Javier Philippine Law Lecture Notes
CREDIT TRANSACTIONS
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Credit Transactions – all transactions involving the
purchase or loan of goods, services, or money in the
present with a promise to pay or deliver in the future.
They are contracts of security and has two types:
o Contracts of Real Security (secured
transactions) – those supported by a collateral or
and encumbrance of property.
o Contracts of Personal Security (unsecured
transactions) – those the fulfillment of which by
the principal debtor secured or supported only by
a promise to pay or the personal commitment of
another such as a guarantor or surety.
Security – 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.
o Personal security – when an individual becomes
a surety or a guarantor.
o Real security – When a mortgage, pledge,
antichresis, charge or lien or other devices used
to have property held come out of which the
person can be compensated for loss.
Bailment – comes from the French word “baillor”
meaning “to deliver”. It is 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.
o Bailor (lender) – the giver; the party who
delivers the possession or custody of the thing
bailed.
o Bailee (borrower) – The recipient; The party
who receives the possession or custody of the
thing thus delivered.
General Provisions on Bailment
 A contract was relation involving an agreement
between the parties that the property ultimately is to
be returned by the ability to the bailor or is to be
delivered to a designated third party.
 It does not necessarily mean that an agreement is
always necessary to create a bailment. It may be
created by the operation of law.
 There's no requirement that their agreement be in
writing period to be legally enforceable, it must
contain all the elements of a valid contract.
 There are two kinds of contractual bailment.
o Different kinds but of same general character
– there are several kinds of bailments creating
different rights and obligations on the part of the
bailor and the bailee although the different kinds
are of the same general character. There is an
obligation on the part of the bailey to restore the
subject of the bailment and the same or in other
form or to account therefore.
o Classification with reference to compensation
– the classification is generally with reference to
compensation, under which bailments are
divided into 3 heads, namely:
a. Those for the sole benefit of the bailor
(gratuitous deposit and mandatum) –
bailment of goods without recompense for
the mandatory or person to whom the parties
delivered undertakes to do some act with
respect to the same as simply to carry it or
other ways to do something with respect to it
gratuitously.
b. Those for the sole benefit of the bailee
(commodatum and mutuum)
c. Those for the benefit of both parties
(deposit for a compensation, pledge, and
bailments for hire) – usually results from
bailments involving business transactions.
Also known as mutual-benefit bailments.
LOANS
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.
Javier Philippine Law Lecture Notes
In commodatum the bailor retains the ownership
of the thing loaned, while in simple loan,
ownership passes to the borrower. (1740a)
 A contract of loan is:
- Real contract because the delivery of the thing is
necessary for the perfection of the contract.
- Unilateral contract because once the subject
matter has been delivered, it creates obligations
on the part of only one of the parties.
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Commodatum
Commodatum – a gratuitous contract where the
bailor delivers to the bailee an non-consumable thing
so that the latter may use it for a certain time and
return the identical thing.
- If payment is involved it may be a different
contract (e.g., Lease)(1935).
- If use is not the principal cause of the contract for
the borrower, it may be a different contract (e.g.,
Deposit).
- If the purpose of the contract for the borrower is
the fruits, it may be a different contract (e.g.,
Usufructs).
- Both movable/personal or immovable/real
properties may be the object of a commodatum
(1936), as long as it is non-consumable.
Consumable may be an object of a commodatum
as long as they are used for exhibitions or display
only (1937).
- It is a purely personal contract because:
 Bailee cannot lend the thing to third persons.
The bailor must have a possessory interest or
the right to use the thing because the thing
may be owned by a third person (1938).
 Death of either parties will extinguish the
contract (1939).
- Generally, bailee acquires temporary use of the
object, but not of the fruits because ownership is
not transferred, unless it is stipulated (1940).
Obligations of the Bailee
 Obligations of the Bailee are the following:
1. Take care of the thing with ordinary diligence
(the diligence of a good father of a family).
2. Return the exact identical thing borrowed.
3. Pay for the ordinary expenses for use and
preservation of the thing borrowed (1941).
 Liability for loss of the Bailee (1942):
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1. In case a thing is loss due to a fortuitous event,
the bailee shall not be liable, unless he is guilty
of delay or negligence.
2. If he devotes the thing to any purpose different
from that agreed upon (e.g., A borrowed a car to
B for a trip to Baguio, but A uses the car for a trip
to Mindanao).
3. If he keeps it longer than the period stipulated or
for the accomplishment of its use for which the
commodatum has been constituted because in
this case, the bailee is already in delay.
4. 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.
5. If he lends it to third persons not member of his
household.
6. If, being able to save either the thing borrowed or
his own thing, he chose to save the latter because
such is an act of ingratitude (1746).
In case the object of the commodatum deteriorates
(1943):
- General Rule: Bailee is not liable.
- Exception:
 If there is an expressed stipulation to the
contrary.
 If there is fault or negligence.
 If the bailee devotes the thing to any purpose
different from that agreed upon.
 If he keeps it longer than the period stipulated
or for the accomplishment of its use for which
the commodatum has been constituted.
In case of extraordinary expenses due to force
majeure (unforeseeable circumstances that prevent
someone from fulfilling a contract):
- General Rule: Bailee shall shoulder half of the
extraordinary expenses.
- Exception: If there is an expressed stipulation to
the contrary.
The bailee shall have no right of retention in cases
where the bailor owes something to the bailee. There
shall only be a right of retention in case of hidden
flaws or defects of the thing which causes damage to
the bailee (1944).
If there are two or more bailees under the same
contract of commodatum, their liability shall be
solidary (one of them can be liable for the whole
Javier Philippine Law Lecture Notes
obligation and if he satisfies the obligation, such
shall be extinguished) (1945).
Obligations of the Bailor
 Obligations of the Bailor are the following:
1. Respect the duration of the contract.
- General Rule: Bailor cannot demand the
return of the thing prior to the expiration of
the period (1946, 1st par.).
- Exception:
 If the Bailor has urgent need over the
thing, he can either demand the return of
the thing absolutely or just for temporary
use. In case of temporary use, the contract
of commodatum is suspended and shall
continue after its return to the bailee. If
absolute, the contract of commodatum
shall be extinguished (1946, 2nd par.).
 Precarium – a contract of commodatum
whereby the bailor may demand the thing
loaned at will (1947).
 If the bailee commits any of the acts of
ingratitude under the law on donations
(1948):
I. Crime – if donee should commit
some offense against the person,
owner or property of the donor, his
wife, or children under his parental
authority.
II. Defamation – if donee imputes to
the donor any criminal offense, or
any acts involving moral turpitude,
even though he should prove it,
unless the crime has been
committed against the donee
himself, his wife, or children under
his authority.
III. Refusal to support – if donee
unduly refuses him support when
the donee is legally or morally
bound to give support to the donor.
 The loan itself is for an illegal or immoral
purpose.
2. Pay for the extraordinary expenses in case of
preservation (1949, 1st par.). However, notice is
generally required to be given him before the
expenses were paid by the bailee, except when
they are so urgent that the reply to the notification
cannot be awaited without danger.
3. If the extraordinary expenses arise on the
occasion of the actual use of the thing by the
bailee, both parties shall equally bear the
expenses (1949, 2nd par.).
4. He shall have the duty to disclose the hidden
defects of the object to the bailee. If the bailee
suffers the damage due to the hidden defects, the
bailor shall be liable for damages (1951). In such
case, the bailee shall have the right to retain the
thing.
5. He cannot exempt himself from the payment of
expenses or damages by abandoning the thing to
the bailee (1952).
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Mutuum
Mutuum – bailor delivers to the bailee money or
other consumable thing upon the condition that the
latter shall pay the same amount of the same kind and
quality.
- Contemplates both fungible and consumable
things.
- Ownership is transferred to the bailee and is also
bound to pay to the creditor an equal amount of
the same kind and quality (1953).
- In terms of form:
 If the object of mutuum is money, it must be
either in the currency stipulated by the parties
or in legal tender.
 If the object of mutuum is other than money,
it must be replaced by an object of the same
kind, quality, or quantity. But if it is
impossible, it shall be paid by the value at the
time of perfection of the contract (1955).
Fungible things – those who share usually dealt with
by number, weight, or measure such as grain, oil,
sugar, etcetera so that any given unit or person is
treated as the equivalent of any other unit or portion.
Consumable – consumed when used in a manner
appropriate its purpose or nature, like rice, gasoline,
money, fruit, firewood, etc.
Interest
Interest – it is the compensation allowed by the law,
paid to the lender for the use of either money, goods,
or credit. There are 3 requisites to receive monetary
interest (1956):
1. It must be expressly stipulated.
Javier Philippine Law Lecture Notes
2. The agreement on interest must be in writing.
The parties may also stipulate that the obligation
shall be subject to a certain rate of interest. If the
rate is not written, the legal rate shall be imposed
(6% per annum). If the interest was stipulated
that such is payable in kind, the value shall be
that which is appraised at the current price at the
time and place of payment.
3. The interest must be lawful.
 Usury – the illegal action or practice of lending
money at unreasonably high rates of interest.
 The usury law is suspended, allowing financial
institutions to impose a higher rate of interest than
the legal rate of interest. However, the supreme court
held that the interest may be strucked down in case it
is so unconscionable or shocking to the conscience
that it makes the debtors slaves to financial
institutions.
 If a person pays interest where interest is not due, the
rules on solutio indebiti shall apply. In other words,
the person who paid can recover it.
REAL ESTATE MORTGAGE
ARTICLE 2124. Only the following property
may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the
laws, imposed upon immovables.
Nevertheless, movables may be the object of a
chattel mortgage. (1874a)
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Mortgage – a contract whereby the debtor secures to
the creditor the fulfillment of a principal obligation,
especially subjecting to such security, immovable
property or real rights over immovable property in
case the principal obligation is not complied with the
time stipulated (2124).
 A contract of mortgage is:
- Real contract because the delivery of the thing is
necessary for the perfection of the contract.
- Unilateral contract because it creates an
obligation only on the part of the creditor who
must free the property from the encumbrance
once the obligation is fulfilled.
- Accessory contract because its consideration is
that of the principal contract from which it
receives its life, and without which it cannot exist
as an independent contract.
- It is also a subsidiary contract.
- It is not a transfer of ownership over the property,
but merely a lien, encumbrance, or a burden
placed upon a property.
- It creates a real right which are enforceable
against the whole world. Since the mortgagor or
debtor is given the right to alienate the property
or transfer it to a third person, which may
subsequently transfer the object again to another
third person, the REM attaches to the property
with each transfer. The implication in turn is that
the mortgagee may claim payment to whoever
possesses the property (2126, 2128, 2129).
- It extends to the property, accessions,
improvements, fruits, income, and rents not yet
received (2127).
 The requisites of an REM are the following:
1. Its purpose is to secure the fulfillment of a
principal obligation. Past and present debts
are covered, but future debts may be covered
provided there is an agreement between the
parties called “dragnet or blanket clause”
which is specifically phrased to subsume all
debts of past or future origins.
2. The mortgagor must be the absolute owner of
the property. Any stipulation preventing the
mortgagor from transferring his property to
someone else is void (2130). The coverage of
this requisite are the present properties that
the mortgagor absolutely owns. Generally,
future properties cannot be subjected to
mortgage, except if there is an expressed
stipulation to the contrary.
3. The mortgagor must have free disposal, or he
must be legally authorized to dispose of the
property.
4. The object must cover only immovable
properties or real rights over the immovable
property only.
5. The requirement of registration