CREDIT TRANSACTIONS
All transactions involving purchase or loan of goods,
services, or money, in the present with a promise to
pay or deliver in the future.
Bailment contracts, contracts of guaranty and
suretyship, mortgage, antichresis, and concurrence
and preference of credits;
Purpose
More exchanges;
Persons are able to enjoy a thing today but pay for it
later;
Through the banking system, actual money transfer is
eliminated by cancellation of debts and credits.
CREDIT TRANSACTIONS – CONTRACTS OF SECURITY;
TWO (2) TYPES
(a)
Secured transactions or contracts of real security —
Those supported by a collateral or an encumbrance of
property;
(b)
Unsecured transactions or contracts of personal
security —
Those the fulfillment of which by the principal debtor
is secured or supported only by a promise to pay or
the personal commitment or another such as a
guarantor or surety;
MEANING AND KINDS OF SECURITY
Security
Is something given, deposited, or serving as a means to
ensure the fulfillment or enforcement of an obligation of a
person to another, or of protecting some interest in
property.
(a) Personal security – when an individual becomes a surety
or a guarantor; or
(b) Real security – when a mortgage, pledge, antichresis,
charge or lien or other device is used to have property held,
out of which the person can be compensated for loss.
MEANING OF BAILMENT
“Bailment” comes from the French word “bailer,” meaning “to deliver.”
The delivery of property by 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.
Bailment may be said to be a contractual relation involving an agreement between the parties
that the property ultimately is to be returned by the bailee to the bailor or is to be delivered to a
designated third party.
Bailment may be created by operation of law;
No requirement that the agreement be in writing. To be legally enforceable, it must contain all
the elements of a valid contract;
Parties in bailment:
(1) Bailor — The giver; the party who
delivers the possession or custody of the
thing bailed; and
(2) Bailee — The recipient; the party who
receives the possession or custody of the
thing thus delivered.
Subject matter of bailment
Bailment involves transfer of possession of
personal or movable property. Thus, while
an owner of land may transfer possession
of it to another for a certain period of time,
the transaction does not constitute
bailment.
Both movable or immovable property may
be the object of commodatum.
LOAN
ARTICLE 1933
By the contract of loan, one of the parties delivers to
another, either something not consumable so that the
latter may use the same for a certain time and return it,
in which case the contract is called a commodatum; or
money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall
be paid, in which case the contract is simply called a loan
or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum the bailor retains the ownership of the
thing loaned, while in simple loan, ownership passes to
the borrower.
CHARACTERISTICS OF CONTRACT OF LOAN
(1) A real contract because the delivery of the thing is necessary
for the perfection of the contract;
(2) A unilateral contract because once the subject matter has
been delivered, it creates obligations on the part of only one of the
parties (the borrower).
CAUSE OR CONSIDERATION IN A CONTRACT OF LOAN
(1) As to the borrower, the acquisition of the thing; and
(2) As to the lender, the right to demand its return or its equivalent.
KINDS OF LOAN
(01)
Commodatum — Where the bailor (lender) delivers to
the bailee (borrower) a non-consumable thing (car) so
that the latter may use it fro a certain time and return
the identical thing;
(02)
Simple loan or mutuum — Where the lender delivers
to the borrower money or other consumable thing
upon the condition that the latter shall pay the same
amount of the same kind and quality.
A thing is consumable when it is consumed when used
in a manner appropriate to its purpose or nature, like
rice, gasoline, money, fruit, firewood, etc.
COMMODATUM vs. MUTUUM (SIMPLE LOAN)
(01)
Commodatum ordinarily involves something not consumable, while
in mutuum, the subject matter is money or other consumable thing;
(02)
In commodatum, ownership of the thing loaned is retained by the
lender, while in mutuum, the ownership is transferred to the
borrower;
(03)
Commodatum is essentially gratuitous, while mutuum may be
gratuitous or it may be onerous, that is, with stipulation to pay
interest;
(04)
In commodatum, the borrower must return the same thing loaned,
while in mutuum, the borrower need only pay the same amount of the
same kind and quality;
(05)
Commodatum may involve real or personal property, while mutuum
refers only to personal property;
COMMODATUM vs. MUTUUM (SIMPLE LOAN)
(06)
Commodatum is a loan for use, while mutuum is a loan for
consumption;
(07)
In commodatum, the bailor may demand the return of the thing
loaned before the expiration of the term in case of urgent need, while
in mutuum, the lender may not demand its return before the lapse of
the term agreed upon; and
(08)
In commodatum, the loss is suffered by the bailor since he is the
owner, while in mutuum, the borrower suffers the loss.
It may also be said that while commodatum is purely personal in
character (see Art. 1939), mutuum is not so.
Kinds of commodatum
(1) Ordinary commodatum; and
(2) Precarium — One whereby the bailor may demand the thing loaned
at will.
ARTICLE 1934
An accepted promise to deliver something by way of
commodatum or simple loan is binding upon parties, but
the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract.
Binding effect of accepted promise to lend
Commodatum and mutuum are real contracts which
require the delivery of the subject matter thereof for their
perfection.
It does not mean that a promise to lend would be without
efficacy.
An accepted promise to make a future loan is a
consensual contract and, therefore, binding upon the
parties but it is only after the delivery, will the real
contract of loan arise.
L corporation (lender) approved the
application of B for a loan of money.
B
executed
the
corresponding
mortgage on his land in favor of L,
which mortgage was registered in the
Registry of Property.
Is there a perfected real contract of
loan?
No. What exists, however, is a binding
consensual contract to make a future
loan which is enforceable by B.
COMMODATUM
ARTICLE 1935
The bailee in commodatum acquires the used of the
thing loaned but not its fruits; if any compensation is to
be paid by him who acquires the use, the contract ceases
to be a commodatum.
Commodatum is essentially gratituous.
Thus, a contract ceases to be a commodatum if any
compensation is to be paid by the borrower who acquires
the use.
In such a case, there arises a lease contract.
If the consideration is the rendering of some service, an
innominate contract will result.
F asked R if he might use his car for a trip to Baguio. If
R agreed and allowed F to get his car, asking nothing in
return for the favor, the contract of commodatum is
created for the sole benefit of F.
Since commodatum is essentially gratuitous, it lacks
the element of consideration and is not, therefore,
enforceable as contract.
Any agreement to lend property by way of
commodatum at a future time would be terminable at
any time by the owner without violating any right
giving rise to action for damages. Once the contract is
perfected, the right of the bailor to demand the return
of the thing is governed by Arts. 1946 and 1947.
Extent of bailee’s right of use
Right to use is limited to the thing loaned but not to its
fruits unless there is a stipulation to the contrary.
As owner of the thing loaned, the bailor is naturally entitled
to its fruits.
Contract similar to donation
Commodatum is similar to a donation – it confers a benefit
to the recipient; presumption is that the bailor has loaned
the thing for having no need therefor.
Purpose of commodatum
The use of the thing loaned “for a certain time”;
If the bailee is not entitled to the use of the thing, the
contract may be a deposit not a commodatum;
ARTICLE 1936
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.
ARTICLE 1937
Movable or immovable property may be the object of
commodatum.
Subject matter of the commodatum
Generally – non-consumable things whether real or personal;
If the purpose is not the consumption of the object but merely
for exhibition, consumable goods may be the subject of
commodatum.
Thus, A lends to B an oversized bottle of wine to be used as
sample or for advertisement.
An example of commodatum involving real property is
when a person allowed another to build a warehouse
on the former’s land so that the latter may use the
property for a certain period without any payment of
rentals.
If no time for use of the land is specified, the contract
would be one of lease.
ARTICLE 1938
The bailor in commodatum need not be the owner of the thing
loaned.
Bailor need not be the owner
Reason: In the loan, ownership does not pass to the borrower;
Thus, a mere lessee of the thing or a usufructuary (one entitled to
the use and the fruits of property belonging to another) may
lend.
But the borrower or bailee himself may not lend lease the thing
loaned to him to a third person.
ARTICLE 1939
Commodatum is purely personal in character.
Consequently:
(1) The death of either the bailor or the bailee
extinguishes the contract;
(2) The bailee can neither lend nor lease the object of
the contract to a third person. However, the members of
the bailee's household may make use of the thing
loaned, unless there is a stipulation to the contrary, or
unless the nature of the thing forbids such use.
Commodatum is purely personal in character (personal
contract).
Thus, death of either party terminates the contract,
unless by stipulation, the commodatum is transmitted to
the heirs of either or both parties.
Generally, the bailee can neither lend nor lease the
object of the contract to a third person.
But the use of the thing loaned (TV set) may extend to
members of the bailee’s household (not considered 3rd
persons) except in two (2) cases:
(1) there is a stipulation to the contrary; and
(2) the nature of the thing (dress) forbids such use.
Article 1939 constitutes an exception to the general rule
that all rights acquired by virtue of an obligation are
transmissible.
ARTICLE 1940
A stipulation that the bailee may make use of the fruits of the
thing loaned is valid.
Contrary stipulation as to fruits
Bailee is entitled only to the use of the thing loaned and not to its
fruits;
Thus, where an animal is the thing loaned, its young subsequently
born is not included in the contract.
But the parties may stipulate that the bailee may also make use
of the fruits of the thing.
Here, the enjoyment of the fruits must only be incidental to the
use of the thing itself. Otherwise, if it is the main cause, the
contract is usufruct.
OBLIGATION OF THE BAILEE
Article 1941
The bailee is obliged to pay for the ordinary expenses for the
use and preservation of the thing loaned.
Liability for ordinary expenses
Reason: Bailee (borrower) acquires the use of the thing loaned,
and he is supposed to return the identical thing;
As a rule, the borrower must take good care of the thing with the
diligence of a good father of a family.
X borrows the car of Y.
X must pay for the gasoline, motor oil, washing, greasing, etc.
bills and he cannot demand reimbursement for these expenses.
Extraordinary expenses is governed by Article 1949.
ARTICLE 1942
The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
(1) If he devotes the thing to any purpose different from that
for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has
been constituted;
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a
member of his household;
(5) If, being able to save either the thing borrowed or his own
thing, he chose to save the latter.
LIABILITY FOR LOSS OF THING LOANED
General rule, bailee is not liable for loss or damage due to a fortuitous
event;
Reason: Bailor retains the ownership of the thing loaned.
Article 1942 specifies the instances when bailee is liable even for a loss due
to a fortuitous event;
Purpose of the law – to punish bailee for his improper acts even if not
proximate cause of the loss.
The reason:
Under No. 1 – bailee acts in bad faith;
Under No. 2 – bailee incurs in delay;
Under No. 3 – Law presumes that parties intended that the borrower shall
be liable for the loss of the thing even if it is due to a fortuitous event;
Under No. 4 – Commodatum is purely personal; and
Under No. 5 – Bailee shows his ingratitude after thing is gratuitously loaned
to him.
ARTICLE 1943
The bailee does not answer for the deterioration of the thing
loaned due only to the use thereof and without his fault.
Liability for deterioration of thing loaned
Deterioration due to ordinary wear and tear;
In the absence of agreement tot he contrary, the depreciation is
borne by the bailor.
Bailee is liable if he is guilty of fault or negligence, or if he
devotes the thing to any purpose different from that for which it
has been loaned.
ARTICLE 1944
The bailee cannot retain the thing loaned on the ground that the
bailor owes him something, even though it may be by reason of
expenses. However, the bailee has a right of retention for
damages mentioned in Article 1951.
Right of retention of thing loaned.
(1) Ownership remains in bailor — Borrower acquires only the use
of the thing the ownership of which remains in the lender;
(2) Only temporary use given to bailee — Bailee would be violating
the bailor’s trust in him to return the thing as soon as the period
stipulated expires or the purpose has been accomplished.
ARTICLE 1945
When there are two or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily.
Liabilty of two or more bailees
Solidarily liability;
Reason – To guarantee the efficacy of the rights of the lender;
Law presumes that the bailor takes into account the personal integrity
and responsibility of all the bailees and that he would not have
constituted the commodatum if there were only one (1) bailee.
OBLIGATIONS OF THE BAILOR
Article 1946
The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of
the use for which the commodatum has been constituted. However,
if in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract
of commodatum is suspended while the thing is in the possession of
the bailor.
Obligation of the bailor to respect duration of loan.
Xxx to allow the bailee the use of the thing loaned for the duration of the
period stipulated or until the accomplishment of the purpose for which the
commodatum was constituted;
But if bailor should have an urgent need of the thing (he needs the car
loaned by him to bring a sick member of his household to a hospital), or if
the borrower commits an act of ingratitude, he may demand its return or
temporary use.
Here, the return may only be temporary or permanent because the law uses
“its return” (meaning permanent) or “temporary use.”
ARTICLE 1947
The bailor may demand the thing at will, and the contractual relation is
called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing
loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
Precarium
Is a kind commodatum where the bailor may demand the thing at will;
A “contract by which the owner of a thing, at the request of another person,
gives the latter the thing for use as long as the owner shall please.”
Cases when contract is precarium
Here, it is presumed that the use of the thing has been granted subject to
revocation by the bailor at any time. Hence, the name precarium;
In the ordinary commodatum, the possession of the bailee is more secure for
he has the right to retain the thing loaned.
ARTICLE 1948
The bailor may demand the immediate return of the thing if the bailee
commits any act of ingratitude specified in Article 765.
Art. 765 is applicable to commodatum because it is essentially gratuitous like
a donation;
Bailee who commits any of the acts of ingratitude makes himself unworthy
of the trust reposed upon him by the bailor.
Right of bailor to demand return of thing for acts of
ingratitude.
Per Art. 765 of Civil Code, any of the following
constitutes acts of ingratitude:
(1) If the bailee should commit some offenses against
the person, the honor or the property of the bailor, or of
his wife or children under his parental authority;
(2) If the bailee imputes to the bailor any criminal
offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the act
has been committed against the bailee himself, his wife
or children under his authority; and
(3) If the bailee unduly refuses the bailor support when
the bailee is legally or morally bound to give support to
the bailor.
ARTICLE 1949
The bailor shall refund the extraordinary expenses during the contract for
the preservation of the thing loaned, provided the bailee brings the same
to the knowledge of the bailor before incurring them, except when they
are so urgent that the reply to the notification cannot be awaited without
danger.
If the extraordinary expenses arise on the occasion of the actual use of the
thing by the bailee, even though he acted without fault, they shall be
borne equally by both the bailor and the bailee, unless there is a
stipulation to the contrary.
Obligation to refund extraordinary expenses.
Extraordinary expenses – like expenses for repairing borrowed house
damaged by a typhoon;
Reason for refund: Bailor profits by said expenses;
Reason to give notice: Bailor may not want to incur the extraordinary
expenses at all;
Bailor should be given discretion as to what must be done with his own
property;
Exception – when so urgent that the reply to the notification cannot be
awaited without danger.
ARTICLE 1950
If, for the purpose of making use of the thing, the bailee incurs expenses
other than those referred to in Articles 1941 and 1949, he is not entitled to
reimbursement.
No obligation to assume all other expenses
Example of “for the purpose of making use of the thing” – borrower buys
extra tire to be used as a reserve on a trip;
Expenses for ostentation are to be borne by the bailee because they are not
necessary for the preservation of the thing;
Ordinary expenses incurred for the preservation of the thing are also for the
account of the bailee.
ARTICLE 1951
The bailor who, knowing the flaws of the thing loaned, does not advise
the bailee of the same, shall be liable to the latter for the damages which
he may suffer by reason thereof.
Liability to pay damages for known hidden flaws.
Requisites which must concur for the application of Art. 1951:
(1) There is a flaw or defect in the thing loaned;
(2) The flaw or defect is hidden;
(3) The bailor is aware thereof;
(4) He does not advise the bailee of the same; and
(5) the bailee suffers damages by reason of said flaw or defect.
Same responsibility of bailor in commodatum is imposed on a pledgor.
If L lends to B his car without informing the latter that its brake is not
working properly, L will be liable in case B is injured by reason thereof.
The liability imposed by law is just a sanction for the bad faith
committed by L.
But if the defect is patent or could have been known to B after
inspection or L was not aware of the defect, L is not liable.
If defect is patent - it is presumed that B will adopt necessary
precautions or is willing to take the risk incident to the use of the car.
If L was unaware of the defect – L is not liable for the reason that
commodatum is gratuitous.
ARTICLE 1952
The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee.
No right of abandonment for expenses and damages
Reason – the expenses and damages may exceed the value of the thing
loaned, and it would, thus, be unfair to allow the bailor to just abandon the
thing instead of paying for said expenses and for damages.
SIMPLE LOAN OR MUTUUM
Article 1953
A person who receives a loan of money or any other fungible thing
acquires the ownership thereof and is bound to pay to the creditor an
equal amount of the same kind and quality.
Mutuum or simple loan
A contract whereby one of the parties delivers to another money or other
consumable thing with the understanding that the same amount of the same
kind and quality shall be paid.
Obligation of borrower is to “pay”.
Mutuum involves the return of the equivalent only and
not the identical thing because the borrower acquires
ownership thereof.
Law uses the word “pay” and not the word “return”
because the consumption of the thing loaned is the
distinguishing character of the contract of mutuum from
that of commodatum.
No criminal liability for failure to pay
In simple loan or mutuum, as contrasted to
commodatum, borrower acquires ownership of the
money, goods, or personal property borrowed.
As owner, the borrower can dispose of the thing
borrowed and his act will not be considered
misappropriation thereof.
No estafa is committed by a person who refuses to pay
his debt or denies its existence.
Fungible things
Are those which are usually dealt with by number, weight or measure
such as grain, oil, sugar, etc., so that any given unit or portion is
treated as the equivalent of any other unit or portion.
Example: one cavan of “wagwag” rice of a particular quality is the
same as any other portion of the same kind, quality, and quantity.
Fungible vs. consumable things
Civil Code classifies movable property into consumable or nonconsumable; but Article 1953 (also Art. 1464 on Sales and Art. 1795 on
Partnership), speaks of fungible things.
Whether a thing is consumable or not depends upon its nature and
whether it is fungible or not depends upon the intention of the parties;
Thus, while wine is consumable by its nature, it is non-fungible if the
intention is merely for display or exhibition because the same wine
must be returned.
ARTICLE 1954
A contract whereby one person transfers the ownership of non-fungible
things to another with the obligation on the part of the latter to give things
of the same kind, quantity, and quality shall be considered a barter.
By the contract of barter or exchange one of the parties binds himself to
give one thing in consideration of the other’s promise to give another thing.
Mutuum and commodatum distinguished from barter
(1) The distinction between mutuum and barter lies in the subject matter.
In the former, it is money or nay other fungible things; in the latter, nonfungible things;
(2) In commodatum, the bailee is bound to return the identical thing
borrowed when the time has expired, or the purpose has been served. In
barter, the equivalent thing is given in return for what has been received;
(3) Mutuum may be gratuitous and commodatum is always gratuitous.
Barter is an onerous contract; it is really a mutual sale.
ARTICLE 1955
The obligation of a person who borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes
another thing of the same kind, quantity and quality, even if it should
change in value. In case it is impossible to deliver the same kind, its value
at the time of the perfection of the loan shall be paid.
Object of simple loan may be either money or consumable or fungible
things.
Form of payment
(1) Loan of money — Payment must be made in the currency which is
legal tender in the Philippines, and in case of extraordinary inflation or
deflation, the basis of payment shall be the value of the currency at
the time of the creation of the obligation.
B borrowed from L P50,000 payable after five (5) years. On the
maturity of the obligation, the value of P50,000 dropped to P25,000
because of inflation.
Here, the basis of payment shall be the equivalent value of the
currency today to that five (5) years ago. Hence, B is liable to pay L
P100,000 unless there is an agreement to the contrary.
(2) Loan of fungible thing — borrower is to pay the lender another
thing of the same kind, quality and quantity. In case it is impossible to
do so, the borrower shall pay its value at the time of the perfection of
the loan.
B borrowed from L two (2) sacks of rice of a certain kind and quality.
At the time the loan was perfected, the price of each sack was P1,400.
B should return to L two (2) sacks of rice of the same kind and quality
although at the time of payment the price had increase to P1,600.
If on the due date of the obligation, the same kind of rice could not be
delivered by B because it was not available for some reason, then B
should pay L the sum of P 2,800 instead, the value of the rice at the
time of the perfection of the loan.
ARTICLE 1956
No interest shall be due unless it has been expressly stipulated in writing.
Requisites for recovery of monetary interest:
(1) The payment must be expressly stipulated;
(2) The agreement must be in writing; and
(3) The interest must be lawful.
If the exact rate of interest is not mentioned, the legal rate (6%) shall be
imposed.
TWO (2) EXCEPTIONS TO THE RULE:
(1) Indemnity for damages — Debtor in delay is liable to pay legal interest
(6%) as indemnity for damages even in the absence of stipulation for the
payment of interest.
(2) Interest accruing from unpaid interest — Interest due shall earn legal
interest from the time it is judicially demanded although the obligation may
be silent upon this point.
Note: By virtue of Central Bank Circular No. 416 (July 29, 1947), the legal
rate is increased from 6% to 12% per annum.
(1) Under a written contract of loan, B is obliged himself
to pay L the sum of P10,000. If nothing was mentioned
about the payment of interest, then no interest is due. If
the contract provides for the payment of 18% interest a
year which is lawful, all the requirements to entitle L to
recover interest are present.
(2) If B incurs in delay, he is liable to pay the interest as
damages, and not for the use of the money agreed upon,
and in the absence of stipulation, interest at the legal
rate which is 6% per annum from the date of delay.
(3) Suppose the payment of 18% interest is stipulated
and B incurred in delay for one (1) year. The indemnity
for damages shall also be the stipulated interest of 18%
so that B shall be liable to pay a total of P3,600 (P1,800
as interest for the first year and another P1,800 as
indemnity for damages for the one (1) year delay.
(4) If the interest was judicially demanded six (6) months
after B incurred in delay, the interest due (P1,800 + P900
= P2,700) shall be earn legal interest (6%) from that time
until payment is made.
ARTICLE 1957
Contracts and stipulations, under any cloak or device whatever, intended
to circumvent the laws against usury shall be void. The borrower may
recover in accordance with the laws on usury.
Usury
The contracting for or receiving something in excess of the amount allowed
by law for the loan or forbearance of money, goods or chattels.
Note: The Usury Law (Act. No. 2655, as amended) mentions two (2)
transactions, to wit: loan and forbearance.
(1) A loan within the purview of the Usury Law would be the loan
called “mutuum”. Commodatum is not included because it is
essentially gratuitous;
(2) The term forbearance, as used in the Usury Law, signifies the
contractual obligation of the creditor to forbear during a given period
to require of the debtor payment of an existing debt then due and
payable.
Where there is no loan or forbearance, there can be no usury.
Interest
Is the compensation allowed by law or fixed by the parties for the loan
or forbearance of money, goods, or credits.
Kinds of interest:
(1) Simple interest — paid for the principal at a certain rate fixed or
stipulated by the parties;
(2) Compound interest — imposed upon interest due and unpaid. The
accrued interest is added to the principal sum and the whole (principal
and accrued interest) is treated as a new principal upon which the
interest for the next period is calculated;
(3) Legal interest — which the law directs to be charged in the
absence of any agreement as to the rate between the parties.
Note: By virtue of Central Bank Circular No. 416 (July 29, 1974), the
legal rate was increased to 12% per annum, now 6% again, as
amended by BSP Circular No. 799 (July 1, 2013).
(4) Lawful interest — which the laws allow or do not prohibit, that is,
the rate of interest is within the maximum prescribed by law; and
(5) Unlawful or usurious interest — which is paid or stipulated to be
paid beyond the maximum fixed by law.
ARTICLE 1958
In the determination of the interest, if it is payable in kind, its value shall
be appraised at the current price of the products or goods at the time and
place of payment.
B borrowed P1,000 from L payable in one (1) year in palay which shall be
appraised at the current market price at the time and place of payment.
When the contract was entered into, the price per cavan of palay was P400.
On the due date of the loan, the price increased to P500.
Here, the value of the palay shall be appraised at P500.
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.
When unpaid interest earns interest
General rule – accrued interest (interest due and unpaid) shall not earn
interest except only in two (2) instances:
(1) When judicially demanded (in Article 2212); and
(2) When there is an express stipulation made by the parties.
This practice is called compounding interest and it is allowed if there is an
express stipulation.
ARTICLE 1960
If the borrower pays interest when there has been no stipulation therefor,
the provisions of this Code concerning solutio indebiti, or natural
obligations, shall be applied, as the case may be.
Payment of interest without stipulation:
(1) Where unstipulated interest (it is, therefore, not due) is paid by mistake,
the debtor may recover as this would be a case of solutio indebiti or undue
payment;
(2) Where the unstipulated interest is paid voluntarily because the debtor
feels morally obliged to do so, there can be no recovery as in the case of
natural obligations.
ARTICLE 1961
Usurious contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code.
Usurious transactions governed by special law.
The Usury law and other special laws apply only so far as they are not
inconsistent with the Civil Code.
According to Article 1175, “usurious transactions shall be governed by
special laws.” Articles 1175 and 1961 have given rise to the question: In case
of conflict, which would prevail, the Usury or the Civil Code?
Note: Usury is now legally inexistent.