Reviewer: Commercial Law I

INTRODUCTION
Obligation Defined – Art. 1156. An obligation is a juridical necessity to give, to do or not to do. Judicial
necessity means the rights and duties arising from obligation are legally demandable and the courts of
justice may be called upon through proper action to order the performance.
Essential requisites:
1. Active Subject
2. Passive Subject
3. Object/Prestation
4. Juridical Tie
Sources of Obligations:
1. Law – rule of conduct that are just and obligatory, promulgated by legitimate authority for the
common observance and benefit.
2. Contracts – A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service. (Article 1305)
- Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. (Article 1159)
- Contracts are not above the law. There are limitations. Stipulations in a contract must not be
contrary to law, morals, good customs, public order or public policy. (Article 1306)
3. Quasi Contracts – Kinds:
- Negotiorum Gestio (management of another’s property) – it is the voluntary management
or administration by a person of the abandoned business or property of another without any
authority or power from the latter.
- Solutio Indebiti (Payment by mistake) – It is the judicial relation which arises when a person
is obliged to return something received by him trough error or mistake.
4. Delicts – Acts or omissions punished by law.
Civil liability arising from delicts:
a. Restitution – which is the restoration of or returning the object of the crime to the injured
party.
b. Reparation – which is the payment by the offender of the value of the object of the crime,
when such object cannot be returned to the injured party.
c. Indemnification – the consequential damages which includes the payment of other damages
that may have been caused to the injures party.
5. Quasi-delicts – There must be fault of negligence attributable to the offender. There must be
damage or injury caused to another. There is no pre-existing contract.
GENERAL RULE FOR OBLIGATION: As a general rule, the law does not require any form in
obligations arising from contracts for their validity or binding force. Obligations arising from other
sources do not have form at all.
EXCEPTION TO FORM:
1. Statute of Frauds:
a. An agreement that by its terms is not to be performed within a year from the making thereof;
b. A special promise to answer for the debt, default, or miscarriage of another;
c. An agreement made in consideration of marriage, other than a mutual promise to marry;
d. An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive part of such goods….
e. An agreement of the leasing for a longer period than one year, or for the sale of real property or
of an interest therein;
f. A representation as to the credit of a third person.
Characteristics of Contracts
1. Freedom or Autonomy of Contracts – The parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided, they are not contrary to law, morals,
good customs, public order, and public policy.
Limitations:
a. Law
b. Police Power
c. Not contrary to morals, good customs and public policy.
2. Obligatoriness of contract – Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
 3. Mutuality of Contracts – Contracts must bind both and not one of the contracting parties; their
validity or compliance cannot be left to the will of one of them
4. Consensuality of Contracts – Contracts are perfect, as a general by mere consent, and from that
moment the parties are bound not only by the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law.
5. Relativity of contracts – Contracts take effect only between the parties, their assigns, their heirs,
except in cases where the rights and obligations arising from the contract are not transmissible
by their nature or by stipulation, or by provision of law.
Classifications:
1. According to cause:
a. Onerous
b. Remuneratory or Remunerative
c. Gratuitous
2. According to obligatory force:
a. Valid
b. Rescissible
c. Voidable
d. Unenforceable
e. Void or inexistent
Sample Problems:
1. D borrowed 100 from C payable after one month. On due date, D tendered a manager's check
showing the amount of the debt to C. However, the latter refused to accept. Is C justified in
rejecting the payment? Why or Why not?
ANSWER: Yes, C is justified in rejecting the payment.
Under the Civil Code of the Philippines, specifically Article 1249, payment of debts in money
shall be made in the currency which is legal tender in the Philippines. A manager’s check, while
generally considered a more secure form of payment than an ordinary check, is still not
considered legal tender. Only coins and notes issued by the Bangko Sentral ng Pilipinas (BSP)
constitute legal tender.
Since D tendered a manager’s check instead of cash, C has the right to refuse it. For the payment
to be valid and extinguish the debt, D must offer payment in legal tender, unless C expressly
agrees to accept the check.
2. S SOLD TO b ON sEPTEMBER 5 A SPECIFIC motor vehicle to be delivered on september 20.
However, on September 15, S sold again and delivered the same motor vehicle to T. Who has
better right over the motor vehicle and why?
ANSWER: T has a better right over the motor vehicle.
Under Article 1473 of the Civil Code of the Philippines, if a thing is sold to different buyers,
ownership is transferred to the one who first takes possession in good faith. In this case:
S first sold the motor vehicle to B on September 5, with delivery set for September 20.
However, before delivery to B, S sold and delivered the same motor vehicle to T on September
15.
Since T took possession of the vehicle first, and there is no indication that T was in bad faith
(meaning T did not know about the prior sale to B), T acquires ownership and has the better
right.
B may have a claim for damages against S but does not have the right to recover the vehicle from
T.
3. D borrowed 100 from C. On due date of the loan, D could not pay C because he lost to a robber
the 100 intended for C. In addition, he sufferred financial reverses, and he was short of cash
even for his current family's needs. Is D legally justified to refuse to pay C? Why or Why not?
ANSWER: No, D is not legally justified in refusing to pay C.
Under Article 1263 of the Civil Code of the Philippines, a debtor is not released from an
obligation to pay a sum of money even if the money intended for payment was lost or stolen.
This is because money is fungible (replaceable), meaning D can still obtain other money to settle
his debt.
Additionally, under Article 1267, while an obligation may sometimes be extinguished due to
extraordinary circumstances that make it extremely difficult to perform, mere financial difficulty
or lack of cash is not a valid excuse for nonpayment.
 Thus, despite D’s financial hardship and the robbery, he is still legally obligated to pay C.
4. While the car of X was parked by the roadside, it was bumped at the rear by a jeep belonging to
Y. Only the car of X suffered damage. Under the circumstances, does it follow that Y is liable to X
for the damage? Why or why not?
ANSWER: Yes, Y is liable to X for the damage to the car.
Under Article 2176 of the Civil Code of the Philippines, any person who causes damage to
another due to fault or negligence is obliged to compensate for the damage. In this case:
 X's car was properly parked by the roadside, meaning X was not at fault.
 Y’s jeep bumped into X’s car, which suggests negligence on Y’s part or on the part of the driver.
Since Y (or the driver of the jeep) was the one who caused the accident, Y is presumed negligent
and is liable for the damage, unless he can prove that the collision was due to force majeure (an
unavoidable event) or that X was also negligent in some way.
5. X saw at about 1 in the afternoon a child alone in a shopping mall. The child who strayed form Y,
his mother, was in tears and appeared very hungry. Out of pity, X took him to a restaurantto eat
for which he spent 20. Y did not give her consent to the good deed of X. Furthermore, they were
on their way home before the child got lost. Is X entitled to be reimbursed by Y for the amount
of 20? Why or why not?
ANSWER: Yes, X is entitled to be reimbursed by Y for the amount of 20.
Under Article 2164 of the Civil Code of the Philippines, if a person voluntarily takes charge of
another’s abandoned business or property without the owner's consent, the owner is obliged
to reimburse necessary expenses as long as the act benefited them. This legal principle is known
as "solutio indebiti" or "negotiorum gestio" (voluntary management of another’s affairs).
In this case:
 X acted out of compassion to help Y’s lost and hungry child.
 Feeding the child was a necessary and beneficial expense for the child’s welfare.
 Although Y did not consent, she benefited from X’s actions because her child was taken care of.
Thus, Y is obliged to reimburse X for the 20 spent on the child’s meal.

CREDIT TRANSACTIONS
Credit transactions include all transactions involving the purchase of loan of goods, services, or money, in
the present with a promise to pay or deliver in the future.
Types of Credit Transactions:
1. Secured – Contracts of real security.
2. Unsecured – Contracts of personal security.
Security – something given, deposited or serving as a means to ensure the fulfillment or
enforcement of an obligations or of protecting some interest in property.
Types of Security:
1. Personal
2. Real
Example:
a. Bailment contracts
b. Contracts of guaranty and suretyship
c. Mortgage
d. Antichresis
BAILMENT
- The delivery of property of one person to another in trust for a specific purpose, with a
contract, express or implied, that the trust shall be faithfully executed and the property
returned or duly accounted for when the special purpose is accomplished or kept until the
bailor reclaims it.
- HOW CREATED?
1. By the establishment of a contractual relationship between the parties; or
2. By the force of law.
- PARTIES TO THE BAILMENT
1. Bailor – Person who temporarily, transfers possession of property to another. He is also
called “comodatario”.
2. Bailee – Person who receives property and who may be committed to certain duties of
care towards the property while it remains in his possession. He is also called
“comodante”.
 - CONTRACTUAL RELATIONSHIP
1. Bailee knowingly has exclusive control over the property received by him;
2. Bailee is duty-bound to use reasonable care to protect the same.
- TYPES OF BAILMENTS AS TO BENEFICIARY
1. Those which are for the sole benefit of the bailor such as gratuitous deposits and
“mandatum”.
2. Those which are for the sole benefit of the bailee, such as commodatum and gratuitous
simple loan or mutuum;
3. Those which are for the benefit of both parties, such as deposit for compensation.
Deposit for Compensation:
a. Involuntary Deposit
b. Pledge
c. Bailment for hire
Involuntary or Necessary Deposit – is deemed a necessary deposit for compensation
where a property belonging to a person is saved from destruction by another
without the former’s knowledge during a calamity in which case the owner is bound
to pay the latter just compensation.
Bailment for hire – also known as ‘locatio et conductio’, arises when goods are left
with the bailee for some use or service by him and is always for some compensation.
1. Hire of things (location rei)
2. Hire of service (location operis faciendi)
3. Hire for carriage of goods (location operis mercium vehendarum)
4. Hire for custody (locatio custodae)
LOAN
- Generally regarded as an amount usually in money, conveyed by one person to another in
the expectation by the lender that it will be returned to him by the borrower, often with
stipulated interest, on a later date.
- In Article 1933 of the NCC, it is a contract by which one of the parties delivers to another,
either:
a. Something not consumable so that the latter may use the same for a certain time and
return it (Commodatum); or
b. Money or other consumable thing, upon the condition that the same amount of the
same kind and quality shall be paid (Mutuum).
- An accepted promise to deliver something by way of Commodatum or Mutuum is binding
upon the parties but the Commodatum or Mutuum itself shall not be perfected until the
delivery of the object of the contract. Delivery is necessary in view of the purpose of the
contract which is to transfer either the use or ownership of the thing loaned.

- LOAN AND DISCOUNTS DISTINGUISHED

LOAN DISCOUNT
Interest is taken at the expiration of a Interest is deducted in advance.
credit.
Generally, on a single – name paper. Always on a double name paper.
*Single – name paper is a type of commercial paper, such as a check or a promissory note,
that bears no endorsement other than the signature of the maker.
*Double – name paper is a type of a commercial paper signed by two persons, usually a
maker and endorser, both of whom accept full liability.
- CHARACTERISTICS:
1. Consensual or Real
2. Onerous
3. Unilateral
4. Nominate
5. Commutative
6. Informal or Formal
7. Principal
- FUNDAMENTAL ASPECTS OF LOAN
1. Time of Maturity
2. Repayment
 3. Interest
4. Secuirty
- .
- CAUSES OF EXTINGUISHMENT
1. Expiration of the time or use stipulated.
2. Claim of the lender.
3. Destruction of the thing.
4. Death of the borrower or lender.
5. Ingratitude of the bailee.

COMMODATUM
- It is essentially a gratuitous contract of loan by which the bailor (or lender) delivers to the
bailee (or borrower) a non-consumable thing so that the latter may use the same for a
certain time and shall return that same thing to the former after lapse of such period.
- CHARACTERISTICS
1. Real Contract
2. Unilateral Contract
3. Essentially gratuitous
4. Purpose is to transfer the temporary use of the thing loaned
5. Principal contract
6. Purely Personal Contract
- CAUSES OF EXTINGUISHMENT
1. Expiration of the time or use stipulated.
2. Claim of the lender.
3. Destruction of the thing.
4. Death of the borrower or lender.
5. Ingratitude of the bailee.
- EXAMPLE
1. The Bureau of Animal Industry loaned to the defendant Jose 3 bulls for breeding
purposes for a period of 1 year, which was later on renewed for another year as regards
1 bull, subject to the payment by the borrower of breeding fee of 10% of the book value
of the bulls. Is this contract of commodatum?
ANSWER: No, this is not a contract of commodatum.
Explanation:
A commodatum is a type of loan where:
1. A lender delivers a non-consumable thing to a borrower.
2. The borrower may use the thing but must return the exact same thing after a period.
3. It must be gratuitous (no payment or fee involved).
In this case:
 The Bureau of Animal Industry loaned the bulls for breeding purposes (which implies
commercial use).
 Jose had to pay a breeding fee (which means the loan was not gratuitous).
 The bulls were used for breeding, meaning they were used for profit, which is inconsistent with
the purely personal use intended in commodatum.
Proper Classification:
This is a lease or contract for use with consideration (the breeding fee), rather than a
commodatum, which must be free of charge.
 Commodatum being fundamentally cost free any contract which obliges the borrower who
acquires the use of thing loaned to pay any sort of compensation to the lender is not a contract
of commodatum but a contract of lease.
2. P and EG executed an agreement, wherein P, as owner of the house, allowed EG to live
in the house for free. In return, Guevarra promised to maintain the cleanliness and
orderliness of the house and to voluntarily vacate the premises upon Pajuyo’s demand.
Is this contract of commodatum?
ANSWER: The agreement reveals that the accommodation accorded by P to EG was not
essentially gratuitous. While the agreement did not require Guevarra to pay rent it
 obligated him to maintain the property in good condition. The imposition of this
obligation makes the agreement a contract different from commodatum.
3. A leased car of B as he needed a car to go to and from his school. During the semester, A
saw his crush, C and to obtain the latter’s yes, A lent B’s car to C for free. Is there a valid
contract of commodatum between A and C?
ANSWER: Yes. It is not necessary in the contract of commodatum that the bailor or
lender be the owner of the thing loaned since ownership of the thing loaned does not
pass to the borrower.
- Commodatum is:
1. It is extinguished by the death of either the bailor of the bailee, unless, by stipulation,
the commodatum is transmitted to the heirs of either or both party;
2. The object of the contract, as a general rule, can neither be lent nor leased by the bailee
to a third person, and
3. The thing loaned may be used, as an exception to the foregoing rule, by the members of
the bailees household (eq. appliances) unless:
a. Such use is stipulated by stipulations;
b. The nature of the thing forbids such use by other persons other than the bailee.
- KINDS OF COMMODATUM
1. Ordinary – Bailor cannot just demand the return of the thing at will because there is a
period or purpose agreed upon by the parties
2. Precarium – Bailor may demand the thing loaned at will in the following cases:
a. Duration of the contract had not been stipulated;
b. Use to which the thing loaned should be devoted had not been stipulated;
c. Use of the thing is merely by tolerance by the owner.
- FOR ordinary commodatum, the bailor can demand the return of the thing loaned before
the expiration of the period stipulated only in the following situations:
1. When the bailor has urgent need of the thing;
2. When the bailee commits any of the acts of ingratitude analogous to those specified in
Article 765 (Grounds for revocation of donation) in which case the bailor may ask that
the contract be revoked and demand that the thing be immediately returned.
Acts of Ingratitude
a. If the done commits an offense against the person, honor, or property of the donor.
Acts such as physical harm, verbal abuse, or damage to the donors’ property can be
considered as offenses warranting revocation;
b. If the done imputes any criminal offense to the donor. False accusation or charges
made by the done against the donor, which damage the latter’s honor or reputation
can also be grounds for revocation.
c. If the done unduly refuses to support the donor. If the donor becomes impoverished
or in need of support and the done unjustly refuses to provide the necessary help
this may also constitute ingratitude.
Subject Object
The person or thing that is doing the action The person or thing that is receiving the
action
The subject of a commodatum is generally May either be Movable (personal property)
any kind of thing that is not consumable. OR Immovable (real property)
Consumable goods MAY, however, be the
subject of commodatum if the purpose of
the contract is not the consumption of the
object but its display or exhibition.
- CONSUMABLE VS. NON – CONSUMABLE – A thing that is not consumable when it may be
enjoyed without altering its substance, such as land, furniture, shares of stocks, and the like.
On the other hand, a thing is consumable when it is used in a manner appropriate to its
purpose or nature, like sugar, oil, money, vegetable, lumber, etc.
- DOES BAILEE HAVE THE RIGHT TO USE THE FRUITS OR IMPROVEMENTS OF THE THING
LOANED? The bailee has the right to use the thing loaned but not its fruits or improvements
as that right belongs to the bailor as the owner of the thing loaned except when there is a
stipulation to the contrary. Generally, the authority of the bailee is limited to the use of the
thing loaned. With respect to the use of the fruits or produce of the thing loaned, the same
 cannot be presumed. There must be an express stipulation to that effect in order for such
use to be permitted. Absent such stipulation, the natural, industrial and civil fruits of the
thing loaned belong to the owner or the bailor and since these fruits are not included in the
contract, their used largely depends on the will of such owner or bailor. Though the law
sanctions such stipulation, the use of the fruits should only be incidental and not the main
cause of the contract. Because if it is the main cause, then the contract may be that one of
USUFRUCT.
- OBLIGATIONS OF THE BAILEE
1. Pay for the ordinary expenses for the use and preservation of the thing loaned;
2. Be liable for the loss of the thing in certain instances even if due to fortuitous events;
3. Answer for the deterioration of the things loaned if with his fault but no if due only to
the use thereof;
4. Cannot retain the thing loaned on the ground that the bailor owes him something, even
though it may be by reason of expenses;
5. To be solidarily liable with the co-bailees;
6. Take good care of the thing with diligence of a good father of a family 9ordinary
diligence).
- PROHIBITED ACTS
1. If he devotes the thing to any purpose different from that for which it has been loaned;
2. If he keeps it longer than the period stipulated, or after the accomplishment of the use
for which the commodatum has been constituted;
3. If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of fortuitous event;
4. If he lends or leases the thing to a third person, who is not a member of his household;
o Household members are those who are permanently living or residing in the house
of the bailee, including the live-in household helpers or kasambahay.
5. If, being able to save either the thing borrowed or his own thing, he chose to save the
latter;
- WHEN LIABLE DUE TO DETERIORATION
1. Bailee is guilty of fault or negligence; or
2. Bailee devotes the thing to any purpose different from that for which it is loaned.
- WHEN RETENTION IS ALLOWED
The bailee has the right of retention for damages mentioned in A1951 of the Civil Code.
A1951 states that the Bailor who, knowing the flaws of the thing loaned, does not advise the
bailee of the same, shall be liable to the latter for the damages which he may suffer by
reason thereof.
 The bailee’s right extend no further than retention of the thing loaned
until he is reimbursed for the damages suffered by him.
 Bailee can not lawfully sell the thing to satisfy such damages without
court’s approval.
- CASE STUDY
1. Whether or not petitioner (vicar) who is in possession of a lot since 1906 with tax
declaration in 1951 can register the property in their name.
ANSWER: NO. They are bailors in commodatum and Vicar are the bailee.
2. Due to the fault and negligence of A and B, bailees, the car they loaned from C was
permanently destroyed. In their contract, however, A, B and C agreed that the liability of
the bailees in case of loss of the thing loaned shall be joint. May C demand full payment
of the damages from A only since he has a crush on B?
ANSWER: Under Article 1945 of the Civil Code, it can be inferred that the parties to a
contract of commodatum cannot validly stipulate that the liability of the bailees shall be
joint.
- ORDINARY DILIGENCE
“Connotes reasonable care consistent with that which an ordinarily prudent person would
have observed when confronted with similar situation.”
 - OBLIGATIONS OF THE BAILOR
1. Respect the duration of the loan;
2. Refund to the bailee extraordinary expenses for the preservation of the thing loaned,
provided the bailee brings the same to the knowledge of the bailor before incurring
them, except when they are so urgent that the reply to the notification cannot be
awaited without danger;
3. Be liable for damages for known hidden flows.
o If the requisites concur, the bailee has the right of retention for damages
o The bailor cannot exempt himself from the payment of expenses or damages by
abandoning the thing loaned to the bailee.
o Aside from such right of retention until fully reimbursed, the bailee has no right to
sell the thing loaned to satisfy his claim for damages.
EXCEPTIONS
1. In case of urgent need in which case the bailor may demand its return or temporary
use;
2. The bailor may demand immediate return of the thing if the bailee commits any act
of ingratitude specified in art. 765.
o EXTRAORDINARY EXPENSES FOR THE PRESERVATION OF THE THING LOANED
1. Borne by the bailor since he is still the owner of the property and he will benefit
from said expense. Accordingly, if the bailee advanced the extraordinary
expenses, the bailor should refund them.
2. Provided, it is brought to the knowledge of the bailor first, since he may not
want to incur the extraordinary expenses at all. Except where the repairs are so
urgent that the reply to the notification cannot be awaited without danger.
o EXTRAORDINARY EXPENSES ARISING OUT OF ACTUAL USE OF THE THING LOANED
1. Borne by the bailor and bailee alike on a 50-50 basis
2. Example includes the repair of a jeep from the collision without the fault of the
bailee
3. Bailee shoulders half because he will benefit from the use of the thing and the
bailor shoulders half because he is the owner and the thing will be returned to
him.

SIMPLE LOAN OR MUTUUM VS. COMMODATUM

MUTUUM DISTINCTIONS COMMODATUM

Consumable thing As to object Non-consumable or non-

fungible thing
May or may not be gratuitous As to cause Essentially gratuitous
For consumption As to purpose For use or temporary
possession
Personal property only As to subject matter Real or personal property
Ownership of the thing passes As to ownership of the thing Ownership is retained by the
to the borrower loaned bailor
A thing of equal amount and of As to thing to be returned The same as the thing loaned
the same kind and quality as
that loaned
Borrowers bears the risk As to who bears the risks of loss Bailor bears the risks
Thing shall be paid after the As to return or payment of the Returned after the expiration of
expiration of the term thing loaned the term and even before in
urgent case
Contract of consumption As to nature of the contract Contract of use
- In Franklin Vives was asked by his neighbor, AS, to help her friend, AB, incorporate his
business, STE. Specifically, Vives was asked to deposit 20 into STE’s bank account to facilitate
its incorporation, with the assurance that the money would be returned within a month. Is
there a contract of Commodatum?
 ANSWER: Yes. In commodatum, the bailor retains the ownership of the thing loaned, while
in simple loan, ownership passes to the borrower. Since its money, it should be mutuum.
HOWEVER, CONSUMABLE GOODS MAY BE A SUBJECT OF COMMODATUM IF THE PURPOSE IS
NOT FOR CONSUMPTION AS WHEN IT IS MERELY FOR EXHIBITION. In case of doubt, the
contemporaneous act and subsequent act of the parties shall be considered in such
determination.
- AB’s attempt to return the 20 with interest allegedly on the mutuum DID NOT CONVERT the
transaction from commodatum to mutuum because such was not the intent of the parties
and the interest corresponds to fruits which in Article 1935 of the Civil Code, it states that
the bailee in commodatum acquires the use not the fruits. Hence it was only proper that the
interest is remitted to Vives.
- NOTES
1. The borrower acquires ownership of the consumable thing upon delivery (actual or
constructive)
2. If what is loaned is money, payment must be made in currency which is legal tender in
the Philippines
3. The issuance of a check does not perfect the contract of mutuum
4. The contract may be considered as perfected only after such has been encashed by the
borrower.
 If what is loaned is a fungible thing, the borrower is obliged to pay the lender another thing of
the same kind, quality and quantity.
- FUNGIBLE THINGS
Those which are usually dealt with by number, weight, or measure such as grain, oil, and
sugar, so that any given unit or portion is treated as the equivalent of any other unit or
portion.
- FUNGIBLE VS NON – FUNGIBLE
A Fungible thing is which the parties agreed to allow to be substituted with an equivalent
thing. A non – fungible thing is the same thing loaned which the parties have the intention of
returning after the intended use and it is generally irreplaceable.
- IF NON – FUNGIBLE IS REPLACED
Barter – if replaced with another unique item.
Mutuum – if replaced with a fungible thing like money.

MUTUUM LEASE
It is a contract for the delivery of money or some It is a contract by which one of the parties
consumable thing to another with a promise to delivers to another some non-consumable thing
repay an equivalent amount of the same kind and in order that the latter may use it during a certain
quality but not a promise to return the same period and return it to the former.
thing loaned which has become the property of The owner or lessor of the property does not lose
the borrower ownership but simply loses his control over the
property rented during the period of the contract.
The relation between the parties is that of The relation between the parties is that of
oblligee, creditor or lender and obligor, debtor or landlord (lessor) and tenant (lessee).
borrower.
The oblige, creditor or lender receives payment The owner of the property leased or rented
for the thing loaned receives “compensation” or “price” either in
money, provisions, chattels, or labor from its
occupant in return for its use.

MUTUUM COMMODATUM BARTER

The subject matter is money or The Subject matter is non- The subject matter is non-
any other fungible (consumable) fungible (non-consumable) fungible (non-consumable)
things things. thing.
The borrower is bound to pay The bailee is bound to return The equivalent thing is given in
the thing of equal amount and the same thing borrowed when return for what has been
 of the same kind and quality as the time has expired or the received.
that loaned at the expiration of purpose has been served.
the term.
It may or may not be gratuitous It is essentially gratuitous. It is an onerous contract as it is
really a mutual sale.
MUTUUM
- Contract whereby one party delivers to another, money or other consumable thing with the
understanding that the same amount of the same kind and quality shall be paid.
- Characteristics
1. Nominate
2. Real
3. Onerous/Gratuitous
4. Formal/Informal
5. Unilateral
6. Principal
7. Commutative
- The existence of a contract of loan cannot be denied merely because it was not in writing.
Surely, there can be a verbal loan. Contracts are binding between parties, whether oral or
written. The law is explicit that contracts shall be obligatory in whatever form the may have
been entered into, provided all the essential requisites for their validity are present. A simple
loan or mutuum exists when a person receives a loan of money or any other fungible thing
and acquires its ownership. He is bound to pay to the creditor the equal amount of the same
kind and quality.
- A promissory note is a solemn acknowledgement of a debt and a formal commitment to
repay it on the date and under the conditions agreed upon by the borrower and the lender.
A person who signs such an instrument is bound to honor it as a legitimate obligation duly
assumed by him through the signature he affixes thereto as token of his good faith. If he
reneges on his promise without cause, he forfeits the sympathy and assistance of this court
and deserves instead its sharp repudiation. The promissory note is the best evidence to
prove the existence of the loan.
- FORM
G.R. No required form of contract. Only delivery perfects the contract.
Exception.
1. If there is an interest
2. Contracts where the amount involved exceeds PhP500
NOTES: These requirements are only for the convenience of the parties and will not
affect the validity of the contract.
- ESSENTIAL REQUISITES:
1. CONSENT of contracting parties
2. OBJECT certain which is the subject matter of the contract
3. CAUSE of the obligation established
4. Delivery of the thing.
- CONSENT
There must be a meeting of the offer and acceptance upon the thing and the cause which
are to constitute the contract.
- OBJECT
Money, Consumable or fungible goods.
The object of the contract must be within the commerce of men.
The object must be determinate and not impossible
- CAUSE
Gratuitous and onerous
- CASE STUDY
1. A contract of loan, like any other contract, is subject to the rules governing the requisites
and validity of contracts in general. CONSENT-OBJECT-CAUSE. ABSENCE of one makes the
contract invalid.
 - THE BORROWER
1. Return the equivalent
2. Payment of interest (if agreed)
3. Timely compliance
- For the conviction of estafa through misappropriation, it must be established that the
accused had an obligation to return the specific money or properlty received. In this case,
the complaints explicitly stated that the amounts received by the petitioners were loans,
which meant that ownership of the money passed to the borrowers. Consequently, the
petitioners were not obligated to return the same money, and their actions could not be
classified as misappropriation.

NON-PAYMENT OF LOAN DISTINCTIONS ESTAFA BY MISAPPROPRIATION

To pay the creditor an equal As to obligation undertaken by An obligation involving the duty
amount of the same kind and the debtor to deliver or return the same
property
Civil in nature As to liability incurred for Criminal in nature
breach

- RULES ON PAYMENT
The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency to which is legal tender in the
Philippines.
- PROMISSORY NOTE
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
- RULES ON PAYMENT OF CHECK
A check is not a legal tender, whether it is an ordinary check or a manager’s check. The rule
applies even if the check was consigned in court. However, there are exceptions to this rule:
1. When a managers check was consigned with the court which the clerk of court endorsed
to the Provincial Treasurer and which then honored by the bank and credited to
Treasurer’s account;
2. When the creditor has accepted the debtors check for the repurchase of the latter’s
property, the former cannot, the following day refuse to accept the check anymore as
payment. The creditor is under estoppel having induced the debtor to believed that he
had consented such form of payment.
3. When after the payment of the check in court the vendor a retro, the vendee a retro
petitioned the court to allow him to withdraw the amount in deposit, the payment in
check is valid.
4. When the check has lost its value due to the fault of the creditor such when he
unreasonably delayed the presentation of the check with the drawee bank for payment,
the payment in check is valid.
5. When the foreign bill of exchange lost its value for the reason that the creditor had
neglected to make a protest. Had there been a timely protest, the debtor could have
pursued the right of recourse against the parties who are secondarily liable.
- INFLATION VS. DEFLATION
In case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis
of payment, unless there is an agreement to the contrary.
 Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation
in the value of currency) and such decrease could not be reasonably
 foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation.
 Extraordinary Deflation, on the other hand, involves an inverse situation.
- REQUISITES FOR EXTRAORDINARY INFLATION (DEFLATION) TO AFFECT AN OBLIGATION
1. That there was an official declaration of extraordinary inflation or deflation from the BSP
2. That the obligation was contractual in nature
3. That the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation.
- CASE STUDY
1. There is no official declaration of BSP on the extraordinary inflation. Therefore
respondents should pay their dollar denominated loans at the exchange rate fixed by
BSP on the date of maturity.
2. D borrowed from C 50 payable after 5 years. On the maturity of the obligation, the value
of the 50 dropped to 2.50 because of inflation. How much will D pay?
ANSWER: 50. Unless the contract specifies adjustment for inflation, D must pay 50 as
originally agreed. Inflation alone does not automatically change the amount to be paid.
NOTE: If what was loaned is a fungible thing other than money, the debtor owes another
thing of the same kind, quantity and quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time of the perfection of loan shall
be paid.
3. D borrowed from C 2 sacks of rice of a certain kind and quality. When the loan was
perfected, the price of each sack was 140.
D should return to C 2 sacks of rice of the same kind and quality although at the time of
payment, the price had increased to 160.
If on the due date of the obligation, the same kind of rice could not be delivered by D
because it was not available, then D should pay C the sum of 280 instead, the value of
the rice at the same time of the perfection of the loan.
- ON THE DATE AGREED UPON BY PARTIES OR ON MATURITY DATE
If the obligation does not fix a period, but from its nature and circumstances it can be
inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the
debtor.
- MAY THE CREDITOR DEMAND PAYMENT OR MAY THE BORROWER MAKE PAYMENT BEOFRE
THE MATURITY DATE?
If the loan is gratuitous, the borrower may pay before the maturity date because as a general
rule, the creditor suffers no prejudice with the return of the money before maturity date.
- WHERE?
If the parties agreed on the place of payment, then payment must be made in the place
stipulated.
If no place was stipulated, the payment shall be made at the domicile of the borrower.
- LOSS OF THING DUE
The loss of thing loaned does not extinguish one’s obligation to pay (unless it is stipulated)
because his obligation is not to return the thing loaned but to pay a generic thing. Genus
Ninquam Perit (Generic thing never perishes)
- CASH ADVANCE
A cash advance is in the nature of a simple loan (mutuum), hence, no fiduciary relationship is
created. Therefore, an employee who availed of cash advances may not be held liable for
estafa for failure to return the same money which he received.
Liquidation simply means the settling of an indebtedness. An employee liquidating his cash
advances is in fact paying back his debt in the form of a loan of money. Similarly, if the
amount of the cash advance, he received is less than the amount he spent for actual travel,
he has the right to demand reimbursement for the amount he spent coming from his
personal funds. Thus, the money advance is actually a loan to the other. He therefore have
 no legal obligation to return the same cash and money which he received from the
respondent.
- BANK DEPOSIT
Fixed, Savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
Whether fixed, savings, or current, deposits are in the nature of a contract of mutuum. There
is a debtor – creditor relationship between the bank and its depositor. The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand.
Thus, a bank deposit being a simple loan earns interest and creates an obligation on the part
of the bank to return the same amount deposited but not the same money that was
deposited.
It bears stressing that the failure of the bank to return the amount deposited will not
constitute estafa through misappropriation punishable under A315 of the RPC, but it will
only give rise to civil liability.
- OTHER RULES THAT APPLY TO THE CREDITOR-DEBTOR RELATIONSHIP BETWEEN A
DEPOSITOR AND A BANK
1. Bank’s right to set-off
2. Payment of deposit check is not a loan
3. Bank’s duty to exercise extraordinary diligence
4. Bank’s obligation to pay interest.
- IRREGULAR DEPOSIT
REFERS TO DEPOSIT OF MONEY IN A BANK MADE BY A DEPOSITOR FOR PURPOSES OF
SAFEKEEPING NOT THE MONEY ITSELF BUT THE VALUE IT REPRESENTS with the
understanding that an equivalent amount but not the same money (bills deposited) shall be
returned to the depositor.

IRREGULAR LOAN LOAN

The only benefit is that it accrues to the depositor The essential cause for the transaction is the
needs of the borrower
The depositor can demand the return of the
article at any time while the lender is bound by
the provisions of the contract of loan and cannot
seek restitution until the time for payment, as
provided in the contract, has arisen;
The depositor has a preference over other The lender is not entitled to the preference over
creditors in the distribution of the debtor’s the other creditors.
property.

- CREDIT CARD
A thin rectangular piece of plastic or metal issued by a bank or financial services company
that allows card holders to borrow funds to pay for goods and services with merchants that
accept cars for payment.
The relationship between a credit card provider and its card holders is that of creditor-
debtor, with the card company as the creditor extending loans and credit to the cardholder,
who as debtors is obliged to repay the creditor.
- CONTRACTS IN CREDIT CARD TRANSACTION
1. The sales contract between the credit card holder and the merchant or the business
establishment which accepted the credit card.
2. The loan agreement between the credit card issuer and the credit card holder
3. The promise to pay between the credit card issuer and the merchant or business
establishment.
The contractual relationship begins to exist only upon the meeting of the offer and
acceptance of the parties involved. When cardholders use their credit cards to pay their
purchases, they merely offer to enter into loan agreements with the credit card company.
 Only after the latter approves the purchase requests the parties enter into binding loan
contracts.
- DEFAULT
Whereby the express terms of the credit card agreement, the credit card company is not
obligated to approve the credit card holder’s purchase request, there arises no demandable
obligation and therefore there can be no finding of default on the part of the former.
- RA 3765 The Truth in Lending ACT (TILA)
An act to require the disclosure of finance charges in connection with extensions of credit.
Any creditor shall furnish to each person to whom credit is extended, prior consummation of
transaction, a clear statement in writing:
1. Cash price or delivered price of the property or service to be acquired
2. The amounts, if any, to be credited as down payment and/or trade in
3. The difference between the amounts set forth under items 1 and 2
4. The charges, individually itemized, which are paid or to be paid
5. The total amount to be financed
6. The finance charge expressed in pesos
7. The percentage that the finance charge bears.
- CONSUMER LOAN
A loan made by the lender to a person which is payable in installments for which a finance
charge is or may be imposed. This term includes credit transactions pursuant to an open-
end- credit plan other than a seller credit card.
Required Disclosures on Consumer loans NOT under open-end credit plan – any creditor
extending a consumer loan or in a transaction which is neither consumer loan , shall disclose
the following:
1. The amount of credit which the debtor will have the actual uses
2. All charges, individually itemized
3. The total amount to be financed
4. The finance charged expressed in pesos
5. The effective interest rate
6. The percentage that the finance charge
7. The default, delinquency or similar charges payable
8. Description of any security interest held
- TYPES OF CONSUMER LOANS
1. PERSONAL LOANS
2. MORTGAGES
3. CREDIT CARDS
4. AUTO LOANS
5. EDUCATION LOAN
6. RE-FINANCE LOAN
7. HOME EQUITY LOAN

INTEREST
- Compensation allowed by law or fixed by the parties for the loan or forbearance of money,
goods or credits
- General Rule: No rules shall be due unless it is stipulated in writing.
- Exceptions: Rule on interest on damages or indemnity for damages (or compensatory
interest)
REQUISITES
1. Must be expressly stipulated
2. Agreement must be in writing
3. Must be lawful: must not be UNCONSIONABLE INTEREST RATES – Agreed interest rates
which are considered as void ab initio for being contrary to morals and the law as
determined by the court.
- RIGHT TO INTEREST ARISES EITHER:
 1. By virtue of contract; or
2. By way of damages for delay of failure to pay the principal on which interest is
demanded, at the time when the debtor is obliged to make such payment.
- KINDS
1. Simple interest
2. Compound interest
3. Legal interest
4. Lawful interest
5. Unlawful or usurious interest
COMPOUND INTEREST
General Rule: Interest on interest is only demandable if:
1. There is a conventional interest – express stipulation in writing to pay interest in
a contract of loan; and’
2. In any or both of the following: When by stipulation of the parties, compounding
or capitalizing of interest is agreed upon, in which case, previously accumulated
interest is added as principal and earns interest as such (compound interest; OR
when the interest that is due and unpaid is judicially demanded whether or not
there is an agreement or stipulation to the effect. Judicial demand is reckoned
from the date of filing of a complaint in court. The rate of interest shall be the
legal rate applicable to loans or forbearance of money.
HOWEVER, it is not enough that the payment of interest shall be stipulated in writing, for the
purpose of imposing compound interest, but it should state the manner in which such interest should be
earned. The agreement between the parties must expressly stipulate that interest already due and
unpaid shall be added to the principal and shall also earn interest.
Article 1959 V. Article 2212
Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid,
which as added principal, shall earn new interest.
To be clear, however, Article 2212 of the Civil Code, which provides that “interest due shall earn
legal interest from the time it is judicially demanded, although the obligation may be silent upon this
point,” does not apply because “interest due” in Article 2212 refers to accrued interest. A look at the
counterpart provision of Article 2212 of the new civil code, Article 1109 of the old Civil Code, supports
this. It provides: Accrued interest shall draw interest at the legal rate from the time the suit is filed for its
recovery, even if the obligation should have been silent on this point. In commercial transactions the
provisions of the code of commerce shall govern. Pawnshops and savings banks shall be governed by
their special regulations.
In interpreting the above provision of the old civil code, the court in Zobel v. City of Manila, ruled
that Article 1109 applies only to conventional obligations containing a stipulation on interest. Similarly,
article 2212 of the new civil code contemplates, and therefore applies, only when there exists stipulated
or conventional interest.
The rule was reiterated in Isla v. Estorga where the court declared: In addition, not only the
principal amount but also the monetary interest due to respondent as discussed above shall itself earn
compensatory interest at the legal rate, pursuant to Article 2212 of the Civil Code, which states that
“interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point.” To be sure, Article 2212 contemplates the presence of stipulated or
conventional interest, i.e. monetary interest, which has accrued when demand was judicially made. In
cases where no monetary interest had been stipulated by th parties, no accrued monetary interest could
further earn compensatory interest upon judicial demand.
In other words, Article 2212 contemplates the presence of stipulated or conventional interest,
i.e., monetary interest, which has accrued when demand was judicially made. Thus, Article 2212 of the
Civil Code finds no application if there was no stipulated monetary interest agreed upon by the parties
which could further earn compensatory interest.
Article 2212’s “interest on interest” is penalty or indemnity for delay in the payment of
stipulated interest. It is by nature, also a compensatory interest. It is expressly prescribed by law and
demand written into every contract. This, all contracting parties should be aware of when they stipulate
on the payment of interest.
 In addition, the standards of unconscionability cannot apply to interest on interest under Article
2212. As Justice Alfredo Benjamin S. Caguioa elucidated, “interest on interest” is fixed by law. In the
absence of contractual relationship between the parties on the rate of interest on accrued interest, the
legal rate shall apply by operation of law. Its imposition is not subject to courts discretionary power.
STIPULATION TO PAY INTEREST: RULES
A. Where a particular rate of interest has been expressly agreed upon in writing by the parties, that
rate, and not the legal rate, shall apply;
B. Should there be no mention in the contract of the exact rate of interest, the legal rate of 12%
(now pegged at 6%) shall be applicable.
C. No increase in interest shall be done unless such increase has also been expressly stipulated;
D. It is only contracts of loan, with or without security, that interest may be stipulated and
demanded;
E. The receipt by the creditor of interest payment up to a certain date for a loan that has already
matured does not ipso facto result in renewal or extension of the maturity period of the loan up
to said date;
F. The stipulation of interest must be mutually agreed upon by the parties and may not be
unilaterally increased by only one of the parties without violating the principle of mutuality of
contracts ordained in article 1308 of the civil code.
MB RESOLUTION 796 AS IMPLEMENTED BY BSP CIRCULAR NO 799 - 6% PER ANNUM IN CASES OF:
A. LOANS;
B. Forbearance of money, goods, credits; and,
C. Judgment involving such loan or forbearance in the absence of express agreement as such rate
of interest, where the interest rate applies during the interim period from the date of judgment
until actual payment.
ARTICLE 2209 OF THE CIVIL CODE – 6% PER ANNUM IN CASES OF:
A. Other sources. (e.g. sale)
B. Damages arising from injury from person; and,
C. Loss of property which does not involve a loan.
RULES FOR AWARD OF INTEREST IN THE CONCEPT OF ACTUAL AND COMPENSATORY
1. When obligation is breached consists in the payment of a sum of money, ex. A loan or
forbearance of money, the interest due should be that which may have been stipulated
in writing.
2. When an obligation, not consulting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty.
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case fails under paragraph 1 or 2 above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.
QUESTION: If debtor pays interest pursuant to verbal agreement, may the debtor later on recover the
same since the agreement is not in writing?
Yes. If there is an agreement to pay interest but the same is entered verbally, the obligation to
pay monetary interest does not become a case of civil obligation. Instead, the obligation to pay monetary
interest is a case of natural obligation pursuant to Article 1960 of the Civil Code which states that “if the
borrower pays interest when there has been no stipulation therefor, the provisions of this code
concerning solution indebiti, or natural obligations, shall be applied, as the case may be.” Applying
Article 1960, if the interest was voluntarily paid despite the borrower’s knowledge that the same is not
legally demandable, the payment is a case of performance of a natural obligation. Consequently, the
lender or creditor authorized to retain the payment pursuant to Article 1423 of the Civil Code which
provides that “natural obligations, not being based on positive law but on equity and natural law, do not
grant a right of action to enforce their performance but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason thereof.” On the other hand, if
the payment of interest is by reason of mistake of fact, the borrower is still entitled to recover the
payment pursuant to the concept of solution indebiti. From the foregoing discussion, it is clear that the
loan becomes gratuitous only in the absence of an agreement, whether oral or in writing, for the
payment of interest.
*Solutio indebiti – “payment of what is not owing”. If someone pays a debt that they do not
owe, the person who received the payment has a duty to return the money.

ESCALATION CLAUSES
Escalation clauses are stipulation allowing increases in the interest rates agreed upon by the
contracting parties.
Explicitly stated in the stipulation of contracts.
Clause in which the contract fixes a base price but contains a provision that in the event of
specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base.
Stipulation in an agreement pertaining to loan or forbearance of money, goods or credits which
contains an escalation clause providing for the reduction of the stipulated interest in the event that the
applicable maximum rate of interest is reduced by law or by the monetary board.

CASE EXPLAINED:
In resolving the issue, the SC referred to PD 1684 which is intended to prevent or forestall any
one-sidedness that an escalation clause in a borrowing instrument may cause in favor of the creditor.
This law specifically states, among others, that parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest is increased by law or by monetary
board: Provided, that such stipulation shall be valid only if there is also a stipulation in the agreement
that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of
interest is reduced by law or by the monetary board: Provided further that the adjustment in the rate of
interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest. (Villa Crista v. Equitable PCI Bank)

GENERAL RULE: Escalation clauses are not illegal per se. To be valid, should specifically provide:
1. that there can be an increase in interest rates if allowed by law or by the monetary
board;
2. that there must be a stipulation on the reduction of the stipulated interest rates in the
event that applicable maximum rates of interest are reduced by law or by the monetary
board.
The absence of de-escalation clause does not automatically invalidate the repricing if the lender
has demonstrated actual reductions in interest rates.

FORBEARANCE
No longer in the structure of a loan.
Refers to arrangements other than a loan agreement, where a person acquiesces to the
temporary use of his money, goods or credits pending the happening of cetain events or fulfillment of
certain conditions.
Examples:
a. Obligation to return money after failure to comply with terms and conditions in the Conditional
Deed of Sale. (Estores v. Sps. Supangan)
Forbearance of money, goods or credits should therefore refer to xxxx. In this case, the
respondent spouses parted with their money even before the conditions were fulfilled. They have
therefore allowed or granted forbearance to the seller to use their money pending fulfillment of the
conditions. They were deprived of the use of their money for the period pending fulfillment of the
conditions and when these conditions were breached, they are entitled not only on the return of the
principal amount paid but also to the compensation for the use of their money. And the compensation
for the use of their money, absent any stipulation, should be the same rate of legal interest applicable to
a loan since the use or deprivation of funds is similar to a loan.
b. Obligation to return money paid for the transfer of franchise rights that did not materialize.
(Arcinue v. Baun)
Forbearance of Goods – includes the sale of goods on installment, requiring periodic paymenet of
money to the creditor.
Forbearance of Credits – includes the sale of anything or credit, where the full amount due can be paid
at a date after the sale. Different from sale by installment.
Example:
a. Banks may offer forbearance agreements, where they temporarily suspend or reduce payments
due to the borrower’s financial situation. This arrangement can prevent the loan from defaulting, giving
the borrower time to stabilize their finances. Forbearance agreements typically come with specific
terms, such as resuming payments after a set period or paying interest-only installments.

SURCHARGES AND PENALTIES

Under BSP Circular 1133, penalty charges must be reasonable and should not exceed what is
necessary to compensate the lender for the inconvenience or financial loss caused by the borrower’s
delay in payment. Excessive penalties, particularly those that far exceed the principal loan amount, may
be considered usurious or unconscionable.
Guides to consider the penalty as usurious or unconscionable are:
1. How will the court determine the reasonability, and
2. How it is computed based on the principal loan amount.

USURY LAW (Suspended)

Article 1969, NCC – Usurious contracts shall be governed by the Usury Law and other special laws, so far
as they are not inconsistent with this code.
Usury – Contracting for or receiving something in excess of the amount allowed by law for the loan or
forbearance of money, goods, or chattels.
Act No. 2655 – An act fixing the rates of interest upon loans and declaring the effect of receiving or
taking usurious rates and for other purposes.
CBP Circular No. 905 - 82 – The rate of interest, including commissions, premiums, fees and other
charges, loan or forbearance of any money, goods, credits, regardless of maturity and which is secured or
unsecured, that may be collected by any person, whether natural or juridical, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.
While Central Bank of the Philippines Circular No. 905 – 82 has effectively removed the interest
ceilings prescribed under the Usury Law, lenders may not impose interest rates that would “enslave
borrowers or hemorrhage their assets.”
Who Are Covered?
1. Financing companies or those credit facilities to consumers and the industrial, commercial or
agricultural enterprises;
2. Lending Companies or those engaged in granting loans from their own capital (or funds
sourced from not more than 19 persons);
3. Online lending platforms or those with lending applications, websites and other financial
technology – enabled programs or systems through which financing companies and lending
companies’ services and products are made available.
What are Covered?
This policy intends to cover short term small value, and high – cost consumer credit targeting
primarily the low-income borrowers. Therefore, the unsecured, general-purpose loans offered by LCs,
FCs, and their OLP that do not exceed the amount of P10,000 and loan tenor of up to four months shall
be subject to the prescribed ceilings on interest rates and other fees under this Circular.
Applicable ceilings on interest rates and other fees for specific loans offered by LCs, FCs, and their
OLPs.
1. A nominal interest rate ceiling equivalent to 6 percent per month (-0.2 percent per day)
2. An effective interest rate ceiling equivalent to 15% per month (-0.5% per day) which shall
include Nominal IR along with all applicable fees and charges but excluding fees and penalties for
late payment and non-payment.
 3. A cap on penalties for late payment or non-payment at 5% per month on outstanding
scheduled amount due.
4. A total cost cap of 100% of total amount borrowed (applying to all interest, other fees, and
charges, and penalties) regardless of time the loan has been outstanding.

GUARANTY AND SURETY

COMPARISON
Guaranty
- Promise to answer for the debt, default or miscarriage of another person.
- Exists when a person, called the ‘guarantor’ binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
- It is a promise to answer for the payment of some debt or the performance of some
obligation, on default of such payment or performance, by a third person who is liable or
expected to become liable for it in the first instance.
Suretyship
- An agreement by which a party, called the surety, guarantees the performance of another
party, called the principal or obligor, of an obligation or undertaking in favor of a third party
called the obligee.

GUARANTY SURETYSHIP
Engagement of the guarantor is a collateral The surety is charged as an original promisor.
undertaking.
Guarantor is secondary liable in case the debt Surety if primarily liable regardless of whether
cannot be paid by the principal. the principal is financially capable to fulfill his
obligation.
Guarantor binds himself to pay should the Surety undertakes to pay should the principal fail
principal fail to pay. to pay.
Guarantor is the insurer of the solvency of the Surety is the insurer of the debt.
debtor.
Guarantor can avail of the benefit of excussion Surety cannot avail of the benefit of division and
and division in case the creditor proceeds against excussion.
him.
Discharged by the mere indulgence of the Not discharged by either indulgence or neglect
principal; not liable unless notified of default. and want of notice.

GUARANTY
- Nominate
- Consensual
- Either Onerous or Gratuitous
- Formal
- Either unilateral or bilateral. Some references consider it unilateral because it is more of the
benefit of creditor.
- Accessory Contract
- Subsidiary Contract because the liability is only subsidiary.
- Guarantor must be a person different from the debtor.
Kinds as to General Classification:
1. Personal – A guaranty where an individual personally assumes the fulfillment of the personal
obligation.
2. Real – A guaranty in the form of a movable or immovable property. Guarantor’s property is used
for guaranty.
Kinds as to Origin:
1. Conventional – A guaranty constituted by agreement of the parties.
2. Legal – A guaranty imposed by virtue of the provision of law.
3. Judicial – A guaranty required by a court to secure the eventual rights of the parties in a case.
Kinds as to Consideration:
1. Gratuitous – A guaranty where the guarantor does not receive any price or renumeration for
acting as such.
2. Onerous – A guaranty where the guarantor receives valuable consideration for his guaranty.
General Rule – A GUARANTY IS GENERALLY PRESUMED TO BE GRATUITOUS, UNLESS THERE IS A
STIPULATION THAT IT IS ONEROUS.
Kinds as to Number:
1. Single Guaranty – One constituted solely to guarantee or secure performance by the debtor of
the principal obligation.
2. Double Guaranty or Sub – Guaranty – One constituted to secure the fulfillment of the obligation
of a guarantor by a sub-guarantor.
As to Scope and Extent:
1. Definite – A guaranty that is limited to the principal obligation only, or to a specific portion of it.
2. Indefinite or Simple – A guaranty that includes all the accessory obligations of the principal, e.g.
costs, including judicial costs.
Scope of Guaranty
1. The principal obligations of the debtor. A.2055
2. The accessory obligations pertaining to the principal obligation. A. 2055
3. The obligations that arise as a matter of law from the guaranteed obligations such as the
payment of interest if delay occurs.
4. The obligation to pay judicial costs incurred after the guarantor has been judicially required to
pay.
RULES on the Guaranty:
Example 1: Pursuant to a compromise agreement entered into by the deceased, MS, which involved
disputed over his estate, his heir, GS agreed to pay P100K to FV and FS, with an initial payment of
p40K and subsequent payments of P20K over three years. EE signed as a guarantor for this
agreement. May EE, the guarantor, deny liability by contending that he received no benefit being
a guarantor, thus, the contract lacked consideration for him? Contract must have Consent-
Object-Cause/Consideration
Answer 1: No. The guarantor is bound by the same consideration that makes the contract effective and
supports the principal. The law further clarifies that it is not necessary for a guarantor to receive
a direct benefit from the contract; the detriment suffered by the plaintiffs in dismissing their
action was adequate consideration. Thus, as the legal framework recognizes the validity of the
compromise and the obligations arising from it, the assertion was unfounded.
Rule 1: A guarantor is bound by the same consideration that makes the contract effective between
the principal parties to it.
Rule 2: A guarantor need not participate in the benefit for which constitutes the consideration as
between the principal parties to the contract.
Example 2: Wife guarantees the obligation of her BFF without her husband’s knowledge. When the
wife’s liability arose, the creditor or BFF now demands payment from the wife. Is the accessory
obligation of the guaranty VALID?
Answer 2: Yes, as per rule stated below.
Rule 3: A married woman MAY guarantee an obligation even without the consent of the husband.
A2049
Example 3: Will the guaranty bind the conjugal party?
Answer 3: It depends on the facts,
Rule 4: An obligation guaranteed by a married woman will only bind the conjugal partnership if the
husband gives his consent or the guaranty redounded to the benefit of the family of the
guarantor spouse.
Example 4: Philmar who has a crush on Andy entered into a stipulation with Andy’s creditor where he
volunteered to guaranty Andy’s obligation. Such agreement was without the knowledge or
consent of Andy. Is the accessory obligation of guaranty valid?
Answer 4: Yes.
Rule 5: A guaranty, being a unilateral contract, existing for the benefit of the creditor and not for the
debtor, may be entered into without the knowledge or consent or even against the will of the
principal debtor but subject to the provisions of A.1236 and A.1237 of the Civil Code.
Article 1236: The creditor is not bound to accept payment on the performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary. Whoever pays for another may demand from the debtor what he has paid, except that
if he paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor. (Only the money which was not paid by the
debtor can be recovered NOT the entire amount if some were already paid by the principal
debtor.)
Article 1237: Whoever pays on behalf of the debtor without the knowledge or against the will of
the latter, he cannot compel the creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty, or penalty. (Guarantor cannot subrogate the real property which was
guaranteed BUT only recovery of money)
Rule 6: When payment is made with the knowledge or consent of the debtor, the guarantor shall be
subrogated to all the rights which the creditor has against the debtor. (Even if there was
payment made by the debtor, the full amount of the debt if paid by the guarantor with the
consent of the debtor can be recovered. The debtor can recover the excess payment from the
creditor.)
Rule 7: A guaranty, being a mere accessory contract, cannot exist without a valid principal obligation.
Example 5: May a guaranty secure a future debt?
Answer 5: Yes.
Rule 8: Under Article 2053 of the civil code, a guaranty may be given to secure even future debts, the
amount of which may not be known at the time of the guaranty is executed. CONTINUING
GUARANTY – A continuing guaranty is one which is not limited to single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally indented to
provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which as they accrue, the guarantor becomes liable. Otherwise
stated, a continuing guaranty is one which covers all transactions, including those arising in the
future which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof. A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period; especially if the right to recall
the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is
to secure advances to be made from time to time the guaranty will be construed to be a
continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions
such as payment of any debt, any indebtedness, any deficiency, or any sum, or the guaranty of
any transaction or money to be furnished the principal debtor at any time, or on such time that
the principal debtor may require, have been construed to indicate a continuing guaranty.
Rules for Continuing Guaranty:
- One which is not limited to single transaction but which contemplates a future course of
dealings, covering a series of transactions generally for an indefinite time or until revoked;
- Prospective in its operations and is generally intended to provide security with respects to
future transactions;
- Future debts, even if the amount is not yet known, may be guaranteed but there can be no
claim against the guarantor until the amount of the debt is ascertained or fixed and
demandable;
- Take note however that the above-mentioned provision may be misleading in sanctioning
guarantees for future debts. What should be bore in mind is that there is already an existing
obligation that is being guaranteed. The guaranty would be void if there is no existing
obligation.
Example 6: Maria obliged herself to pay Philmar PhP100K if Philmar marries Andy. Derek guaranteed the
fulfillment of the obligation. Is the obligation valid? Is the contract of guaranty valid?
Answer 6: Yes. Yes.
Rule 9: Art 2053. A guaranty may also be given as security for future debts, the amount of which is not
yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured.
Example 7: Maria, a minor, obliged herself to pay Philmar P100K. Derek guaranteed the fulfillment of the
obligation.
Rule 10: Article 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural obligation.
Rule 11: When an obligor puts forward a guaranty for his natural obligation, he, in effect, is indirectly
acknowledging his liability to the oblige and that implied recognition amounts to no less than a
resultant conversion of his erstwhile natural obligation into a civil one.
Example 8: Maria obliged herself to pay Philmar P100K. Derek guaranteed the payment of P50K only. Is
the guaranty valid?
Answer 8: Yes but limited to only P50K.
Rule 12: A guarantor cannot generally bind himself for more than the liability of the principal debtor
with respect to:
1. The amount of the principal obligation; and
2. The onerous nature of its conditions.
Rule 13: A guarantor’s liability may be less than that of the principal debtor, but should he bind himself
for more, his liability shall be reduced to those limits of the debtor.
EXCEPTION:
1. Interest in the concept of actual or compensatory damages;
2. Judicial costs; and
3. Attorney’s fees.
Due to failure to pay upon extrajudicial demand and his having compelled the creditor to
seek redress from the court in order to obtain payment.
The penalty which may be provided in the bond to hold a guarantor liable for violation of
the condition in such bond.
The amount specified in the bond as the guarantor’s obligation does not limit the extent
of the damages that may be recovered from the principal as the latter’s liability is basically
governed by the obligation assumed by him under his contract.
Rule 14: A guaranty is not presumed but must be expressly consented to by the guarantor, and cannot
extend to more than what is stipulated in it. Thus, for a contract of guaranty to bind the
guarantor, it must be explicitly consented to by him with his unequivocal intention to assume
liability and with full cognizance of his act.
Rules 15: A guaranty is strictly construed against the creditor and in favor of the debtor. Any doubt as to
the terms and conditions of the guaranty agreement should be resolved in favor of the
guarantor.
Rules 16: But this strictissimi juris rule finds no application to surety which are organized for the purpose
of conducting an indemnity business at established rates of compensation. A compensated
corporate surety is a business association organized for the purpose of assuming classified risks
in large numbers, for profits and on an impersonal basis, through the medium of standardized
written contractual forms drawn by its own representatives with the primary aim of protecting
its own interests.
Question 1: Is there a need for the creditor to accept the contract of guaranty before the guarantor may
be made secondarily liable?
Answer 1: No, the creditor's acceptance of the contract of guaranty is not required for the guarantor to
be made secondarily liable. In a contract of guaranty, the liability of the guarantor is typically
independent of the creditor's acceptance.
 In most legal systems, a contract of guaranty becomes effective as soon as the guarantor
agrees to it, even if the creditor has not expressly accepted it. The guarantor’s liability is
generally contingent on the principal debtor's failure to fulfill their obligation to the creditor.
However, it's worth noting that the specifics can vary depending on jurisdiction and the
terms of the guarantee agreement. Some legal systems or contracts might include provisions
that require the creditor's acknowledgment or acceptance to trigger certain rights, but this is not
the norm. Generally, the guarantor becomes liable as soon as they agree to the contract of
guarantee.
Question 2: What are the qualifications?
Answer 2: The qualifications are:
1. He must be of integrity;
2. He must have the capacity to bind himself; and,
3. He has sufficient property to answer for the obligation which he guarantees.
Question 3: What happens if the guarantor loses one or more of his qualifications after perfection of the
contract of guaranty?
Answer 3: He will remain a guarantor.
GENERAL RULE: Once the contract of guaranty has become perfected and binding, the
supervening incapacity of the guarantor would not operate to exonerate him of the eventual
liability he has contracted.
Article 2057. If the guarantor should be convicted in the first instance of a crime involving
dishonesty or should become insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is excepted where the creditor has
required and stipulated that a specified person should be the guarantor.
Article 1636. An insolvent is a person who either has ceased to pay his debts in the ordinary
course of business or cannot pay his debts as they become due, whether insolvency proceedings
have been commenced or not.
Section 4, RA 10142 (FRIA). It or he is a debtor who is generally unable to pay its or his liabilities
as they fall due in the ordinary course of business or has liabilities that are greater than its or his
assets.
To demand a replacement of the guarantor is optional to the creditor. It is his right, not his
duty. He may waive it if he chooses, and hold the guarantor to his bargain.
In case it is the principal debtor who selects the guarantor, the former shall vouch for the
latter’s qualifications which must be possessed by him from the moment the guaranty is
constituted up to the time the principal obligation is extinguished.
Conversely, if it is the creditor who selects and designates the guarantor, it must be due to the
former’s having considered the latter to be qualified therefore it is the creditor, not the debtor,
who should rightfully assume the duty to select and designate the guarantor.

BENEFIT OF EXCUSSION
Article 2058, CC. The guarantor cannot be compelled to pay the creditor unless tha latter has
exhausted all the property of the debtor and has resorted to all the legal remedies against the
debtor.
The creditor must first obtain a judgment against the principal debtor before assuming to run
after the alleged guarantor, “for obviously the exhaustion of the principal’s property cannot even
begin to take place before judgment has been obtained.”
How to use the benefit of excussion?
In order that the guarantor may make use of the benefit of excussion, he must:
1. Set it (excussion) up against the creditor upon the latter’s demand for payment; and,
Rules: The guarantor may only be able to set up the defense of excussion or exhaustion
of the debtor’s property after judgment on the principal obligation has already been obtained by
the creditor and the former is unable to pay. If he fails to do so, he in effect has foreclosed his
right to set up the defense of escussion.
2. Point out to the creditor available property of the debtor within the Philippines sufficient
to cover the amount of the debt.
 Rules: A guarantor cannot demand exhaustion by the creditor of the property of the
debtor, unless he can identify sufficient leviable property of the latter within the Philippine
territory.
Benefit of Excussion NOT available:
1. If the guarantor has expressly renounced it;
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor;
4. When he has absconded, or cannot be sued within the Philippines unless he has left
manager or a representative;
5. If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation;
Rules: While a guarantor enjoys the benefit of excussion, nothing prevents him from
paying the obligation once demand is made on him. Excussion, after all, is a right granted to him
by law and as such he may opt to make use of it or waive it.
Rules: A guarantor’s waiver of the right of excussion cannot prevent it from demanding
reimbursement from the debtor as the law clearly requires the debtor to indemnify the
guarantor what the latter has paid.
Rules: Moreover, if the benefit of excussion is waived, the guarantor can be directly
compelled by the creditor to pay the entire debt without exhaustion of the debtor’s property.
Rules: A guarantor who engages to directly shoulder the debt of the debtor, waiving
the benefit of excussion and the requirement of prior presentment, demand, protest or notice of
any kind, undoubtedly makes himself solidarily liable to the creditor.
6. If he fails to comply with the provisions of Article 2060 of the Code;
7. If he is a judicial bondsman and sub-surety (2080);
8. If he has given a pledge or mortgage as a special security for the payment of the
principal obligation; and,
9. If he fails to interpose excussion as a defense prior to the rendition of judgment against
him.

- The benefit of excussion and the requirement of consent to extensions of payment are
protective devices pertaining to and conferred on the guarantor and which may be invoked
by the guarantor against the creditor as defenses to bar the unwarranted enforcement of
the guaranty.
- Where a guarantor did not avail of these defenses and voluntarily paid its obligation
according to the tenor of the guaranty as soon as demand was made on it, it did not, by such
waiver, permit the principal debtors to raise the same defenses against it, which only the
guarantor may invoke against the creditor, to avoid payment of their own obligation to the
guarantor.
- Aside form the rule that the benefit of excussion may be waived by the guarantor, it has also
been held that excussion is not a prerequisite for the creditor to secure a judgment against
the guarantor.
- But even if after such judgment has been rendered, the guarantor can still demand
deferment of its execution against him until after the assets of the principal debtor shall
have been exhausted.
Rules: (Creditor) After the guarantor has complied with the requisites for him to make
use of the benefit of excussion, the creditor is obliged to:
1. Exhaust all the property of the debtor pointed out to him by the guarantor; and,
2. Resort to all the legal remedies against the debtor.
Article 2062, CC. In every action by the creditor, which must be against the principal debtor
alone, except in the cases mentioned in Article 2059, the former shall ask the court to notify
the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up
such defenses as are granted him by law. The benefit of excussion mentioned in Article 2058
shall always be unimpaired, even if judgment should be rendered against the principal
debtor and the guarantor in case of appearance by the latter.
Question 4: May the guarantor decide not to participate in the proceedings against the principal debtor
even if with notice from court?
Answer 4: Yes.
Question 5: Will non-participation in the proceedings result to waiver of the guarantor’s right to the
benefit of excussion?
Answer 5: No. Article 2062, CC. The benefit of excussion mentioned in Article 2058 shall always be
unimpaired, even if judgment should be rendered against the principal debtor and the guarantor
in case of appearance by the latter.
Example 9: Maria obliged herself to pay Philmar P100K if Philmar marries Andy. Derek guaranteed the
fulfillment of the obligation. During the reception, Philmar and Andy demanded payment of the
P100K from Maria when the latter approached their table. Maria refused prompting the couple
to file a complaint before the barangay. During their confrontation, the parties agreed in writing
that Maria will pay her obligation in 5 installments but subject to 1% per month interest. If Maria
failed to pay her obligation and after exhaustion of all remedies and properties of the debtor,
may Derek be made liable to pay?
Answer 9: Yes.
Question 6: How much? A. 100K lump sum. B. P100K plus full interest. C. P100K installment plus monthly
interest. D. P100K installment.
Answer 6: D. P100K installment. A compromise between the creditor and the principal debtor benefits
the guarantor but does not prejudice him.
Question 7: What if the compromise was entered into between the creditor and the guarantor? Would
your answer be the same?
Answer 7: No. The answer will be B. P100K plus full interest. That which entered into between the
guarantor and the creditor benefits but does not prejudice the principal debtor.
Article 2063, CC. A compromise between the creditor and the principal debtor benefits the
guarantor but does not prejudice him. That which entered into between the guarantor and the
creditor benefits but does not prejudice the principal debtor.
Example 10: Maria obliged herself to pay Philmar P100K. Derek guaranteed the fulfillment of the
obligation. Derek, on the other hand, entered into a contract with her ex, Angelica where the latter
guaranteed the fulfillment of the obligation of Derek as a guarantor of Maria. If Maria failed to pay and
Derek waived his right to the benefit of excussion, may Philmar make Angelica immediately liable?
Answer 10: No. Article 2064, CC. The guarantor of a guarantor shall enjoy the benefit of excussion, both
with respect to the guarantor and to the principal debtor.

BENEFIT OF DIVISION
Example 11: Maria obliged herself to pay Philmar P100K. Derek and Angelica guaranteed the
fulfillment of the obligation. After exhaustion of the properties and legal remedies against Maria,
Philmar was only able to collect P10K. How much may Philmar collect from Derek? From
Angelica?
Answer 11: P45K each from Derek and Angelica. Article 2065, CC. If from the law, or the nature or
the wording of the obligations to which the preceding article refers the contrary does not
appear, the credit or debt shall be presumed to be divided into as many shares as there are
creditors or debtors, the credits or debts being considered distinct from one another, subject to
the Rules of Court governing the multiplicity suit.
Example 12: Maria obliged xxxxx was able to collect P10K. Philmar now runs after guarantors.
However, upon demand, Derek became insolvent. How much may Philmar demand from
Angelica?
Answer 12: P90K. Article 2073, CC. If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion.
Example 13: Maria xxxxx guarantors are Derek, angelica, and Carlo xxx was able to collect P10K.
Philmar now runs after the guarantors. Derek became insolvent. How much may Philmar
demand from Angelica and Carlo?
Answer 13: P45K each. Article 2073 applies.
Question 8: If Angelica paid the entire amount, is she entitled to reimbursement?
Answer 8: Yes.
Question 9: From whom? A. Maria, the debtor. B. Philmar, the creditor. C. Derek, co-guarantor. D.
Derek and Carlo, the co-guarantors.
Answer 9: A. Maria, the debtor. Article 2073, CC. When there are 2 or more guarantors of the same
debtor and for the same debt, the one among them who has paid may demand of each of the
others the share which is proportionally owing from him.
RULES:
A co-guarantor who pays can always demand reimbursement from the principal debto,
whether he pays only his share or he pays the entire debt. But article 2073 also authorizes the
paying co-guarantor to seek reimbursement from his co-guarantors in the event that he pays the
entire obligation. However, in order for the guarantor who pays the entire obligation to be
entitled to demand reimbursement from his co-guarantors pursuant to Article 2073, it is a
condition sine qua non (indispensable condition) that the payment must have been made by
the guarantor concerned in virtue of a judicial demand or that the principal debtor is
insolvent.
Outside of the said situations, guarantor cannot go after his co-guarantors for re-
imbursement. His remedy is against the principal debtor.
If the guarantor demands reimbursement from the debtor pursuant to Article 2066, he is
entitled to recover the total amount of the debt which he paid, including his share.
If guarantor demands reimbursement from his co-guarantors pursuant to Article 2073,
upon reimbursement, all of them may, in turn, demand reimbursement from the debtor for the
share corresponding to each, in accordance with the provisions of Article 2066.
Defense: In a suit filed by the paying guarantor against the co-guarantors for their respective
shares in the obligation, the latter may set up against the former the same defenses which the
debtor could have raised against the creditor. (e.g. payment by the debtor which extinguished
the principal obligation, fraud, confusion, illegality novation, prescription, remission of the debt,
etc.)
The co-guarantors, however, are precluded from setting up defenses which are not
transmissible owing to their being purely personal to the debtor (e.g. minority of the debtor at
the time of the obligation was contracted; lack of capacity, insolvency, bankruptcy, etc.)
Should the guarantor for whom a sub-guarantor binds himself becomes insolvent, the
latter shall be responsible to the other co-guarantors in the same manner as the guarantor is
liable to them.
Question 10: When is the benefit of division NOT available?
Answer 10: Article 2065, CC. The benefit of the division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion against the principal debtor.
Reimbursement
Scope: The indemnity comprises:
1. The total amount of the debt.
2. The legal interest thereon from the time the payment was made known to the debtor,
even though it did not earn interest for the creditor.
Interest – The increase is not due to the contract but because of the default or delay on
the part of the debtor.
3. The expenses incurred by the guarantor after having notified the debtor that payment
had been demanded of him.
Expenses – Includes: Costs and expenses suffered by guarantor in connection with or
relating to the performance of his obligations after he has notified the debtor that
payment had been demanded of him by the creditor; and judicial costs incurred after he
has been judicially required to pay.
4. Damages, if they are due.
Subrogation
Subrogation has been referred to as the doctrine of substitution which is an arm of
equity that may guide or even force one to pay a debt for which an obligation was incurred but
which was in whole or in part paid by another.
 Subrogation transfers to the persons subrogated the credit with all the rights
appertaining to it, either against the debtor or against a third person, be they guarantors or
possessors of mortgages, subject to stipulation in a conventional subrogation.
Exception:
a. Where a guaranty is entered into or payment is made by the guarantor without the
knowledge or consent, or against the will of the principal debtor, in which case the guarantor can
recover only in so far as the payment has been made beneficial to the debtor.
b. Where payment is made by a third person who does not intend to be reimbursed by the
debtor, in which case such payment will be considered a donation, but subject to the required
consent of the debtor. However, as to the creditor who has accepted such payment, the same is
valid.
c. Where the right to demand reimbursement from the debtor has been waived by the
guarantor.
Example 14: Maria, obliged herself to pay Philmar P100K on or before December 31, 2025. Derek
guaranteed the fulfillment of the obligation. Unknown to Maria, Derek paid her obligation today.
May Derek now demand reimbursement from Maria?
Answer 14: No. A guarantor who pays before a maturity cannot demand reimbursement from the
debtor.
RULE: Where the debtor’s obligation is for a period, it becomes due and demandable only
upon the arrival of the day fixed.
Thus, a guarantor who pays before a maturity cannot demand reimbursement from the
debtor:
1. Until the expiration of the period (upon maturity); or
2. Unless the payment has been previously consented to or subsequently ratified
by the debtor, either expressly or impliedly.
Example 15: Maria, obliged herself to pay Philmar P100K on or before December 31, 2025. Derek
guaranteed the fulfillment of the obligation. Unknown to Maria, Derek paid her obligation. On
due date, Maria discovered that Derek already paid her obligations but despite such information,
with her pride, she fully paid Philmar again. May Derek demand reimbursement later on?
Answer 15: Yes, from Maria the principal debtor because despite knowing that it was already paid,
she still paid it.
RULES: The general is that:
First, the guarantor must first notify the debtor before paying the creditor; and
Second, should he fail to so inform the debtor of such payment and the debtor repeats
the payment, unaware of the previous payment, the guarantor’s only remedy is to ask for refund
of the amount paid from the creditor, without recourse or cause of action against the debtor for
the return of the same amount, even if the creditor should become insolvent.
Exception: a. If despite the absence of notice from the guarantor, the debtor repeats the
payment knowing fully well that the guarantor has already paid the creditor;
b. If the guaranty is gratuitous and the guarantor was prevented by fortuitous
event to notify the debtor about the payment; and
c. The creditor becomes insolvent.
Question 11: May the guarantor proceed against the debtor before payment?
Answer 11: Yes.
RULES: Article 2071. The guarantor, even before having paid, may proceed against the principal
debtor:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired;
4. When the debt has become demandable by reason of the expiration of the
period for payment;
 5. After the lapse of ten years, when the principal obligation has no fixed period for
its maturity, unless it be of such nature that it cannot be extinguished except
within a period longer that ten years;
6. If there are reasonable grounds to fear that the principal debtor intends to
abscond;
7. If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is to obtain release from the
guaranty, or to demand a security that shall protect him from any proceedings by the
creditor and from the danger of insolvency of the debtor.
If the debtor cannot make full payment, the release of the guarantor can only be
obtained with the consent of the creditor by persuading the latter to accept an equally
safe security, either another suitable guaranty or a pledge or mortgage.
Question 12: May a third person be made liable to reimburse the guarantor upon payment of the
debtor’s debt?
Answer 12: Yes. Article 2072, CC. If one, at the request of another, becomes a guarantor for the debt
of a third person whos is not present, the guarantor who satisfies the debt may sue either the
person so requesting or the debtor for reimbursement.
Extinguishment of Guaranty
Causes:
1. Upon extinguishment or termination of the principal obligations;
2. By the creditor’s voluntary acceptance of an immovable property other than money
(dacion en pago) payment of the debt;
Dacion en pago – Special mode of payment by which the debtor offers another thing to
the creditor who accepts it as equivalent of payment of an outstanding obligation, which
undertaking is really one of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor’s debt. It
is only when the thing offers as an equivalent is accepted by the creditor that novation
takes place, thus, totally extinguishing the debt and relieving the guarantor of his
liability. Should the creditor be subsequently evicted from the property subject of
dacion, such eviction will have the effect of reviving the principal obligation but not the
contract ofguaranty. The creditor may sue the debtor for eviction which is distinct from
the purpose for which the guaranty was constituted.
3. Partially as to one of the co-guarantors in favor of whom a release is made by the
creditor even though the principal obligation still remains;
-May work against the interests of the other co-guarantors especially in the event one of
the latter becomes insolvent.
-To preclude this inequitable situation from occurring, ythe law made sure that any
contemplated release favoring one of several guarantors without getting the consent of
the rest should benefit all of them but only insofar as the share of the favored guarantor
is concerned.
4. By an extension of time granted to the debtor by the creditor without the consent of the
guarantor;
Deadline of Extension
Article 2079, CC. An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor
to demand payment after the debt has become due does not of itself constitute any
extension of time referred to herein.
- The theory behind A. 2709 is that an extension of time given to the principal debtor by the
creditor without surety’s consent would deprive the surety of his right to pay the creditor
and to be immediately subrogated to the creditor’s remedies against the principal debtor
upon the original maturity date. The surety is said to be entitled to protect himself against
the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period.
 - The grant of extension by the creditor to the debtor may cause prejudice to the guarantor in
that the debtor may become insolvent during the delay which extension naturally causes,
thus depriving the guarantor of the useful exercise of the right to indemnity or
reimbursement which the law concedes to him, in which case it would be unjust to exact
responsibility from him to proceed against the principal debtor even before having paid,
among other cases, if the latter is insolvent, or when the period for payment has expired. In
order to be released from the guaranty or obtain a security which will protect him from any
proceedings of the creditor and from the danger of insolvency of the debtor, it is obvious
that such remedy is not sufficient for the purposes mentioned. The guarantor can only resign
himself to that remedy if those dangers take place within the period for which he became
bound, but in no manner should he be bound to bear those consequences against his will
after the expiration of the said period.
Example 16: Maria obliged herself to pay Philmar P100K on or before February 28, 2025. Derek
guaranteed the fulfillment of the obligation. On due date, philmar did not demand payment
from Maria. Is the contract of guaranty now deemed extinguished due to the implied extension
of payment?
Answer 16: No. To authorize the release of the guarantor, the extension of time for payment must
be expressly and clearly granted to the debtor by the creditor and done without the consent of
the guarantor. In other words, a mere implied extension will not suffice. Also, (Art. 2079) the
mere failure on the part of the creditor to demand payment after the debt has become due does
not of itself constitute any extension of time referred to herein.
- In order to constitute an extension discharging the guarantor, it should appear that the
extension was for a definite period, pursuant to an enforceable agreement between the
principal debtor and the creditor, and that it was made without the consent of the guarantor
or with a reservation of rights with respect to him. The contract must be one which
precludes the creditor from, or at least hinders him in, enforcing the principal contract
within the period during which he could otherwise have enforced it, and which precludes
the guarantor from paying the debt.
Question 13: Does the rule apply to extension of time to pay a single installment only?
Answer 13: Yes. As a general proposition, an extension of time granted by the creditor with respect
to a single installment without the consent of the guarantor shall release the latter with respect
to the said installment only.
Even if there is an acceleration clause, but the same is merely optional or discretionary
upon the creditor, the extension of time granted by the creditor to the debtor with respect to
one installment without the consent of the guarantor discharges the latter only with respect to
that installment and not for the other installments.
If, however, the acceleration clause is of the automatic type, the extension of payment
even with respect to one installment extinguishes the guaranty. The court explained that in an
automatic acceleration clause, the act of extending payment with respect to a single installment
without the consent of the guarantor, constituted in fact an extension of payment of the whole
amount of the indebtedness which results in the extinguishment of the guaranty.
5. Whenever by some act of the creditor, the guarantors cannot be subrogated to the
rights of the former;
6. For the same causes by which obligations in general are extinguished.
Causes of Extinguishment of Obligations:
a. Payment or performance;
b. Loss of the thing due;
c. Condonation or remission of the debt;
d. Confusion or merger of the rights of creditor and debtor;
e. Compensations;
f. Novation;
g. Annulment;
h. Rescission;
i. Fulfillment of resolutory condition;
 j. Prescription.

SURETYSHIP
An agreement by which a party, called the surety, guarantees the performance of
another party, called the principal or obligor, of an obligation or undertaking in favor of a third
party, called the obligee.
Defined as the relation which exists where one person has undertaken an obligation and
another person is also under obligation or other duty to the obligee, who is entitled to but one
performance and as between the two who are bound, one rather than the other should
perform.
Liability:
The surety’s liability to the creditor (obligee) or promise of the principal (debtor or
obligor) is direct, primary and absolute, and therefore, he is directly and equally bound with the
principal such that the creditor may proceed against any one of the solidarily debtors (the
principal or the surety).
In the case of Auto Corp Group v. Intra strata, the court held that “the provisions of the
Civil Code on Guarantee, other than the benefit of excussion, are applicable and available to the
surety. The court finds no reason why the provisions of Article 2079would not apply to Surety.”
In the case of Ong v. PC Bank, the court held that “reliance of petitioners – spouses on
Articles 2063 and 2081 of the CC is misplaced as these provisions refer to contracts of guaranty.
They do not apply to suretyship contracts.”
There is a sea of difference in the rights and liabilities of a guarantor and a surety. A
guarantor ensures the solvency of the debtor while a surety is an insurer of the debt itself. A
contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only
after the creditor has proceeded against the properties of the principal debtor and the debt
remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is
the principle of excussion. In a suretyship contract, the benefit of excussion is not available to
the surety as he is principally liable for the payment of the debt. As the surety insures the debt
itself, he obligates himself to pay the debts if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go
directly against the surety although the principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor. A surety is directly, equally and absolutely – bound
with the principal debtor for the payment of the debt and is deemed as an original promisor and
debtor from the beginning.
Characteristics:
1. The surety’s obligation is not an original and direct one for the performance of his own
act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the principal is said to be
direct, primary and absolute; In other words, he is directly and equally bounded with the
principal.
2. Suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. A surety is considered in law
as being the same party as debtor in relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are interwoven as to be inseparable.
3. Suretyship requires a principal debtor to whom the surety is solidarily bound by way of
an ancillary obligation of segregate identity from the obligation between the principal
debtor and the creditor. The suretyship binds the surety to the creditor, in as much as
the latter is vested with the right to proceed against the former to collect the credit in
lieu of proceeding against the principal debtor for the same obligation.
4. Suretyship creates a legal tie between the surety and the principal debtor to which the
creditor is not privy or party. The moment the surety full answers to the creditor for the
obligation created by the principal debtor, such obligation is extinguished.
 5. Under a suretyship contract, the surety may seek full reimbursement from the principal
debtor for the amount paid, for the surety does in fact “become subrogated to all the
rights and remedies of the creditor.” Suretyship gives a right to full reimbursement which
falls within the other rights, actions, and benefits pertaining to the surety by reason of
the subsidiary obligation assumed by the surety, in contrast to the provision of Article
1217 which provides that the solidary debtors who affected to the payment to the
creditor “may claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made.” Even as the surety is solidarily bound with
the principal debtor to the creditor, the surety who pays the creditor has the right to
recover the full amount paid, and not just any proportional share, from the principal
debtor or debtors.
6. Demand on the sureties is not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand.
7. A surety is not entitled, as a matter of right, to be given notice of the principal’s default.
In as much as the creditors owes no duty of active diligence to take care of the interest
of the surety, his mere failure to voluntarily give information to the surety of the default
of the principal cannot have the effect of discharging the surety. The surety is bound to
take notice of the principal’s default and to perform the obligation.
8. Where, by the terms of the contract, the obligation of the surety is the same as that of
the principal, then as soon as the principal is in default, the surety:
a. Is likewise in default; and,
b. May be sued immediately ad before any proceedings are had against the
principal.
9. Surety is not presumed, but must be express, and cannot extend to more that what is
stipulated in it.
10. A surety’s liability is determined strictly by the terms of contract of suretyship, in relation
to the principal contract between the debtor and the creditor. This is the reason why a
contract of surety is unenforceable unless made in writing or evidenced by some writing.
11. In suretyship contract, the benefit of excussion is not available to the surety as he is
principally liable for the payment of the debt.
12. A contract of surety is an undertaking addressed chiefly to the creditor and does not of
itself, without any express stipulation to the contrary, imply any covenant whatsoever by
the surety with the debtor that the former will fulfill the obligation guaranteed for the
benefit of the latter.
13. The surety is not discharged by the neglect of the creditor to sue the principal at the
time the debt falls due, even if such delay continues until the principal becomes
insolvent. If the surety is dissatisfied with the degree of activity displayed by the creditor
in the pursuit of his principal, he may:
a. pays the debt himself; and
b. become subrogated to all the rights and remedies of the creditor

LEGAL AND JUDICIAL BOND

Bond – Commonly understood to mean an undertaking that is sufficiently secured.
Legal Bond – Bond required by law.
Judicial Bond – Bond required in judicial proceedings.
Bondsman – Person bound by a bond to act as surety for another person, either by virtue of a
law or in compliance with a court order.
Article 2082, CC. The bondsman who is to be offered in virtue of a provision of law or of a
judicial order shall have the qualifications prescribed in article 2056 and in special laws.
Article 2083, CC. If a person bound to give a bond in the cases of the preceding article, should
not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be
admitted in lieu thereof.
Article 2084, CC. A judicial bondsman cannot demand the exhaustion of the property of the
principal debtor. A sub-surety in the same case, cannot demand the exhaustion of the roperty of
the debtor or of the surety.