or 12% per annum. iniquitous, unconscionable and exorbitant. However, we
can not consider the rate "usurious" because this Court has
The Court of Appeals declared illegal the stipulated interest consistently held that Circular No. 905 of the Central Bank,
rates of 7% and 5% per month for being excessive, adopted on December 22, 1982, has expressly removed
iniquitous, unconscionable and exorbitant. the interest ceilings prescribed by the Usury Law and that
the Usury Law is now "legally inexistent."
Petitioners aver that the stipulated interest of 5% monthly
and higher cannot be considered unconscionable because In Security Bank and Trust Company vs. Regional Trial
these rates are not usurious by virtue of Central Bank Court of Makati,  it was held that CB Circular No. 905
(C.B.) Circular No. 905-82 which had expressly removed "did not repeal nor in any way amend the Usury Law
the interest ceilings prescribed by the Usury Law. but simply suspended the latter’s effectivity." "Usury
Petitioners add that respondents were in pari delicto  since has been legally non-existent in our jurisdiction.
they agreed on the stipulated interest rates of 7% and 5% Interest can now be charged as lender and borrower
per month. They further aver they honestly believed that may agree upon."
the interest rates they imposed on respondents’ loans were
not usurious. Nevertheless, we find the interest at 5.5% per month, or
66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and,

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

hence, contrary to morals ("contra bonos mores"), if Greatland to her, with interest at the legal rate starting July
not against the law. The stipulation is void. 24, 1981, date when demand was first made.

On September 4, 1990, petitioner filed a motion in the trial

Q1: What is the effect if the interest is excessive and court praying that private respondent to refund to her the
iniquitous? excess payment of P1,898,623.67 with interests at 6%.
Private respondent opposed the motion of petitioner with
A1: It will be reduced by the Courts. respect to the rate of interest to be charged on the amount
of P2,300,000.00. According to private respondent, the
legal interest on the principal amount of P2,300,000.00 due
her should be 12% per annum  pursuant to CB Circular No.
Q2: Since it was reduced, did the court considered it 416 and not 6% per annum as computed by petitioner.
unconscionable? What is the ruling as to the liability?
The Court of Appeals was of the theory that the action in
A2: Yes. The Court ruled that their liability is only at Civil Case No. 239-A filed by private respondent against
1% per month or 12% p.a. petitioner "involves forbearance of money, as the principal
award to plaintiff-appellee (private respondent) in the
amount of P2,300.000.00 was the overdue debt of
So even if there is a suspension of the usury law defendant-appellant to her since July 1981. The case is, in
it does not mean that the debtor shall not anymore be liable effect, a simple collection of the money due to plaintiff-
for any interest if the stipulated rate was ruled as iniquitous. appellee, as the unpaid creditor from the defendant bank,
The Courts will only reduce it. the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central
Bank Circular No. 416, the Court of Appeals held that the
In the case of Pilipinas Bank… applicable rate of interest is 12% per annum.

PILIPINAS BANK vs. COURT OF APPEALS Petitioner argues that the applicable law is Article 2209 of
the Civil Code, not the Central Bank Circular No. 416.
FACTS: Private respondent Lilia Echaus filed a complaint
against petitioner and its president, Constantino Bautista, ISSUE: Whether or not the legal rate of interest on the
for collection of a sum of money. The complaint alleged: (1) amount of P2,300,000.00 adjudged to be paid by petitioner
that petitioner and Greatland Realty Corporation executed to private respondent is 12% per annum.
a "Dacion en Pago," wherein Greatland conveyed to
petitioner several parcels of land in consideration of the RULING: Presidential Decree No. 116 authorized the
sum of P7,776,335.69; (2) that Greatland assigned Monetary Board to prescribe the maximum rate or rates of
P2,300,000.00 out of the total consideration of the  Dacion interest for the loan or renewal thereof or the forbearance
en Pago, in favor of private respondent ; and (3) that of any money, goods or credits and amended the Usury
notwithstanding her demand for payment, petitioner in bad Law (Act No. 2655) for that purpose.
faith, refused and failed to pay the said amount assigned to
her. As amended, the Usury Law now provides:

The trial court ordered petitioner and its co-defendant, Sec. 1. The rate of interest for the loan or forbearance of
jointly and severally, to pay private respondent any money, goods, or credits and the rate allowed in
P2,300,000.00 the total amount assigned by Greatland in judgments, in the absence of express contract as to such
her favor out of the P2,300,000.00 liability of defendant rate of interest, shall be six  per centum per annum  or such
Pilipinas to Greatland plus legal interest from the dates of rate as may be prescribed by the Monetary Board of the
assignments until fully paid. Central Bank of the Philippines for that purpose in
accordance with the authority hereby granted.
On June 28, 1990, the Court of Appeals rendered a
decision in CA-G.R. No. CV-06017, which modified the Sec. 1-a. The Monetary Board is hereby authorized to
judgment and ordered Pilipinas Bank to pay 2,300,000,00 prescribe the maximum rate or rates of interest for the loan
Pesos, representing the total amount assigned by or renewal thereof or the forbearance of any money, goods
or credits, and to charge such rate or rates whenever

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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

warranted by prevailing economic and social The Court agrees. Private respondent was paid in advance
conditions:Provided, That such changes shall not be made the amount of P5,517,707.00 by petitioner to the order for
oftener that once every twelve months. the execution pending appeal of the judgment of the trial
court. On appeal, the Court of Appeals reduced the total
In the exercise of the authority herein granted, the damages to P3,619,083.33, leaving a balance of
Monetary Board may prescribe higher maximum rates for P1,898,623.67 to be refunded by private respondent to
consumer loans or renewals thereof as well as such loans petitioner. In an execution pending appeal, funds are
made by pawnshops, finance companies and other similar advanced by the losing party to the prevailing party with the
credit institutions although the rates prescribed for these implied obligation of the latter to repay former, in case the
institutions need not necessarily be uniform. appellate court cancels or reduces the monetary award.

Acting on the authority vested on it by the Usury Law, as In the case before us, the excess amount ordered to
amended by P.D. No. 116, the Monetary Board of Central refunded by private respondent falls within the ruling in
Bank issued Central Bank Circular No. 416, which Viloriaand Buiser  that Circular No. 416 applies to cases
provides: where money is transferred from one person to another
and the obligation to return the same or a portion thereof is
By virtue of the authority granted to it under Section 1 of subsequently adjudged.
Act 2655, as amended, otherwise known as the "Usury
Law" the Monetary Board in its Resolution No. 1622 dated
July 29, 1974, has prescribed that the rate of interest for Q1: What is dacionenpago?
the loan, or forbearance of any money, goods, or
credits  and the rate allowed in judgments, in the absence A1: Article 1245 provides that dation in payment,
of express contract as to such rate of interest, shall be whereby property is alienated to the creditor in satisfaction
twelve (12%) per cent per annum. This Circular shall take of a debtin money, shall be governed by the law on sales.
effect immediately.

Note that Circular No. 416, fixing the rate of interest at 12%
per annum, deals with (1) loans; (2) forbearance of any Q2: Again, when do we apply the 12%?
money, goods or credit; and (3) judgments.
A2: When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or a
What then is the nature of the judgment ordering petitioner
forbearance of money, the interest due should be that
to pay private respondent the amount of P2,300,000.00?
which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time
The said amount was a portion of the P7,776,335.69 which
it is judicially demanded. In the absence of stipulation, the
petitioner was obligated to pay Greatland as consideration
rate of 12% p.a. to be computed from default, i.e., from
for the sale of several parcels of land by Greatland to
petitioner. The amount of P2,300,000.00 was assigned by judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the NCC.
Greatland in favor of private respondent. The said
obligation therefore arose from a contract of purchase and
sale and not from a contract of loan or mutuum. Hence,
what is applicable is the rate of 6% per annum as provided Q3: As to the 2.3 M what interest rate must be
in Article 2209 of the Civil Code of the Philippines and not applied? As to the excess?
the rate of 12% per annum as provided in Circular No. 416.

Petitioner next contends that, consistent with its thesis that

Circular No. 416 applies only to judgments involving the
payment of loans or forbearance of money, goods and
credit, the Court of Appeals should have ordered private
respondent to pay interest at the rate of 12% on the
overpayment collected by her pursuant to the advance
execution of the judgment.

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

A3: The said amount was a portion of the 7.7 M On January 7, 1982 defendant Allied Brokerage
petitioner was obligated to pay to Greatland as Corporation received the shipment from defendant Metro
consideration for the sale of several parcels of land by Port Service, Inc., one drum opened and without seal.
Greatland to petitioner. The amount of 2.3 M was assigned
in favor of Lilia Echaus. The said obligation therefore arose On January 8 and 14, 1982, defendant Allied Brokerage
from a contract of purchase and sale and not from a Corporation made deliveries of the shipment to the
contract of loan or mutuum. Hence, what is applicable is consignee's warehouse. The latter excepted to one drum
the rate of 6% p.a. a asprovided in Article 2209 of the NCC which contained spillages, while the rest of the contents
and not the rate of 12% p.a. as provided in Circular No. was adulterated/fake.
416.
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of
However, as to the excess, it shall earn interest
defendants. Claims were presented against defendants
of 12% p.a. The reason is that the BSP Circular applies
who failed and refused to pay the same.
only to judgments involving the payment of loans or
forbearance of money, goods and credit. Echaus must
As a consequence of the losses sustained, plaintiff was
refund the excess amount to Pilipinas Bank (parasiyang
compelled to pay the consignee P19,032.95 under the
payment of loan/forbearance that’s why i-apply ang 12% sa
aforestated marine insurance policy, so that it became
excess; there is that obligation to return/refund.)
subrogated to all the rights of action of said consignee
against defendants

We also have the case of Eastern Shipping. This case The Court, among others, ordered defendants to pay
provided us with a guideline. plaintiff, jointly and severally The amount of P19,032.95,
with the present legal interest of 12%  per annum from
EASTERN SHIPPING LINES, INC. vs. October 1, 1982, the date of filing of this complaints, until
HON. COURT OF APPEALS AND MERCANTILE fully paid (the liability of defendant Eastern Shipping, Inc.
INSURANCE COMPANY, INC shall not exceed US$500 per case or the CIF value of the
loss, whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the actual
invoice value of each package, crate box or container in no
FACTS: This is an action against defendants shipping case to exceed P5,000.00 each, pursuant to Section 6.01
company, arrastre operator and broker-forwarder for of the Management Contract)
damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the ISSUE:
consignee the value of such losses/damages.

1. Whether or not a claim for damage sustained on

On December 4, 1981, two fiber drums of riboflavin were a shipment of goods can be a solidary, or joint and several,
shipped from Yokohama, Japan for delivery vessel "SS liability of the common carrier, the arrastre operator and the
EASTERN COMET" owned by defendant Eastern Shipping customs broker. YES
Lines. The shipment was insured under plaintiff's Marine
Insurance Policy No. 81/01177 for P36,382,466.38. 2. Whether the payment of legal interest on an
award for loss or damage is to be computed from the time
Upon arrival of the shipment in Manila on December 12, the complaint is filed or from the date the decision
1981, it was discharged unto the custody of defendant appealed from is rendered.
Metro Port Service, Inc. The latter excepted to one drum,
said to be in bad order, which damage was unknown to 3. Whether the applicable rate of interest, referred
plaintiff. to above, is twelve percent (12%) or six percent (6%). 6%

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

HELD: default, i.e., from judicial or extrajudicial demand under

and subject to the provisions of Article 1169   of the Civil
1. Solidary. Since it is the duty of the ARRASTRE to take Code.
good care of the goods that are in its custody and to deliver
them in good condition to the consignee, such 2. When an obligation, not constituting a loan or
responsibility also devolves upon the CARRIER. Both the forbearance of money, is breached, an interest on the
ARRASTRE and the CARRIER are therefore charged with amount of damages awarded may be imposed at
the obligation to deliver the goods in good condition to the the discretion of the court  at the rate of 6% per
consignee. annum.   No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.  
Accordingly, where the demand is established with
The common carrier's duty to observe the requisite reasonable certainty, the interest shall begin to run from
diligence in the shipment of goods lasts from the time the the time the claim is made judicially or extrajudicially (Art.
articles are surrendered to or unconditionally placed in the 1169, Civil Code) but when such certainty cannot be so
possession of, and received by, the carrier for reasonably established at the time the demand is made,
transportation until delivered to, or until the lapse of a the interest shall begin to run only from the date the
reasonable time for their acceptance by, the person entitled judgment of the court is made (at which time the
to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. quantification of damages may be deemed to have been
Court of Appeals, 161 SCRA 646; KuiBai vs. Dollar reasonably ascertained). The actual base for the
Steamship Lines, 52 Phil. 863). When the goods shipped computation of legal interest shall, in any case, be on the
either are lost or arrive in damaged condition, a amount finally adjudged.
presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express 3. When the judgment of the court awarding a sum of
finding of negligence to hold it liable. money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
2. It may not be unwise, by way of clarification and finality until its satisfaction, this interim period being
reconciliation, to suggest the following rules of thumb for deemed to be by then an equivalent to a forbearance of
future guidance. credit.

THEREFORE, the legal interest to be paid is SIX

PERCENT (6%) on the amount due computed from the
I. When an obligation, regardless of its source, i.e., law, decision, dated 03 February 1988, of the court a quo. A
contracts, quasi-contracts, delicts or quasi-delicts   is TWELVE PERCENT (12%) interest, in lieu of SIX
breached, the contravenor can be held liable for damages.   PERCENT (6%), shall be imposed on such amount upon
The provisions under Title XVIII on "Damages" of the Civil finality of this decision until the payment thereof (pursuant
Code govern in determining the measure of recoverable to no.3 above.)
damages. 

II. With regard particularly to an award of interest in the

concept of actual and compensatory damages, the rate of NOTE: The Central Bank Circular imposing the 12%
interest, as well as the accrual thereof, is imposed, as interest per annum applies only to loans or forbearance of
follows: money, goods or credits, as well as to judgments involving
such loan or forbearance of money, goods or credits, and
1. When the obligation is breached, and it consists in the that the 6% interest under the Civil Code governs when the
payment of a sum of money, i.e., a loan or forbearance of transaction involves the payment of indemnities in the
money, the interest due should be that which may have concept of damage arising from the breach or a delay in
been stipulated in writing.  Furthermore, the interest due the performance of obligations in general. Observe, too,
shall itself earn legal interest from the time it is judicially that in these cases, a common time frame in the
demanded.  In the absence of stipulation, the rate of computation of the 6% interest per annum has been
interest shall be 12% per annum to be computed from
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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

applied, i.e., from the time the complaint is filed until the What if it was the debtor who voluntarily agreed to such
adjudged amount is fully paid. interest rate? What happened in the case of Dio vs Japor?

Dio vs Spouses Japor

Q1: Why do you think that is necessary for the SC to Facts: Spouses Virgilio Japor and Luz Roces Japor were
lay down this guideline? the owners of a residential lot including its improvements
situated in Lucena City.
A1: Based on the rulings in the previous cases there
are variations depending upon the circumstances of each On August 23, 1982, the respondents obtained a loan
case that is why it is necessary for the SC to reconcile of P90,000 from the Quezon Development Bank (QDB),
everything in one simple guideline. and as security therefor, they mortgaged the said lots, as
evidenced by a Deed of Real Estate Mortgage.
Subsequently, the parties amended the deed increasing
respondents’ loan to P128,000.
Q2: So what is the imposable rate of interest?
The respondents failed to pay their aforesaid loans. 
A2: 6% p.a. because the contract is sale and However, before the bank could foreclose on the mortgage,
transportation of goods. respondents offered to mortgage their properties to
petitioner Teresita Dio.  Respondents mortgaged anew the
two properties already mortgaged with QDB to secure the
timely payment of a P350,000 loan that respondents had
Looking at this case it did not reverse the mode from petitioner Dio. Under the terms of the deed,
of imposition of interest in the previous cases rather it just respondents agreed to pay the petitioner interest at the rate
presented a simpler guideline. of five percent (5%) a month, within a period of two months
or until April 14, 1989. In the event of default, an additional
interest equivalent to five percent (5%) of the amount then
due, for every month of delay, would be charged on them.
You will find out later in one case that even if the
However, the respondents failed to settle their obligation to
legal interest rate has already been amended you still have
petitioner on April 14, 1989, the agreed deadline for
to be familiar with these cases kasi you should know what
settlement. On August 27, 1991, petitioner made written
interest rate should be applied specially those prior to July
demands upon the respondents to pay their debt. Despite
1, 2013. You have to make some distinctions.
repeated demands, respondents did not pay, hence
petitioner applied for extrajudicial foreclosure of the
mortgage.

Issue: Won the stipulation of 5% interest within the 2 month

period and 5% interest for every month of delay after that is
November 25, 2015
contrary to morals, if not, illegal.
Transcribed by: Robelen Callanta
Ruling: The stipulation as to the 5% interest for the two-
We have already emphasized that there is no more month period was sustained. However, the stipulation as to
usurious interest or unlawful interest due to the suspension the 5% interest for every month of delay after that
of the Usury Law. However, we have also discussed in the (compound interest) was deemed unconscionable.
case of Chua that despite the suspension of the Usury Law
The evidence shows that it was indeed the respondents
imposing maximum interest rates or ceiling rate for interest,
who proposed the 5% interest rate per month for two (2)
parties or creditors cannot impose interest rates which are
months.  Having agreed to said rate, the parties are now
deemed exorbitant, iniquitous or unconscionable. We have
estopped from claiming otherwise. For the succeeding
also discussed in the case of Chua that the effect is that
period after the two months, however, the Court of Appeals
the stipulation will be considered void and the interest will
correctly reduced the interest rate to 12% per annum  and
be reduced accordingly by the Supreme Court.
the penalty rate to 1% per month, in accordance with
Article 2227of the Civil Code.

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

The Usury Law is now legally inexistent. Interests may be 5% per month until fully paid? What do you think should be
set at rates agreed upon. However, the interest rate albeit the judgment in that scenario?
technically cannot be considered as usurious, may be
equitably reduced should it be found by the courts as A6: The SC would have to change the interest rate if it is
iniquitous, unconscionable and hence, contrary to morals if iniquitous.
not against the law.
Q7: What do we take into consideration to say that the
interest is iniquitous, unconscionable and exorbitant for the
Supreme Court to lower the interest rates?
Q1: Was the 5% per month deemed unconscionable?
A7: 1. Whether it is the debtor himself who made the
A1: Yes. In previous cases, even the interest rate of above offer
3% per month is already unconscionable. What is deemed
conscionable is 12% per year or 1% per month. 2. Whether the interest rate is within the interest
rate that has been established by jurisprudence. It seems
Q2: So what happened to the interest rate here agreed that the mark established by jurisprudence is 3% per month
upon? Was the 5% additional interest which was actually at most.
the penalty for every month of delay sustained?
Q8: But if we use that jurisprudence in the case of Prisma,
A2: As to the 5% interest within the 2 months, it was upheld why is it that the 5% in the case of Dio was upheld? How
by the court. (Maam interrupts the student) do you reconcile everything that we have discussed? What
I am trying to ask is what do we take into consideration to
Q3: Isn’t it that we mentioned that it is unconscionable? say that the interest is unconscionable?

A3: What is unconscionable is only the 2 nd part of the A8: What is iniquitous, unconscionable and exorbitant
interest wherein there will be 5% interest within the would depend upon the FACTUAL CIRCUMSYANCES. In
succeeding period after the 2 months. The 1 st part was this case, it was Dio who made the offer that it was 5% for
upheld by the court because it was the debtor himself who the first 2 months so it was upheld and the fact that it was
made the proposal regarding the interest rate of 5% per the creditor that offered the additional 5% penalty, it was
month within the first 2 months. considered unconscionable.

Q4: Isn’t it that it was also their agreement that in case of a First thing that you should consider in deeming the interest
default there will also be an additional 5% interest per rate as exorbitant, iniquitous and unconscionable are the
month? Why can’t we use the same reasoning (interest FACTUAL circumstances of each case. If you look at Dio,
rate voluntarily agreed upon) as to the penalty? Civil Code or Circulars or jurisprudence, there is no fixed
rate.
A4: It is because the Supreme Court recognizes the reality
that whenever a person would need money, he would bite The court never said that interest of 3% and above is
into any offer or any kind of arrangement even though it is automatically considered iniquitous or
already iniquitous such as the 5% per month interest which unconscionable. Jurisprudence says that it can serve
the Supreme Court has already held in previous cases as as a guide but by itself, we cannot say that 3% and
iniquitous. above interest rate can be considered
unconscionable. What are the other factual
Q5: How about the 5% interest for the two-month period? circumstances that can be considered by the court?
Why was it upheld by the court? In the case of Dio vs Japor, the fact that it was the
respondents who proposed the interest for the two
A5: Because it was the debtor himself who made such offer months was also considered not only because they
and probably ma’am because it was only valid for the 2 were the once who proposed it but I think it was also
month period and not absolute u til the entire debt is paid. taken into consideration the period, the 2 month
period.

So that is why I asked what if it is the debtor who

Q6: Let us change the facts a bit. What if it was voluntarily voluntarily proposed the 5% interest per month, can
offered by the debtor that he would be liable for interest of
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By: 2 Manresa 2015-2016

we say that it is iniquitous and unconscionable even So applying the amendments we have the case of Nacar.
if it is the debtor who voluntarily offered for such
rate? I don’t think so. I think the Supreme Court Dario Nacar vs Gallery Frames
would also deduce that. Have you remembered
discussing the case of Medel in your Obligations and Facts: Dario Nacar filed a labor case against Gallery
Contracts? Because in the case of Medel, the rate Frames and its owner Felipe Bordey, Jr. Nacar. On
was already stipulated but the Court otherwised held October 15, 1998, the Labor Arbiter (LA) found Gallery
that it was iniquitous. I think it was also 5%. In Medel Frames guilty of illegal dismissal hence the Arbiter
vs CA, the stipulated rate of interest at 5.5% per awarded Nacar P158,919.92 in damages consisting of
month is considered excessive, iniquitous and backwages and separation pay. Gallery Frames appealed
unconscionable, so the interest imposed was 12% all the way to the Supreme Court (SC). The Supreme Court
per annum and additional 1% per month penalty. affirmed the decision of the Labor Arbiter and the decision
became final on May 27, 2002.

With that, you cannot say that you could use the principle After the finality of the SC decision, Nacar filed a motion
of estoppel for the interest rate not to be equitably reduced before the LA for recomputation as he alleged that his
by the court. Recall also the case of Prisma. What was the backwages should be computed from the time of his illegal
ground why the SC did not rule anymore as to the interest dismissal (January 24, 1997) until the finality of the SC
rate being unconscionable? Because it was never raised decision (May 27, 2002) with interest. The LA denied the
during appeal and also taking into consideration that it was motion as he ruled that the reckoning point of the
a short period of time- 6 months. Again, there is no hand- computation should only be from the time Nacar was
and-fast rule as to what is considered as iniquitous or illegally dismissed (January 24, 1997) until the decision of
unconscionable interests for the courts to reducethe the LA (October 15, 1998). The LA reasoned that the said
interest rate. No fixed rates although nagserve as a guide date should be the reckoning point because Nacar did not
yung above 3%. The principle of estoppel or the fact that it appeal hence as to him, that decision became final and
was voluntarily made by the respondent by itself cannot be executory.
used.
ISSUE: Whether or not the Labor Arbiter is correct.
Short span of time for the payment and failure to pay can
be taken into consideration. But all in all again, it depends HELD: No. There are two parts of a decision when it comes
upon the factual circumstances of the case. to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal).
In this case, the Supreme Court held that the 5% for the 2 The first part is the ruling that the employee was illegally
months was unconscionable and was subsequently dismissed. This is immediately final even if the employer
reduced to 12% per annum or 1 % per month. Also, with appeals – but will be reversed if employer wins on appeal.
regard to the surplus the SC held here that the surplus was The second part is the ruling on the award of backwages
the result of the computation of the CA of the outstanding and/or separation pay. For backwages, it will be computed
liability based on the reduced rate of 12%. In the instant from the date of illegal dismissal until the date of the
case, there is no surplus to speak of because in adjusting decision of the Labor Arbiter. But if the employer appeals,
the interest and penalty rates from unconscionable levels, then the end date shall be extended until the day when the
what the court did was to reflect the true price of the land at appellate court’s decision shall become final. Hence, as a
the time of the foreclosure sale. Please take note what are consequence, the liability of the employer, if he loses on
to be considered unconscionable. appeal, will increase – this is just but a risk that the
employer cannot avoid when it continued to seek recourses
By the way, the case of Medel is GR No. 131162, against the Labor Arbiter’s decision. This is also in
November 27, 1998. accordance with Article 279 of the Labor Code.

Also, last time we already discussed the case of Eastern

Shipping. It provided the guideline on what is the interest
rate to be imposed and when should it start. As we also To recapitulate and for future guidance, the guidelines laid
discussed last time, the guidelines in Eastern Shipping has down in the case of Eastern Shipping Linesare accordingly
already been amended due to the Circular which took modified to embody BSP-MB Circular No. 799, as follows:
effect on July 1, 2013.

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I. When an obligation, regardless of its source, A1: The 12% interest was imposed on the award of
i.e., law, contracts, quasi-contracts, delicts or quasi-delicts backwages from the finality of the decision on May 27,
is breached, the contravenor can be held liable for 2002.
damages. The provisions under Title XVIII on "Damages"
of the Civil Code govern in determining the measure of Q2: Why 12%?
recoverable damages.
II. With regard particularly to an award of interest A2: It was 12 % first because they followed the ruling in
in the concept of actual and compensatory damages, the Eastern Shipping. The guideline in Eastern Shipping (3 rd
rate of interest, as well as the accrual thereof, is imposed, paragraph) states that when the judgment of the court
as follows: awarding a sum of money becomes final and executory,
the interest to be imposed is 12%.
When the obligation is breached, and it consists
Q3: So what is May 27, 2002?
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that A3: The date when the resolution/decision of the court
which may have been stipulated in writing. Furthermore, became final and executory.
the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the Q4: After that, what is the penalty to be imposed?
rate of interest shall be 6% per annum to be computed
from default, i.e., from judicial or extrajudicial demand A5: The penalty to be imposed is 6% until full payment.
under and subject to the provisions of Article 1169 of the
Civil Code. Alright, what do we have here? This is actually emanating
from a case of dismissal with the NLRC wherein there was
When an obligation, not constituting a loan or forbearance a judgment for liability for Php 158,000 as backwages and
of money, is breached, an interest on the amount of separation pay. The judgment became final and executory
damages awarded may be imposed at the discretion of the on May 27, 2002 and there was a recomputation – from
court at the rate of 6% per annum. No interest, however, Php 158,000, it became Php 417,000 plus because of the
shall be adjudged on unliquidated claims or damages, interest rates. Backwages is computed from time of illegal
except when or until the demand can be established with dismissal until final judgment. Separation pay is computed
reasonable certainty. Accordingly, where the demand is from the time of employment until final judgment.
established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or Interest rate of 12% per annum of the total monetary award
extrajudicially (Art. 1169, Civil Code), but when such from May 27, 2002 (resolution became final and
certainty cannot be so reasonably established at the time executory). Thereafter, 6% from July 1, 2013 until full
the demand is made, the interest shall begin to run only satisfaction. Take note that Circular No. 799 issued by the
from the date the judgment of the court is made (at which Bangko Sentral Monetary Board saying that the legal
time the quantification of damages may be deemed to have interest is now 6% should be applied prospectively, not
been reasonably ascertained). The actual base for the retroactively. Consequently, the 12% interest shall run until
computation of legal interest shall, in any case, be on the June 30, 2013. (By the way, walay 31 and June) So from
amount finally adjudged. July 1, 2013, it is 6% per annum as the prevailing rate of
interest.
When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, Again, that is the relevance of why we still discuss cases
whether the case falls under paragraph 1 or paragraph 2, applying the rule in Eastern Shipping. We have to make a
above, shall be 6% per annum from such finality until its distinction for interest rates made applicable prior to July 1,
satisfaction, this interim period being deemed to be by then 2013.
an equivalent to a forbearance of credit.
ECE Realty vs Hernandez

Facts: Haydn Hernandez filed a complaint for specific

Q1: When was the 12% interest rate imposed? performance with damages against EMIR and ECE Realty
due to the failure of the respondents to deliver a
condominium unit which he purchased from them. The

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respondents allegedly promised to turn over to him the unit involving a forbearance of credit was twelve percent (12%)
by December 31, 1999, but failed to do so. Worse, he per annum, up from six percent (6%) under Article 2209 of
learned that the actual area was only 26 square meters, the Civil Code.  This was reiterated in Central Bank
not 30 square meters as indicated in their contract to sell, Circular No. 905, which suspended the effectivity of the
and the company refused to grant his corresponding Usury Law beginning on January 1, 1983.
reduction in the purchase price; instead the companies told
him to settle his arrears in amortizations. He learned later But since July 1, 2013, the rate of twelve percent (12%)
that that company sold Unit 808 to a third party. per annum from finality of the judgment until satisfaction
has been brought back to six percent (6%).  Section 1 of
The HLURB ruled in favour of the complainant and ordered Resolution No. 796 of the Monetary Board of the Bangko
the company to reimburse the respondent the amount of Sentral ng Pilipinas dated May 16, 2013 provides: “ The
P452,551.65, plus legal interest, from the filing of the rate of interest for the loan or forbearance of any money,
complaint, and to pay the respondent P50,000.00 as moral goods or credits and the rate allowed in judgments, in the
damages, P50,000.00 as attorney’s fees, and P50,000.00 absence of an express contract as to such rate of interest,
as exemplary damages. shall be six percent (6%) per annum. ”  Thus, the rate of
interest to be imposed from finality of judgments is now
The CA affirmed the decision with modification and ruled back at six percent (6%), the rate provided in Article 2209
on the imposable interest: of the Civil Code.
We DIRECT petitioner ECE REALTY AND
DEVELOPMENT INC., to pay respondent Haydyn
Hernandez, the amount of [?]452,551.65 (representing the Q1: Why is it here that the developer was liable to
total amount respondent Hernandez paid petitioner ECE), Hernandez? Was their liability only for damages?
plus 6% interest per annum starting 07 September 2006,
and 12% interest per annum from the time the judgment A1: No ma’am, it was also for the refund of the payments
becomes final and executor[y], until fully paid. made by Hernandez plus interest.

Issue: What is the imposable interest rate on the damages Q2: From what time is the 6% interest imposed?
and refund awarded to Hernandez?
A2: From the filing of the complaint until the finality of
Ruling: SC affirmed the CA decision with modification, by judgment.
reducing the interest imposable after finality from twelve
percent (12%) to six percent (6%). Q3: Why is it only 6% and not 12% prior to July 1, 2013?

Eastern Shipping Lines, Inc. synthesized the rules on the A3: Because under the Eastern Shipping guideline, 6%
imposition of interest, if proper, and the applicable rate, as interest is imposable if what is involved is an obligation
follows: The 12% per annum rate under CB Circular No. other than loan or forbearance of money. What is involved
416 shall apply only to loans or forbearance of money, in this case is the refund of the payments made and also
goods, or credits, as well as to judgments involving such payment for damages.
loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies Q4: Until finality of judgment until fully paid, what is the
“when the transaction involves the payment of indemnities interest rate?
in the concept of damage arising from the breach or a
delay in the performance of obligations in general,” with the A4: Also, 6% maam.
application of both rates reckoned “from the time the
complaint was filed until the [adjudged] amount is fully paid Alright, take note here the relevance of the rule in Eastern
Shipping. It is very easy to remember the effect of the
Thus, from the finality of the judgment awarding a sum of amendment by Bangko Sentral Circular 799 because it is
money until it is satisfied, the award shall be considered a 6% whether or not it is a loan or forbearance of money,
forbearance of credit, regardless of whether the award in goods or credit. Lahat yun sila 6%. Pero bakit natin sila
fact pertained to one.  Pursuant to Central Bank Circular pinag-aaralan? Because here, a 2014 case, prior to July 1,
No. 416 issued on July 29, 1974, in the absence of written 2013, we still take into consideration whether it is a loan or
stipulation the interest rate to be imposed in judgments forbearance of money. Here, 6% interest is imposed

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because from the time of filing until finality, by way of actual In Albos vs Sps. Embisan G.R. No. 210831, November
and compensatory damages, the obligation is not arising 26,2014, the SC held that there was an agreement for 5%
from loan or forbearance of money. From finality until full per month that was deemed as unconscionable. The courts
satisfaction, the total amount due now compounded with reduced it at 12% interest per annum. This was already a
interest due is 6%. 2014 ruling and the CB Circular 799 is already in effect.
The interest rate of 12% per annum was still imposed.
Instead of referring to it as legal interest, the court used the
term “simple interest” of 12% per annum.
Also take note class that we have to make a distinction
between monetary and compensatory interest. Another case is MCMP vs Monark, G.R. No. 201001.
Again, it also reduced theinterest rate to 12%. What was its
Article 1956. guideline? Prevailing jurisprudence.
MONETARY INTEREST COMPENSATORY You take note that despite of the lowering of the legal
INTEREST interest rate by CB Circular 799 to 6% per annum,
Article 1956 Article 2209, 2210 and also nevertheless, the SC has already ruled in newer cases that
those with regard to actual unconscionable interests will still be reduced at 12% per
and compensatory annum.
damages
Article 1957. Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against
With this amendment of the legal interest rate to be usury shall be void. The borrower may recover in
imposed, let us try to connect it with what we have accordance with the laws on usury.
discussed earlier. Kasi it is pretty much clear that if the
interest rate becomes unconscionable, the court will reduce Again, the Usury Law has already been suspended. Why
that. And it is fixed at 12% interest per annum. Of course, do we still mention it every now and then? Because of the
differentiated from penalty. Kasi for penalty, it is like 1% fact that it is suspended and anything suspended may be
interest per month pero fixed yung 12% per annum or 1% lifted. Even if the Usury Law is suspended in 1983, it can
per month. still be lifted. When we talk of Usury, it is a prohibitive
interest for contracting party receiving any interest beyond
Take note, if you take a look at Article 2209, when the New the amount allowed by law. Again, this was suspended.
Civil Code took effect, the legal interest rate was still 6% There is no more ceiling as it will depend on the agreement
per annum. Here sa last phrase, “ and in the absence of of the parties. However, the courts will reduce it if it is
stipulation, the legal interest is 6% per annum.” Kailan siya found to be unconscionable depending on the factual
nagging 12%? Again, through a Central Bank Circular in circumstances of each case.
1974. Then, we have this Central Bank Circular 799 which
took effect on July 1, 2013 so 6% na naman siya. Also, take note that if we talk about usury, it is only in
relation to the existence of a loan or forbearance of money.
Yung mga cases that we discussed, applying the interest If there is no loan or forbearance of money, goods or credit,
rate of 12% per annum are from 1974 until June 30, 2013. there is no usury to speak of.
Since the legal interest is now 6%, do you think that if the
interest rate is deemed unconscionable, the court will What is the effect if you have a usurious or unconscionable
reduce it to 6%, not 12%? interest? Again, the stipulation will be invalidated and
considered void by the court, interest will be reduced but
We have these cases. Please take note of this. the principal obligation will still stand.

Article 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.

Differentiate it from Article 1955

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Article 1955. The obligation of a person who borrows defendant’s outstanding account as of August 28, 1986,
money shall be governed by the provisions of articles 1249 with the corresponding stipulated interest and charges
and 1250 of this Code. thereof, until fully paid, plus attorney’s fees in an amount
equivalent to 25% of said outstanding account. This was
If what was loaned is a fungible thing other than money, upheld by the CA.
the debtor owes another thing of the same kind, quantity
and quality, even if it should change in value. In case it is Issue: Whether the court committed an error in upholding
impossible to deliver the same kind, its value at the time of the decision of the trial court which compounded the
the perfection of the loan shall be paid. interest on surcharges. No.

Ruling: The stipulated fourteen percent (14%) per annum

But if you are talking about the interest, time and place of
interest charge until full payment of the loan constitutes the
payment.
monetary interest on the note and is allowed under Article
Compound interest was mentioned earlier. 1956 of the New Civil Code. 7 On the other hand, the
stipulated two percent (2%) per month penalty is in the
Q1: What do you mean by compound interest? form of penalty charge which is separate and distinct from
the monetary interest on the principal of the loan.
A1: Compound interest is the interest of the principal
amount and the interest already due. The compounding of the penalty or compensatory interest
is sanctioned by and allowed pursuant to Article 1959 of
TAN vs CA the New Civil Code considering that:

Facts: Tan obtained several loans from CCP as evidenced First, there is an express stipulation in the promissory note
by several promissory notes. Petitioner defaulted but after permitting the compounding of interest. The fifth paragraph
a few partial payments he had the loans restructured by of the said promissory note provides that: "Any interest
respondent CCP, and petitioner accordingly executed a which may be due if not paid shall be added to the total
promissory note P3,411,421.32 payable in five (5) amount when due and shall become part thereof, the whole
installments. amount to bear interest at the maximum rate allowed by
law."10 Therefore, any penalty interest not paid, when due,
shall earn the legal interest of twelve percent (12%) per
The pertinent portion of the promissory note (Exhibit "A")
annum, in the absence of express stipulation on the
imposing interest and penalties provides that:
specific rate of interest, as in the case at bar.
For value received, I/We jointly and severally promise to Second, Article 2212 of the New Civil Code provides that
pay to the CULTURAL CENTER OF THE PHILIPPINES "Interest due shall earn legal interest from the time it is
P3,411,421.32 judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began
With interest at the rate of FOURTEEN per cent (14%) per to run on the penalty interest upon the filing of the
annum from the date hereof until paid. PLUS THREE complaint in court by respondent CCP on August 29, 1984.
PERCENT (3%) SERVICE CHARGE. In case of non- Hence, the courts a quo did not err in ruling that the
payment of this note at maturity/on demand or upon default petitioner is bound to pay the interest on the total amount
of payment of any portion of it when due, I/We jointly and of the principal, the monetary interest and the penalty
severally agree to pay additional penalty charges at the interest.
rate of TWO per cent (2%) per month on the total amount
due until paid, payable and computed monthly. Q1: What was the ruling of the court with regard to the 2%
penalty per month?
Petitioner Tan failed to pay any installment on the said
restructured loan of P3,411,421.32, the last installment A1: This was upheld by the court because this was
falling due on December 31, 1980. expressly stipulated in their contract. If there is an express
stipulation in the promissory note, then it will be permitted
CCP filed a complaint for the collection of sum of money. citing Article 2212.
The trial court rendered a decision ordering defendant to
pay plaintiff, the amount of P7,996,314.67, representing
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Article 2212. Interest due shall earn legal interest from the Under the facts of this case and by stipulation of the
time it is judicially demanded, although the obligation may parties, interest began to run on the penalty upon the filing
be silent upon this point. of the complaint on August 29, 1994. However, please take
note of the judgment here. The Supreme Court held that
Q2: Aside from the fixed rate, simple interest rate of 2% per the penalty charged was reduced to 12% per annum or 1%
month, are you saying that the same penalty is also per month starting August 28, 1996. Because from that
compounded? Do you have a compound interest in the time, there were partial payments made so it took into
stipulation of the parties? consideration the good faith on the part of Tan. That is why
it reduced it to 12% beginning August 28, 1996.
A2: Yes. It was in the contract.

So what do we have here? Imposition of penalty and

interest that was upheld by the court. The Civil Code
permits a penalty apart from the monetary interest. This is
what I mentioned earlier. You have to distinguish monetary November 26 (1st hour)
interest from compensatory interest. The 42% interest per
annum here which was upheld by the court was considered Transcribed by: Kelvin John Du
a monetary interest. It complied with the requirements
under Article 1956. It was expressly stipulated in writing. As Recap:
to the 2% per month penalty, that refers to the We emphasized the Guidelines in the case of Eastern
compensatory interest. The SC still held that such is valid. Shipping and how it was changed based by virtue of the
Penalty clauses can be in the form of penalty or amendment under BankoSentral Circular No. 799, as seen
compensatory interest. Thus, the compounding of the in the cases of Nacar as well as ECE.
penalty or compensatory interest is sanctioned and allowed
by Article 1959 pf the New Civil Code, In the cases we have discussed, if the interest is deemed
exorbitant or unconscionable, then it would be reduced. In
Article 1959. Without prejudice to the provisions of article the cases before 2013 or previous cases, the SC has ruled
2212, interest due and unpaid shall not earn interest. that the interest rate be reduced to 12% interest per
However, the contracting parties may by stipulation annum. With the change or amendment in the legal interest
capitalize the interest due and unpaid, which as added rate, it was still 12% by using prevailing jurisprudence,
principal, shall earn new interest under the cases of Albosvs. Embisan[GR No. 210831] and
MCMP vs. Monark[GR No. 201001].
Here, the promissory note provides: Any interest which
may be due, if not paid, shall be added to the total amount We also looked at cases in determining whether the
when due and shall become part thereof. The whole interest is unconscionable or not. Always look at the factual
amount of their interest at the maximum rate allowed by circumstances of the case. There is no definite interest rate
law. Therefore, any amount of interest not paid when due, to say if it is unconscionable or not. Probably, we can take
shall earn the interest of 12% per annum in the absence of into consideration if the parties failed to raise it as an issue,
an express stipulation of a specific rate of interest as in the as in the case of Prisma, or if it was voluntarily offered by
case at bar. the debtor, as in the case of Dio.

So when can there be compounding of interest? When you Take note that the principle of estoppel by itself cannot be
have an Article where the stipulation is provided under used or cannot be based to say that the interest rate
Article 1959. cannot be deemed as unconscionable or not. The principle
of estoppel cannot be predicated on an illegal act. Validity
Another ground for the imposition of a compounding of a contract cannot be considered as valid by estoppel if it
interest is Article 2212. is prohibited by law or contrary to public policy. Although in
the case of Dio, it is only for a 2-month period, but if you
Article 2212. look at the facts of the case, the SC did not say that you
apply the principle of estoppel, but it only said that it was
Article 2212. Interest due shall earn legal interest from the voluntarily offered and cannot now raise that defense that
time it is judicially demanded, although the obligation may he be bound by the stipulated interest.
be silent upon this point.
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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

but Sigaan refused.

Again, estoppel should not be used haphazardly in saying
that there is no problem since the debtor agreed to it. Look Issue: WON Sigaan has the obligation to refund Villanueva
at the other factual circumstances available in each case.
The principle of estoppel in itself, you cannot use that to Ruling: Yes, under Article 1960: If the borrower pays
validate a stipulation in a contract which is illegal by law or interest when there has been no stipulation therefor, the
contrary to law or contrary to public policy. provisions of this Code concerning solutioindebiti, or
natural obligations, shall be applied, as the case may be.
We also discussed the compounding of interest:
General Rule: Accrued interest, interest due and unpaid, The overpayment was in the form of solutioindebiti. The
shall not earn interest unless in 2 instances. creditor must refund back to the debtor. Here, it was
Exception: There is no compounding of interest unless: proven that the loan had no stipulation in writing, Sigaan
1. Article 1959 – express stipulation should refund the excess of the payment.

Article 1959. Without prejudice to the provisions of article Q: But isn’t it that there are 2 kinds of interest? We have
2212, interest due and unpaid shall not earn interest. monetary interest, the requisites of which are provided in
However, the contracting parties may by stipulation Article 1956, that there must be an express stipulation in
capitalize the interest due and unpaid, which as added writing. But the other instance is if there is default-
principal, shall earn new interest. compensatory interest. Can the petitioner here be liable for
compensatory interest?
2. Article 2212 – when it is judicially demanded A: No. There is no showing or evidence that Villanueva had
difficulty or defaulted in paying the loan.
Article 2212. Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may Article 1960. If the borrower pays interest when there has
be silent upon this point. been no stipulation therefor, the provisions of this Code
concerning solutioindebiti, or natural obligations, shall be
Parties may stipulate on the imposition of both interest and applied, as the case may be.
penalty in case of default on the part of the borrower. There
is a distinction between monetary interest and The phrase “no stipulation therefor” refers to Article 1956,
compensatory interest as discussed in the case of Tan vs. in reference to simple loan or mutuum.
CA.
Here, if there is a stipulated interest by mistake, the debtor
What is the effect if the debtor has already paid interest but can recover based on the principle ofsolutioindebiti or
it turns out therewas no express stipulation in writing? It is undue payment, or even if by natural obligation.
a contractof simple loan but there is payment of interest but
it turns out there is no express stipulation in writing? Natural obligation – it is an obligation not based on law but
There is solutioindebiti. on equity and natural law; it does not grant a right of action
to enforce their performance but after voluntary fulfillment
What is solutioindebiti? There is a payment or delivery of a by the obligor, they authorize the retention of what has
sum of money to a person not entitled to it, by mistake. been delivered or rendered by reason thereof

In the case of Sigaan, he already paid 660,000 in excess of

Case: Sigaan vs. Villanueva the principal amount. Considering that there was no
express stipulation in writing for the said interest, he should
Facts:Sigaan is a PNO officer. Villanueva was approached not have been held liable to the creditor. With that, the
by Sigaan to offer a loan, since she needed it she availed creditor has the obligation to return it to the debtor or
of it. The loan was not put in writing and there was no petitioner in this case as provided under Article 1960.
stipulation of interest. Thereafter, Villanueva issued several
checks, the excess of which was to pay for the interest. The principle of solutioindebiti applies where a payment is
Sigaan vexed her to pay more, which amounted to 1.2 made where there exists no binding relation between the
million. Villanueva then demanded the refund of the excess payor who has no duty to pay and the person received the
of the amount since there was no stipulation as to interest

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

payment, and the payment is made through mistake and Case: Solidbank vs. Permanent Homes
not through liberality or some other cause.
Facts: Permanent Homes is a real estate development
How about for compensatory interest? company and to finance its Buena Vida project, it was
The SC held that the respondent should not also be liable granted an omnibus credit line facility by Solidbank. To
for compensatory interest as it was not proven that secure the loan, it mortgaged units within its project.
respondent defaulted in paying the loan. As earlier found,
no interest was due on the loan because there was no Issue: WON the increases in the interest rates should be
written agreement as regards to the payment of interest. void for being unilaterally imposed

In this case, there was no monetary interest, no default, no Ruling: No.The Usury Law had been rendered legally
compensatory interest. ineffective by Resolution No. 224 dated 3 December 1982
of the Monetary Board of the Central Bank, and later by
Article 1961. Usurious contracts shall be governed by the Central Bank Circular No. 905 which took effect on 1
Usury Law and other special laws, so far as they are not January 1983. These circulars removed the ceiling on
inconsistent with this Code. interest rates for secured and unsecured loans regardless
of maturity. The effect of these circulars is to allow the
As we have pointed out numerous times already, usury is parties to agree on any interest that may be charged on a
now legally non-existent. The interest legally chargeable loan. The virtual repeal of the Usury Law is within the range
depends upon the agreement between the lender and the of judicial notice which courts are bound to take into
borrower. account.Although interest rates are no longer subject to a
ceiling, the lender still does not have an unbridled license
Usury – defined as contracting for or receiving something to impose increased interest rates. The lender and the
in excess of the amount allowed by law for the loan or borrower should agree on the imposed rate, and such
forbearance of money; the taking of more interest for the imposed rate should be in writing.
use of money than the law allows.
There can be no usury of there is no loan or forbearance of The stipulations on interest rate repricing are valid because
money to speak of. (1) the parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbank’s written notice
Act No. 2655 otherwise known asThe Usury Law was to Permanent of the new interest rate; and (3) Permanent
enacted in 1916. Its purpose was for the protection of the has the option to prepay its loan if Permanent and
borrowers from the imposition of unscrupulous lenders who Solidbank do not agree on the new interest rate. The
take undue advantage of the necessities of others. phrases "irrevocably authorize," "at any time" and
"adjustment of the interest rate shall be effective from the
Under the Usury Law, the Monetary Board was authorized date indicated in the written notice sent to us by the bank,
to prescribe the maximum rate of interest for the loan or or if no date is indicated, from the time the notice was
renewal thereof or the forbearanceof money, goods or sent," emphasize that Permanent should receive a written
credits. By virtue of the authority given to the Monetary notice from Solidbank as a condition for the adjustment of
Board, the MB prescribed in 1974 that the rate of interest the interest rates.
for loan or forbearance of money, goods or credits, in the
absence of express contract as to such rates of interest, Q: What did they agree upon as to the interest rates
shall be 12% per annum. imposed as to the loans? Can Solidbank increase the
interest rates?
That is why in the Civil Code, the Usury Law is mentioned A: They agreed in their promissory notes that an increase
even in theprovisions under mutuum, because the Usury or decrease in the interest rates shall be mutually agreed
Law was in effect at the time the New Civil Code was by the parties.
promulgated. Thereafter it was suspended.
Q: Is that agreement considered valid?
Q: When was the Usury Law suspended? A: Yes, the SC said it is valid. First, the parties mutually
A: The suspension took effect in January 1, 1983. agreed on the said stipulations. Second, the repricing only
takes effect uponSolidbank’s written notice to Permanent of

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

the new interest rate. Third, Permanent has the option to rates due to the financial markets, it should also be present
repay its loan, if they do not agree on the new interest rate. in the contract. In other words, there is an escalation
clause and a de-escalation clause, which are both present
Q: Since the stipulation was valid, was it proper for in the agreement between the parties.
Solidbank to impose the increased rates to Permanent
Homes? From what time? From the time the interest rates Again, while the stipulation is considered valid, Solidbank’s
were already increased? What was the reason behind the computation of the interest due from Permanent should be
increase of interest rates by Solidbank? This was taken adjusted to take effect only upon Permanent’s receipt of
into consideration by the court. Why was there a need for the written notice from Solidbank. In this case, Solidbank
Solidbank to increase the rates? What happened? did not present any written memorandum to support its
A: As contained in the promissory notes, there was a allegation that it promptly advised Permanent of the
provision stating that they irrevocably authorize Solidbank change in interest rates.
to increase or decrease at any time the interest rate agreed
in the note, or in the business thereof, or the prevailing The repricing in interest rates under the facts of this case
rates in the local or international capital markets. were held to be not unconscionably out of line with the
upper range of lending rates to other borrowers since it
Q: What was the factor that made Solidbank increase the happened at theheight of the Asian financial crisis in 1997.
interest rate to be imposed on the loans of Permanent? Here, the repricing of the interest rate was not deemed
A: Because of the Asian financial crisis during that time. unconscionable. Remember- factual circumstances of the
case.
Q: With that, they increased the rate. The SC the increase
was proper and it was not unconscionable because of the Why do we still discuss the Usury Law? Because it was
Asian financial crisis. We are saying that the stipulation is merely suspended.
valid. However, was it already proper for Solidbank to
impose the interest rate? Elements for usury to exist:
A: Permanent should first receive a written notice from 1. There is a loan or forbearance of money, goods
Solidbank as a condition for the adjustment of the interest. or credits; and
In this case, they did not receive any notice. 2. There is an agreement or understanding between
the parties that the loan shall or may be returned
Although as we have mentioned earlier, the Usury Law has
already been legally ineffective or suspended since For the interest to be considered usurious, there must be
January 1, 1983, and that there is no more ceiling in unlawful intent on the part of the creditor to take more that
interest rates, the lenders still do not have unbridled license the legal rate for the use of money or its equivalent, and
to impose increased interest rates. that the takingor agreeing to take for the use of the loan of
something in excess of what is allowed by law.
Here, the stipulations on interest rate repricing are valid
because (1) the parties mutually agreed on said Purpose of the Usury Law: For the protection ofborrowers
stipulations; (2) repricing takes effect only upon Solidbank’s from the imposition of unscrupulous lenders who take
written notice to Permanent of the new interest rate; and undue advantage of the necessities of others.
(3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new interest Nevertheless, despite its suspension, the interest of
rate. The phrases "irrevocably authorize," "at any time" and borrowers is still protected by the rulings of the SC as to
"adjustment of the interest rate shall be effective from the what interest is considered unconscionable or exorbitant.
date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was Usury is not applicable in:
sent," emphasize that Permanent should receive a written 1. Rentals
notice from Solidbank as a condition for the adjustment of 2. Contracts of lease
the interest rates. 3. Bona fide sale
4. Increase in price of things sold as a result of a
In relation to (1), take note that for parties to agree in any sale on credit
increase in the interest rates, which is an escalation clause, 5. True pacto de retro sale
there must also be a provision that in case of lower interest

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Just take note of that in case the Usury Law is no longer Facts: This involves $3,000 which Zshornack gave to BPI
suspended. for safekeeping. However, BPI sold the dollar accounts and
converted it to peso which they deposited to the account of
Part IV: Deposit Zshornack. BPI was not able to deliver the said amount
demanded by Zshornack.
I. Deposit in General and its Different Kinds
Issue: WON there is a contract of deposit
Article 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the Ruling: Yes, the real intention of the parties was for BPI to
obligation of safely keeping it and of returning the same. If safekeep the amounts for Zshornack.
the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other Q: If it is a contract of deposit then the bank will be held
contract. liable to Zshornack?
A: Yes for the return of the exact amount, but the SC held
Who are the parties in a contract of deposit? that Zshornack cannot anymore recover damages since
1. Depositary or the depositorio – the recipient the contract is considered to be void since there is an
2. Depositor or the depositante – the one who gives existing Circular issued by the BangkoSentral stating that
foreign currencies should be sold 1 day after they are
There is no requirement in a contract of deposit that the received by the bank. Although the parties entered into a
depositor be the owner of the thing delivered for contract of deposit, it is contrary to law as there was an
safekeeping as there is no transfer of ownership involved in existing Circular prohibiting the said act. He cannot recover
a contract of deposit. damages.

Similar to a contract of loan, a contract of deposit is a real What do we have here? It is clear that the purpose of the
contract as it is perfected by delivery. It can be a unilateral delivery of the $3,000 was for safekeeping. So, it is
contact if gratuitous, and bilateral if for compensation. contract of deposit. But what did the employee of the bank
do? He converted the $ to Php, and the peso equivalent
Under Article 1962, it is clear that the principal purpose of was deposited to the account of Zhornack.
deposit is that it is for safekeeping. If safekeeping is only
an accessory obligation, it could not be considered as a Here, the issue in relation to our case is with regard to
contract of deposit; it could be a contract of lease, a damages because instead of returning the exact same
commodatum or even a contract of agency, wherein the thing subject of the contract of deposit, what happened was
purpose of safekeeping is only ancillary to the main that they converted it to their peso equivalent.
objective or main purpose in the contract
The SC heldit is true that there was a contract of deposit.
 Delivery of money to a person with payment or As earlier stated, the document and the subsequent acts of
delivery of records or documents to a lawyer the parties show that they intended the bank to safekeep
hired to represent a party – That is not a contract the foreign exchange, and return it later to Zshornack, who
of deposit but it is a contract of agency wherein alleged in his complaint that he is a Philippine resident. The
the money or the documentsdelivered will be parties did not intended to sell the US dollars to the Central
kept by the depositary, but it is only ancillary to Bank within one business day from receipt. Otherwise, the
his principal obligation as that of an agent contract of depositum would never have been entered into
 Balance of commission or account in agent’s at all.
possession at the principal’s disposal – It is a
deposit which the agent must return or restore to Since the mere safekeeping of the greenbacks, without
the principal when demanded. The agent can be selling them to the Central Bank within one business day
held liable for estafa if he misappropriates it or from receipt, is a transaction which is not authorized by CB
diverts its use to another purpose. Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions. Hence,
pursuant to Article 5 of the Civil Code, it is void, having
Case: BPI vs. IAC been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords

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By: 2 Manresa 2015-2016

neither of the parties a cause of action against the Article 1964. A deposit may be constituted judicially or
other. That is why Zhornack cannot recover for the second extrajudicially.
cause of action for damages.
2 kinds of deposit:
Take note, maybe under this case, the employee did not 1. Judicial or sequestration – takes place when an
understand or was mistaken as to the deposit; that is why it attachment or seizure of property in litigation is
is important to take note of the distinction between deposit ordered
and mutuum. 2. Extrajudicial – 2 kinds:
a. Voluntary deposit – delivery is made by
What is the difference between deposit and mutuum? the will of the depositor, or by two or
Deposit Mutuum
Subject It can be a Only involves
Another distinction or another important thing why we need matter movable or an money or other
to distinguish between these 2 contracts is under Article immovable thing consumable thing
1287 in relation to compensation or set-off. Principal The principal The principal
purpose purpose is for purpose is for use
Article 1287. Compensation shall not be proper when one safekeeping or consumption
of the debts arises from a depositum or from the
Parties Parties are the Parties are the
obligations of a depositary or of a bailee in commodatum.
depositor and the lender and the
Neither can compensation be set up against a creditor who
depositary borrower
has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301. The depositor can The lender must
demand the wait until the
Depositum – contract of deposit as defined under Article return of the thing expiration of the
1962. or subject matter period granted to
at will, as a the debtor
In both commodatum and depositum, compensation or general rule
offset is not available. But, we can do so and it is Generally May be subject to
applicable or available to extinguish the obligations of the gratuitous compensation
parties if what is involved is onlymutuum or simple loan. more persons, each of whom believes
himself entitled to the thing deposited
Depositum Commodatum b. Necessarydeposit – made in
For safekeeping For transfer of the use compliance with either a legal
May be gratuitous Essentially gratuitous obligation, on the occasion of any
As to extrajudicial deposit, Can have movable or calamity, or by travelers in hotels or
only movable properties immovable property inns or by travelers with common
are involved carriers

Article 1963. An agreement to constitute a deposit is Judicial Deposit Extrajudicial Deposit

binding, but the deposit itself is not perfected until the Through the will of the Through the will of the
delivery of the thing. court parties of the contract
Ensures the right of the It is for custody and
This emphasizes the nature of a deposit being a real party to property or to safekeeping
contract- it is perfected by mere delivery. recover in case of a
favorable judgment
If you agree to enter into a contract of deposit what you Generally involves Generally involves movables
have is merely a consensual contract, an ordinary contract, immovables only
and it will not yet give rise to a perfected deposit until the Always onerous Generally gratuitous
thing is delivered- same as that of a commodatum and The thing is returned only Upon the demand of the
simple loan or mutuum. Unless it is delivered, it will not upon order of the court or depositor
give rise to a commodatum. when the litigation has
already ended

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

On behalf of the person On behalf of the depositor,

who has a right or thing or person We now go to the first kind of extrajudicial deposit which is
designated the voluntary deposit.

Article 1965. A deposit is a gratuitous contract, except Article 1968. A voluntary deposit is that wherein the
when there is an agreement to the contrary, or unless the delivery is made by the will of the depositor. A deposit may
depositary is engaged in the business of storing goods. also be made by two or more persons each of whom
believes himself entitled to the thing deposited with a third
General rule: A contract of deposit is gratuitous. person, who shall deliver it in a proper case to the one to
Exceptions: whom it belongs.
1. By stipulation of the parties as long as it is not
contrary to law, morals, good customs, public In voluntary deposit, the delivery is made by the will of the
order and public policy depositor. He gets to choose to whom he will deposit the
2. When the depositary is engaged in the business thing for safekeeping.
of storing goods; such as a warehouseman
where it is for compensation and not out of pure Ordinarily, voluntary deposit involves two persons but three
generosity persons may be involved under the second sentence of
3. If the property is saved from the destruction Article 1968. In such case, the third persons assumes the
without the knowledge of the owner. There is an obligation to deliver it to the one to whom it belongs.
involuntary deposit wherein the owner of the
property is bound to pay just compensation. In case there are two persons who are contesting as to
who is entitled to the return of the thing, the third person
Article 1966. Only movable things may be the object of a will now assume the obligation to deliver it to the one to
deposit. whom it belongs.
Ex. A thing is delivered to him then there is another person
Obviously, this refers to an extrajudicial deposit. Only who claims it as the owner. What is the option here on the
movable or personal property may be the object of an part of the third person? If he returns it to one of them then
extrajudicial deposit, whether it is voluntary or necessary. he might be mistaken, and vice versa. Under special civil
The purpose is for safekeeping.The possibility that the actions, there is what we call interpleader. This is filed by
thing may disappear or may be lost or stolen is not present the third person. He will implead the two persons for the
in a real property. However in judicial deposit, it may cover judge to determine who the owner is, and in the meantime
movable or immovable properties but generally it involves the third person will keep the thing.
immovable properties.
Interpleader – a special civil action whereby a person who
Notice that the contract of deposit does not embrace has property in his possession, or an obligation to render
incorporeal or intangible property because incorporeal or wholly or partially without claiming any right therein or an
intangible property follows the person of the owner, where interest which is not disputed by the claimant/s, comes to
he goes. Essentially, you do not deliver since there is no court and asks that the persons entitled to demand
physical form for these kinds of property. How can it give compliance with the obligation be required to litigate among
rise to a contract of deposit when you cannot even themselves in order to determine finally who is entitled to
physically deliver? the same.

Article 1967. An extrajudicial deposit is either voluntary or With that, it can still be considered a voluntary deposit
necessary. under the second sentence of Article 1968.

General rule: A deposit is voluntary. As pointed out earlier, the main distinction between
Exception: It is necessary only in 3 instances: voluntary and necessary deposit is that in voluntary
1. When there is a legal obligation deposit, the depositor has complete freedom in choosing
2. On the occasion of any calamity the depositary; wherein such freedom is lacking in a
3. For travelers in hotels and inns necessary deposit. It lacks the free choice on the part of
the depositor.
II. Voluntary Deposit

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By: 2 Manresa 2015-2016

As mentioned earlier, there is no transfer of ownership in a Q: While it is true that there is no Contract of Deposit
contract of deposit. It is not required that the depositor between Mike and Calibo because the purpose of the
must be the owner. The thing deposited maybelong to a delivery of the tractor was not for safekeeping. However,
person other than the depositor. why can’t Calibo retain possession of the tractor despite
Ex. Carrier, agent, lessee the fact that Mike delivered it for security?
They may temporarily deposit goods in their possession
since a contract of deposit does not involve transfer of A: Because Mike was not the owner of the tractor.
ownership.
Q: Why would ownership be an issue? Because it was said
earlier that ownership is not required in a Contract of
Deposit? So the reason why the Supreme Court held that
there’s no deposit is because when it was delivered the
purpose is not for safekeeping and Calibo said that it’s not
November 26 (2nd hour) for safekeeping but to act as a security for the obligations
of Mike. Why is it that Calibo cannot retain possession of
Transcribed by: Kamille Buhay the tractor despite his allegation that it was for the security
of Mike’s obligation to pay?
CALIBO V CA
A: Because Calibo raised the issue on pledge. For a
FACTS: Pablo purchased an agricultural tractor. He asked contract of pledge to be valid it is necessary that the pledge
his son Mike to safe-keep it for him. Mike was renting a is constituted to secure the fulfillment of a principal
house, owned by Calibo, for residential purposes. He kept obligation and the pledgor to be the absolute owner of the
the tractor in the garage of the house. Sometime later, thing pledged. Here, Mike is not the owner of the tractor
Mike failed to pay his obligations to Calibo. However, the and therefore there is a necessity to return the object.
former assured the latter that the account shall be settled
with the tractor as a security. Thereafter, despite demands Q: So under the facts of this case there was no Contract of
from Calibo, Mike was not able to pay his outstanding Deposit at all?
obligations. When Pablo discovered this, he went to Calibo
to obtain possession of the tractor. Calibo denied this and A: There is a Contract of Deposit between Pablo and Mike.
insisted that the tractor was given as security by Mike.
Ok. Because it is clear that when Pablo delivered the
Pablo offered to pay Mike’s indebtedness with checks.
tractor to Mike, the purpose was for safekeeping. However,
Calibo wanted that Mike’s electric bills be included in the
between Mike and Calibo, there was no Contract of
check. Pablo did not consent to this demand and this is
Deposit.
where he instituted an action for replevin, claiming
ownership over the tractor. However, according to Calibo, Take note here the reason whyCalibo retained possession
he has valid claim to keep he tractor because Mike has not of the tractor was because Mike delivered it as a security
yet paid his obligations. for his obligation. So, it is a Contract of Pledge. However,
there is no valid pledge because for a Contract of Pledge to
ISSUE: W/N CALIBO CAN VALIDLY HOLD ON TO THE
be valid, the pledgor must be the absolute owner of the
TRACTOR BECAUSE THERE IS AN ALLEGED
thing pledged. In this case, Mike, the pledgor, is not the
CONTRACT OF DEPOSIT BETWEEN HIM AND MIKE.
owner of the tractor. So, there is no valid pledge. Also, it is
NO.
alleged that there should be a Contract of Agency here,
HELD: In a Contract of Deposit there must be an intention however, the Supreme Court held that there is no Contract
between the parties to safe-keep the object. However, in of Agency as the purpose of the delivery to Mike was for
this case, Calibo himself said that he received the tractor safekeeping. Mike was acting not only without appellee’s
not for safekeeping but as a security for the payment of authority but without the latter’s knowledge as well. Mike
Mike’s obligations. Therefore, there was no deposit and the here could not be considered as an agent of Pablo when
principal purpose was for security. Consequently, Calibo he delivered the tractor to Calibo. And lastly, in relation to
had no right to refuse the delivery of the tractor to the true what we are discussing right now, there is no valid deposit.
owner who is Pablo. Pablo as owner had every right to Here, the purpose is not for safekeeping but as a form of
seek to repossess the tractor as well as the institution of security for the payment of Mike’s obligation. There is no
the present action for replevin.
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Jacinto St., Davao City
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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

deposit where the principal purpose for receiving the object as a depositary. So here, to whom will you return the thing
is not for safekeeping. deposited if the depositor is incapacitated? Legal
representative, or the incapacitated if he has already
So again, take note of the principal purpose: that is for acquired capacity. That is the same thing/premise that you
safekeeping. have learned in your obligations and contracts. However,
take note that as a depositary if the thing is demanded from
Article 1969. A contract of deposit may be entered into you to be returned to the depositor who is incapacitated,
orally or in writing. you cannot refuse to return it allegedly because the
contract is voidable. Why? Because again under Contracts,
Contracts therefore shall be obligatory in whatever form persons who are capable cannot allege the incapacity of
they may have been entered into provided all essential those with whom they contract. That’s under Article 1397.
requisites for their validity are present. (Article 1356)
Article 1971. If the deposit has been made by a capacitated
So here, 1969 just tells us that even if it was orally entered person with another who is not, the depositor shall only
into or even if it is in writing, you relate this to Article 1963: have an action to recover the thing deposited while it is still
As long as there is a delivery, there is a perfected contract in the possession of the depositary, or to compel the latter
of deposit. Of course, the purpose is for safekeeping. Other to pay him the amount by which he may be enriched or
than that, there are no other formalities required for the benefited himself with the thing or its price. However, if a
existence of the contract. third person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its recovery.
Article 1970. If a person having capacity to contract
accepts a deposit made by one who is incapacitated, the As to the depositary who is incapacitated, he does not
former shall be subject to all the obligations of a depositary, incur the obligations of a depositary as provided in this
and may be compelled to return the thing by the guardian, chapter. However, 1971 states that such incapacitated
or administrator of the person who made the deposit, or by depositary shall be liable for the thing deposited while it is
the latter himself if he should acquire capacity. still in his possession or to pay the depositor the amount by
which he may have benefited himself with the thing or its
So with that we can say that as long as the depository is
price subject to the right of any third person who acquired
capacitated, he is subject to the obligations of a depositary
the thing in good faith. Notice it’s not the value of the
regardless of the capacity or incapacity of the depositor. If
property but the price or the extent that the incapacitated
the depositor is incapacitated, the depositary must return
depositary was benefited.
the property to the legal representative or to the depositor
himself if he should acquire capacity. Let us say you have a depositary who is a minor and
received the things from the depositor for safekeeping. He
Q: What is the status of the contract if one of the parties is
sold it to a third person. What did he do with the purchase
incapacitated?
price? Punta siyang Jollibee; kainsiya. The value of the
A: Voidable. property is let us say P1000 for safekeeping. Peroyunnga,
hindingatalagaalam kung magkanotalaga so let us say that
Q: What if both parties are incapacitated? the purchase price is only P500, ok? So to what extent can
you demand from the incapacitated depositary? Only to the
A: Unenforceable extent that he may have benefited himself, yungbinilinyasa
Jollibee na P500 or kung hindi man nabenefit,
So that is still the same case here. If it turns out that the nandunlangsakanyayungpera, pwedeyun.
depositor is incapacitated who can demand the return? If
you are the depositary and you know that the depositor is What if subject to the right of any third person who
incapacitated, would you return the subject matter to him? acquired the thing in good faith. What if
What is the effect if you would return the subject matter of binentanyaperohindi pa nadeliveryung purchase price? For
the deposit to the incapacitated depositor? Will it extinguish what price niyabinenta? P500. So tinanongsi incapacitated
your obligation as a depositary? Remember that for depositary, saannayung thing? Ay binentakokay X.
payment or performance, the person receiving the payment Magkano? P500. Saannayungbinayad? Wala pa man
or the performance must be capacitated. Diba? So here, if siyanagbayadsa akin. So puntahanmosi third person
the depositor is incapacitated, what is the effect of the nanakabili. Anong liability nung third person? Yung price
obligation? It will not necessarily extinguish your obligation lang if he is in good faith. Not the value of the property. If
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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

the third person is in bad faith, in other words he had degree of care is required than if it is a gratuitous contract
knowledge that the depositary who sold the thing to him is of deposit.
indeed incapacitated, then the depositor may recover the
thing from the said third person. If the third person is in CHAN V MACEDA
good faith, the depositor’s action only against the
depositary to compel him the price received or the amount FACTS: Mr. Maceda obtained a loan from the
which he may have benefited himself. Development Bank of the Phils. (DBP). This was for the
construction of a hotel project in Tacloban. Maceda
Obligations of the depositary engaged the services of Moreman Builders Corporation
wherein they had a contract wherein Moreman was going
Article 1972. The depositary is obliged to keep the thing to build the project until December 1977. Afterwards
safely ad to return it, when required, to the depositor, or to Moreman obtained several construction materials and
his heirs and successors, or to the person who may have equipment and these were deposited to certain Spouses
been designated in the contract. His responsibility, with Chan in their warehouse. This deposit was then free of
regard to the safekeeping and the loss of the thing, shall be charge (gratuitous deposit). The contract of deposit was
governed by the provisions of Title I of this Book. between Moreman and Spouses Chan. Now Moreman
here failed to build the project which prompted Mr. Maceda
If the deposit is gratuitous, this fact shall be taken into to file an action for rescission and damages against
account in determining the degree of care that the Moreman. While the case was pending, Moreman pulled
depositary must observe. out the said construction materials and equipment from
Sps. Chan. After the case was pursued, Mr. Maceda
1972 emphasizes the two primary obligations of the wanted to withdraw the said materials and equipment from
depositary: 1) Safe-keep the thing and 2) return the thing Sps Chan contending that he is the owner the same; that
when required. Also this article emphasizes the degree of he was the one that contracted with Moreman for the
care or diligence on the part of the depositary: same construction of the hotel project which was the purpose for
diligence he would exercise over his own property. the purchase of the said materials. Meanwhile, Sps. Chan
Remember that considering that the purpose of deposit is contend that the materials were already withdrawn from
for safekeeping, then there must be some confidence on them and were no longer in their possession. This time, Mr.
the depositary. In a contract of deposit, it involves Maceda filed an action against Sps. Chan because he
depositor’s confidence in his good faith and trust. He takes alleges that he is the rightful owner of the said materials
into account the diligence which the depositary is and that he should be the one who should have the right to
accustomed with respect to his own property. The withdraw the said deposited materials and not Moreman.
depositary cannot excuse himself from liability in case of
loss by claiming that he exercised the same amount of care ISSUE: W/N MR. MACEDA HAS THE RIGHT TO
toward the thing deposited as he would toward his own. DEMAND THE RELEASE OF THE SAID MATERIALS OR
What if nagdanghag (hahaha), by nature, yungsi CLAIM DAMAGES THEREOF. NO.
depositary.And then yung thing that was deposited to him
for safekeeping walana-take care. So can we say na“kung HELD: He has no right to claim damages nor does he have
akuanamaopudnaangmahitabo?” Obviously hindi. Why? the right to recover the said materials. In this case, the
Because that would be less than required under the Supreme Court noted that Mr. Maceda is not a party in the
circumstances. Again recall, what is the standard diligence contract of deposit between Moreman and the Sps. Chan.
required in obligatioins? Diligence of a good father of a And in this case, not being a party to the contract of
family, unless, there is a different degree required by law or deposit, Mr. Maceda has no right to withdraw the said
by stipulations between the parties. So that is Article 1163 materials based on the principle of Privity of Contracts.
of Obligations and Contracts.
Q: Now, in the Privity of Contracts, who is entitled to claim
Likewise, under ObliCon, you have Article 1170: A debtor demand and the obligation arising from the contract?
shall be liable for loss if the loss is due to his fault or
negligence. And Article 1265. Loss of the thing while in In the Privity of Contracts under the Civil Code, the ones
possession of the debtor; it will give rise to the presumption who are entitled to the rights is the party himself, his heirs
that the fault is on his part. If the contract of deposit is and assigns.
gratuitous, due care is still required, as found in the second
paragraph of 1972. If it is for compensation, a higher

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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

So in this case, Maceda is not any of those three. But is it time he made a demand for their returnthe Supreme Court
not that under the privity of contracts there are exceptions? holds that he has no right whatsoever to claim for
damages. Take note of that.
Q: Can we apply any of the exceptions here in the case of
Maceda Article 1973. Unless there is a stipulation to the contrary,
the depositary cannot deposit the thing with a third person.
A: In this case, the exceptions cannot be applied because If deposit with a third person is allowed, the depositary is
Maceda failed to prove that he has the right to the saide liable for the loss if he deposited the thing with a person
materials. What he can do is to go after Moreman and not who is manifestly careless or unfit. The depositary is
Sps. Chan. responsible for the negligence of his employees.
Recall Article 1311 under oblicon which grants right to third
persons to demand the obligation arising from a contract So the rule here is different. The exceptions here are
even if he is not a party nor an heir nor an assignee. different with that of a commodatum. The same
siyasacommodatum in the sense that a depositary here is
Q: What stipulation would that be so that a third person not allowed to deposit the thing with a third person.
would be entitled to the right arising from a contract? What Sacommodatum not allowed sa third persons to use the
do you call that stipulation in favor of a third person? thing. A depositary cannot allow third persons as this is
Because that was one of the allegations here that there founded on trust and confidence. Exception: if authorized
was a need to prove that stipulation. by express stipulation.
A: Stipulation pouratrui. In case of loss, the depositary shall be liable (take note of
this) if he transfers the deposit with a third person without
So, here, remember that there are exceptions to the
authority of the depositor although there is no negligence
principle of privity of contract, one of which is stipulation
on the part of the depositary and the part of the third
pour atrui under 1311. In this case however, there was a
person. So if he deposited it for safekeeping with a third
failure to prove the existence of that stipulation in favor of
person without the consent of the depositor, even if the
Maceda. In other words, there was no stipulation pour
thing was lost because of a fortuitous event, the depositary
atrui.
shall be held liable; no need for negligence. If he deposits
Here, remember that the contract of deposit was between the thing with a third person who is manifestly careless or
Sps. Chan and Moreman. Applying 1311, contracts are unfit, even if authorized, then the depositary may be liable,
binding upon the parties (and their assigns and heirs) who even in the absence of negligence on his part. So dito, he
execute them. When there is no privity of contract, there is was authorized to deposit the thing with the third person
likewise no obligation or liability to speak about and thus no but if it is proven that the third person is manifestly careless
cause of action arises. Specifically, in an action against the or unfit, the depositary shall be held liable.
depositary, the burden is on the plaintiff to prove the
And lastly, if the thing is lost through negligence of his
bailment or deposit and the performance of conditions
employees, then the depositary may be held liable,
precedent to the right of action.A depositary is obliged to
whether the employees are manifestly careless or not. So
return the thing to the depositor, or to his heirs or
with these three instances, the depositary shall be held
successors, or to the person who may have been
liable for the loss. So with that, when can he not be held
designated in the contract. In the present case, the record
liable for the loss? If the depositary deposits the thing with
is bereft of any contractof deposit between petitioner and
a third person when he was allowed to do so and the thing
respondent if at all, it was only between Moreman and Sps.
was lost without the negligence of the third person and
Chan. Granting that there was indeed a deposit between
such third person is not manifestly careless or unfit. All the
petitioners and Moreman, it is still incumbent upon
elements must be present. 1) Loss without negligence; 2)
respondent to prove its existence and that it was executed
allowed to deposit to a third person, and 3) third person
in his favor. In other words, we are looking for if there was
was not manifestly careless or unfit. If all those are present
a stipulation pour atruidito. But respondent miserably failed
the depositary is exempted from liability.
to do so. Here, he only produced unsigned delivery
receipts. Since there was no contract of deposit and Article 1974. The depositary may change the way of the
respondent also failed to prove that there were construction deposit if under the circumstances he may reasonably
materials and equipment in petitioners warehouse at the presume that the depositor would consent to the change if
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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

he knew of the facts of the situation. However, before the bank. The same could be withdrawn only upon the joint
depositary may make such change, he shall notify the signatures of a representative of CA Agro and the spouses
depositor thereof and wait for his decision, unless delay upon full payment of the purchase price.
would cause danger.
CA Agro and the spouses then rented a safety deposit box
Obligation on the depositary to change the way or the of private respondent Security Bank and Trust Company
manner of adeposit if there are circumstances indicating and for this purpose they signed a contract of lease, which
that the depositor would consent to the change. However, it contains inter alia, the following conditions. x xx “13. The
is required that the depositary should notify the depositor bank is not a depositary of the contents of the safe and has
and wait for the latter’s decision, unless delay would cause no interest whatsoever in said contents, except herein
danger as to the subject matter. This is in keeping with the expressly provided, and it assumes absolutely no liability in
obligation of the depositary to exercise the diligence of a connection therewith.” Subsequently, two keys were given:
good father of a family. Ano bang way or manner? 1 to CA Agro and 1 the Sps. Pugao. There is also a guard
Probably, how it is stored, packaging, among others key which remained in the possession of the bank. The
safety deposit box can only be opened with the use of the
Article 1975. The depositary holding certificates, bonds, guard key and any one of the other keys simultaneously.
securities or instruments which earn interest shall be bound
to collect the latter when it becomes due, and to take such Thereafter, a certain Margarita Ramos offered to buy from
steps as may be necessary in order that the securities may CA Agro the property at a higher price. When the safety
preserve their value and the rights corresponding to them deposit box was opened in the presence of CA Agro, the
according to law. spouses, and the bank’s representative, the box yielded no
certificates of title. Because of the delay in the
The above provision shall not apply to contracts for the rent reconstitution of the title, Ramos withdrew her earlier offer
of safety deposit boxes. to purchase the lots; as a consequence thereof, CA Agro,
petitioner, allegedly failed to realize its expected profits.
So here, obligations on the depositary of the thing Hence, CA Agro filed a complaint for damages against the
deposited which earns interest: respondent bank. In its answer, the bank alleged that CA
Agro had no cause of action because of paragraphs 13 and
1) To collect the interest as it becomes due, (of 14 of the contract of lease.
course, also the capital itself when it is due) and
2) To take such steps as may be necessary to (The contents of the safety deposit box which can be
preserve its value and the rights corresponding to opened only with the use of one of the two renter’s keys
it. given to the joint renters and by a guard key in the
possession of the bank were missing.)
Notice the last paragraph in 1975; the above provision shall
not apply to contracts for the rent of safety deposit boxes. ISSUE:
Q: What’s the difference between a contract of lease and 1) W/N THE CONTRACT IS AN ORDINARY
lending of safety deposit boxes? CONTRACT OF LEASE.
2) W/N THE PROVISIONS CITED IN THE
A: In a contract of lease, the renters possess the said
CONTRACT ARE VALID.
property. Meanwhile, in a contract of rent of a safety
3) W/N THE RESPONDENT BANK IS LIABLE FOR
deposit box, it is a special kind of deposit where the
DAMAGES.
absolute possession and control of the safety box is not
given to the renters. HELD: The contract of rent of a safety deposit box is not an
ordinary contract of lease but a special kind of deposit
CA AGRO-INDUSTRIAL DEV. CORP. V. CA because 1) the full and absolute possession of the safety
deposit box was not given to the petitioner and spouses
FACTS: CA Agro through its president, purchased parcels
Pugao, 2) the guard key remained in the possession of the
of land from Sps. Pugao. Among terms and conditions of
bank and without this key neither of the renters could open
the agreement were that the titles to the lots shall be
the box.
transferred to CA Agro upon full payment of the purchase
price and that the owner’s copies of certificates of titles Q: What is a special kind of deposit because the purpose
thereto, shall be deposited in a safety deposit box in any here is for safekeeping? So what makes it a special kind of
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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

deposit? We have already mentioned earlier that how it is The bank shall perform the services permitted under
different from an ordinary contract of lease. But how will it subsections (a) (b) and (c) of this section as depositories or
be considered as a special kind of deposit? as agents.

A: The possession of the thing does not remain in the

renters but remains in the possession of the bank. Q: Why would those provisions under the general banking
act make the stipulations you mentioned in the contract of
Q: But that’s a purpose of a deposit. You deliver it to the
lease not valid?
depositary for purposes of safekeeping. But what is in a
special kind of deposit? You already know that it’s not an The first (par. 13), why is it considered void?
ordinary contract of lease. You mentioned it’s a special
kind of deposit. Why is it special? A: Because the Supreme Court said in this case that the
condition under paragraph 13, it is on a wrong premise. It is
Who has access to the contents of the safety deposit box? not correct to assert that the bank has neither the
possession nor the control of the contents of the box
A: The Bank really. Because even if there is the presence
because in fact the safety deposit box itself is located in its
of duplicate keys which are in the possession of CA Agro
premises under its absolute control and moreover, the
and the spouses, none of them could open the box without
respondent bank keeps the guard key of the said box. And
the guard key which remains with the respondent bank.
as stated earlier, the renters cannot open the subject box
In other words, the depositary bank here does not have full unless the bank cooperates by using the guard key.
access. While the safety deposit box is within its premises,
In addition, the stipulation there that the bank is not a
it cannot open the same without the keys in possession of
depositary is not binding to the parties because the nature
the depositor.
of a contract is determined by the intention of the parties
Q: Now, how about the provisions in the contract of lease and not by the nomenclatures of the contract that they
that were in dispute here? What were these provisions and entered into. So here, despite of the stipulation, this is a
were they upheld by the Supreme Court? deposit. Although it is special kind of deposit, nevertheless
a deposit with the bank considered as a depositary.
A: The Supreme Court did not uphold the provisions which
provide that the respondent bank is not a depositary of the Q: How about paragraph 14? Why is it considered void?
contents of the safe and has no interest whatsoever in said What does par.14 state?
contents, except herein expressly provided, and that it
A: Par. 14. The bank has no interest whatsoever in said
assumes absolutely no liability in connection therewith.
contents, except herein expressly provided, and itassumes
Q: Why are these two provisions not valid? absolutely no liability in connection therewith.

A: Because the prevailing view is that the relation between Q: Why is it void? Doon pa langsa “absolutely no liability in
the bank renting out safe deposits boxes and its customer connection therewith.” What does that mean?
with respect to the contents of the box is that of a bail or/
So here, again, the contract for the rent of a safety deposit
and bailee, the bailment being for hire and mutual benefits.
box is not an ordinary contract of lease but is considered a
That prevailing rule has been adopted in Section 72 of the
special kind of deposit. It is not characterized as an
General Banking Act.
ordinary contract of lease because the full and absolute
possession and control of the safety deposit box was not
Section 72. In addition to the operations specifically
given to the renters: petitioner and Pugaos in this case.
authorized elsewhere in this Act, banking institutions other
The guard key of the box remained with the bank. The
that building and loan associations may perform the
bank could not likewise open the box without the renter’s
following services:
key. This is clear that the depositary cannot open the box
(a) Receive in custody funds, document and valuable without the renter being present. In other words, that
objects and rents safety deposits taxes for the safeguard of makes it a special kind of deposit.
such effects.
The contractual relation between a commercial bank and
xxxxxxxxx
another party in a contract of rent of a safety deposit box

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

with respect to its contents placed by the latter is one of a lang. Perodalawangsusi yang ibigaysaiyo. Angisa,
bailor and bailee, thebailment being for hire and mutual saiyoangisapwedesaiyongkilala, and then meron yang
benefit, and it is not an ordinary deposit but special kind of authority; kasamayansa form kung sinoang authorized to
deposit. There is an annual payment for the rent. access the safety deposit box. Meronyansilang picture
doonsa form. Every time na mag-access ka, you have to
(Anybody here who has worked in a bank; has seen a affix your signature. So icheckng bank
safety deposit box?) kungikawbayungtaonapwede mag access. So what do you
mean by that? Even if I give you the key, if you are not the
So here, the Supreme Court held also that the contract of depositor mentioned therein whocan access the safety
deposit may be entered into orally or in writing and parties deposit box, hindikanyanbasta-bastapayaganngbangko. So
may establish such stipulations, clauses, terms and that’s something which we should consider.
conditions as they may deem convenient provided that they
are not contrary to law, morals, good customs, public order So, what happened here? Dalawangsusi: Pugaos and the
or public policy. Paragraphs 13 and 14 are considered void petitioner. They never informed the bank nadapatisabay.
as they are contrary to law and public policy. Paragraph 13: Kasiang ordinary agreement talagasa bank anyone who
bank is not a depositary neither the possession nor the has the key authorized, kumbaga OR silahindi “and”,
control of the same. The safety deposit box is located in its pwedemaka-access. So here, the bank was not liable
premises and is under its absolute control. Moreover the because the one who came, the spouses Pugao most
bank keeps the guard key to the said box. In other words, probably, had key. Looking at their forms, that person was
as a depositary, it has to some extent possession and authorized to access the safety deposit box. So therefore,
control of the subject matter. may access, ino-pen nila, kung may nilagay or may kinuha,
walasilangalam. Di yanalamngbangko
As to par.14: the bank has no interest whatsoever to the kunganoanglamanng safety deposit box. Yung bank, it
said contents, except as herein expressly provided, and does not know kung anoangnilagay mo. Kung
itassumes absolutely no liability in connection therewith. angnilagaymojan titles sa property, jewelry, love letters..
(chika2hehe) This is an available service to most of the
What would that mean? Hindi siya mag-exercise ng due banks here in the Philippines.
diligence as to the subject matter. And again that is
considered as void. Q: If the bank has no knowledge of what is inside the
safety deposit box, do they practice some precautionary
Now, is the bank liable in this case? The Supreme Court measures like for example I keep an illegal drug or
held NO. No competent proof was presented to show that something.
respondent Bank was aware of the agreement between the
petitioner and the Pugaos to the effect that the certificates A: Wala. The bank would not be held liable for the contents
of title were withdrawable from the safety deposit box only of the said safety deposit box. Why? Because if you try to
upon both parties' joint signatures, and that no evidence rent a safety deposit box, igoranasila mag-turn sa key.
was submitted to reveal that the loss of the certificates of Walakang i-fifill-up na form kung
title was due to the fraud or negligence of the respondent anoanginilagaymosaloobng box. You just affix your
Bank.  It was obvious that either of them could ask the signature and indicate the time you went out. Yun lang. So
Bank for access to the safety deposit box. if you placed something illegal, the bank wouldn’t be held
liable, well unless it would be found that it had knowledge.
Q: What happens in a safety deposit box? Ikawang liable kasiiyo man yunna safety deposit box.
Isipinnalangninyoyungmga Borne Identity namga movie,
diba. Yung mag-access sila, yunmga spy-spy, (Mga 5k daw per year and rent sa safety deposit box. Avail
yungibathumbmark, yungibasusi..yungibasamata..thenma- na kayo. :p)
open yungisa..
mapansinninyoyungtagabankowalajanpag.open. So
makitaninyo may baril, may passport…o ganyan. Deposit
box yan. Perodito, di kapwedemaglagayngbarilkaybawal
man magdalangbarilsabanko. Pero here, what’s the
practice in a safety deposit box? Dalawayung keyholes.
One is kept by the bank and one saiyo. Ikaw may option
kanyankungdalawa kayo magkaroonng access or ikaw December 2, 2015

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Transcribed by: Jodivie Malnegro Q1: But isn’t it that In their contract of lease, there was a
stipulation that the bank will be exempted from liability in
So, still with the VOLUNTARY DEPOSIT. The last article case of damage of things deposited in the deposit box?
that we have discussed is Art 1975 with emphasis as to the
next sentence therein, The above provision (the first A1: Yes Maam. However, that is contained in Conditions 9
paragraph of 1975) shall not apply to contracts for the rent and 13 of the contract but the SC nullified the provisions
of safety deposit boxes. Again, take note of the distinctions and that the bank cannot exempt itself from liability. They
between a contract of lease and a lease of a safety deposit are void as they are contrary to law and public policy. They
box: should exercise due diligence in the care of the safety
deposit box.
In the case of CA Agro, it was emphasized that the
Q2: What was the reason that the stamps kept in the safety
(1) lease of a safety deposit box is a special kind of deposit box were damaged?
deposit. It cannot be characterized as an ordinary
contract of lease because the full and absolute A2: The safety deposit box was located in the lowest part.
control of the safety deposit box was not given to And despite the fact that there were two floods, they still
the lessees or renters. The guard key remains as did not inform Sia, therefore, the water seeped into the
in the case, with the bank and the bank could not stamps.
open the box without the renter’s key.
(2) The relation between a bank renting out a safety Q3: But with that, can the bank now raise a defense or
deposit box and its customer with respect to the fortuitous event? That the loss or damage resulting from a
contents of the box is that of a bailor and bailee. fortuitous event, the bank here could not be held liable.
Bailment being for hire and mutual benefits.
A3: Yeah. however they were held negligent for failure to
Now, we also have this case of notify Sia and that the court held that they did not go to
court with clean hands
Sia v CA
Q4: How about the fact as defense that they could not have
Facts: Sia here has 2 stamp collections and he decided to access to the said safety deposit box?
deposit them in the safety deposit box. Flood occurred in 2
instances. However, the bank did not notify Sia and as a A4: The least they could do was notify Sia so that he could
result of which, it aggravated the damage to the stamp. Sia take his stamps from the safety deposit box.
filed a claim for damages against SBTC. However, on its
So, in this case of SIA v CA, the Court pointed
defense claim that it was just an ordinary contract of lease.
out that the provisions in the contract that are similar to
So their liability is only with respect to preventing anyone
those struck out in the case of CA Agro. So in this case, it
from opening the safety deposit box.
is not at all difficult to conclude that the conditions in no. 9
Issue: WON the rental of a safety deposit box is a mere and 13 in the lease agreement must be stricken down for
contract of lease being contrary to law and public policy as they are meant to
exempt the bank from liability for any damage, loss or
SC Ruled: Negative. As discussed earlier in Compana destruction of the contents of the safety deposit box. Now
Agricola, it is not a mere contract of lease. The rent of a take not here, the proximate cause of the damage caused
safety deposit box is a special kind of deposit. In this case, to the stamps placed in the safety deposit box was due to a
SC held that SBTC was negligent and thus not exempt flood, but that fortuitous event cannot be used by the bank
from any liability. because it is guilty of negligence. The negligence here on
the part of the was that they should have lost no time in
notifying Sia, that the box could have been opened to
retrieve the stamps to avoid any further deterioration. But
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they failed to do so. In fact, notice there were 2 floods – (in) However, if it’s not of the same kind and quality; the duty of
1985 and 1986. But they did not do anything. So the the depositary is to keep them separate or at the very least,
defense of fortuitous event is not available because if you identifiable as he must return to each depositor the
recall the requisites under your Obligations (and identical article delivered.
Contracts); the obligor must be free from any participation
to the aggravation of the injuries resulting to the creditor. Why would this be relevant?
So in this case, fortuitous event is not available as a
In case of loss, like for example you have several sacks of
defense. The fact that the key or the other key is in
rice. You put them in the same corner, in tne same place,
possession of Sia was also not available as a defense.
they are of the same kind and quality. So, we apply the
Because here, the cause of action is damages due to the
general rule that they can be commingled. What if there is
negligence on the part of the bank.
a flood or there is a fire and only portion of the sacks of rice
So, a rent of a safety deposit box is again, not an were damaged? Who will shoulder the said damage? As
ordinary contract of lease. It’s a special kind of deposit. It is long as the depositary is not at fault or negligent, like for
not strictly governed by the provisions on deposit. The example the cause is a fortuitous event, then who will bear
contracts and laws under the Civil Code governing deposit the loss? The owners, but proportionate. They cannot say,
may be suppletorily applied but since it’s a special kind of sa baba lang yung nadamage, sayo yan kasi ikaw yung
deposit, what will govern will be: unang nagdeposit. They cannot do so, because we have a
rule here in Art 1976, proportionate interest in the mass. As
1. Agreement of the parties – as long as it is not there are 5 depositors, they will divide the loss among
contrary to law, public policy, customs, public themselves.
order among others
2. General Banking Law – as pointed out in the ART. 1977. The depositary cannot make use of the thing
case of CA Agro and Sia, it was pointed out with deposited without the express permission of the depositor.
regards to the functions of the banks as lessors Otherwise, he shall be liable for damages.
of safety deposit box However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.
ART. 1976. Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of the So again, the principle purpose for a contract of
same kind and quality, in which case the various depositors deposit is for safekeeping, not use. Because if the principal
shall own or have a proportionate interest in the mass. purpose is use and not safekeeping, then that will be
considered as commodatum. Unauthorized use makes the
General rule: The depositary is permitted to commingle depositary liable for damages. However, there may be
grain or other articles of the same kind and quality. instances where in the depositary may use the thing even
without the express permission of the depositor when such
Various depositaries of commingled goods shall own the use is for the preservation of the thing. But the use must be
entire mass in common and each depositor shall be limited only for that purpose – to preserve the thing.
entitled to such portion of the entire mass as the amount [example: car paandarin mo but do not drive it from Dvo-
deposited by him bears to the whole. Tagum, hindi na for preservation yan]

Exemption: by stipulation. If the parties stipulated not to What is the effect if the purpose is safekeeping
commingle such grains or other articles, then that should but the depositary made use of it?
govern.
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.
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The permission shall not be presumed, and its existence A5:

must be proved.
You said there was a commodatum. We have a
palay, cavans of palay being the object. But you mentioned
that palay is a consumable thing, even though generally
Baron v David the subject matter of a commodatum is a nonconsumable
thing. So why do you say that we have a commodatum
Facts: Silvestra and Guillermo Baron are the aunt and here?
uncle of Pablo David, who is running a rice mill. Silvestra
placed 1, 012 cavans of rice, Guillermo 1, 865 cavans of Q6: Did the SC state here that the contract involved is a
rice. On January 17, 1921; a fire occurred in the rice mill loan or a commodatum?
which destroyed the palay which were in the possession of
Pablo David. Therefore Silvestra and Guillermo seek to A6: I think Maam, the contract that the parties entered into
recover the value of their palay which were deposited in the here Maam was a contract of sale because there was a
rice mill of David. However, David claims here that the payment made by David to Baron.
palay was deposited subject to future withdrawal and he
Q7: Based on the findings here of the SC, what was the
seeks to be relieved from liability because it was a
nature of the agreement between David and Baron(s)?
fortuitous event which was the fire.
A7: It was a contract of sale
Issue 1: What is the nature of the contract entered into by
David and Baron? Q8: Why sale?

Issue 2: WON David is liable for the value of the palay A9: it met the requisites of a contract of sale Maam. there
was a payment made by David
SC Ruled: [The contract entered between the parties is one
of commodatum. Under Art 1978 of NCC When the Q10: Why can it not be considered as a deposit?
depositary has permission to use the thing deposited, the
contract loses the concept of a deposit and becomes a A10: Because David can’t deliver it to use or consume the
loan or commodatum. And by appropriating the thing, the palay Maam by giving it to the Barons
bailee becomes liable for its value....]
Q11: What is his obligation if he will not now include these
Q1: What is the nature of a commodatum? palays delivered in the milling process?

A1: it is essentially gratuitous A11: He will be liable for the palay Maam

Q2: What is the subject matter of the commodatum? The practice here is if you deliver sacks of palay
to the miller (David) then he will include it and then mill it
A2: non-consumable and he will pay the one who delivered the palay the value
because he has the intention to sell what has been milled –
Q3: What is the subject matter in this case? grains to sya dba to other buyers.
A3: palay Q12: Now, what is the relevance here in determining if this
is really a deposit or a contract of sale?
Q4: Is it consumable or nonconsumable?
A12: If it’s a contract of sale, David will be liable.
A4: Consumable
Q13: What will be the basis of his liability? It was alleged
Q5: When can a consumable object or thing be the subject
here that the reason for the loss of the sacks of palay was
matter in a contract of commodatum?
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a fire. What is the effect of that cause to the liability of was really in a character of sale. Even supposing that the
David? palay had been delivered in the character of deposit
subject to future sale, nevertheless, if it was understood
A13: If it is a contract of sale then there is already a that the defendant might mill the palay and has in fact
delivery. appropriated it for his own use, he is of course bound to
account for its value. In this case, as provided in Art 1978
Q14: What happens in delivery?
NCC, it is mentioned that it does not necessarily mean that
A14: There is transfer of ownership, Maam. what we have here is a loan or commodatum because:

Q15: What happens when there’s a fortuitous event which First, it will not be a commodatum because:
will damage or deteriorate the object or the subject matter
1. In a commodatum, it is essentially gratuitous
that has been delivered? Who bears the loss in case of a
2. The subject matter is a consumable thing
fortuitous event?
3. Nothing in the facts of the case that the purpose
A15: The owner, Maam bears the loss. There was already was merely for exhibition
a delivery to Baron so therefore he is liable to pay for the
Second, will it be considered as a contract of loan? What
value of the palay which was delivered to David.
will be your obligation in a simple loan? You deliver the
Q16: How would that be different if this was really a same kind and quality. But what you are going to deliver
contract of deposit? here is the value. So, the closest here to consider is a
contract of sale. So, with that, the fire did not extinguish the
A16: In a contract of deposit, David here will not be liable obligation unlike if it was a true contract of deposit, the
because the occurrence f fire is a fortuitous event. (But damage or the loss of the thing subject of a deposit due to
there was a delivery to him?) In a contract of deposit, he is a fortuitous event will extinguish the obligation of the
obliged to return the same thing to Baron and due to depositary as long as there is no negligence on his part.
fortuitous event, it is now impossible to return the palay.
Reiterates Art 1978. So here:
So here, take note, David is held liable. There
was an understanding between the parties that the 1. If the thing deposited is not consumable but
defendant (David) was at the liberty to convert palay into allowed to use it, it will lose the character of a
rice and dispose of it at his venture. So from palay, i-mill contract of deposit and it will be considered as a
nya magiging rice diba. So again, it’s really my question, commodatum as long as it conforms with the
Palay – rice- and then rice. Walay conversion? May requisites thereof, despite being denominated as
conversion. So for sacks of rice burned in fire, what do you a deposit, unless safekeeping is still the principal
call them? So there’s no, what’s the translation in Tagalog? purpose.
Palay, is yung hindi pa sya namill. Pag namill nay un yung 2. If the thing deposited is money or a consumable
rice or bigas. Pag naluto na sya, kanin pero rice parin sya. thing and the depositary is allowed to use it and it
Then meron pang tutong, sa Bisaya dukot. results to consumption and converts it to a simple
loan or mutuum with the obligation to deliver the
So back in the case, considering that the same kind and quality.
defendant has milled and doubtlessly sold the rice prior to 3. If, however safekeeping is the principal purpose,
the date of fire, 1920 dineliver yung palay, fire occurred then it will be considered as a deposit but an
January 1921. It was customary in this instance that when irregular one.
palay is delivered it will be milled. So what happened here,
it results that David will be bound to the Barons for its value Q1: Now, what’s the difference between a contract of loan
and his liability was not extinguish by the occurrence of fire. and a deposit?
What will be his liability now? Yung value of the said rice. It

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A1: In a contract of loan, there is an obligation to return the engage to return the same coins received and of which the
equivalent of the thing of the same kind and quality but in a amount deposited consisted and they could have
contract of deposit, to return the exact same thing. accomplished the return agreed upon by delivering the sum
equal to the one received by them. Debtors are therefore
Javellana v Lim lawfully authorized to make use of the amount deposited
which they have done however when the payment was
Facts: They enter into a contract which was initially referred demanded, they were not able to pay it or return it to the
to as a contract of deposit, whereas if you look into the creditor. So, it was really a contract of loan and not a
contents of the contract, it states that “We have received deposit. Remember, the depositary cannot make use of the
from Angel Javellana the sum with interest P2,658.58 thing deposited without the express permission of the
which will be returned to the said gentleman jointly and depositor. In fact here, the creditor, by granting the debtors
severally on January 20, 1898. However, the extension, confirmed the express permission previously
circumstances that follow would show that there was given to them to use and dispose of the amount stated as
actually a contract of loan because first, when the amount having been deposited. Further, there was no renewal of
was supposed to be returned to Javellana, Lim was not the contract of deposit converted into a loan because the
able to return the said amount. However, he asked for an defendant received the amount by virtue of a real contract
extension of time. Moreover, there was also an interest (of loan) under the name of deposit since the so-called
which was added to the original amount which was bailees were forthwith authorized to dispose of the amount
supposedly deposited to Lim. deposited.
Issue: WON the agreement between the parties is a Again, do not confuse loan from deposit. Always
contract of loan or a contract of deposit. look at the intention of the parties and what are their
respective obligations. The contract will not be defined by
SC Ruled: It was a contract of loan of money although it
the terms used therein but as to what the law says such
was denominated as a deposit, because of the earlier
contracts will be considered.
circumstances discussed, therefore, it was a contract of
loan. Also consider, permission to use is not presumed
under Article 1978 when such use is necessary for the
Q1: Isn’t it that there were 2 contracts that were executed
preservation of the thing deposited and the burden is upon
here? The first contract was denominated as a deposit, the
the depositary to prove that permission has been given.
second one was a contract of loan. Can you say that there
was a conversion here of the contract between the parties ART. 1979. The depositary is liable for the loss of the thing
form deposit to loan? through a fortuitous event:
A1: There was no conversion. As SC held, there was only (1) If it is so stipulated;
a renewal of a contract of loan and that the first contract
which was denominated as a deposit was already a real (2) If he uses the thing without the depositor’s permission;
contract of loan. [Despite the term that was used by the
parties that it was a contract of deposit.] (3) If he delays its return;

So, you have here the document of indebtedness (4) If he allows others to use it, even though he him-self
states the plaintiff left on deposit a sum of money they will may have been authorized to use the same.
jointly and severally oblige to return on a certain day. Now
in the second document which is a real loan of money with General Rule: Depositary is not liable for the loss of the
interest as appears perfectly defined. However, the SC thing deposited due to a fortuitous event as long as
ruled here that at the very beginning, the contract entered depositary is without fault.
into between the parties is one of loan. They did not
Exception: Article 1979
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Notice under Article 1979, there is no negligence. evidence by Compania Agricola in its claim to be declared
But in the case of Sia v CA, there was negligence which as a preferred creditor in the proceedings of the insolvency
was the reason for the bank to be held liable despite the of Mariano Velasco & Co.
damage due to a fortuitous event. So, what is the basis
there? Go back to the general rule under obligations and Issue: WON there was indeed a deposit as evidenced by
contracts under Article 1170 [ Article 1170. Those who in the document
the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner SC Ruled: There was indeed a deposit in this case. SC
contravene the tenor thereof, are liable for damages.] referred to the case of Gavieres v De Tavera, Javellana v
Lim and Rogers v Smith. The case of Gavieres is very
Art. 1980. Fixed, savings, and current deposits of money in similar to the case at bar which involved a delivery of
banks and similar institutions shall be governed by the P3000 which was evidenced by an agreement which was
provisions concerning simple loan. (n) similar to the agreement made by Compania Agricola and
Velasco & Co. The Court ruled that although the document
As I mentioned a while ago, if the thing deposited questioned said that it was a deposit, it nevertheless is a
is money and you allow the depositary to use it, what do contract of loan since an examination of the entire
you have? It is still considered as a deposit but an irregular document would clearly show the intention of the parties
one. Let’s assume you have money in the bank. Why will which was a loan and not a deposit since it also stipulated
you put the money in the bank? Interest? Primarily, it is for the interest and a term if three months.
safekeeping. It is a deposit in that sense. But when you
withdraw your money, will it be the exact same thing, same Q1: Will it not be considered as an irregular deposit?
money, same serial number that you deposited? No. And
A1: Even though it is not a deposit, it cannot also be
what does the bank do with the money that you deposit?
regarded as an irregular deposit. In this case also cited the
They use it, to invest or loan to other person. So with that,
case of Rogers v Smith citing Manresa, the court
what do you mean by an irregular deposit?
differentiated deposit from an irregular deposit. Some of
Q1: What is an irregular deposit? We have a special kind of the distinctions mentioned are:
deposit which is the safety deposit box, but this is irregular
1. In an irregular deposit, the benefit is solely for the
deposit. What makes it irregular?
depositor while in a loan, the cause for the
A1: In a regular deposit, the benefit goes to the depositor. transaction is the necessity of the borrower. In a
As compared to an irregular deposit which will benefit both loan for money, the benefit is for both of the
parties. parties,
2. In an irregular deposit, the depositor can demand
the return of the item at any time, while in a loan;
the lender is bound by the stipulation in the
Compania Agricola v Nepomuceno contract and cannot seek restitution until the time
for payment, as provided in the contract, has
Facts: It involves the Mariano Velasco & Company which arisen.
was declared as insolvent. In this case, Compania Agricola
filed a claim against one of the companies under Mariano So, it is clear in this case of Companis Agricola
Velasco &Co. It claimed that it deposited an amount of that the transaction is not a contract of deposit but a
money to the said Company before. It presented a receipt contract of loan since it was not mainly for the benefit of
which stated that “Marina Velasco & Co received from Compania Agricola but for both parties. And neither could
Compania Agricola the sum of ten thousand Philippine the alleged depositor demand payment but should wait for
pesos as a deposit at the interest of six per cent annually, the term stipulated that is three months after.
for the term of three months from date.” This was used as

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Q2: What is the effect that it is now regarded as a loan? when the act of the congress arrived, now that the value of
What if it’s a loan and not a deposit, what’s the relevance? the gold was much higher than silver and it is actually
Why did we have to determine if it’s a loan or a deposit? doubled. Since it was favourable to him, Rogers alleged
that it was a contract of deposit and that Smith must give
A2: To determine if they have a preferred claim. him the same gold that he deposited from 1876.
Q3: When will it be considered as a preferred claim? Issue: Whether it was a contract of deposit
A3: If it is a deposit. SC Ruled: No. The Court found it ridiculous since he was
receiving such interest and he will invoke at the same time
So, in this case of Compania v Nepomuceno, the
that it was a contract of deposit, and demanded the Smith,
Court emphasized the distinctions between a loan and an
Bell & Co to give him the same gold that he deposited.
irregular deposit.
There was also a discussion whether it was an irregular
Irregular Deposit Loan deposit or a contract of loan.
As to That which accrues Necessity of the
benefit solely to the depositor borrower In an irregular deposit, the benefit is one-sided
Right to Depositor can demand Lender is bound and it is only for the benefit of the depositor, while in a loan
Demand return at any time by provisions of the contract is for the benefit of both. On the part of the
Return of contract cannot depositor/lender is the interest, and on the part of the
Item seek restitution borrower/debtor is the money he can appropriate for
until the time for business.
payment, as
Secondly, in terms of when the lender/ depositor
provided in the
demand the deposit; in an irregular deposit, he can actually
contract, has
demand the return of the thing at any time while in a loan;
arisen
he must wait for the expiration or whatever stipulation they
Q1: What do we have in the case of Rogers v Smith, is have agreed upon.
there an irregular deposit or a loan?
As to preference to the distribution of the
A1: A contract of loan and not a deposit nor an irregular properties of the debtor, the depositor has the preference
deposit while the creditor in a loan does not have such preference.

The Court said that it was actually a contract of

Rogers v Smith
loan and though the court did not state estoppels, it
Facts: Sometime in the late 1800s, Jose Rogers deposited somehow like that way because for more than 20 years he
a sum of P12,000 worth of gold in Smith, Bell & Co with has been receiving silver and now just because of the act
interest of 8% per annum which accrued beginning 1876 of congress which he actually construed erroneously, he is
and from then on for more than 20 years, Rogers received now estopped in demanding that he is entitled to receive
such interest every month from Smith. Now, here happens gold.
the act of the Congress which converted the currency of
the Philippines form silver to gold. Before such, Rogers Q2: Is there a remaining liability since it is a loan, so aside
received the interests in silver currency from Smith and from the payment of interest, you have to give back the
following the act of congress, Rogers sent a letter of principal. How about the principal here, is there a
protest to Smith alleging that since he deposited the remaining obligation as to the principal? To return the value
currencies in gold back in 1876, he is entitled now to the of the principal? What was the cause of action in this case.
same gold. Apparently, when he deposited the money in
gold, the value of silver was much higher but it all changed
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A2: The cause of action was for the return of 12,000 pesos and therefore the relationship was that of between a
worth of gold or 24, 000 pesos worth of silver. creditor and debtor and not that of a depositor and a
depositary.
So here, it is a contract of loan, not a deposit so
there is no obligation to return the exact same thing which
was the gold. However, since it is a loan, you must return
the same kind and quality or the value thereof.

Q3: So how about as to the principal obligation as to the December 3, 2015 (1st Hour)
principal contract of loan? Was there any ruling of the
Court or was there any fact presented that it was already Transcribed by: Jing Lomondot
made? What’s the obligation here?
So the last article we discussed was Article 1978
A3: The return of the money itself or the original deposit wherein we have discussed that the contract of deposit
Maam. loses its concept as such when the depositary has
permission to use the thing deposited and the said contract
He is entitled to recover the 12, 000 pesos which will now be considered a loan or commodatum except
is the value. So there is still a liability. No extinguishment of where safekeeping is still the principal purpose of the
the obligation but no obligation to return what he has contract.
deposited nor what he has delivered because here, again,
it is a loan and not a deposit. No obligation to return the In the case of Javellana vs. Lim, in recent cases
exact same thing that was delivered but rather the the SC pointed out three distinctions between a contract of
equivalent value thereof. loan, this refers to a simple loan, and that of an irregular
deposit:
Here, again, the distinctions are emphasized.
Aside from the benefits, if it’s for loan of money, for the IRREGULAR DEPOSIT SIMPLE LOAN
benefit of both parties otherwise it is an irregular deposit.
I. The only benefit is that The essential cause for the
An irregular deposit is solely accruing for the benefit of the
which accrues to the transaction is the necessity
depositor. Here the benefit of Smith Bell & Co received was
depositor of the borrower
the use of money and the benefit which Rogers received is
the interest of his money. II. Depositor can demand A lender in a loan, as found
the return of the article at by the provisions of the
In an irregular deposit, the depositor can demand anytime contract, cannot seek
the return of the article at any time while the lender is restitution until the time for
bound by the provisions of the contract and cannot seek payment as provided in the
restitution until the time for payment. In this case, plaintiff contract has arisen
cannot demand his money at any time.
III. The depositor has a Wherein if it is a contract of
And the other distinction that was pointed out and preference over other loan, it is not considered as
it was emphasized in the case of Compania, in an irregular creditors in the distribution a preferred credit
depositor, teh depositor has a preference over other of debtor’s property
creditors in the distribution of the debtor’s property unlike
that in a contract of loan.

So, the document in question is evidence of an Article 1979. Liability in case of fortuitous event:
ordinary loan despite that they used the term deposit. And,
a loan was created between the plaintiff and the defendant ART. 1979. The depositary is liable for the loss of the thing
through a fortuitous event:

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(1) If it is so stipulated; CBTC.

(2) If he uses the thing without the depositor’s Thereafter, Eastern obtained a loan of P73,000.00 from
permission; CBTC. Eastern issued a negotiable promissory note for
P73,000.00 payable on demand to the order of CBTC. In
(3) If he delays its return; addition, the loan was also secured by the joint checking
account of Velasco and Lim with a balance of P331,261.44
(4) If he allows others to use it, even though he him-self
by virtue of a “Holdout Agreement” signed by Eastern and
may have been authorized to use the same.
Lim and CBTC wherein CBTC acceptsa holdout on the
And then Article 1980: joint account in the names of Lim and Velasco to the full
extent of their alleged interests.
Article 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the On the other hand, a case for the settlement of Velasco's
provisions concerning simple loan. (n) estate was filed. In the said case, the whole balance of
P331,261.44 in the aforesaid joint account of Velasco and
The cases of Rogers vs. Smith and Compania Lim was being claimed as part of Velasco's estate. The
Agri-cola are those cases which discuss the distinction intestate court granted motion of the heirs of Velasco to
between simple loan and irregular deposit. withdraw the balance and authorized the heirs to divide
among themselves the amount withdrawn.
What is the nature of a bank deposit? A bank
deposit is an irregular deposit but the provisions on the BPI filed with the RTC a complaint against Lim and Eastern
contract of loan will be applied. demanding payment of the promissory note for
P73,000.00. Defendants Lim and Eastern, in turn, filed a
What happened in the case of BPI vs. Court of counterclaim against BPI for the return of the balance in
Appeals? the disputed joint account of Lim and Velasco that is the
subject of the Holdout Agreement and the interests thereon
after deducting the amount due on the promissory note.
BPI vs. COURT OF APPEALS
RTC dismissed the complaint. CA affirmed the decision
that that it was the duty of CBTC to to set off the loan of
P73,000.00 covered by the promissory noteto the joint
FACTS:Respondents Eastern Plywood Corporation account of Lim and Velasco.
(Eastern) and Benigno D. Lim (Lim), an officer and
stockholder of Eastern, held one joint bank account with
the Commercial Bank and Trust Co. (CBTC), the
ISSUE:WON BPI is liable to the private respondents on the
predecessor-in-interest of petitioner BPI.
account subject of the Holdout Agreement after its
Subsequently, a joint checking account in the amount of withdrawal by the heirs of Velasco? YES
P120,000.00 was opened in the name of Lim and Mariano
Velasco with funds withdrawn from the account of Eastern
and/or Lim. HELD:It should be noted that BPI cannot be compelled to
set-off Lim and Velasco's joint account to the payment of
Velasco died. At the time of his death, the outstanding
the note for the loan obtained by Eastern in the amount of
balance of the account stood at P662,522.87. By virtue of
P73,000. The Holdout Agreement only conferred on CBTC
an Indemnity Undertaking executed by Lim, one-half of this
a power, not a duty. Generally, a bank is under no duty or
amount, P331,261.44, was provisionally released and
obligation to make the application. To apply the deposit to
transferred to one of the bank accounts of Eastern with

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By: 2 Manresa 2015-2016

the payment of a loan is a privilege, a right of set-off which was still in the joint checking account. So the Court here
the bank has the option to exercise. Hence, BPI can ruled that BPI is liable to Eastern because there was a
demand payment of the loan of P73,000.00 despite the hold-out agreement and the nature of the contract between
existence of the Holdout Agreement Eastern and the bank is one of a loan. So there is a
creditor-debtor relationship between them.
However, BPI was not specifically ordered to release the
account to the heirs of Velasco; hence, it was under no Q3: Who is the creditor?
judicial compulsion to do so. , The order of the court merely
authorized the said heirs to withdraw the account. The A3:Eastern and the debtor is the bank. So the bank, BPI,
disputed joint account was proved and established to should pay Eastern because although it is a deposit, it is an
belong to Eastern even if it was deposited in the names of irregular deposit and the nature of it is a loan. That’s why
Lim and Velasco. As the real creditor of the bank, Eastern BPI should pay Eastern.
has the right to withdraw it or to demand payment thereof.
Discussion: Here, it was emphasized that bank
SC held that bank deposits are in the nature of irregular deposits are in the nature of irregular deposits wherein they
deposits; they are really loans because they earn interest. are really loans because they earn interest. Relationship
The relationship then between a depositor and a bank is between a depositor and a bank is one of creditor and
one of creditor and debtor. The deposit under the debtor and the deposit under the questioned joint account
questioned account was an ordinary bank deposit; hence, it in the name of Lim and Velasco was an ordinary bank
was payable on demand of the depositor. deposit. Hence, it was payable on demand of the depositor.
The account was proved and established to
Because the ownership of the deposit remained belong to Eastern. That was necessary. Why? Because
undetermined, BPI, as the debtor, had no right to pay to here if it cannot be proven that the bank had knowledge
persons other than those in whose favor the obligation was that the amount belongs to Eastern, then Eastern has no
constituted or whose right or authority to receive payment claim as to the half portion of that account. Because really,
is indisputable. Payment made by the debtor to the wrong the account here was in the name of Lim and Velasco, it
party does not extinguish the obligation as to the creditor was proven here that the account belonged to Eastern as
who is without fault or negligence, even if the debtor acted the real creditor of the bank. Eastern has the right to
in utmost good faith and by mistake as to the person of the withdraw it or demand payment thereof. BPI should not
creditor, or through error induced by fraud of a third person. have allowed such withdrawal releasing half of the money
The payment then by BPI to the heirs of Velasco, even if to the estate of Velasco because the bank had already
done in good faith, did not extinguish its obligation to the admitted in the hold-out agreement the question of
true depositor, Eastern. ownership of the money deposited in the account.

So take note here, bank deposit are in the nature

of irregular deposits wherein applying Article 1980, we
Q1: In whose name was the joint account that is at dispute apply the provisions on loans. So here the distinction in
here? the previous cases we have discussed is not that too
technical in form. Wala masyado defining line kung ano
A1: In the name of Lim and Velasco.
iyong irregular deposit and loan when it comes to laid back
Q2:The one who is claiming against BPI is Eastern. What deposit. Very specific siya.
was the basis of Eastern’s claim as to the money in that
Recall in the previous cases we had, Compania
joint account of Lim and Velasco?
and Rogers vs. Smith, the transaction involved there did
A2: The basis is the fact that the money which was used to not involve a bank. Partnership ang meron pero it was not
open the checking account is that of the money of Eastern. a bank deposit. So in those instances, the distinction
That’s why Eastern is claiming the half of the amount which between irregular deposit and loan was really relevant. But

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By: 2 Manresa 2015-2016

when it comes to bank deposits, it is clear that they are in

the nature of an irregular deposit but nevertheless they are
considered still as loans because they earn interest. HELD: Section 41 of the Negotiable Instruments Law
Interest in the sense that you put the money in the bank for provides: Where an instrument is payable to the order of
the purpose of safekeeping, you get to earn interest. The two or more payees or indorsees who are not partners, all
bank gets to use it, invest it, lend it to other people and must indorse unless the one indorsing has authority to
earn interest on it as well. indorse for the others.

Now another case that we have is the case of Metrobank. Bitanga alone endorsed the crossed check, and petitioner
What happened in this case? allowed the deposit and release of the proceeds thereof,
despite the absence of authority of Bitanga’s co -payee BA
Finance to endorse it on its behalf. The payment of an
instrument over a missing indorsement is the equivalent of
METROBANK vs. B.A. FINANCE payment on a forged indorsement or an unauthorized
indorsement in itself in the case of joint payees. Clearly,
FACTS: Lamberto Bitanga obtained from respondent BA
petitioner,through its employee, was negligent when it
Finance Corporation a loan, to secure which, hemortgaged
allowed the deposit of the crossed check, despite the lone
his car to respondent BA Finance. Bitanga had the
endorsement of Bitanga, ostensibly ignoring the fact that
mortgaged car insured by respondentMalayan Insurance.
the check did not, it bears repeating, carry the indorsement
The car was stolen. On Bitanga’s claim, Malayan Insurance of BA Finance.
issued a check payable to the order of "B.A. Finance
The SC does not agree, however, to the CA’s affirmance of
Corporation and Lamberto Bitanga", drawn against
the trial court’s grant of legal interest of 12% per annum on
China.The check was crossed with the notation “For
the value of the check since the obligation in this case did
Deposit Payees’ Account Only. Without the indorsement or
not arise out of a loan or forbearance of money, goods or
authority of his co-payee BA Finance, Bitanga deposited
credit. Article 1980 does not find application in this case
the check to his account with the Asianbank, now merged
since the nature of the relationship between BA Finance
with herein petitioner Metrobank. Bitanga subsequently
and petitioner is one of agency whereby petitioner, as
withdrew the entire proceeds of the check. In the
collecting bank, is to collect for BA Finance the
meantime, Bitanga’s loan became past due, but despite
corresponding proceeds from the check.
demands, he failed to settle it.
Not being a loan or forbearance of money, the interest
BA Finance eventually learned of the loss of the car and
should be 6% per annum computed from the date of
of Malayan Insurance’s issuance of a crossed check
extrajudicial demand until finality of judgment; and 12% per
payable to it and Bitanga, and of Bitanga’s depositing it in
annum from finality of judgment until payment.
his account at Asian bank and withdrawing the entire
proceeds thereof. BA Finance thereupon demanded the
payment of the value of the check from Asian bank but to
no avail, prompting it to file a complaint for sum of money Q1:Who is/are the payee/s of the check?
and damages against Asian bank and Bitanga, alleging
that it is entitled to the entire proceeds of the check. A1: Bitanga and BA Finance.

Q2:What does that mean that they are the payees and it is
a cross-checked. You mentioned that it is for deposit only.
ISSUE: WON Metrobank should be held liable for allowing For deposit to whom?
Bitanga to withdraw the whole proceeds of the check
without proper indorsement from BA Finance? YES A2:For deposit to both (Bitanga and BA Finance) ma’am.

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Q3: Can you apply here Article 1980 of the Civil Code that A10: In this case ma’am, if it is not a loan then the
the transaction here is between that of a creditor and applicable interest is 6% per annum. That was the finding
debtor applying the provisions of a loan? of the SC.

A3:No ma’am. Discussion:Here, relate this to your Negotiable Instruments

when you get to Section 41, Indorsement of two or more
Q4: Why was there an issue as to the applicability of Article payees.
1980?
Here, the bank was negligent because it allowed Bitanga to
A4:The Court ruled ma’am that Section 41 of the withdraw the proceeds of the check even if the payees are
Negotiable Instruments Law is applicable. both Bitanga and B.A. Finance. So that was the
negligence on the part of the bank. Remember a bank is
Q5: How about our topic right now, Article 1980, is the
imbued with public interest such that the highest degree of
transaction involved in this case related to Article 1980?
diligence and the highest standards of integrity and
What is the relevance of Article 1980 here? Why was it
performance are expected of banks in order to maintain the
necessary for the Court to determine whether Article 1980
trust and confidence of the public in general in the banking
is applicable or not? Is there a debtor-creditor relationship
sector.
between the bank and BA Finance?
Further the SC emphasized that the obligation in this case
A5: No ma’am.
did not arise out of a loan or forbearance of money, goods,
Q6: What is their relationship between these two entites? or credits. They did not have a bank deposit in this
account, so walay creditor and debtor relationship. Article
A6: Contract of Agency ma’am. 1980 is not applicable since the nature of the relationship
between B.A. Finance and petitioner is one of agency.
Q7: Who is the agent? Whereby petitioner, as collecting bank, was to collect for
B.A. Finance the corresponding proceeds of the check.
A7: The bank ma’am.
Not being a loan or forbearance of money, interest is 6%
Q8: Okay, the bank is the agent of BA Finance. Why per annum from the day of extrajudicial demand until
would that be relevant? Agency and no debtor-creditor finality of judgment and 12% from finality until payment.
relationship, no loan?
What happened in the case of Reyes vs. Court of Appeals?
A8: The relationship of Metrobank and BA Finance is one
of agency ma’am where Metrobank, as a collecting bank, is
to collect for BA Finance the proceeds relating to the REYES vs. COURT OF APPEALS
check. But it failed to do so.
FACTS: Philippine Racing Club, Inc. (PRCI) sent 4
Q9: What now? Why was it necessary for the SC to delegates to the 20th Asian Racing Conference to be held
discuss that this is an agency and not a loan? in Sydney, Australia. Petitioner Gregorio H. Reyes sent
Godofredo Reyes to Far East Bank and Trust Company
A9: In this case ma’am, the Court held that in order to
(respondent) to apply for a foreign exchange demand draft
determine the applicable interest ma’am.
in Australian dollars (AU$1,610.00).
Q10: Okay. So since this is agency and not a loan, what is
The bank’s assistant cashier first denied the application for
the applicable interest?
the reason that respondent bank did not have an Australian
dollar account in any bank in Sydney. Since Godofredo
asked if there could be a way for respondent bank to

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By: 2 Manresa 2015-2016

accommodate PRCI's urgent need to remit Australian ISSUE: WON the respondent bank was negligent?NO
dollars to Sydney, the cashier informed him of another way
of effecting the requested remittance.

The respondent bank would draw a demand draft against HELD: The evidence shows that the respondent bank did
Westpac-Sydney and have the latter reimburse itself from everything within its power to prevent the dishonor of the
the U.S. dollar account of the respondent in Westpac-New subject foreign exchange demand draft. An employee of
York. This arrangement has been customarily resorted to Westpac-Sydney mistakenly read the printed figures in the
since the 1960's and the procedure has proven to be SWIFT cable message of respondent bank as "MT799"
problem-free. instead of as "MT199". Such erroneous reading of its cable
message by a Westpac-Sydney employee could not have
The respondent bank approved the said application of been foreseen by the respondent bank. The respondent
PRCI and issued a Foreign Exchange Demand Draft bank had to re-confirm and repeatedly notify Westpac-New
(FXDD) in the sum applied forpayable to the order of the York to debit its (respondent bank's) deposit dollar account
20th Asian Racing Conference Secretariat of Sydney, with it and to transfer or credit the corresponding amount to
Australia, and addressed to Westpac-Sydney as the Westpac-Sydney to cover the amount of the said demand
drawee bank. draft.

Upon due presentment of the FXDD the same was The degree of diligence required of banks is more than that
dishonored stating that“No account held with Westpac." of a good father of a family where the fiduciary nature of
Meanwhile, Wespac-New York sent a cable to respondent their relationship with their depositors is concerned. In
bank informing the latter that its dollar account in the sum other words banks are duty bound to treat the deposit
of AU$ 1,610.00 was debited. The respondent bank accounts of their depositors with the highest degree of
informed Wespac-New York requesting the latter to honor care. But the said ruling applies only to cases where banks
the reimbursement claim of Wespac-Sydney. Upon its act under their fiduciary capacity, that is, as depositary of
second presentment for payment, the FXDD was again the deposits of their depositors. But the same higher
dishonored by Westpac-Sydney for the same reason. degree of diligence is not expected to be exerted by banks
in commercial transactions that do not involve their
When petitioner Reyes arrived in Sydney, he went directly fiduciary relationship with their depositors.
to the lobby of Hotel Regent Sydney to register as a
conference delegate. At the registration desk, the The case at bar does not involve the handling of
conference secretariat said that he could not register petitioners' deposit. Instead, the relationship involved was
because the FXDD for his registration fee had been that of a buyer and seller, that is, between the respondent
dishonored for the second time. The same situation was bank as the seller of the subject foreign exchange demand
experienced by his wife Consuelo who is a member of the draft, and PRCI as the buyer of the same, with the 20th
House of Rep representing the District of Makati, Metro Asian Racing conference Secretariat in Sydney, Australia
Manila. as the payee thereof. The FXDD was intended for the
payment of the registration fees of the petitioners as
The petitioners filed a complaint for damages against delegates of the PRCI. Hence, respondent bank was not
FEBTC. Claiming that as a result of the dishonor of the required to exert more than the diligence of a good father
said demand draft, they were exposed to unnecessary of a family in regard to the sale and issuance of the subject
shock, social humiliation, and deep mental anguish in a FXDD.
foreign country, and in the presence of an international
audience. RTC and CA ruled in favor of respondent.

Q1: What was the diligence required of the bank in this

case?

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A1:Degree of diligence required is more than that of a good What happened in the case of Guingona vs. City Fiscal?
father of a family but it only applies to fiduciary
relationships wherein the bank was handling the deposit of
a client. But in this case, there was no fiduciary
relationship between Far East bank and Reyes because it GUINGONA vs. CITY FISCAL
was treated more like of a sales transaction wherein Reyes
FACTS: Respondent David invested with the Nation
bought the deman draft from Far East bank. Therefore, the
Savings and Loan Association (NSLA) the sum of
diligence required from Far East bank was simply that of a
P1,145,546.20 on nine deposits, P13,531.94 on savings
good father of a family and not more than of that.
account deposits (jointly with his sister, Denise Kuhne),
Q2:So with that, is the bank liable to Reyes? US$10,000.00 on time deposit, US$15,000.00 under a
receipt and guarantee of payment and US$50,000.00
A2:No ma’am. It was held that the bank did exercise the (jointly with Denise Kuhne). David alleged that he was
diligence of a good father of a family. induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close
Discussion:The Court emphasized that the degree of associate of petitioner Guingona Jr., then NSLA President.
diligence required of banks more than that of a good father
of a family is required when there is a fiduciary nature of NSLA was placed under receivership by the Central Bank,
their relationship with their depositors. So you have here a so that David filed claims therewith for his investments and
contract between the parties which does not involve a those of his sister. Thereafter, Guingona and Martin, upon
deposit account. When we say higher degree of diligence, David’s request, assumed the bank’s obligation to David by
more than the standard of diligence of a good father of executing a joint promissory note in favor of private
family, that is only applicable for contracts of deposits that respondent acknowledging an indebtedness of
are covered in Article 1980. Pl,336,614.02 and US$75,000.00. This promissory note
was based on the statement of account as prepared by the
In this case, however, there’s no contract of deposit. respondent. The amount of indebtedness assumed
Highest degree of care applies only to cases where banks appears to be bigger than the original claim because of the
act under their fiduciary capacity that is as depositary of the added interest and the inclusion of other deposits of private
deposits of their depositors. Same higher degree of respondent's sister.
diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary Petitioners Guingona and Martin agreed to divide the said
relationship with their depositors. Respondent bank is not indebtedness, and Guingona executed another promissory
required to exert more than the diligence of a good father note whereby he personally acknowledged an
of a family in regard to – what happened here? Sale and indebtedness of P668,307.01 and US$37,500.00 in favor of
issuance of a foreign exchange demand draft. The case at David. Subsequently, David received a report from the
bar does not involve the handling of petitioner’s deposit, Central Bank that only P305,821.92 of those investments
instead what we have here is a buyer and seller were entered in the records of NSLA.
relationship.
David charged petitioners with estafa and violation of
Under the facts of the case, it was proven that the Central Bank Circular No. 364 and related regulations on
respondent bank acted in good faith and in fact did not foreign exchange transactions in the Office of the City
cause the embarrassment of the petitioners in Sydney, Fiscal.
Australia as the error, mali ang pagpasok sa number, was
not on the part of Far East bank but rather of West-pac Petitioners moved to dismiss the charges against them for
Sydney. The employee of West-pac Sydney made such lack of jurisdiction because David’s claims allegedly
error, so therefore the bank here was not held liable. comprised a purely civil obligation, but the motion was
denied. After the presentation of David’s principal

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By: 2 Manresa 2015-2016

witness, petitioners filed this petition for prohibition and criminal liability was deemed avoided, because when the
injunction because the production of various documents aforesaid bank was placed under receivership by the
showed that the transactions between David and NSLA Central Bank, petitioners Guingona and Martin assumed
were simple loans i.e., civil obligations which were novated the obligation of the bank to private respondent David,
when Guingona and Martin assumed them thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and
private respondent David into an ordinary debtor-creditor
ISSUE: WON the contract perfected was a contract of
relation between the petitioners and private respondent.
simple loan?YES.
Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would
HELD: It must be pointed out that when private respondent merely be a failure to pay the obligation as a debtor.
David invested his money with NSLA, the contract that was
perfected was a contract of simple loan or mutuum and not
a contract of deposit. Thus, Article 1980 of the New Civil
Q1: Who is Guingona here?
Code provides that “fixed, savings, and current deposits of-
money in banks and similar institutions shall be governed A1: Guingona here is one of the officers of NSLA ma’am
by the provisions concerning simple loan.” who prompted David to invest.

Bank deposits are in the nature of irregular deposits. They Q2: To whom was these deposits made?
are really 'loans because they earn interest. All kinds of
bank deposits, whether fixed, savings, or current are to be A2: To the bank.
treated as loans and are to be covered by the law on loans.
Current and saving deposits, are loans to a bank because Q3: Was there liability for Estafa?
it can use the  same.
A3:The SC held here ma’am that there was no liability for
Hence, the relationship between the private respondent Estafa because here, although the various pleadings and
and the Nation Savings and Loan Association is that of documents filed by David indisputably showed that he
creditor and debtor; consequently, the ownership of the invested money in time and savings deposit with NSLA, it
amount deposited was transmitted to the Bank upon the has already been ruled in several cases by the SC that
perfection of the contract and it can make use of the these arrangements are not actually deposits but are
amount deposited for its banking operations, such as to actually in the form of mutuum or loan. So the SC further
pay interests on deposits and to pay withdrawals. While the discussed ma’am that because of this, failure of the bank to
Bank has the obligation to return the amount deposited,  it honor the time deposit is failure to pay its obligation as a
has, however, no obligation to return or deliver the same debtor and it is not a breach of trust arising from a
money  that was deposited. And the failure of the Bank to depositary’s failure to return the subject matter of deposit.
return the amount deposited will not constitute estafa
If we would recall our lesson in Criminal Law II, one of the
through misappropriation punishable under Article 315, par.
essential elements of the crime of Estafa is breach of trust
l(b) of the Revised Penal Code, but it will only give rise to
wherein the offender is not able to return a thing that was
civil liability.
entrusted to him. In this case, the SC held that because it
But even granting that the failure of the bank to pay the is only a mutuum, a loan, that ownership of the money
time and savings deposits of private respondent David transferred from David to Guingona, et.al through the bank
would constitute a violation of paragraph 1(b) of Article 315 and because of that there was no fiduciary relationship that
of the Revised Penal Code, nevertheless any incipient was violated.

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Q4: So in other words, there was no liability here at all? What is Escrow? An escrow is a written instrument wherein
The bank and Guingona would not be liable anymore? the terms thereof purports a legal obligation wherein it is
deposited by the grantor or is delivered to a third party for
A4: There was only no liability for Estafa, however, there the depositary to keep it until the performance of a
will still be civil liability for the said amount ma’am. condition or the happening of a certain event.

Discussion:Here, again the Court emphasized that when Escrow was discussed in the case of Province of Bataan
you put money on the bank in the form of a deposit, that is vs. Villafuerte. What happened here?
a simple loan or mutuum, not a contract of deposit for main
purpose of safekeeping in depositum. While it is true that
people may put money in the bank for principally for
safekeeping, again, it is clear under Article 1980 that such PROVINCE OF BATAAN vs. VILLAFUERTE
bank deposits will be governed by the provisions of loan.
FACTS: Pursuant to PD 464, otherwise known as the Real
As a loan or simple mutuum, there is a transfer of Property Tax Code of 1974, the Provincial Treasurer of
ownership to the debtor in this case the bank. So here it Bataan advertised for auction sale the BASECO property
was again emphasized bank deposits are in the nature of due to real estate tax delinquency amounting to
irregular deposits, they are really loans because they earn P7,914,281.72, inclusive of penalties.  After its auction
interest. All kinds of bank deposits are to be treated as sale, the property was acquired by petitioner Province of
loans and are to be covered by law on loans. Failure of the Bataan and subsequently title over the same was
respondent bank to honor the time deposit is failure to pay consolidated in its name.
its obligation as a debtor and not in breach of trust arising
from the depositary’s failure to return the subject matter of Eventually, petitioner, entered into a ten-year contract of
the deposit. lease with 7-R Port Services, Inc., whereby portions of the
BASECO property were leased to the latter. Petitioner
Ownership of the amount was transmitted to the bank upon forged another contract of lease with Marina Port Services,
perfection of the contract and therefore the bank can make over a ten-hectare portion of the BASECO property.
use of the amount deposited for its banking operation.
There was no obligation to return or deliver the same PCGG filed for annulment of sale, principally assailing the
money that was deposited. The failure of the bank to validity of the tax delinquency sale of the BASECO
return the amount deposited will not constitute estafa property in favor of petitioner Province of Bataan.  It filed
through misappropriation but it will only give rise to a civil an “Urgent Motion to Deposit Lease Rentals,” alleging that
liability over which, remember City Fiscals ang respondents the rentals amounting to “Hundreds of Millions of Pesos”
dito, so public respondents have no jurisdiction. They can are “in danger of being unlawfully spent, squandered and
have a claim as to the bank but I think it’s under dissipated to the great and irreparable damage of
receivership so what you have here is simple loan can be plaintiffs(the Republic of the Philippines, BASECO and
included as an ordinary credit not a preferred credit. others) who are the rightful owners of the property leased.”

However, take note, that it was also pointed out here in the The lower court granted the PCGG’s urgent motion and
court that it appears there was a novation of the original ordered the defendant Province of Bataan to remit to the
contractual obligation wherein there is now an ordinary court the lease rentals it may receive from the defendant 7-
creditor-debtor relationship between petitioners and private R Port Services and the Marina Port Services from the
respondents. The failure of the bank or Guingona to pay receipt of this order. It also ordered the clerk of court to
the deposit, again will still not constitute a breach of trust deposit the amount under special time deposit with the
but merely failure to pay the obligation of a debtor, only civil Land Bank in the name or account of the Court to be held
liability. in trust for the person, natural or juridical, who may lawfully

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be entitled thereto. the rightful claimants of the subject property.

According to petitioner, “the escrow orders in question are To trace its source, the court’s authority proceeds from its
null and void ab initio  for having been issued absent any jurisdiction and power to decide, adjudicate and resolve the
legal basis” and are “merely calculated to prejudice the issues raised in the principal suit.  Stated differently, the
petitioner province without any practical or worthwhile, deposit of the rentals in escrow with the bank, in the name
much less legal objective.” of the lower court, “is only an incident in the main
proceeding.” To be sure, placing property in litigation under
judicial possession, whether in the hands of a receiver, and
administrator, or as in this case, in a government bank is
ISSUE: WON the deposit of rentals in escrow was proper?
an ancient and accepted procedure.
YES

Q1: What was the subject matter of this case?

HELD: An escrow is a written instrument which by its terms
imports a legal obligation and which is deposited by the A1: The lease rentals ma’am.
grantor, promisor, or obligor, or his agent with a stranger or
third party, to be kept by the depositary until the Q2:So money can be subject of an escrow. Where was the
performance of a condition or the happening of a certain money put?
event, and then to be delivered over to the grantee,
promisee, or obligee. A2:It was ordered to be deposited in the bank ma’am.

While originally, the doctrine of escrow applied only to Discussion:So it’s in the bank. It served as an escrow.
deeds by way of grant, or as otherwise stated, instruments Again we look at here the definition of an escrow, but it is in
for the conveyance of land, under modern theories of law, the form of a deposit, you put money in the bank. So in
the term escrow is not limited in its application to deeds, other words, I think it was also mentioned here that it was a
but is applied to the deposit of any written instrument with a time deposit, so it’s really a bank account deposit wherein
third person. Particular instruments which have been held we could apply Article 1980. But again the conditions of
to be the subject of an escrow include bonds or covenants, putting the money, in this case, in the bank is because by
deeds, mortgages, oil and gas leases, contracts for the virtue of the order of the court in the form of an escrow.
sale of land or for the purchase of personal property,
Escrow here is not a common practice but it is allowed
corporate stocks and stock subscriptions, promissory notes
under our jurisdiction. It is a written instrument which by its
or other commercial paper, insurance applications and
terms imports a legal obligation and which is deposited with
policies, contracts for the settlement of will-contest cases,
the grantor, depositor or obligor or his agentwith a stranger
indentures of apprenticeship, receipts assigning
or third party to be kept by the depositary until the
concessions and discontinuances and releases of causes
performance of a condition or the happening of a certain
of action. Moreover, it is no longer open to question that
event and and then to be delivered over to the grantee,
money may be delivered in escrow.
promisee, or obligee.
The lower court, in the course of adjudicating and resolving
the issues presented in the main suit, is clearly empowered
to control the proceedings therein through the adoption, Escrow is not limited in its application to deeds, but is
formulation and issuance of orders and other ancillary applied to the deposit of any written instrument with a third
writs, including the authority to place the properties person. It can be bonds, covenants, deeds, mortgages,
in custodia legis, for the purpose of effectuating its leases, contracts for the sale, stock subscriptions,
judgment or decree and protecting further the interests of promissory notes, insurance applications, contracts for will-

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By: 2 Manresa 2015-2016

contest cases, indentures, among other kinds of Let’s proceed to Articles 1981 and 1982.
documents.
Article 1981. When the thing deposited is delivered closed
So if this is the subject matter you put it in the depositary, and sealed, the depositary must return it in the same
what you have here is a contract of deposit for the purpose condition, and he shall be liable for damages should the
of safekeeping in the meantime wala pa natapos iyong seal or lock be broken through his fault.
transaction. However, here the SC likewise emphasized
that it is no longer open to question that the money may be
delivered in an escrow arrangement. So that is what
Fault on the part of the depositary is presumed, unless
happened in this case. The deposit of the rentals, money,
there is proof to the contrary.
in escrow with the bank happened and this was upheld by
the SC. This is only an incident to the main proceeding.
Since the money here was put into escrow by virtue of a
deposit account, we would say that Article 1980 is As regards the value of the thing deposited, the statement
applicable. So just take note of that. of the depositor shall be accepted, when the forcible
opening is imputable to the depositary, should there be no
So those are the cases in relation to Article 1980. Again, proof to the contrary. However, the courts may pass upon
take note here, governed by the provisions concerning the the credibility of the depositor with respect to the value
loan, deposits of money in banks that are fixed, savings claimed by him.
and current are really loans to a bank, so the bank is the
creditor (?) and you are the debtor (?).

They are really loans to a bank because the bank can use When the seal or lock is broken, with or without the
the same in its ordinary transactions and for the banking depositary's fault, he shall keep the secret of the deposit.
business in which it is engaged. And as what we have
seen in the cases that we have discussed, in this kind of
deposit, banks are required to exercise higher diligence,
more than the diligence of a good father of a family. Article 1982. When it becomes necessary to open a locked
box or receptacle, the depositary is presumed authorized to
Also take note, as in this instance, you say there is a do so, if the key has been delivered to him; or when the
contract of loan, they’re simple mutuum, Estafa or instructions of the depositor as regards the deposit cannot
misappropriation the bank would not be held liable. be executed without opening the box or receptacle.

Also take note, recall your obligations and contract with

regard to compensation or offset. You cannot apply
compensation or offset if what you have is a contract of So these articles point out other obligations of a depositary:
depositum through contract of deposit. But if you’d say
1. Return the thing deposited when delivered,
contract of loan in the form of a bank deposit, then
closed and sealed in the same condition.
compensation can be applied. Most probably we’ve
already discussed, may utang ka sa banko, nag loan ka, 2. Obligation to pay for damages should the seal or
and at the same time you have a savings account deposit lock be broken through his fault. Remember
and then due na iyong loan mo, hindi ka pa rin there is a presumption that if the seal or lock is
nagbabayad. What could the bank do? It can hold or it can broken, he is presumed at fault unless proven
withdraw the amount from your savings account to pay off otherwise.
your obligation. Can they do that? Yes, kung
compensation or set off, a mode of extinguishing an
obligation.

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3. Likewise, he has the obligation to keep secret of has applied to his own use from the day on which he did
the deposit, the contents thereof, when the seal so, and those which he still owes after the extinguishment
or lock is broken regardless if he is at fault or not of the deposit.

Why would be this relevant? Because again this Article 1984. The depositary cannot demand that the
emphasizes the fiduciary nature of a contract of deposit. depositor prove his ownership of the thing deposited.
Just because accidentally na-open or nasira iyong lock
does not mean that you are now entitled to divulge the Nevertheless, should he discover that the thing has been
contents thereof. So otherwise, that would be considered stolen and who its true owner is, he must advise the latter
as a violation of trust. Although that if it is open of the deposit.
accidentally without the fault of the depositary and then you
If the owner, in spite of such information, does not claim it
discovered it has illegal subject matter, then I think it is
within the period of one month, the depositary shall be
much proper that you report it to the authorities.
relieved of all responsibility by returning the thing deposited
4. Respect the secrets which the depositor desires to the depositor.
to keep in guard. Statement here on the part of
If the depositary has reasonable grounds to believe that the
the depositor is a prima facie evidence only.
thing has not been lawfully acquired by the depositor, the
And take note under Article 1982, instances when the former may return the same.
depositary is authorized to open the said box. If there is a
Alright, so here the depositary cannot require the depositor
presumed authority, the key has been delivered to him or
to show proof that he is the owner of the thing deposited as
when the instructions of the depositor as regards the
a condition for the return.
deposit cannot be executed without opening the box. In
other words, there is a necessity to open it as well. Remember ownership is not essential for the perfection of
a contract of deposit. Now, we have this rule here on not
Article 1983. The thing deposited shall be returned with all
requiring ownership because otherwise it may open ?? to
its products, accessories and accessions.
bad faith.The depositary may use it as a ground to refuse
to return the thing to the depositor. But the person who
personally deposited and delivered the thing to him on the
Should the deposit consist of money, the provisions relative pretense of requiring proof of ownership, he will now be
to agents in Article 1896 shall be applied to the depositary. able to retain the thing even if it turns out that he is in bad
faith. Maghimo lang siya reason that “You are not the
owner so I will not return it.” Again, ownership is not
required in contract of deposit.
So we already know, fruits, accessions and accessories
should pertain to the owner. Depositor is the owner or But what if the depositary has knowledge that the depositor
represents the owner of the thing deposited and therefore is not the true owner thereof. What are the steps that he
the products, accessories and accessions should be should take?
returned to him. Return the thing itself, subject of the
deposit, plus the fruits, accessions and accessories which 1. If it appears that a third person is the
are consequence of ownership. owner of the thing deposited, to be
relieved of all the responsibility the
Depositary has no right to make use thereof and we are depositor must advise the true owner
through with that. And also take note in Article 1983 there that he has in his possession the thing
is reference to Article 1896, that is under agency. that he own. Of course this is subject
Depositary is in delay or has used the money is liable for that he has knowledge kung sino iyong
interest as indemnity. He owes interest on the sums he may-ari. Otherwise, if he has no
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knowledge that who is the true owner, take into consideration the nature of the contract of deposit,
how could he inform the said owner. the depositary has the obligation to return the thing, di ba
iyan ang kanyang primary obligation. Otherwise, if he
2. After he has informed the true owner, he refuses then it would be contrary to the nature of a deposit.
will give that owner one month period to
claim. Why is there we have this one But on the other hand, it is also risky on the part of the
month period? For the protection of the depositary having knowledge that there is a different owner
depositary so that otherwise, he has to of the subject property. So what is the best thing to do on
wait forever, “Ill just wait until the true the part of the depositary? He can file and action for
owner will claim.” So one month lang. interpleader. You have the depositor here who’s
demanding for the return of the thing to him and then you
3. What happens after the one month have, on the other hand, its true owner who alleges in
period has expired? The depositary can some form that he is the true owner of the subject property.
return the thing to the depositor without So better for the depositary to file an action for
any liability to the depositor and without interpleader. These two parties will litigate among
any liability to the true owner whom he themselves who really has the better right to the
has already informed of the said thing in possession of the real property.
his possession. But of course, the true
owner can still go after the depositor or Article 1985. When there are two or more depositors, if
the one who is in possession of the they are not solidary, and the thing admits of division, each
thing, can assert his right by the delivery one cannot demand more than his share.
of the personal property to him by filing,
for example, an action for replevin. When there is solidarity or the thing does not admit of
division, the provisions of articles 1212 and 1214 shall
What if he does not know who is the true owner but the govern. However, if there is a stipulation that the thing
depositary has reasonable grounds to believe that it has should be returned to one of the depositors, the depositary
not been lawfully acquired by the depositor? shall return it only to the person designated. 

Example: The depositor delivered several jewelries for What we have here? Two or more depositors. Take note
safekeeping. No need to require ownership so you just the assumption here is they are only joint depositors, not
accept it for safekeeping. The next day that the depositary solidary. If the thing deposited is divisible, and the
found out that a pawnshop was robbed several jewelries depositors are not solidary, then each depositor can
were stolen. He does not know really kung sino ang true demand only his share.
owner or he does not really know kungito ba iyong jewelry
na nandoon. At the same time he has knowledge that the So let us say the two depositors delivered 100 sacks of rice
depositor does not have the capacity to have this much to the depositary. Subject matter is divisible, depositors
jewelry. are not solidary, presumption applies that they are joint.
So when one of them demands for the delivery or the
So what is his remedy? Return the thing, those jewelries, to return of the sacks of rice, it’s only as to the extent of their
the depositor. Return if there is reasonable grounds to proportionate shares. So 50 sacks lang ang mademand ng
believe that the thing has not been lawfully acquired by the isang depositor.
depositor.
However, if it is stipulated that the depositors are solidary
Now however, if you take a look at Article 1984, it does not depositors or the thing deposited is not divisible, then we
state what would happen or what should happen if the true apply the rule on active solidarity, these are discussed
owner was informed and within the one month period the under obligations.
depositor will now demand the return of of the thing? If we

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Article 1212. Each one of the solidary creditors may do Article 1987. If at the time the deposit was made a place
whatever may be useful to the others, but not anything was designated for the return of the thing, the depositary
which may be prejudicial to the latter. must take the thing deposited to such place; but the
expenses for transportation shall be borne by the
depositor.

Article 1214. The debtor may pay any one of the solidary If no place has been designated for the return, it shall be
creditors; but if any demand, judicial or extrajudicial, has made where the thing deposited may be, even if it should
been made by one of them, payment should be made to not be the same place where the deposit was made,
him. provided that there was no malice on the part of the
depositary. 
However, take note of the last sentence, if there is a
stipulation that the thing should be returned to one of the Place to return. Obviously if there is a stipulation, then it
depositors, dapat sa kanya lang. Depositary siya with only should be at that place agreed upon wherein the expenses
to the person designated even if such person has not yet shall be borne by the depositor.
made any demand.
In the absence of stipulation, where the thing deposited
Return of the deposits stipulated bound to return it only to might be even if it is not the same place where the original
the person designated, although he has not made any deposit was made provided, that the transfer was
demand for its return. accomplished without malice on the part of the depositary.

Article 1986. If the depositor should lose his capacity to Differentiate this from the general rules as to delivery under
contract after having made the deposit, the thing cannot be Article 1251.
returned except to the persons who may have the
administration of his property and rights.  Article 1251. Payment shall be made in the place
designated in the obligation.
Alright, if at the time of the contract of deposit was
perfected, one of the parties is incapacitated, we already
know the contract is voidable.
There being no express stipulation and if the undertaking is
But what if at the time the contract was perfected or both to deliver a determinate thing, the payment shall be made
parties were capacitated but subsequently they became wherever the thing might be at the moment the obligation
incapacitated. So we take into consideration what we have was constituted.
discussed before in relation to Article 1986. If the depositor
subsequently became incapacitated, the property must be
return to his guardian or administrator or the person who
In any other case the place of payment shall be the
made the deposit or to the depositor himself if he should
domicile of the debtor.
acquire capacity. Article 1970, in relation to Article 1986, it
cannot be returned to the same depositor since he has
already lost his capacity except to the persons who may
have the administration of his property and rights. If the debtor changes his domicile in bad faith or after he
has incurred in delay, the additional expenses shall be
Ito iyong sabi ko last time when we discussed Article 1970. borne by him.
Again, what is the effect if you delivered to the other party
who was already incapacitated? That will not extinguish
your obligation. So to extinguish your obligation as a
depositary, deliver it to one who administers the property These provisions are without prejudice to venue under the
and rights of the incapacitated depositor. Rules of Court. 
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However, as the exception provided in Article 1988 is really

prone to abuse. The depositary should only be authorized
If there’s no express stipulation and the subject matter is a in case of conflicting claims to consign the thing in court
determinate thing, place of delivery is wherever the thing through again an action of interpleader.
might be at the moment the obligation was constituted
which is different here in Article 1987. What is the effect notified and here comes a third person
who asserts his right over the subject property despite such
Article 1988. The thing deposited must be returned to the demand, if you are the depositary and then you return it to
depositor upon demand, even though a specified period or the depositor? Mamaya ikaw ang hahabolin ng third
time for such return may have been fixed. person. So what’s the best thing? Again, for the depositary
to file an action for interpleader.
This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he Article 1989. Unless the deposit is for a valuable
have been notified of the opposition of a third person to the consideration, the depositary who may have justifiable
return or the removal of the thing deposited. In these reasons for not keeping the thing deposited may, even
cases, the depositary must immediately inform the before the time designated, return it to the depositor; and if
depositor of the attachment or opposition.  the latter should refuse to receive it, the depositary may
secure its consignation from the court.
When we distinguish depositum from mutuum, we have
already emphasized that as to a depositum, the general
rule is that the depositor can demand the return of the thing
deposited at will whether a period has been stipulated or Take it into consideration, if it’s gratuitous, the depositary
not. may likewise return the thing deposited notwithstanding
that a period has been fixed but it must be for a justifiable
Whenever a period is agreed, the same is for the benefit of reason.
the depositor and therefore when he demands for the
return of the thing before the period, it means that he has If the depositor refuses to receive the thing, the remedy
waived it and he can validly waive such period because it is available for the depositary is to deposit the thing at the
for his benefit. However, if the deposit is for compensation, disposal of judicial authority through consignation.
while the depositor can demand for the return of the thing,
the depositary is nevertheless entitled to the compensation However, if the contract of deposit is for a valuable
corresponding to the entire period. consideration, compensation, depositary has no right to
return the thing deposited before the expiration of the time
Article 1988, however, provides for the exceptions wherein designated even if he should suffer any convenience as a
the depositor cannot compel the depositary to return the consequence.
thing:
Distinguish Article 1988 from Article 1989:
1. When the thing is judicially attached while in
depositary’s possession. Otherwise, the ART. 1988 ART. 1989
depositary will be disobeying the judicial order of
It refers to the kind of Refers to the depositary to
attachment.
depositor to demand the return the thing
return the thing at anytime. notwithstanding it has been
fixed, if it is gratuitous,
2. Notified of the opposition of a third person to the cannot return if it is subject
return or the removal of the thing deposited. for a valuable consideration.

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Article 1990. If the depositary by force majeure or 1. Under Article 1972, to keep the thing safely.
government order loses the thing and receives money or
another thing in its place, he shall deliver the sum or other 2. The same article, to return the thing. General
thing to the depositor.  rule, upon demand. However, if gratuitous
there must be justifiable reason, return the
thing plus accessories and accession.
However, if the thing was lost due to a force
Recall one of the primary obligations of a depositary, to majeure or government order, obligation to
return the exact thing that has been deposited. return money or another thing that was
received in its place.
Now what happens in Article 1990? The thing was lost due
to a force majeure or government order. In this case, the 3. Where to return? By agreement or where the
depositary shall not be liable for loss. However, if the thing is deposited.
depositary receives something in exchange for the loss of
the thing, money or other thing, then he has the duty to 4. Obligation not to deposit in the third person
deliver to the depositor what he has received. Otherwise, unless authorized.
he will have unjust enrichment, he would unjustly enrich
himself at the expense of the depositor. 5. Under Article 1974, to change the way of
deposit.
Article 1991. The depositor's heir who in good faith may
have sold the thing which he did not know was deposited, 6. To earn interest under Article 1980. Again,
shall only be bound to return the price he may have differentiate from rent of safety deposit box.
received or to assign his right of action against the buyer in
7. Collect interest from capital to preserve its
case the price has not been paid him.
value, that’s Article 1975.

8. Obligation not commingle the thing if so

Alright, so what happens here? Take note here nakalagay stipulated and if it’s of different kind and
dyan depositor’s heir but it should be depositary. Bakit? In quality.
possession man of the thing. So the depositary already
9. Obligation not to make use of the thing
died and it’s the heir who has sold the thing subject of the
deposited unless authorized.
deposit. So take note, it must be depositary instead of
depositor. 10. Liability for loss in case of fortuitous event.
What are those instances? Take note of that.
If the depositary dies, the object is left to the heir. The heir
has no knowledge that it was subject to a contract of 11. Obligation when the thing deposited is
deposit. So what does he do? He sells it in good faith. So delivered sealed and closed
what would now be the obligation of the heir? Return the
price received or assign the right to collect the same if he 12. Obligation to pay interest on sums converted
has not been paid. Take note, again it refers to price and to personal use if deposit consist of money.
to the value of the thing.
13. And advise the true owner if discovered that
However, if the heir is in bad faith, in other words he has the thing deposited was stolen.
knowledge that the thing was subject to a deposit, then
there will be liability for damages.

So with that, we could say that the following are the

obligations of the depositary:

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December 3, 2015 (2nd hour) depositor who will bear the loss. You have to reimburse the
depositary.
Transcribed by: Cid Benedict D. Pabalan
Exceptions:

(1) At the time of the constitution of the deposit the

Obligations of the Depositor depositor was not aware of it;

Art. 1992. If the deposit is gratuitous, the depositor is (2) Depositor was not expected to know the dangerous
obliged to reimburse the depositary for the expenses he character of the thing;
may have incurred for the preservation of the thing
deposited. (1779a) (3) Depositary was notified of the character of the thing and
should have exercised the proper care;
This article only applies to gratuitous deposit. This is based
on gratuity. The depositor then would have incurred just the (4) Depositary was aware of it even without the advice of
same. Otherwise, the depositor would unjustly enrich the depositor.
himself at the expense of the depositary.
Art. 1994. The depositary may retain the thing in pledge
This is different from commodatum---it is the bailee who until the full payment of what may be due him by reason of
pays for the expenses. the deposit. (1780)

Unlike in commodatum, there is a distinction for ordinary This is different from commodatum. Under 1994, the
and extraordinary expenses for preservation. With regard depositary has the right to hold or retain the thing until he is
to depositum, there is no distinction because the right to paid of what is due him by reason of the deposit.
reimbursement here covers all expenses for preservation
whether ordinary or extra ordinarybut these must be In 1994, there is a contract of pledge created by operation
necessary expenses. Useful expenses or luxurious of law. The thing deposited acts as a security for the
expenses for mere pleasure are not covered in this article. obligation of the depositor. The thing retained serves as a
security for what may be due to the depositary by reason of
If the deposit is subject to compensation: the deposit.

General Rule: The expenses for the preservation of the This is similar to a contract of agency, the right of the agent
thing shall be borne by the depositary because the to retain but different from that of commodatum.
expenses are already included in the compensation paid to
the depositary as agreed upon by the parties. Art. 1995. A deposit its extinguished:

Exception: (1) Upon the loss or destruction of the thing deposited;

Unless otherwise stipulated by the parties. (2) In case of a gratuitous deposit, upon the death of either
the depositor or the depositary. (n)
Art. 1993. The depositor shall reimburse the depositary for
any loss arising from the character of the thing deposited, First, the modes of extinguishing a contract of deposit are
unless at the time of the constitution of the deposit the not exclusively stated in 1995 because obviously there are
former was not aware of, or was not expected to know the other causes for the extinguishment of a contract of deposit
dangerous character of the thing, or unless he notified the which may be applied here:
depositary of the same, or the latter was aware of it without
advice from the depositor. (n) (1) when the thing is returned

General rule: (2) in case there is novation

The depositary shall be reimbursed for any loss suffered by (3) merger
him because of the character of the thing deposited;
flammable, chemical, breakable. In case of loss arising (4) expiration of the term
from the character of the thingdeposited it will be the
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(5) fulfillment of the resolutory condition. 4. (1754) Passengers in common carriers

If the contract of deposit is gratuitous then either of the First type of deposit:
depositor or the depositary shall extinguish the contract of
deposit. The depositary will not be obliged to continue with Par1: Those made in compliance with a legal obligation:
the contract of deposit and return it to the heirs of the
depositor. 1. Article 538: Judicial deposit of a thing, the possession of
which is being disputed in a litigation by two or more
If the deposit was for compensation, the contract of deposit persons
shall not be extinguished by the death of either party. It is
an onerous deposit thus it is not personal in nature. 2. Article 586: Deposit in the bank or public institution of
public bonds payable to order or bearer
In 1978, rights of transmission are transmissible to their
respective heirs and the heirs if either party have a right to 3. Article 2104: The deposit of a thing pledge when the
terminate the deposit even before the expiration of the term creditor uses the thing without the authority of the owner or
and even if it is for compensation. It is however automatic. uses it in any other way.

4. Those required in suits as provided in the Rules of

Court.

5. Those constituted to guarantee contracts with the

NECESSARY DEPOSIT government. In this case the deposit arises from an
obligation of a public or administrative character.
Art. 1996. A deposit is necessary:
Second type of deposit:
(1) When it is made in compliance with a legal obligation;
2nd Par.: Those that take place on the occasion of any
(2) When it takes place on the occasion of any calamity, calamity, such as fire, storm, flood, pillage, shipwreck, or
such as fire, storm, flood, pillage, shipwreck, or other other similar events.
similar events. (1781a)
The law imposes on the recipient the obligations of a
Art. 1997. The deposit referred to in No. 1 of the preceding bailee.
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on The object here is not for safekeeping but to save the
voluntary deposit. property. It is still considered as a necessary deposit. It is
also considered as a quasi bailment, involuntary bailment
The deposit mentioned in No. 2 of the preceding article or involuntary deposit or depositum miserable. The cause
shall be regulated by the provisions concerning voluntary of relation here is between the calamity and the constitution
deposit and by Article 2168. (1782) of the deposit.

In necessary deposit there is no freedom to choose who The governing rule with regard to this deposit is 2168 on
will be the depositary unlike in a voluntary deposit. quasi contract. During a calamity, the properties saved
from destruction by another person without the knowledge
Kinds of necessary deposits of the owner the latter is to pay the former just
compensation otherwise unjust enrichment. This is a
1. (1996)When it is made in compliance with a legal negotiorumgestio quasi contract.
obligation
Art. 1998. The deposit of effects made by the travellers in
2. (1196)When it takes place on the occasion of any hotels or inns shall also be regarded as necessary. The
calamity, such as fire, storm, flood, pillage, shipwreck, or keepers of hotels or inns shall be responsible for them as
other similar events. depositaries, provided that notice was given to them, or to
their employees, of the effects brought by the guests and
3. (1998) Travelers in hotels and inns that, on the part of the latter, they take the precautions

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

which said hotel-keepers or their substitutes advised FACTS:

relative to the care and vigilance of their effects. (1783)
This arose after a hotel guest, and Pioneer’s insured,
Art. 1999. The hotel-keeper is liable for the vehicles, checked into the City Garden hotel in Makati. The hotel’s
animals and articles which have been introduced or placed parking attendant and co-defendant got the keys to the
in the annexes of the hotel. (n) guest’s vehicle and parked it an adjacent lot owned by a
third party. The guest was subsequently awakened so as
The third type of necessary deposit is under Articles 1998 to be advised that his car had been taken. The guest made
and 1999. the necessary reports and thereafter filed a claim for
insurance with Pioneer which paid the same as indemnity
The terms travelers and guests are used here for the vehicle’s loss. Pioneer alleged that the loss was an
synonymously. This refers to transients and not boarders. offshoot of the hotel’s negligence and accordingly filed a
They shall be governed by the rules on contract of lease. claim by means of subrogation, against the hotel and its
parking valet. It was established that there was a previous
Hotel keeper and in keeper are used synonymously under similar incident and yet no “no necessary precautions were
the civil code. taken to prevent its repetition xxx”. Pioneer argued that the
hotel was “was wanting in due diligence in the selection
Hotel is a building of many rooms chiefly for overnight and supervision of its employees particularly its parking
accommodation of transients and several floors served by valet.”
elevators usually with large open street-level lobby.
The Hotel argued that the insured was not a guest of the
Innis a public house for the lodging of travelers for hotel but a visitor therein, that its valet did not get his keys
compensation and until capacity is reached; a place of but it was the insured who requested him to find a space
public entertainment that does not provide lodging. wherever one was available, that valet parking was
provided for convenience of its customers and that it was a
Motel is an establishment which provides lodging and
special privilege that was given to the insured. The vehicle
parking and in which the rooms are usually accessible from
was taken without using the key which was even turned
an outdoor parking area.
over to the owner. Its valet even tried to run after the
carnappers to no avail.
Hotel keepers and in-keepers may be held responsible as
depositaries with regard to the effects of their guests;

1. Previously informed about the effects brought by the The guest testified that he drove his vehicle in front of the
guests hotel where the parking attendant approached and asked
him for his key, and issued a “valet parking customer’s
2. The guests have taken precaution prescribed regarding
claim stub.” He then checked in at the hotel with a
the safekeeping of their effects.
companion. At around 1 a.m., he was advised of the
carnapping incident. An adjuster testified that based on
The liability is not limited to the effects lost or damaged in
his investigation, the hotel would assist guests in parking,
the hotel rooms which come under the term the term
and with only 12 parking slots, entered into an agreement
baggage or articles such as clothing as are ordinarily used
with an adjacent bank to use the latter’s space at night. He
by travelers but includes those lost or damaged in hotel
discovered that a van had been carnapped from the same
annexes such as vehicles in the hotel‘s garage.
lot barely a month before.

The lower court ruled in favor of Pioneer and ordered

Durban to pay the “sum of P1,163,250.00 with legal
“DURBAN APARTMENTS CORPORATION vs. PIONEER
interest thereon from July 22, 2003 until the obligation is
INSURANCE AND SURETY CORPORATION,” G.R. No.
fully paid and attorney’s fees and litigation expenses
179419 (January 12, 2011),
amounting to P120,000.00.” This was affirmed by the
The Supreme Court passed upon the liability of hotels for Court of Appeals.
providing valet parking to guests.
RULING:

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

The High Court upheld the ruling that the hotel was in which said hotel-keepers or their substitutes advised
“default for failure to appear at the pre-trial conference and relative to the care and vigilance of their effects.”
to file a pre-trial brief, and thus, correctly allowed
respondent to present evidence ex-parte.” It also affirmed The insured deposited the vehicle for safekeeping with the
the finding that it was liable for the loss of the vehicle. The hotel, through its employee. This employee issued a claim
procedural aspect will not be dealt with in detail here. stub to the insured. The contract of deposit was perfected
from the delivery of the vehicle, when the keys were
Despite the finding of default, the Supreme Court handed over to the hotel’s employee, and which he
emphasized that “defendant’s (petitioner’s) preclusion from “received with the obligation of safely keeping and
presenting evidence during trial does not automatically returning it.”
result in a judgment in favor of plaintiff (respondent). The
plaintiff must still substantiate the allegations in its This could conceivably be used as basis for users of mall
complaint.” and other public parking lots to claim indemnity for loss or
damage to their vehicles. It would be interesting to see if
It found that the allegations of Pioneer in the complaint the practice of placing disclaimers of liability in the parking
were substantiated, “i.e., a contract of necessary deposit stub, as well as in signages, would be upheld by the courts
existed between the insured xxx and petitioner. On this as binding on the users. It does stand to reason that when
score, we find no error in the following disquisition of the you are made to park and pay, parking lot providers owe a
appellate court: degree of care to insure your vehicle is kept safe and
sound. And if they fail to adhere to this standard, then they
[The] records also reveal that upon arrival at the City should be sorry they didn’t, as in this case.
Garden Hotel, See gave notice to the doorman and parking
attendant of the said hotel, x xxJustimbaste, about his You have here a contract of a necessary deposit.
Vitara when he entrusted its ignition key to the latter. x Regardless of the facts that see was not a recorded or
xxJustimbaste issued a valet parking customer claim stub checking guest of the hotel, remember that the parking
to See, parked the Vitara at the Equitable PCI Bank attendant of the hotel duly accepted the keys thus there
parking area, and placed the ignition key inside a safety was a contract of deposit perfected even if the car was not
key box while See proceeded to the hotel lobby to check in. parked in the hotel premises. So with that see deposited
The Equitable PCI Bank parking area became an annex of his car for safekeeping with petitioner who is its employee
City Garden Hotel when the management of the said bank and therefore they should have exerted the diligence
allowed the parking of the vehicles of hotel guests thereat required in taking care of the subject car. Notice that this
in the evening after banking hours. “ was actually the second time that such incident happened.
So in this case the hotel was made liable.
Interesting is the finding that the bank’s parking area was
deemed an “annex” to the hotel. A hotel’s use of an Take note, the liability is not limited to the effects lost or
adjacent lot appears to subject the same to its control. damaged in the hotel rooms which come under the term
the term baggage or articles such as clothing as are
The Court cited Article 1962, in relation to Article 1998, of ordinarily used by travelers but includes those lost or
the Civil Code: damaged in hotel annexes such as vehicles in the hotel‘s
garage.
“Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the Art. 2000. The responsibility referred to in the two
obligation of safely keeping it and returning the same. If the preceding articles shall include the loss of, or injury to the
safekeeping of the thing delivered is not the principal personal property of the guests caused by the servants or
purpose of the contract, there is no deposit but some other employees of the keepers of hotels or inns as well as
contract. strangers; but not that which may proceed from any force
majeure. The fact that travellers are constrained to rely on
Art. 1998. The deposit of effects made by travelers in
the vigilance of the keeper of the hotels or inns shall be
hotels or inns shall also be regarded as necessary. The
considered in determining the degree of care required of
keepers of hotels or inns shall be responsible for them as
him.
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

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Art. 2001. The act of a thief or robber, who has entered the character of the thing brought into the hotel These 2
hotel is not deemed force majeure, unless it is done with instances are provided under Art 2002.
the use of arms or through an irresistible force.
Art. 2003. The hotel-keeper cannot free himself from
Art. 2002. The hotel-keeper is not liable for compensation if responsibility by posting notices to the effect that he is not
the loss is due to the acts of the guest, his family, servants liable for the articles brought by the guest. Any stipulation
or visitors, or if the loss arises from the character of the between the hotel-keeper and the guest whereby the
things brought into the hotel. responsibility of the former as set forth in articles 1998 to
2001 is suppressed or diminished shall be void.
Arts 2000-2002 further discusses the liability of the hotel-
keeper. Hotel-keeper is responsible regardless of the This similar to the law on common carriers which does not
amount of care exercised if: allow a common carrier to dispense with or limit its
responsibility by stipulation or posting of notices as this is
1) There is loss or injury caused by his servants or against the law morals and public policy.
employees, as well as strangers, provided all the elements
in Art 1998 are present; Therefore, hotel-keepers or inn-keepers as depositary
should be subject to extraordinary degree of care for the
(2) If the loss is caused by the act of a thief or robber, protection and safety of travelers who have no alternative
without the use of arms or irresistible force, then the hotel- but to rely on the good faith and care of those with whom
keeper is liable; because in that case, the hotel-keeper is they make lodging.
considered negligent.

When is the hotel-keeper not liable?

YHT Realty Corp. v. CA, et al., G.R. No. 126780, February
(1) If the loss or injury is caused by force majeure; (2000) 17, 2005
(2) Theft or robbery committed by a stranger, not the Facts:
employee or the servant of the hotel-keeper, with the use
of arms and irresistible force (unless the hotel-keeper is Maurice Peaches McLoughlin is an Australian
guilty of fault or negligence) (2001) businessman-philanthropist who used to stay at the
Sheraton Hotel during his trips to the Philippines prior to
(3) The hotel-keeper is not liable for compensation if the 1984. He met Brunhilda Mata-Tan who befriended him and
loss is due to the acts of the guest, his family, servants or showed him around. Tan convinced Mcloughlin to transfer
visitors, or if the loss arises from the character of the things to the Tropicana from the Sheraton where afterwards he
brought into the hotel. (2002) stayed during his trips from Dec 1984 to Sept 1987.
With regard again to theft or robbery by a stranger, you · On 30 Oct 1987, McLoughlin arrived from Australia
have to consider whether there was use of arms or and registered with Tropicana. He rented a safety deposit
irresistible force. If it is done without the use of arms or box as his usual practice. The box required two keys, the
irresistible force, hotel-keeper is liable. However, if it is with guest had one and one from the management. He placed
the use of arms or irresistible force, the general rule is that US $10,000 in one envelope and US$5,000 in another ,
the hotel-keeper is not liable; except if the hotel-keeper is AU$10,000 in another envelope and other envelopes with
found to be negligent or at fault failing to provide against his passport and credit cards. On 12 Dec 1987, he took
the loss or injury. If the loss is due to the employee or from the box the envelope with US$5,000 and the one with
servant of the hotel-keeper, do not take into consideration, AU$10,000 to go to Hong Kong for a short visit, because
whether there was use of firearms or not. Servants and he was not checking out. When he arrived in HK, the
employees are deemed to be under the direct supervision envelope with US$5,000 only contained US$3,000, but
and control of the hotel-keeper. That‘s why if such loss is because he had no idea if the safety deposit box has been
due to the act of servant or employee of the hotel-keeper, tampered, he thought it was just bad accounting.
the hotel-keeper will be liable. If loss is due to the acts of
the guest, his family, servants or visitors, the hotel will not · After returning to Manila, he checked out of the
be held liable. As well as if the loss arises from the Tropicana on 18 Dec 1987 and left for Australia. When he
arrived he discovered that the envelope with US$10,000

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

was short of US$5,000. He also noticed that the jewelry he · Tan and Lopez, however, were not served with
bought in Hong Kong which he stored in the safety deposit summons, and trial proceeded with only Lainez, Payam
box upon his return to Tropicana was likewise missing, and YHT Realty Corporation as defendants.
except for a diamond bracelet.
(a) whether the loss of money and jewelry is supported by
· He went back to the PH on 4 Apr 1988 and asked the evidence. YES.
Lainez (who had custody of the management key) if some
money was missing or returned to her, to which the latter Where the credibility of a witness is an issue, the
answered there was not. He again registered at the established rule is that great respect is accorded to the
Tropicana and rented a safety deposit box. He placed an evaluation of the credibility of witnesses by the trial court.
envelope containing US$15,000, another of AU$10,000. The trial court is in the best position to assess the
On 16 Apr, he opened his safety deposit box and noticed credibility of witnesses and their testimonies because of its
that US$2,000 and AU$4,500 was missing from the unique opportunity to observe the witnesses firsthand and
envelopes. note their demeanor, conduct and attitude under grilling
examination.
· He immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the (b) whether there was gross negligence on the part of the
key assigned to McLoughlin. McLoughlin went up to his innkeepers
room where Tan was staying and confronted her. Tan
admitted that she had stolen McLoughlin’s key and was Payam and Lainez, who were employees of Tropicana, had
able to open the safety deposit box with the assistance of custody of the master key of the management when the
Lopez, Payam and Lainez. Lopez also told McLoughlin that loss took place. They even admitted that they assisted Tan
Tan stole the key assigned to McLoughlin while the latter on three separate occasions in opening McLoughlin’s
was asleep. safety deposit box.

· McLoughlin requested the management for an The management contends that McLoughlin made its
investigation of the incident. Lopez got in touch with Tan employees believe that Tan was his spouse for she was
and arranged for a meeting with the police and McLoughlin. always with him most of the time. The evidence on record
When the police did not arrive, Lopez and Tan went to the is bereft of any showing that McLoughlin introduced Tan to
room of McLoughlin at Tropicana and thereat, Lopez wrote the management as his wife. Mere close companionship
on a piece of paper a promissory note. and intimacy are not enough to warrant such conclusion.
They should have confronted him as to his relationship with
· He made Lopez and Tan sign a promissory note for Tan considering that the latter had been observed opening
him for the loss. However, Lopez refused liability on behalf McLoughlin’s safety deposit box a number of times at the
of the hotel, reasoning that McLoughlin signed an early hours of the morning.
"Undertaking for the Use of Safety Deposit Box" which
disclaims any liability of the hotel for things put inside the Art 2180, par (4) of the same Code provides that the
box. owners and managers of an establishment or enterprise
are likewise responsible for damages caused by their
· On 17 May 1988 McLoughlin went back to AU and employees in the service of the branches in which the latter
consulted his lawyers. They wrote a letter addressed to are employed or on the occasion of their functions. Given
Pres. Cory Aquino which was pushed back to the DOJ and the fact that the loss of McLoughlin’s money was
the Western Police District. He went back from the PH to consummated through the negligence of Tropicana’s
AU several times more to attend business and follow up employees both the employees and YHT, as owner of
but the matter was only filed on 3 Dec 1990 since he was Tropicana, should be held solidarily liable pursuant to Art
not there to personally follow up. 2193.

· McLoughlin filed an action against YHT Realty WON the "Undertaking for the Use of the Safety Deposit
Corporation, Lopez, Lainez, Payam and Tan. Box" is null and void.

· The RTC rendered judgment in favor of McLoughlin. Yes, it is null and void. Art. 2003[1] is controlling.
The CA modified only the amount of damages awarded.

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Jacinto St., Davao City
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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

This is an expression of public policy that the hotel executed that lease of that safety deposit box, this is again
business like common carriers are imbued with public similar to the provisions on stipulations limiting liability in
interest. This responsibility cannot be waived away by any the previous cases that we had. Paragraphs (2) and (4) of
contrary stipulation in so-called "undertakings" that the ―undertaking‖ manifestly contravene Article 2003 of
ordinarily appear in prepared forms imposed by hotel the New Civil Code for they allow Tropicana to be released
keepers on guests for their signature. from liability arising from any loss in the contents and/or
use of the safety deposit box for any cause whatsoever.
The CA (former case) even ruled before that hotelkeepers Remember that such provision in the contract is void for
are liable even though the effects are not delivered to them being contrary to public policy. The hotel business like the
or their employees, but it is enough that the effects are common carrier‘s business is imbued with public interest.
within the hotel or inn. Also with regard to the effects of their guests, the SC held
that it is not necessary that they be actually delivered to the
Pars. 2 and 4 of the undertaking manifestly contravene Art. innkeepers or their employees. It is enough that such
2003 of the NCC. Meanwhile, the defense that Art. 2002 effects are within the hotel or inn. With greater reason
exempts the hotel-keeper from liability if the loss is due to should the liability of the hotelkeeper be enforced when the
the acts of the guest, family or visitors falls because the missing items are taken without the guest‘s knowledge and
hotel is guilty of negligence as well. This provision consent from a safety deposit box provided by the hotel
presupposes that the hotel-keeper is not guilty of itself.
concurrent negligence or has not contributed in any degree
to the occurrence of the loss. The responsibility of the hotel-keeper shall extend to loss
of, or injury to, the personal property of the guests even if
Q: Isn‘t it that in Art 2002 if the loss is due to the act of the caused by servants or employees ofthe keepers of hotels
guest, the hotel is not liable? Can we not apply 2002 or inns as well as by strangers, except as it may proceed
saying that the loss is due to the act of the guest or family from any force majeure.
of the guest?
In the case at bar, there is no showing that the act of the
A: There was negligence on the part of the hotel-keeper as thief or robber was done with the use of arms or through an
they merely assumed that Tan is the wife of the guest, thus irresistible force to qualify the same as force majeure. With
Art 2002 is not applicable. regard to the application of Art 2002, wherein the hotel
anchors their defense, this provision presupposes that the
Q: What is the ruling of the court with respect to Art 2002? hotel-keeper is not guilty of concurrent negligence or has
In order to apply Art 2002, what is required for the inn- not contributed to the loss.A depositary is not responsible
keeper? for the loss of goods by theft, unless his actionable
negligence contributes to the loss. Here Tropicana is guilty
Here you have a contract of deposit between the guest of of concurrent negligence in allowing Tan, who is not the
the hotel for the use of a safety deposit box. Under the registered guest, to open the safety-deposit box of
provisions of the Civil Code, this is considered as a McLaughlin.
necessary deposit. In this case, a person (Tan) other than
the one who is registered as guest, had access to the This provision (Art 2003) it similar to that of the common
safety deposit box. Therefore Tropicana Hotel should be carrier, which does not allow a common carrier to dispense
held liable for damage due to the negligence of their with or limit its liability by posting notices. Such notices
employee. Take note that the depositary also possess a (limiting liability) is obviously contrary to law and public
key that is needed to open the safety box. The depositary policy. Hotel-keepers or inn-keepers as depositary should
must ascertain the authority of the person who wants to be subject to extraordinary degree of care as this is a
access the box. In this case, there was no instruction from necessary deposit.
McLaughlin that Tan would be allowed to access the said
safety-deposit box. TAKE NOTE:
Suspicious circumstances also surround this case. When Hotelkeepers are liable even though the effects are not
would Tan usually open? Dawn or early morning. The very delivered to them or their employees, but it is enough that
least that the hotel could have done is to call McLaughlin the effects are within the hotel or inn.
and inquire whether Tan is authorized to access the
deposit box. In relation to the agreement and undertaking
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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Art. 2004. The hotel-keeper has a right to retain the things the filing of a complaint or a receiver may be appointed by
brought into the hotel by the guest, as a security for credits the court to administer and preserve the property in
on account of lodging, and supplies usually furnished to litigation. If it is a personal property, it may be seized by the
hotel guests. (n) sheriff in actions such as replevin or manual delivery of
personal property.
Art 2004, is another instance wherein a contract of pledge
is created by law. This is given to the hotel-keepers to Is a notice of lis pendens equivalent to a judicial deposit?
compensate them for the liability imposed upon them by No
law. What is the effect of a notice of lis pendens? It serves as a
notice to third persons that the property is under litigation.
This is different from the general rule in commmodatum,
because the bailee can retain the thing for reason of Los Banos Rural Bank vs Africa
hidden defect.
In June 1989, the Quezon City Hall building where the
However if you remember in your Criminal Law, the act of Register of Deeds was then holding office was razed by
not paying the hotel for accommodation constitutes estafa fire, destroying some of its records/ documents among
and not only civil liability. which was the original Transfer Certificate of Title covering
a parcel of land situated in Diliman, Quezon City, and
registered in the name of Pacita Africa. The aforesaid
property was part of the conjugal property of Pacita and her
late husband Alberto Africa.
December 9, 2015 On request of Pacita, respondent Macy Africa, the
common-law wife of petitioner Antonio Africa, worked for
Transcribed by: Luna Acosta the reconstitution of the aforesaid TCT. The same was
done and a new Transfer Certificate of Title was issued in
We are already done with the two kinds of extrajudicial the name of Pacita Africa. While the reconstituted title was
deposit, voluntary and necessary deposit. Now let’s go in her possession, Macy allegedly forged, or caused the
over the second kind of deposit which is judicial deposit, forgery of, Pacitas signature on a Deed of Absolute Sale
also known as sequestration. dated December 29, 1992, purporting to transfer ownership
of the subject property to Macy. On the strength of the
Article 2005. A judicial deposit or sequestration takes forged Deed of Absolute Sale, Macy was able to cause the
place when an attachment or seizure of property in issuance of the title in her name. Macy caused the
litigation is ordered. preparation of a fake title in the name of Pacita, which the
former showed to the latter to make Pacita believe that the
said title was issued in Pacita’s name.
Article 2006. Movable as well as immovable property may
be the object of sequestration.
Sometime in March 1994, petitioners discovered private
respondents fraudulent act. They likewise came to know
Article 2007. The depositary of property or objects that the subject property was mortgaged by Macy to the
sequestrated cannot be relieved of his responsibility until respondent bank. To protect their interests over the subject
the controversy which gave rise thereto has come to an property, petitioners lodged an action in court against Macy
end, unless the court so orders. and the respondent bank for Annulment of Title, Deed of
Absolute Sale and Deed of Mortgage.  The respondent
bank foreclosed the subject property on June 11, 1996
Article 2008. The depositary of property sequestrated is without due notice to the petitioners, prompting the
bound to comply, with respect to the same, with all the petitioners to amend the complaint, this time incorporating
obligations of a good father of a family. therein a prayer for the issuance of a temporary restraining
order and/or writ of preliminary injunction, to stop the
A judicial deposit or sequestration takes place when an respondent bank from, among others, consolidating title to
attachment or seizure of property in litigation is ordered. the subject property.
The properties here may be attached by the sheriff upon
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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Issue 1: Whether or not the issuance of the writ of contingent on the existence of a final judgment on the
preliminary injunction was proper. action and ordinarily has no effect on the merits thereof.
Thus, the notice of lis pendens  does not suffice to protect
Ruling: Yes. Injunction is a preservative remedy aimed at herein respondents rights over the property. It does not
no other purpose than to protect the complainants provide complete and ample protection.
substantive rights and interests during the pendency of the
principal action. A preliminary injunction, as the term itself A notice of lis pendens is not equivalent to a judicial
suggests, is merely temporary,  It is to be resorted to only deposit. It merely serves as an announcement to the whole
when there is a pressing necessity to avoid injurious world that the property in question is subject to litigation,
consequences that cannot be remedied under any and as a warning that those who have an interest in the
standard of compensation. property do so at their own risk.

Moreover, injunction, like other equitable remedies, The purpose of a judicial deposit is to maintain the status
should be issued only at the instance of a suitor who has quo ante during the litigation or to ensure the rights of the
sufficient interest in or title to the right or the property parties to the property in case there is a favorable
sought to be protected. It is proper only when the plaintiff judgment. It is merely auxiliary to a case pending in court.
appears to be entitled to the relief demanded in the The depositary of the sequestrated property or the property
complaint. In particular, the existence of the right and the subject of judicial deposit is the person appointed by the
violation thereof must appear in the allegations of the court, and under Article 2008, has the obligation to take
complaint and must constitute at least a prima facie care of the property with the diligence of a good father of
showing of a right to the final relief. Thus, there are two the family and may not be relieved of this responsibility
requisite conditions for the issuance of a preliminary until the litigation is ended or the court so orders.
injunction, namely, (1) the right to be protected exists prima
facie, and (2) the acts sought to be enjoined are violative of Take note of the distinction between judicial and
that right. It must be proven that the violation sought to be extrajudicial deposit:
prevented would cause an irreparable injustice. Judicial Extra Judicial
How it By the will of the By the will of the
Further, while a clear showing of the right is happens court parties (contract)
necessary, its existence need not be conclusively Security (secure For the safekeeping
established. In fact, the evidence required to justify the the right of the of the property
issuance of a writ of preliminary injunction in the hearing party in case of a
thereon need not be conclusive or complete. The evidence favorable
need only be a sampling intended merely to give the court judgement)
an idea of the justification for the preliminary injunction, Subject matter Generally Only movable
pending the decision of the case on the merits. Thus, to be immovable property
entitled to the writ, respondents are only required to show property
that they have the ostensible right to the final relief prayed Remuneration Always onerous May be gratuitous or
for in their Complaint. subject to
compensation
Issue 2: Is a notice of lis pendens enough to protect the For whom In behalf of the In behalf of the
rights of the petitioners such that a writ of preliminary person who in depositor or third
injunction is no longer needed? judgment has a party who deposited
right
Ruling: No. A notice of lis pendens  serves as an Right of return Through the Upon demand of the
announcement to the whole world that a particular real order of the court depositor
property is in litigation and as a warning that those who or when litigation
acquire an interest in the property do so at their own risk -- has ended
they gamble on the result of the litigation over it. However,
the cancellation of such notice may be ordered by the court
that has jurisdiction over it at any given time. Its Article 2009. As to matters not provided for in this Code,
continuance or removal -- like the continuance or the judicial sequestration shall be governed by the Rules of
removal of a preliminary attachment or injunction -- is not Court.

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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

other hand, is defined as a building or place where the

Judicial deposit is remedial or procedural in nature, goods are deposited and stored for profit.
therefore the Rules of Court are applicable.
Take note of what is described as a warehouse receipt. It
Now let’s go to the warehouse receipts law and the trust is a written acknowledgment by a warehouseman that he
receipts law. We will discuss this because it is still included has received and holds certain goods therein described in
in the syllabus for the Bar. These two laws are special store for the person whom it is issued. As document of title
credit transactions which are covered under your it is provided under Art 1636.
commercial law.
It therefore has a threefold nature:
RA 2137: Warehouse Receipts Law (1) A contract – a contract of deposit or a contract of
carriage
What is the purpose of Warehouse Receipts Law? (2) Evidence of receipt of goods
1. To regulate the status, rights, and liabilities of a person (3) Operates as a transferable document of title
in a warehousing contract;
2. To protect those who in good faith and for value, acquire What is the difference between a negotiable warehouse
negotiable warehouse receipts by negotiation; reciept and a negotiable instrument?
3. To render the title to and right of possession of property
stored in warehouses more easily convertible; NIL NWR
4. To facilitate the use of warehouse receipts as Subject matter is money Subject matter is goods
documents of title; Object of value is the Object of value refers to the
5. To place greater responsibility on the warehouseman instrument itself goods deposited
There are parties No parties that are
What is the scope of the Warehouse Receipts Law? It secondarily liable secondarily liable
covers all types of warehouses whether public or private An original bearer An original bearer
warehouses bonded or not bonded. However there is a instrument will always be instrument subsequently
special law towards bonded warehouses (General Bonded considered a bearer indorsed, it becomes an
Warehouse Act). instrument, thus can be order instrument
negotiated by mere
GBWA regulates and supervises warehouses which puts delivery
up a bond. While the WRL, describes mutual duties and There is a concept of There is no concept of
rights of a warehouseman who issues warehouse receipts holder in due course who holder in due course In
to the depositor; and covers all warehouses whether has a better title than the negotiable instruments, an
bonded or not. transferor originally bearer instrument,
can still be negotiated by
Applicability of the WRL: it applies to warehouse receipts delivery even if it has been
issued by a warehouseman as defined under Section 58 of indorsed.
the WRL. The civil code (specifically provisions on
documents of title) is applied to all other instances where In warehouse receipt, even if it is originally bearer, once it
the receipt is not issued by the warehouseman. This is in is especially indorsed it is considered an order document or
connection to a contract of deposit wherein you deliver the receipt.
goods to a warehouse man for the purpose of security.
However, a depositary is not necessarily a holder of a Under Section 9 of the Negotiable Instruments Law, even if
warehouse receipt. it is originally an order instrument, when the last or only
endorsement is an endorsement in blank, that can be
Warehouse receipts are considered as a negotiable considered as a bearer instrument. We do not have the
document of title, as distinguished from your negotiable same rule with regard to a warehouse receipt. A bearer
instruments. instrument if specially endorsed becomes an order
instrument under the WRL.
Warehouseman is a person lawfully engaged in the
business of storing goods for profit. Warehouse, on the

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Sec. 2. Form of receipts; essential terms. Warehouse Act. (b) In any wise impair his obligation to exercise that
receipts need not be in any particular form but every such degree of care in the safekeeping of the goods entrusted to
receipt must embody within its written or printed terms: him which is reasonably careful man would exercise in
(a) The location of the warehouse where the goods are regard to similar goods of his own.
stored,
(b) The date of the issue of the receipt, Section 3 provides for the power of a warehouseman to
(c) The consecutive number of the receipt, insert specific terms and conditions subject to the limitation
(d) A statement whether the goods received will be provided under Sec 3.
delivered to the bearer, to a specified person or to a
specified person or his order, Sec. 4. Definition of non-negotiable receipt. — A receipt in
(e) The rate of storage charges, which it is stated that the goods received will be delivered
(f) A description of the goods or of the packages containing to the depositor or to any other specified person, is a non-
them, negotiable receipt.
(g) The signature of the warehouseman which may be Sec. 5. Definition of negotiable receipt. — A receipt in
made by his authorized agent, which it is stated that the goods received will be delivered
(h) If the receipt is issued for goods of which the to the bearer or to the order of any person named in such
warehouseman is owner, either solely or jointly or in receipt is a negotiable receipt. No provision shall be
common with others, the fact of such ownership, and inserted in a negotiable receipt that it is non-negotiable.
(i) A statement of the amount of advances made and of Such provision, if inserted shall be void.
liabilities incurred for which the warehouseman claims a
lien. There are two kinds of warehouse receipt
1. Negotiable
If the precise amount of such advances made or of such 2. Non-negotiable
liabilities incurred is, at the time of the issue of, unknown to
the warehouseman or to his agent who issues it, a To be considered negotiable it must be indicated therein
statement of the fact that advances have been made or that the goods are deliverable to bearer or order. We have
liabilities incurred and the purpose thereof is sufficient. A here the terms of negotiability similar to negotiable
warehouseman shall be liable to any person injured instruments. However as seen under sections 4 and 5, a
thereby for all damages caused by the omission from a provision in the negotiable warehouse receipt that the
negotiable receipt of any of the terms herein required. instrument is non-negotiable is void. The word “negotiable”
is usually printed on the face of the negotiable warehouse
If the goods are improperly described, it does not make the receipt. The failure to mark it as negotiable however does
warehouse receipt ineffective, as long as the identity of the not necessarily render it non-negotiable. As long as it is
goods be fully established by evidence. indicated therein or it bears the terms of negotiability,
“bearer” or “order”, it could still be considered as negotiable
What is the effect of omission of these essential terms in document or a negotiable receipt even though it is
the warehouse receipt? The validity of the warehouse indicated as non-negotiable
receipt is not affected. What can happen? The
warehouseman be liable for damages. In any case, the A document is non-negotiable when it is deliverable to the
negotiability of the receipt will not be affected and the depositor or any specified person. As a general rule, it
contract will be converted to ordinary deposit wherein it will should be stamped on its face as nonnegotiable or not
be the civil code which is applicable. Just like any contract, negotiable. It cannot be negotiated, but it can be
the warehouse receipt shall not contain stipulations that are transferred or assigned. Failure to mark it as non-
contrary to public policy, and laws. It also must not contain negotiable shall make it negotiable if it carries the terms of
a stipulation exempting the warehouseman from liability for negotiability. A negotiable warehouse receipt is negotiated
misdelivery or negligence. Any provision to that note will be by delivery if it is a bearer document. If there is a special
void. endorsement, it becomes an order instrument and it has to
be indorsed plus delivered for a valid negotiation.
Sec. 3. Form of receipts. — What terms may be inserted. A
warehouseman may insert in a receipt issued by him any If the warehouse receipt is non-negotiable, transferee of
other terms and conditions provided that such terms and the non-negotiable warehouse receipt must notify the
conditions shall not: (a) Be contrary to the provisions of this warehouseman of the transfer to him of such receipt.
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Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Notice is required. Prior notice will not affect the levy of the actual possession of the goods until the receipt is
attachment or execution. If the warehouse receipt is surrendered to him or impounded by the court.
negotiable, notice is not required. It is as if the
warehouseman directly issued the receipt to the person in Goods covered by the negotiable receipt cannot be
possession. attached or levied upon directly and creditors must resort to
attaching or levying the receipts in the hands of a debtor-
Obligations of a warehouseman transferor. If it is in the hands of the holder, it may be free
The warehouseman issues the warehouse receipt, take from legal attachment or levy of transferors creditors.
good care of the goods and to deliver the goods to the
person lawfully entitled (taking into consideration of it is Rights of a warehouseman
negotiable or not). There is also a rule not to comingle the A warehouseman has the right to be paid, he has the right
goods even if they are of the same kind and quality, unlike to exercise his lien on the goods if not paid, to refuse
in an ordinary deposit where it is not an issue if the goods delivery for proper legal circumstances
are mixed if they are the same. There are also obligations
to ensure the goods under certain circumstances, to mark Sec. 27. What claims are included in the warehouseman's
a non-negotiable receipt as such, to mark as such the lien Subject to the provisions of section thirty, a
duplicates of a warehouse receipt, to give proper notice in warehouseman shall have a lien on goods deposited or on
case of the sale of the goods, to take out and cancel the the proceeds thereof in his hands, for all lawful charges for
warehouse receipt when the goods are delivered. The storage and preservation of the goods; also for all lawful
warehouseman shall not be liable for non-delivery without claims for money advanced, interest, insurance,
surrender of the warehouse receipt. In the absence of the transportation, labor, weighing, coopering and other
warehouse receipt, you cannot demand the delivery of the charges and expenses in relation to such goods, also for all
goods from the warehouseman kasi dyan siya magdepend reasonable charges and expenses for notice, and
if whether or not you are entitled to the goods. advertisements of sale, and for sale of the goods where
default had been made in satisfying the warehouseman's
What happens in the absence of the warehouse receipt, lien.
walang duplicate and hindi talaga mahanap?
In case the warehouseman is not paid he has the right to
Section 14. Lost or destroyed receipts. — Where a exercise his lien on the goods wherein it is a form of
negotiable receipt has been lost or destroyed, a court of security on his part. Just like a pledge or mortgage, this is
competent jurisdiction may order the delivery of the goods for the payment of the charges, money advanced and other
upon satisfactory proof of such loss or destruction and expenses provided in section 27.
upon the giving of a bond with sufficient sureties to be
approved by the court to protect the warehouseman from
Sec. 30. Negotiable receipt must state charges for which
any liability or expense, which he or any person injured by
the lien is claimed. If a negotiable receipt is issued for
such delivery may incur by reason of the original receipt
goods, the warehouseman shall have no lien thereon
remaining outstanding.  The court may also in its discretion
except for charges for storage of goods subsequent to the
order the payment of the warehouseman's reasonable
date of the receipt unless the receipt expressly enumerated
costs and counsel fees.
other charges for which a lien is claimed. In such case,
there shall be a lien for the charges enumerated so far as
Section 25. Attachment or levy upon goods for which a they are within the terms of section twenty-seven although
negotiable receipt has been issued. If goods are delivered the amount of the charges so enumerated is not stated in
to a warehouseman by the owner or by a person whose act the receipt.
in conveying the title to them to a purchaser in good faith
for value would bind the owner, and a negotiable receipt is Unless the charges are so specified in a negotiable receipt,
issued for them, they can not thereafter, while in the then it is understood that the warehouseman’s lien is
possession of the warehouseman, be attached by limited to charges for storage of the goods subsequent to
garnishment or otherwise, or be levied upon under an the date of receipt.
execution unless the receipt be first surrendered to the
warehouseman or its negotiation enjoined. The Under Section 36 the remedies available to the warehouse
warehouseman shall in no case be compelled to deliver up man in enforcing his lien.

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

Sec. 36. Effect of sale. After goods have been lawfully sold Section 42, if such order receipt is delivered without
to satisfy a warehouseman's lien, or have been lawfully endorsement, the mere delivery of the negotiable receipt
sold or disposed of because of their perishable or transfers title to the goods to the holder as against the
hazardous nature, the warehouseman shall not thereafter transferor. This also grants the holder the right to compel
be liable for failure to deliver the goods to the depositor or transfer or to endorse the receipt but the effects of
owner of the goods or to a holder of the receipt given for negotiation shall take place after actual endorsement. This
the goods when they were deposited, even if such receipt is similar to the provisions of negotiable instruments.
be negotiable.
What if the negotiable receipt has warranties?
A warehouseman can exercise lien over the goods
deposited to him however if he remains unpaid he can Sec. 44. Warranties of a sale of receipt. A person who, for
refuse to deliver the goods until the lien is satisfied. value, negotiates or transfers a receipt by indorsement or
Another remedy available to him is to cause the extra- delivery, including one who assigns for value a claim
judicial sale of the property and apply the proceeds to the secured by a receipt, unless a contrary intention appears,
value of the lien. This right is provided under sections 33 warrants: (a) That the receipt is genuine, (b) That he has a
and 34. Another option is to file an action for the collection legal right to negotiate or transfer it, (c) That he has
of unpaid charges or by way of counterclaim he claims an knowledge of no fact which would impair the validity or
action to recover the property for him, or other such worth of the receipt, and (d) That he has a right to transfer
remedies as allowed by law. the title to the goods and that the goods are merchantable
or fit for a particular purpose whenever such warranties
Proper negotiation under Section 41, ipso jure grants to the would have been implied, if the contract of the parties had
holder of the warehouse receipt, not only the title of the been to transfer without a receipt of the goods represented
transferor of the goods but also the title of the depositor, thereby.
the person who actually delivered the goods to the
warehouseman. There is also a direct obligation of the Warranties of sale of receipt:
warehouseman to hold possession of the goods for him, 1. That the receipt is genuine
the holder, without need of notice. If the warehouseman 2. That the transferor has legal right to negotiate or transfer
releases the goods to a person who is not the holder of the it
warehouse receipt, the warehouseman can be held liable. 3. That the transferor has no knowledge of any defect that
may impair the validity or worth of the receipt
Sec. 42. Rights of person to whom receipt has been 4. The right to transfer the title to the goods and that the
transferred. — A person to whom a receipt has been goods are merchantable or fit for a particular purpose
transferred but not negotiated acquires thereby, as against
the transferor, the title of the goods subject to the terms of The transferor may be held liable for breach of any of the
any agreement with the transferor. If the receipt is non- warranties provided.
negotiable, such person also acquires the right to notify the
warehouseman of the transfer to him of such receipt and Sec. 45. Indorser not a guarantor. — The indorsement of a
thereby to acquire the direct obligation of the receipt shall not make the indorser liable for any failure on
warehouseman to hold possession of the goods for him the part of the warehouseman or previous indorsers of the
according to the terms of the receipt. Prior to the receipt to fulfill their respective obligations.
notification of the warehouseman by the transferor or
transferee of a non-negotiable receipt, the title of the Indorsement of a negotiable receipt does not make an
transferee to the goods and the right to acquire the indorser liable for the failure of the warehouseman or
obligation of the warehouseman may be defeated by the previous indorsers to comply with their obligations.
levy of an attachment or execution upon the goods by a
creditor of the transferor or by a notification to the Sec. 46. No warranty implied from accepting payment of a
warehouseman by the transferor or a subsequent debt. A mortgagee, pledgee, or holder for security of a
purchaser from the transferor of a subsequent sale of the receipt who, in good faith, demands or receives payment of
goods by the transferor. the debt for which such receipt is security, whether from a
party to a draft drawn for such debt or from any other
If you have an order warehouse receipt, it must be person, shall not, by so doing, be deemed to represent or
endorsed and delivered for a valid negotiation. Under
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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

to warrant the genuineness of such receipt or the quantity the court. If it is a negotiable receipt, hindi basta basta
or quality of the goods therein described. maclaim ang goods unless you present the warehouse
receipt itself. The depositor who originally deposited the
We have a mortgagee or pledgee who subjected the goods goods actually has no title over the same unless he has the
covered by the warehouse receipt as a security for the warehouse receipt. If it has been negotiated, even if he is
payment of an obligation. A mortgagee, pledgee, or holder the depositor, he cannot claim the goods without the
for security who demands or receives payment for the debt receipt. But if it is non-negotiable it can be attached with
for which such receipt is security such receipt of payment prior notification to the warehouseman.
shall not be deemed to represent or to warrant the
genuineness of the receipt nor the quality or quantity of Trust Receipts Law
goods. When the goods are delivered to the mortgagee,
pledgee, or holder for security by virtue of their right as When is there liability for estafa for violation of the trust
such, the warranties under section 46 is not applicable. receipts law?
When the entrustee fails to turn over the proceeds of the
Sec. 49. Negotiation defeats vendor's lien. Where a sale of goods covered by the trust receipt, or when the
negotiable receipt has been issued for goods, no seller's entrustee fails to return the goods of the trust receipt if not
lien or right of stoppage in transitu shall defeat the rights of disposed in accordance with the agreement of the trust
any purchaser for value in good faith to whom such receipt receipt.
has been negotiated, whether such negotiation be prior or
subsequent to the notification to the warehouseman who Under section 4 of the trust receipt law trust receipt is
issued such receipt of the seller's claim to a lien or right of defined as a written document signed by the trustee in
stoppage in transitu. Nor shall the warehouseman be favor of the entruster whereby the latter releases the goods
obliged to deliver or justified in delivering the goods to an to the possession of the former upon the trustee‘s promise
unpaid seller unless the receipt is first surrendered for to hold the said goods in trust for the entruster (the one
cancellation. who delivered the goods) to sell or dispose of the goods
and to return the proceeds thereof to the extent of the
No seller‘s lien or right of stoppage in transitu shall defeat amount owing to the entruster or to return the goods if
the rights of any purchaser for value in good faith to whom unsold or not otherwise disposed.
such receipt has been negotiated. If the goods covered in
that warehouse receipt are in the possession of the Purpose of the law:
warehouseman, the goods are still in transit, and you have (1) To punish dishonesty and abuse of one who tends in
an unpaid seller, if he wants to exercise his right to the handling of money or goods to the prejudice of the
stoppage in transitu, his right to stop the goods in transit owner regardless of whether or not the latter is the owner.
will have to give way to the right of an innocent purchaser (crime of estafa);
for value; one who purchase the warehouse receipt from (2) To encourage and promote the use of trust receipts as
the buyer. In stoppage in transitu under sales, the general an additional and convenient aid to commerce and trade;
rule is the unpaid seller can exercise his right to stoppage (3) To provide for the regulation of trust receipts
in transit and his right will prevail over that of the buyer. transactions in order to assure the protection of the rights
and enforcement of obligations of the parties involved
The exception here is when the goods are covered by a therein;
warehouse receipt and are validly negotiated to an (4) To declare the misuse and/or misappropriation of goods
innocent purchaser for value; a purchaser who has no or proceeds realized from the sale of goods, released
knowledge that the unpaid seller has already exercised his under trust receipts as a criminal offense punishable under
right to stoppage in transitu. What is important is the buyer the revised penal code.
has in his possession the warehouse receipt, he can validly
negotiate it to another person and that person must have The trust receipt need not be in any particular form
no knowledge of the right to stoppage in transitu as however it must substantially contain the following
exercised by the unpaid seller. essential terms:
(a) a description of the goods, value of the goods,
With regard to levy and attachment if the warehouse undertaking or a commitment of the entrustee to hold in
receipt is negotiable, there must be surrender of the receipt trust for the entruster the goods;
or negotiation is enjoined or the receipt is impounded by
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By: 2 Manresa 2015-2016

(b) to dispose of them in the manner provided for in the owner of the goods but merely the holder of security
trust receipt; and interest. Entrustee is the borrower, buyer, or the importer to
(c) to turn over the proceeds of the sale of the goods whom the goods are delivered for sale with the obligation
to return the proceeds of the same. The entrustee is
Generally, there is no contract of agency established considered the owner of the goods purchased and the law
wherein you have a trust receipt. However, the entrustee‘s imposes on him the risk of loss of the goods. The seller is
breach of trust may subject him to criminal and civil liability not actually a party to the trust receipt contract but to the
like for estafa. contract of sale under the trust receipt.

A trust receipt is applied to items destined for sale or items Rights of an entruster:
process as a component of a product ultimately sold and (1) entitled to the proceeds
manufactured and used to repair equipment used in the (2) entitled to the return of the goods if unsold
business. The trust receipt law does not cover the sale of (3) as against an innocent purchaser for value the entruster
goods, document or instruments by a person in the is not preferred. But as against creditors of the entrustee,
business of selling goods, documents or instruments for the entrustor has a preferred claim over the goods covered
profit who has general property rights in such goods by the receipt. (Section 11)
documents or instruments or sells the same to the buyer on (4) the entruter has the right to transfer the trust take
credit retaining title and other interest as security of the possession of the goods and to sell the goods in a public
payment of the purchase price. sale (Section 12)
(5) the entruster likewise has the right to purchase the
Trust receipt vs. consignment same goods at the intended public sale(Section 7)
There is no processing transaction if the assignment is for
the mere consignment of the goods. If you are going to Obligations of an entruster
apply the trust receipts law it is more than the arrangement (1) to give possession of the goods to the entrustee and to
of the consignor and consignee. There are similarities give at least 5 day notice to the entrustee of the intention to
because you are delivering goods to the entrustee. But if sell the goods at an intended public sale. The entrustee on
you are going to apply the trust receipt law, again take not the other hand has the right to receive the surplus in case
of what is the purpose therein. Because there is no trust of a public sale as provided under section 7.
receipt transaction if it is for mere consignment of the (2) To have possession of the goods as a condition for his
goods with the obligation on the part of the person to whom liability.
it is delivered to release proceeds or to return if unsold.
Essentially in trust receipt you have here the seller does Obligations of the entrustee
not retain title to the property. In consignment you have a (1) To hold the goods or the sale proceeds;
transaction to consider between the consignor and (2) To return the goods in the event of non-sale or upon
consignee wherein the consignor retains ownership over demand of the entruster;
the property. (3) To comply with his alternative obligation to return the
proceeds or the goods. The return of the proceeds “enbre
Trust receipt vs. pledge garla”. The obligation to deliver the goods “vevol vera”.
In a transaction covered by a trust receipt, the person (4) To ensure against loss of the goods
financed possesses the property, the entrustee. In pledge, (5) To keep the goods and sale proceeds separate and
it is the financer that possesses the property or the creditor. identifiable
I trust receipt agreement there is no sale. (6) If there are other conditions provided under the trust
receipt, observe those conditions.
Trust receipt vs. Chattel mortgage
In trust receipt there is no lien stated over the property in Letters of Credit
chattel mortgage is subject the property to a lien. There are instances wherein banks would resort to
agreements like trust receipts. This letter of credit is mostly
Parties to a Trust Receipt used in international transactions. It is actually a bank to
With regard to trust receipt there are three parties, the bank transaction. It is actually easier because banks can
entruster, entrustee, and the seller. When you talk about be trusted more than individuals, lalo na kung kilala na ang
the entruster you have a lender or financier. He is the bank.
person who has title over the goods, not necessarily the

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

What happens here? If you have for example X in the of res perit domino, wherein the same does not apply when
Philippines who wants to purchase goods from Y in Hong what you have is a real trust receipts agreement.
Kong, he cannot just send his payment and hope that the
goods will be delivered, there is no assurance or security Rosario Textile Mills vs Home Bankers
as to the agreement. On the part of Y, he cannot expect Rosario Textile Mills Corporation (RTMC) applied from
that the goods he will send will be paid immediately by X. Home Bankers Savings & Trust Co. for an Omnibus Credit
What would happen is X will apply from a bank a letter of Line for P10 million. The bank approved RTMCs credit line
credit. The bank will guarantee that X will actually make the but for only P8 million. Yujuico signed a Surety Agreement
payment. It is actually like a contract of loan wherein the in favor of the bank, in which he bound himself jointly and
bank lends X the money and X is expected to pay the severally with RTMC for the payment of all RTMCs
bank, but the money does not actually go to X but to Y’s indebtedness to the bank from 1989 to 1990. RTMC
bank. Y will then send the goods. What happens next is availed of the credit line by making numerous drawdowns,
there will be a trust receipts agreement between X and his each drawdown being covered by a separate promissory
bank wherein the bank will be the entruster and X will be note and trust receipt. RTMC, represented by Yujuico,
the entrustee. The goods will be delivered to X but there is executed in favor of the bank a total of eleven (11)
the expectation that the bank will be paid. The purpose of promissory notes.
the trust receipt was merely for security of the loan
obtained by X thru the letter of credit. Despite the lapse of the respective due dates under the
promissory notes and notwithstanding the banks demand
This is not strictly a trust receipts agreement, we have to letters, RTMC failed to pay its loans. Hence the bank filed a
make a distinction. If X refuses to pay in this case, this complaint for sum of money against RTMC and Yujuico
does not necessarily mean that he is liable for estafa just
like in a regular trust receipts agreement. Since this is a RTMC and Yujuico contend that they should be absolved
mutuum or loan and the trust receipt was only issues as a from liability. They claimed that although the grant of the
security, then there is no criminal liability for estafa, there credit line and the execution of the suretyship agreement
can only be a recovery of sum of money and damages, civil are admitted, the bank gave assurance that the suretyship
case lang. Kung hindi makabayad si X sa bank, the agreement was merely a formality under which Yujuico will
obligation to pay did not arise from the trust receipt but not be personally liable. They argue that the importation of
through the contract of loan. Hindi napunta ang title ng raw materials under the credit line was with a grant of
goods sa bank, hinawakan lang nila ang title as security. In option to them to turn-over to the bank the imported raw
a real trust receipts agreement, the entruster has the title to materials should these fail to meet their manufacturing
the goods and the title is not passed to the entrustee. The requirements. RTMC offered to make such turn-over since
money and goods never belonged to the entrustee, what the imported materials did not conform to the required
the entrustee does is merely to hold the goods and sell specifications. However, the bank refused to accept the
them, if unsold, return them, but not to take possession same, until the materials were destroyed by a fire which
over the goods or the money when the goods are sold. gutted down RTMCs premises. RTMC and Yujuico contend
Ipasa lang niya, hindi niya inagkin na kanya. that under the trust receipt contracts between the
parties, they merely held the goods described therein in
In cases of letters of credit and trust receipts agreements, trust for respondent Home Bankers Savings and Trust
you have to take into consideration what the real Company (the bank) which owns the same. Since the
agreement of the parties is. Sometimes it may really be ownership of the goods remains with the bank, then it
closer to a trust receipt agreement than to a mutuum and should bear the loss. With the destruction of the goods by
that will open up the possibility for estafa. You really have fire, petitioners should have been relieved of any obligation
to distinguish between the two possible transactions. If the to pay.
goods are held merely as a security, then it can be
considered as a simple loan. If there is an intention by the Issue: Whether or not the concept of res perit domino
bank or financial institution to maintain the title to the applies in this case
goods, then it can be a trust receipt agreement.
Ruling: No.
As a guide you can check the case of Rosario Textile Mills It is thus clear that the principal transaction between
vs Home Bankers. Take into consideration the discussion petitioner RTMC and the bank is a contract of loan. RTMC
used the proceeds of this loan to purchase raw materials

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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

from a supplier abroad. In order to secure the payment of projects, which were the general contractors of these
the loan, RTMC delivered the raw materials to the bank as projects, have not yet paid them; thus, ACDC had yet to
collateral. Trust receipts were executed by the parties to receive the proceeds of the materials that were the subject
evidence this security arrangement. Simply stated, the trust of the trust receipts and were allegedly used for these
receipts were mere securities. constructions. As there were no proceeds received from
A trust receipt as a security transaction intended to aid in these clients, no misappropriation thereof could have taken
financing importers and retail dealers who do not have place.
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to Issue: Whether or not the transactions were trust receipt
acquire credit except through utilization, as collateral, of the agreements
merchandise imported or purchased. It secures an
indebtedness and there can be no such thing as security Ruling: No.
interest that secures no obligation. There are two obligations in a trust receipt
If under the trust receipt, the bank is made to appear as the transaction. The first is covered by the provision that refers
owner, it was but an artificial expedient, more of legal to money under the obligation to deliver it ( entregarla) to
fiction than fact, for if it were really so, it could dispose of the owner of the merchandise sold. The second is covered
the goods in any manner it wants, which it cannot do, just by the provision referring to merchandise received under
to give consistency with purpose of the trust receipt of the obligation to return it ( devolvera) to the owner. Thus,
giving a stronger security for the loan obtained by the under the Trust Receipts Law, intent to defraud is
importer. To consider the bank as the true owner from the presumed when (1) the entrustee fails to turn over the
inception of the transaction would be to disregard the loan proceeds of the sale of goods covered by the trust receipt
feature thereof... to the entruster; or (2) when the entrustee fails to return the
The contract between the parties is a loan. What goods under trust, if they are not disposed of in accordance
respondent bank sought to collect as creditor was the loan with the terms of the trust receipts.
it granted to petitioners, not the proceeds from the sale of  
the goods under a trust receipt. In all trust receipt transactions, both obligations
on the part of the trustee exist in the alternative the return
You can also read the case of Land Bank vs Lamberto of the proceeds of the sale or the return or recovery of the
Perez: goods, whether raw or processed. When both parties enter
into an agreement knowing that the return of the goods
Land Bank vs Lamberto Perez subject of the trust receipt is not possible even without any
On June 7, 1999, LBP filed a complaint for estafa against fault on the part of the trustee, it is not a trust receipt
the respondents. LBP extended a credit accommodation to transaction penalized under Section 13 of P.D. 115; the
ACDC through the execution of an Omnibus Credit Line only obligation actually agreed upon by the parties would
Agreement (Agreement). In various instances, ACDC used be the return of the proceeds of the sale transaction. This
the Letters of Credit/Trust Receipts Facility of the transaction becomes a mere loan, where the borrower is
Agreement to buy construction materials. The respondents, obligated to pay the bank the amount spent for the
as officers and representatives of ACDC, executed trust purchase of the goods.
receipts in connection with the construction materials.. The  
trust receipts matured, but ACDC failed to return to LBP In concluding that the transaction was a loan and not a
the proceeds of the construction projects or the trust receipt, we noted in that the industry or line of work
construction materials subject of the trust receipts. LBP that the borrowers were engaged in was construction. We
sent ACDC a demand letter for the payment of its debts, pointed out that the borrowers were not importers acquiring
including those under the Trust Receipts Facility. When goods for resale. Indeed, goods sold in retail are often
ACDC failed to comply with the demand letter, LBP filed within the custody or control of the trustee until they are
the complaint for estafa. purchased. In the case of materials used in the
The respondents contended that the trust receipts in this manufacture of finished products, these finished products if
case do not contain (1) a description of the goods placed in not the raw materials or their components similarly remain
trust, (2) their invoice values, and (3) their maturity dates, in the possession of the trustee until they are sold. But the
in violation of Section 5(a) of P.D. 115. Moreover, they goods and the materials that are used for a construction
alleged that ACDC acted as a subcontractor for project are often placed under the control and custody of
government projects and its clients for the construction the clients employing the contractor, who can only be

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Jacinto St., Davao City
 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
Based on the Lectures of Atty. Sarona
By: 2 Manresa 2015-2016

compelled to return the materials if they fail to pay the

contractor and often only after the requisite legal
proceedings. The contractors difficulty and uncertainty in
claiming these materials (or the buildings and structures
which they become part of), as soon as the bank demands
them, disqualify them from being covered by trust receipt
agreements.
 
Based on these premises, we cannot consider
the agreements between the parties in this case to be trust
receipt transactions because (1) from the start, the parties
were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for which
they were used; and (2) from the moment the materials
were used for the government projects, they became
public, not LBPs, property. Since these transactions are not
trust receipts, an action for estafa should not be brought
against the respondents, who are liable only for a loan. 

~END OF PRELIMS COVERAGE~

“If it’s easy, it will not last; because everything that lasts is
not easy....” 

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