Credit Transactions
Object of a contract of loan
IX. CREDIT TRANSACTIONS
1.
2.
A. LOAN
Consumable and Non-consumable things
A thing is consumable when it cannot be used in a
manner appropriate to its nature without being
consumed.
GENERAL PROVISIONS
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.
(BAR 1993, 2004, 2005)
On the other hand, a non-consumable thing is a
movable thing which can be used in a manner
appropriate to its nature without it being
consumed. (Pineda, 2006; Art. 418, NCC)
Fungible and non-fungible things
1.
Commodatum is essentially gratuitous.
2.
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. (Art. 1933, NCC)
2.
Fungible thing is one where the parties have
agreed to allow the substitution of the thing
given or delivered with an equivalent thing.
Non-fungible thing is one where the parties
have the intention of having the same identical
thing returned after the intended use. (3
Manresa 58; Pineda, 2006)
NOTE: As to whether a thing is consumable or not,
it depends upon the nature of the thing. As to
whether it is fungible or not, it depends upon the
intention of the parties. (Ibid.)
Kinds of loan
1.
Commodatum – The object is generally not
consumable; and
Mutuum – The object is consumable.
Commodatum – where the bailor (lender)
delivers to the bailee (borrower) a nonconsumable thing so that the latter may use it
for a given time and return the identical thing;
Fungibles are usually determined by number,
weight, or measure.
Mutuum or Simple Loan – where the lender
delivers to the borrower money or other
consumable thing upon the condition that the
latter shall pay same amount of the same kind
and quality. (Pineda, 2006)
GR: Non-fungible things are irreplaceable. They
must be returned to the lender after the purpose of
the loan had been accomplished.
Irreplaceability of non-fungible thing
XPN: Non-fungible things may be replaced by
agreement of the parties. In such case, the contract
is barter and not loan.
Commodatum is a loan of use because there is a
transfer of the use of the thing borrowed while
mutuum is a loan of consumption because there is a
transfer of the ownership of the thing, which is
generally received for consumption.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Delivery essential to perfection of loan
Delivery is necessary in view of the purpose of the
contract which is to transfer either the use or
518
Civil Law
ownership of the thing loaned.
5.
An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object
of the contract. (Art. 1934, NCC)
6.
It may be gratuitous or with stipulation to pay
interest; and
It is a unilateral contract. (Rabuya, 2017)
Perfection of the contract of mutuum
Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of
the object of the obligation. (Art. 1316, NCC) While
mutuum or simple loan is not mentioned, it has the
same character as commodatum. Hence, mutuum is
also a real contract which cannot be perfected until
the delivery of the object.
Unlawful purpose of the contract of loan
If the loan is executed for illegal or immoral or
unlawful purpose or use, the contract is void. (De
Leon, 2021)
An accepted promise to make a future loan is a
consensual contract and therefore, binding upon
the parties but it is only after delivery, will the real
contract of loan arise.
The bailor may immediately recover the thing
before any illegal act is committed, and provided he
is innocent or in good faith. (Arts. 1411 & 1412, NCC)
MUTUUM
Mere issuance of checks does not perfect the
contract of loan. It is only after the checks have been
encashed that the contact may be deemed perfected.
Characteristics of a Contract of Mutuum
1.
2.
Borrower acquires ownership of the thing (Art
1953, NCC);
Consideration in a simple loan
1.
If the thing loaned is money, payment must be
made in the currency stipulated, and if it is not
possible to deliver such currency, then in the
currency which is legal tender in the
Philippines. (Art. 1249, NCC)
2.
Object of mutuum
NOTE: In case of extraordinary deflation or
inflation, the basis of payment shall be the value
of the currency at the time of the creation of the
obligation (Art. 1250, NCC); and
3.
Its object is money or fungible and consumable
things.
Governing rules on payment of loan
If fungible thing other than money was loaned,
the borrower is obliged to pay the lender
another thing of the same kind, quality and
quantity even if it should change in value. (Art.
1955(2), NCC)
If the object of loan is:
1. Money – Governed by Arts. 1249 and 1250,
NCC.
GR: Payment shall be made in the currency
stipulated.
Nature of a Contract of Mutuum
1.
2.
3.
4.
As to the borrower – The acquisition of money
or any other fungible thing; and
As to the lender – the right to demand the return
of the money or any other fungible thing or its
equivalent.
The purpose of the contract is consumption;
The subject-matter is either money or
consumable;
Ownership passes to the borrower;
It is a real contract;
XPN: If not, that currency which is legal tender
in the Philippines.
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
Commodatum v. Mutuum (1996, 2004 BAR)
In case of extraordinary inflation – payment
shall be made at the value of the currency at the
time of the creation of the obligation, unless
there is an agreement to the contrary. (Art.
1250, NCC)
COMMODATUM
As to Object
Non-consumable
Non- fungible.
Loan of money can be payable in kind if there
is an agreement between the parties.
2.
MUTUUM
Consumable or Fungible thing – Debtor or
borrower shall pay another thing of the same
kind, quality and quantity even if it should
change in value. If cannot be done, the value of
the thing at the time of its perfection (delivery)
shall be the basis of the payment of the loan.
(Art. 1955, NCC)
and
Money or consumable
thing.
As to Cause
Gratuitous, otherwise
it is a lease.
May or may not be
gratuitous.
As to Purpose
Use or temporary
possession of the
thing loaned.
Q: Can Estafa be committed by a person who
refuses to pay his debt or denies its existence?
A: NO, because the debtor in mutuum becomes the
owner of the thing delivered to him. If he consumed
or disposed of the thing, the act which is an act of
ownership is not misappropriation. Hence, there is
no basis for a criminal prosecution. (Flores, Jr. v.
Enrile, G.R. No. L-38440, 20 July 1982)
GR: Not its fruit
because the bailor
remains the owner.
Consumption
XPNs:
Use of the fruits is
stipulated; enjoyment
of
the
fruits
is
stipulated;
or
enjoyment of the fruits
is incidental to its use.
Destruction of the thing loaned
The destruction of the thing loaned does not
extinguish one’s obligation in a simple loan because
his obligation is not to return the thing loaned but
to pay a generic thing.
As to Subject Matter
Real or
property.
personal
Generally
nonconsumable things but
may
cover
consumables if the
purpose of the contract
is for exhibition.
Only
property.
personal
As to ownership of the thing
Retained by the bailor.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
520
Passes to the debtor.
Civil Law
INTEREST AND
THE SUSPENSION OF USURY LAW
As to thing to be returned
Equal amount of the
same kind and quality.
Exact thing loaned.
Interest
Who bears risk of loss
Bailor
It is the compensation to be paid by the borrower
for the use of the money lent to him by the lender. It
is paid either as compensation for the use of money
(monetary interest) or as damages (compensatory
interest). (Andreas vs. BPI, G.R. No. 23836, 09 Sept.
1925)
Debtor
When to return
In case of urgent need
even
before
the
expiration of term (the
contract is in the
meantime suspended).
Only
after
the
expiration of the term.
Classes of Interest
1. Simple or Monetary – The interest which is
paid for the use or forbearance of the money, at
a certain rate stipulated in writing by the
parties; (Art. 2209, NCC; Odiamar v. Valencia,
G.R. No. 213582, 12 Sept. 2018)
Contract
Contract of use
Contract
consumption
of
2. Compound– The interest which is imposed
upon accrued interest, that is, the interest due
and unpaid; (Arts. 1959 & 2212, NCC)
Mutuum v. Lease
MUTUUM
LEASE
Object is money or any
consumable (fungible)
thing.
Object may be any
thing,
whether
movable
or
immovable, fungible or
non-fungible.
There is transfer of
ownership.
No
transfer
ownership.
Creditor-debtor
relationship.
Lessor-lessee
relationship.
Unilateral
Bilateral
The
money
or
consumable
thing
loaned is not returned
but the same amount of
the same kind and
quantity shall be paid.
The debtor returns the
thing/s leased.
3. Legal – That interest which the law directs to be
paid in the absence of any agreement as to the
rate; (Art. 2209, NCC) and
4. Compensatory – The interest paid by virtue of
damages for delay or failure to pay principal
loan on which interest is demanded. (Odiamar
v. Valencia, G.R. No. 213582, 12 Sept. 2018)
of
NOTE: Finance Charges – Are not merely a specie of
interest, but these include interest, fees, service
charges, discounts, and such other charges incident
to the extension of credit under R.A. No. 3765, or the
Truth in Lending Act. Not disclosing the true finance
charges in connection with the extensions of credit
is a form of deception which the Court cannot
countenance. It is against the policy of the State as
stated in the Truth in Lending Act – to protect its
citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of
such cost with a view of preventing the uninformed
use of credit to the detriment of the national
economy. (Sec. 2, R.A. No. 3765; UCPB v. Beluso, G.R.
No. 159912, 17 Aug. 2007)
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
loans or forbearances of money) from the date of
judicial or extrajudicial demand.
Requisites for Recovery of Interest
1.
2.
3.
The payment of interest must be expressly
stipulated; (Jardenil v. Salas, G.R. No. L-47878, 24
July 1942)
The agreement to pay interest must be in
writing; (Art. 1956, NCC) and
The interest must be lawful.
The foreclosure proceedings are also void. Since the
obligation of making interest payments is illegal and
thus non-demandable, the payment of the principal
loan obligation was likewise not yet demandable.
With Zenaida not being in a state of default, the
foreclosure of the subject properties should not
have proceeded. (Bulatao v. Zenaida, G.R. No.
235020, 10 Dec. 2019, J. Caguioa)
Rules on interest
GR: No interest shall be due unless it is stipulated in
writing. (Art. 1956, NCC) (2004 BAR)
Liability for interest even in the absence of
stipulation (exceptions to Art. 1956)
XPNs:
1. In case of interest on damages or indemnity for
damages, it need not be in writing; (Art. 2209,
NCC) or
2. Interest accruing from unpaid interest. (Art.
2212, NCC)
1.
Indemnity for damages — The debtor in delay is
liable to pay legal interest as indemnity for
damages even in the absence of stipulation for
the payment of interest. (De Leon, 2013) The
“obligation consisting of the payment of a sum
of money’’ referred to in Article 2209 is not
confined to a loan or forbearance of money. It
has also been applied by the Supreme Court in
cases involving default in the payment of price
or consideration under a contract of sale and an
action or damages for injury to persons and loss
of property and an action for damages arising
from unpaid insurance claims. (Castelo v. CA,
G.R. No. 96372, 22 May 1995) Interest as
indemnity for damages is payable only in case
of default or non- performance of the contract.
As they are distinct claims, they may be
demanded separately. (Sentinel Insurance Co.
Inc. v. CA, G.R. No. L-52482, 23 Feb. 1990)
2.
Interest accruing from unpaid interest — Interest
due shall earn interest from the time it is
judicially demanded although the obligation
may be silent upon this point. (Art. 2212, NCC;
see Sec. 5, Usury Law) Both Art. 2212 of the Civil
Code and Sec. 5 of the Usury Law are applicable
only where interest has been stipulated by the
parties. Art. 1212 contemplates the presence of
stipulated or conventional interest which has
accrued when demand was judicially made. In
cases where no interest had been stipulated by
the parties, no accrued conventional interest
could further earn interest upon judicial
demand. (Isla vs. Estorga, G.R. No. 233974, 02
NOTE: Art. 1956 applies only to interest for the use
of money and not to interest imposed as items of
damages.
Stipulation of a Particular Interest Rate
If a particular rate of interest has been expressly
stipulated by the parties, that interest, not the legal
rate of interest shall be applied. (Casa Filipina Dev.
Corp. v. Deputy Executive Secretary, G.R. No. 96494,
28 May 1992)
Q: In dire need of money, Zenaida mortgaged a
parcel of land to Atty. Bulatao to secure a loan
worth P200,000. The real estate mortgage
entered by the parties stipulated a 5% per
month interest. Zenaida failed to pay the loan
later on and as such Atty. Bulatao foreclosed the
property. Were the stipulated interest rate and
the ensuing foreclosure sale valid?
A: NO. The Court has ruled that 5% per month or
60% per annum interest rate is highly iniquitous
and unreasonable; and since the interest rate
agreed upon is void, the rate of interest should be
12% per annum (the then prevailing interest rate
prescribed by the Central Bank of the Philippines for
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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Civil Law
When an obligation, not constituting 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. The Court, therefore, sustains the CA's
ruling that the rate of legal interest imposable on
the liability of the Province of Cebu to WTCI is 6%
per annum. (WT Construction, Inc. v. The Province of
Cebu, G.R. No. 208984, 16 Sept. 2015)
July 2018)
NOTE: Where the court’s judgment which did not
provide for the payment of interest has already
become final, no interest may be awarded.
(Santuban v. Fule, G.R. No. L-59664, 26 Dec. 1984)
Q: Province of Cebu was chosen by former
President Gloria Macapagal-Arroyo to host the
12th ASEAN Summit. To cater to the event, it
Q: Petitioners Isla obtained a loan in the amount
of P100,000.00 from respondent, payable
anytime from six (6) months to one (1) year and
subject to interest at the rate of ten percent
(10%) per month, payable on or before the end
of each month. When petitioners failed to pay the
said loan, respondent sought assistance from the
barangay, and consequently, a Kasulatan ng
Pautang dated December 8, 2005 was executed.
Petitioners, however, failed to comply with its
terms, prompting respondent to send a demand
letter dated November 16, 2006. Once more,
petitioners failed to comply with the demand,
causing respondent to file a Petition for Judicial
Foreclosure against them before the RTC.
Petitioners maintained that the stipulated
interest of ten percent (10%) per month was
exorbitant and grossly unconscionable. The RTC
directed petitioners to pay respondent the
amounts of P100,000.00 with twelve percent
(12%) interest per annum from December 2007
until fully paid and P20,000.00 as attorney's
fees. Is the 12% interest imposed by the Court
valid?
decided to construct the Cebu International
Convention Center (CICC or the project) which
would serve as venue for the ASEAN Summit.
Province of Cebu conducted a public bidding for
the project and WTCI emerged as the winning
bidder for the construction of Phase I. After
completing Phase I, WTCI again won the bidding
for Phase II of the project involving the adjacent
works on CICC. As Phase II neared completion,
the Province of Cebu caused WTCI to perform
additional works on the project, WTCI agreed to
perform the additional works notwithstanding
the lack of public bidding. Weeks before the
scheduled ASEAN Summit, WTCI completed the
project, including the additional works and,
accordingly, demanded payment therefor. WTCI
demanded for payment but the Province of
Cebu still refused to pay. Thus, it filed a
complaint for collection of sum of money before
the RTC. RTC ruled in favor of WTCI. CA affirmed
the RTC's Order but reduced the interest rate to
6% per annum. What is the nature of Province of
Cebu’s liability?
A: The liability of the Province of Cebu to WTCI is
not in the nature of a forbearance of money as it
does not involve an acquiescence to the temporary
use of WTCI's money, goods or credits. Rather, this
case involves WTCI's performance of a particular
service, i.e., the performance of additional works on
CICC, consisting of site development, additional
structural, architectural, plumbing, and electrical
works thereon.
A: YES. Anent monetary interest, the parties are free
to stipulate their preferred rate. However, courts
are allowed to equitably temper interest rates that
are found to be excessive, iniquitous,
unconscionable, and/or exorbitant, such as
stipulated interest rates of three percent (3%) per
month or higher. In such instances, it is well to clarify
that only the unconscionable interest rate is nullified
and deemed not written in the contract; whereas
the parties' agreement on the payment of interest
on the principal loan obligation subsists. It is as if
the parties failed to specify the interest rate to be
imposed on the principal amount, in which case the
legal rate of interest prevailing at the time the
Verily, the Court has repeatedly recognized that
liabilities arising from construction contracts do not
partake of loans or forbearance of money but are in
the nature of contracts of service.
523
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
Q: The court ordered petitioner Nympha S.
Odiamar to pay respondent the amount of
P1,010,049.00 representing the remaining
balance of petitioner's debt to the latter in the
original amount of P1,400,000.00. In said
motion, respondent prays for the imposition of
legal interest on the monetary award due her.
She likewise insists that petitioner's loan
obligation to her is not just P1,400,000.00 but
P2,100,000.00 and, as such, she should be made
to pay the latter amount. Whether a prayer for
the imposition of legal interest on the monetary
award due is proper?
agreement was entered into is applied by the Court.
This is because, according to jurisprudence, the legal
rate of interest is the presumptive reasonable
compensation for borrowed money.
In this case, petitioners and respondent entered into
a loan obligation and clearly stipulated for the
payment of monetary interest. However, the
stipulated interest of ten percent (10%) per month
was found to be unconscionable, and thus, the
courts a quo struck down the same and pegged a
new monetary interest of twelve percent (12%) per
annum, which was the prevailing legal rate of
interest for loans and forbearances of money at the
time the loan was contracted on December 6, 2004.
(Isla vs. Estorga, G.R. No. 233974, 02 July 2018)
A: YES. In the absence of an express stipulation as
to the rate of interest that would govern the parties,
the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%)
per annum but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently,
the twelve percent (12%) per annum legal interest
shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum
shall be the prevailing rate of interest when
applicable.
NOTE: In expropriation cases, interest is imposed if
there is delay in the payment of just compensation
to the landowner since the obligation is deemed to
be an effective forbearance on the part of the State.
Such interest shall be pegged at the rate of 12% per
annum on the unpaid balance of the just
compensation, reckoned from the time of taking or
the time when the landowner was deprived of the
use and benefit of his property such as when title
is transferred to the Republic, or emancipation
patents are issued by the government, until full
payment. (LDB v. Santos, G.R. No. 213863, 27 Jan.
2016)
Applying the foregoing parameters to this case,
petitioner's loan obligation to respondent shall be
subjected to compensatory interest at the legal rate
of twelve percent (12%) per annum from the date of
judicial demand, i.e., August 20, 2003, until June 30,
2013, and thereafter at the legal rate of six percent
(6%) per annum from July 1, 2013 until finality of
this ruling. Moreover, all monetary awards due to
respondent shall earn legal interest of six percent
(6%) per annum from finality of this ruling until
fully paid. (Odiamar v. Valencia, G.R. No. 213582, 12
Sept. 2018)
Payment of Interest when there is No Stipulation
1.
2.
A borrower borrowed money. No interest was
stipulated. If by mistake he pays, then this will
be a question of undue payment or solutio
indebiti. We should then apply the rules on the
subject.
If a borrower borrows money and orally agrees
to pay legal interest at 10% per annum, there is
really no obligation to pay since the interest
was not agreed upon in writing. If he
nevertheless pays because he considers it his
moral obligation to pay said interest, he cannot
recover the interest that he has given
voluntarily. This will now be a natural
obligation, and the provisions on said subject
should apply. (Paras, 2008)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Basis of the Right to Interest
The basis of the right to interest is it only arises by
reason of the contract (stipulation in writing) for the
use of money or by reason of delay or failure to pay
principal on which interest is demanded due to a
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Civil Law
Thus, collection of interest without any
stipulation therefor in writing is prohibited by
law.
breach of an obligation. (Baretto v. Santa Marina,
G.R. No. 11908, 04 Feb. 1918)
Equitable mortgage
b. YES. The quasi-contract of solutio indebiti
harks back to the ancient principle that no
one shall enrich himself unjustly at the
expense of another. The principle of solutio
indebiti applies where (1) a payment is
made when there exists no binding relation
between the payor, who has no duty to pay,
and the person who received the payment;
and (2) the payment is made through
mistake, and not through liberality or some
other cause. The Supreme Court has held
that the principle of solutio indebiti applies
in case of erroneous payment of undue
interest. (Siga-an v. Villanueva, G.R. No.
173227, 20 Jan. 2009)
Equitable mortgage is one which, although it lacks
the proper formalities or other requisites of a
mortgage required by law, nevertheless reveals the
intention of the parties to burden real property as a
security for a debt, and contains nothing impossible
or contrary to law.
Interest in equitable mortgage
There can be no interest to be collected in equitable
mortgage because the same is not stipulated in
writing. (Tan v. Valdehueza, G.R. No. L-38745, 06 Aug.
1975)
Recovery of unstipulated interest
Interest on unliquidated claims
A payment for unstipulated interest can be
recovered if paid by mistake, the debtor may
recover as in the case of solutio indebiti or undue
payment. However, if payment is made voluntarily,
no recovery can be made as in the case of natural
obligation. (Art. 1960, NCC)
GR: Interest may not be adjudged on unliquidated
claims or damages.
XPN: When or until the demand can be established
with reasonable certainty. (BPI vs. Land Investors
and Developers Corporation, G.R. No. 198237, 08 Oct.
2018)
Q: Siga-an granted a loan to Villanueva in the
amount of P540,000.00. Such agreement was
not reduced to writing. Siga-an demanded
interest which was paid by Villanueva in cash
and checks. The total amount Villanueva paid
accumulated to P1,200,000.00. Upon advice of
her lawyer, Villanueva demanded for the return
of the excess amount of P660,000.00 which was
ignored by Siga-an.
a. Is the payment of interest valid?
b. Is solutio indebiti applicable? Explain.
(2012 Bar)
A:
a. NO. Payment of monetary interest is
allowed only if:
1. There was an express stipulation for
the payment of interest; and
2. The agreement for the payment of
interest was reduced in writing.
The concurrence of the two conditions is
required for the payment of monetary interest.
Running of interest on unliquidated claims
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, NCC), but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to
run only from the date the judgment of the court is
made at which time the quantification of damages
may be deemed to have been reasonably
ascertained.
The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
(BPI vs. Land Investors and Developers Corporation,
G.R. No. 198237, 08 Oct. 2018)
525
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
from default (i.e., judicial or extrajudicial
demand) subject to provisions of Art. 1169
of the Civil Code;
Monetary interest and compensatory interest
Monetary interest must be expressly stipulated in
writing and it must be lawful. (Art. 1956, NCC)
c.
When an obligation, not constituting 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.
d.
Where the demand is established with
reasonable certainty, the interest shall
begin to run from the time the claim is
made judicially or extrajudicially (Art.
1169, NCC); and
e.
When such certainty cannot be so
reasonably established at the time the
demand is made, the interest shall begin to
run only from the date the judgment of the
court is made at which time the
quantification of damages may be deemed
to have been reasonably ascertained. The
actual base for the computation of legal
interest shall, in any case, be on the amount
finally adjudged.
The ruling in Eastern Shipping Lines has now been
modified by Bangko Sentral ng Pilipinas Monetary
Board Circular No. 799 Series of 2013, providing
that:
The rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as
to such rate of interest, shall be six percent (6%) per
annum. (BSP Circular No. 799, 01 July 2013)
Prospective application of BSP Circular No. 799
It should be noted, nonetheless, that the new rate
could only be applied prospectively and not
retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only
until June 30, 2013. Come July 1, 2013 the new rate
of six percent (6%) per annum shall be the
prevailing rate of interest when applicable. (Nacar
v. Gallery Frames, G.R. No. 189871, 13 Aug. 2013)
The new guidelines on the application of Legal
Interest
1.
2.
When an obligation, regardless of its source
(i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts) is breached, the contravenor can
be held liable for damages and the provisions
under Title XVIII on Damages of the Civil Code
govern in determining the measure of
recoverable damages; and
When the judgment of the court awarding a sum of
money becomes final and executory, whether the
case falls under under paragraph (a) or (c) above,
the rate 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. (Nacar v. Gallery Frames, G.R. No. 189871,
13 Aug. 2013)
For the award of interest in the concept of
actual and compensatory damages, the rate of
interest and its accrual is imposed as follows:
a. For breach of obligations consisting of loan
or forbearance of money, interest due shall
be that stipulated in writing. Interest due
shall itself earn legal interest from the time
it is judicially demanded;
b.
NOTE: Judgments that have become final and
executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented.
(Ibid)
In the absence of stipulation, the rate of
interest shall be 6% per annum, computed
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
526
Civil Law
Authority of BSP Monetary Board to set interest
rates
when it is judicially demanded, although the
obligation is silent upon this point. (Art. 2212, NCC)
The Supreme Court affirmed the authority of BSP
Monetary Board (BSP-MB) to prescribe the
maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low
priority such as consumer loans, as well as such
loans made by pawnshops, finance companies and
similar credit institutions. (Advocates for Truth in
Lending Inc. v. Monetary Board, G.R. No. 192986, 15
Jan. 2013)
Rule on Compounding of Interest
GR: Accrued interest (interest due and unpaid) shall
not earn interest.
XPNS: When:
1. There is express stipulation made by the parties
- that the interest due and unpaid shall be added
to the principal obligation and the resulting
total amount shall earn interest (Art. 1959,
NCC); or
2. Judicial demand has been made upon the
borrower. (Art. 2212, NCC)
Basis for the Interest Rate for Compensatory
Interest
1.
2.
3.
NOTE: Such accrued interest will bear interest at
the legal rate (Art. 2212, NCC) unless, a different rate
is stipulated. (Hodges v. Regalado, 69 Phil. 588, 14
Feb. 1940)
Central Bank Circular No. 799 – 6% per annum
in cases of:
a. Loans;
b. Forbearance of money, goods and credits;
and
c. Judgment involving such loan or
forbearance
Art. 2209 – 6% per annum in cases of:
a. Other sources (i.e., sale);
b. Damages arising from injury from person;
and
c. Loss of property which does not involve a
loan.
Interest accruing from unpaid interest
(compound interest) – Interest due shall earn
interest from the time it is judicially demanded
although the obligation is silent upon this point.
(Art. 2212, NCC)
Increase in Interest Rates
No increase in interest shall be due unless such
increase has also been expressly stipulated.
(Security Bank &Trust Co. v RTC of Makati, G.R. No.
113926, October 23, 1996)
The unilateral determination and imposition of
increased rates is violative of the principle of
mutuality of contracts ordained in Article 1308 of
the Civil Code. One-sided impositions do not have
the force of law between the parties, because such
impositions are not based on the parties’ essential
equality. (NSBCI v. PNB, G.R. No. 148753, 30 July
2004)
Forbearance
Forbearance signifies the contractual obligation of
the creditor to forbear during a given period of time
to require the debtor payment of an existing debt
then due and payable. Such forbearance of giving
time for the payment of a debt is, in substance, a loan.
(Pineda, 2006)
Governing rule on Usurious Transactions
CB Circular No. 905 has expressly removed the
interest ceilings prescribed by Usury Law; thus, the
said law has become legally non-existent.
NOTE: It did not repeal or amend the usury law but
merely suspended its effectivity. (Security Bank &
Trust Company v. RTC of Makati, G.R. No. 113926, 23
Oct. 1996)
Compounding of interest
There must first be a stipulation of payment of
interest and this interest may earn interest only
527
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
President are bound by the Credit Agreement
and solidarily liable with ERMA for payment.
Erma obtained various peso and dollar
denominated loans from Security Bank
evidenced by promissory notes. Under
thesepromissory notes, the interest on the
principal at varying rates (7.5% per annum for
dollar obligation and 16.75% or 21% per annum
on peso obligation). In default of payment, ERMA
requested for restructuring of the agreement
and offered a certain property as collateral.
However, Security Bank restructured only
partially which ERMA did not accept. Security
Bank demanded payment against ERMA and the
sureties for the loans inclusive of interest and
penalty charges with additional claim for
Interest of 20% per annum on the peso
obligation and 7.5% per annum on the dollar
obligation from November 1, 1994 until fully
paid and penalty charge of 2% per month of the
total outstanding principal and interest due and
unpaid. The RTC ruled in favor of SBC but did not
impose the additional claims.
a. Whether ERMA and sureties are liable for
the additional claim?
b. Whether there is novation which would
release the sureties from liability?
There is certainly nothing in said circular which
grants lenders carte blanche authority to raise
interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their
assets. Stipulations authorizing iniquitous or
unconscionable interests are contrary to morals, if
not against the law. (Rey vs. Anson, G.R. No. 211206,
07 Nov. 2018)
When Usury Law does not apply
1.
A contract for the lease of property is not a loan;
hence, the rental paid is not governed by the
Usury Law; (Tolentino v. Gonzales, 50 Phil. 5, G.R.
No. 26085, 12 Aug. 1927) or
2.
The increase of the price of a thing sold on credit
over its cash sale price is not interest within the
purview of the Usury Law, if the sale is made in
good faith and not as a mere pretext to cover a
usurious loan. (Manila Trading v. Tamaraw, G.R.
No. L-22995, 28 Feb. 1925)
Such price is the selling price for a sale made on
the installment plan.
Courts may
interests
simply
reduce
unreasonable
A:
a. NO. The Regional Trial Court denied Security
Bank's additional claims for interests and
penalty charges for being iniquitous, and
imposed instead a 12% legal interest on the
total outstanding obligation. In making this
ruling, the Regional Trial Court took into
account the partial payments made by
petitioners, their efforts to settle/restructure
their loan obligations and the serious slump in
their export business in 1993. The Regional
Trial Court held that, under those
circumstances, it would be "iniquitous, and
tantamount to merciless forfeiture of
property" if the interests and penalty charges
would be continually imposed.
Interest stipulated by the contracting parties is valid
however if the interest rate agreed upon is
iniquitous and unconscionable, the courts may
reduce the same as reason and equity demand.
(Imperial v. Jaucian, G.R No. 149004, April 14, 2004)
In the case of Medel v. CA (G.R. No. 131622, 27 Nov.
1998), the court ruled that while stipulated interest
of 5.5% per month on a loan is usurious pursuant to
CBC No. 905, the same must be equitably reduced
for being iniquitous, unconscionable, and
exorbitant. It is contrary to morals. It was reduced
to 12% per annum in consonant with justice and fair
play.
Q: ERMA obtained credit facility from Security
Bank Co. by virtue of the Credit Agreement they
executed. They also executed Suretyship
Agreement
whereby
Ernesto
Marcelo,
President, and Sergio Ortiz – Luiz, Jr, Vice-
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
b. NONE. The Regional Trial Court and the Court
of Appeals were in agreement that while there
were ongoing negotiations between Erma and
Security Bank for the restructuring of the loan,
528
Civil Law
per annum. Finally, Samuel filed an action
questioning the right of the bank to increase the
interest rate up to 48%. The bank raised the
defense that the Central Bank of the Philippines
had already suspended the Usury Law. Will the
action prosper or not? Why? (2001 BAR)
the same did not materialize. Erma offered to
restructure its entire outstanding obligation
and delivered TCT No. M-7021 as collateral, to
which Security Bank counter-offered a partial
restructuring or only up to P5,000,000. This
counteroffer was not accepted by Erma. There
was no new contract executed between the
parties evidencing the restructured loan. The
nature and extent of respondent Ortiz's liability
are set out in clear and unmistakable terms in
the Continuing Suretyship agreement. Under its
express terms, respondent Ortiz, as surety, is
"bound by all the terms and conditions of the
credit instruments." His liability is solidary with
the debtor and co-sureties; and the surety
contract remains in full force and effect until full
payment of Erma's obligations to the Bank.
(ERMA Industries, Inc. v. Bank Corporation, G.R.
No. 191274, 06 Dec. 2017)
A: YES. While it is true that the interest ceilings set
by the Usury Law are no longer in force, it has been
held that P.D. No. 1684 and CB Circular No. 905
merely allow contracting parties to stipulate freely
on any adjustment in the interest rate on a loan or
forbearance of money but do not authorize a
unilateral increase of the interest rate by one party
without the other's consent. (PNB v. CA, G.R. No.
107569, 08 Nov. 1994) To say otherwise will violate
the principle of mutuality of contracts under Article
1308 of the Civil Code. To be valid, therefore, any
change of interest must be mutually agreed upon by
the parties. (Dizon v. Magsaysay, G.R. No. L-23399, 31
May 1974) In the present problem, the debtor not
having given his consent to the increase in interest,
the increase is void.
Floating Interest
Floating interest is the interest stipulated by banks
which is not fixed and made to depend upon the
prevailing market conditions, considering the
fluctuating economic conditions.
A stipulation for floating interest is not valid. A
stipulation for a floating rate of interest in a letter of
credit in which there is no reference rate set either
by it or by the Central Bank, leaving the
determination thereof to the sole will and control of
the lender bank is invalid. While it may be
acceptable for practical reasons given the
fluctuating economic conditions for banks to
stipulate that interest rates on a loan not be fixed and
instead be made dependent on prevailing market
conditions, there should be a reference rate upon
which to peg such variable interest rates.
Consolidated Bank and Trust Corp. (Solid Bank) v.
CA, G.R. No. 114672, 19 Apr. 2001)
Escalation Clauses
Escalation clauses refer to stipulations allowing an
increase in the interest rate agreed upon by the
contracting parties. (Juico v. China Banking
Corporation, G.R. No. 187678, 10 Apr. 2013)
Escalation Clause must have de-escalation
clause
Escalation clauses refer to stipulations allowing an
increase in the interest rate agreed upon by the
contraction parties. (Ibid.)
An escalation clause can be valid only if it also
includes a de-escalation clause or a stipulation that
the rate of interest agreed upon shall be reduced in
the event that the maximum rate of interest is
reduced by law or by the Monetary Board. (PNB v.
IAC, G.R. No. 75223, 14 Mar. 1990)
Q: Samuel borrowed P300,000.00 housing loan
from the bank at 18% per annum interest.
However, the promissory note contained a
proviso that the bank "reserves the right to
increase interest within the limits allowed by
law." By virtue of such proviso, over the
objections of Samuel, the bank increased the
interest rate periodically until it reached 48%
The presence of escalation clause without the
corresponding de-escalation clause in the event of a
reduction of interest as ordered by law makes the
clause one-sided as to make it unreasonable. Any
529
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
increase in the interest rate pursuant to an
escalation clause must be the result of an agreement
between two parties. Increases unilaterally
imposed by a bank are in violation of the principle
of mutuality of contracts. (PNB v. CA, G.R. No.
109563, 09 July 1996)
B. DEPOSIT
Deposit is a contract whereby a person (depositor)
delivers a thing to another (depositary), for the
principal purpose of safekeeping it, with the
obligation of returning it when demanded. (Pineda,
2006)
A contract of deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it and
returning the same upon demand. (Art. 1962, NCC)
Its principal purpose is safekeeping and returning
the same.
When Contract of Deposit is Perfected
A deposit, being a real contract, is perfected by
delivery (Art. 1316, NCC), but an agreement to
constitute a deposit is merely consensual and is
therefore binding upon mere consent. (Art. 1963,
NCC)
Characteristics of contract of deposit
1.
Real contract – it can only be perfected by the
delivery of the object of the contract. (Art. 1316,
NCC) or an agreement to constitute deposit is
binding but the deposit itself is not perfected
until the delivery of the thing. (Art. 1963, NCC)
NOTE: There is no consensual contract of
deposit; there is only a consensual promise to
deliver which is binding if such is accepted.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
530
2.
Object of the contract must be a movable
property. This rule applies only to extra-judicial
deposit. Thus, in cases of judicial deposit, the
subject matter may be a real property; or
3.
Purpose is for the safekeeping of the thing
deposited. (Art. 1962, NCC) This must be the
principal purpose and not only secondary;
NOTE: If safekeeping is merely secondary, the
contract is not a deposit but some other
contract.
Civil Law
4.
Principal – its existence is not dependent on
another contract.
5.
Informal – no particular form is required for the
contract.
6.
It is gratuitous, unless there is a:
a. Contrary agreement;
b. The depositary is engaged in the business
of storing goods, like a warehouseman (Art.
1965, NCC); or
c. Where the property is saved from
destruction without knowledge of the
owner, the latter is bound to pay the other
person just compensation (as in case of
involuntary deposit).
Deposit v. Mutuum, Commodatum, and Lease
DEPOSIT
MUTUUM
Purpose
Safekeeping/custody
Consumption
When to return
Upon expiration of
the term granted to
the borrower.
Upon demand of the
depositor.
Subject Matter
Movable (extrajudicial)
or may be immovable
(judicial).
Money or other
fungible thing.
Relationship
NOTE: Deposit shall be considered as a loan if
there is a stipulation for the payment of
interest. (Aquino v. Deala, G.R. No. 43304, 21
Oct. 1936) The reason is that interest can only
arise from a contract of loan (mutuum).
Depositor-depositary
Lender-borrower
Compensation
May be gratuitous
or with a stipulation
to pay interest.
There
can
be
compensation
of
credits.
Generally gratuitous. No
compensation of things
deposited with each
other (except by mutual
agreement).
Q: Is there an instance where there is
compensation even though the depositary is not
engaged in business of storing goods or there is
no agreement as to compensation?
DEPOSIT
COMMODATUM
A: YES. When during a fire, flood, storm, or other
calamity, property is saved from destruction by
another person without the knowledge of the
owner, the latter is bound to pay the former just
compensation. (Art. 2168, NCC)
Safekeeping.
7.
May be gratuitous or
onerous.
Principal Purpose
Transfer of use of the
thing.
Nature
The depositary cannot use the thing deposited,
unless:
a. Expressly permitted by the depositor; or
b. Preservation of the thing requires its use,
but only for said purpose. (Art. 1977, NCC)
Always gratuitous by
its essence.
Object
In
extra-judicial
deposit,
only
movables may be
objects thereof.
Both movable and
immovable property
may
be
objects
thereof.
Demandability
Depositor
can
demand the thing at
will.
531
Return of the thing
cannot be demanded
until the lapse of the
period.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
DEPOSIT
LEASE
Purpose
Principal Purpose
Safekeeping.
Security or
the right of
property or
in case of
judgment.
Use of the thing.
When to return
Upon demand of the
depositor.
Upon termination of
the lease contract.
2.
Movables
or
immovables
but
generally immovable.
Judicial (sequestration) (Arts. 1964 & 2005,
NCC) – It takes place when an attachment or
seizure of the property in litigation is ordered.
Extra-judicial (Arts. 1968 & 2004, NCC)
a. Voluntary – The delivery is made by the will
of the depositor or by two or more persons
each of whom believes himself entitled to
the thing entitled. (Art. 1968, NCC); or
b. Necessary – Made in compliance with a legal
obligation, or on the occasion of any
calamity, or by travelers in hotels and inns,
or by travelers with common carriers.
(Arts. 1996 & 1998, NCC)
JUDICIAL
Always onerous
Upon order of the court
or when litigation is
ended.
Person who has a right
or in behalf of
the winner.
Upon
demand
depositor.
of
Depositor or third
person designated.
Ownership of the thing deposited in a contract
of deposit
Will of the contracting
parties.
The depositor need not be the owner of the thing
deposited because the purpose of the contract is
safekeeping and not transfer of ownership. (Art.
1984, NCC)
NOTE: A deposit may also be made by two or more
persons each of whom believes himself entitled to
the thing deposited with a third person, who shall
deliver it in a proper case to the one to whom it
belongs. (Art. 1968, NCC)
The depositary holds
the thing by will of the
depositor.
(Rabuya,
2017)
Rent of Safety Deposit Boxes
The rent of safety deposit boxes is not an ordinary
contract of lease of things but a special kind of
deposit; it is not strictly governed by the provisions
on deposit. (Pineda, 2006)
Status
There is a contract.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Generally gratuitous
but
may
be
compensated
In whose behalf it is held
As to Possession of Thing
No contract.
Movables only
When must the thing be returned
Creation
The
sequestrator
possesses the thing in
virtual representation
of the person who by
the decision of the
court should turn out
to be its owner and
proprietor. (Rabuya,
2017)
and
Cause
EXTRA-JUDICIAL
Will of the court; takes
place
when
an
attachment or seizure
of property in litigation
is ordered, thus it is the
court order that gives
rise to this kind of
deposit.
Custody
safekeeping.
Subject Matter
Kinds of Deposit
1.
to ensure
a party to
to recover
favorable
532
Civil Law
they contracted. (Art. 1397, NCC)
The case of Sia v. CA (G.R. No. 102970, 13 May 1993)
enunciating that a rent of a safety deposit box is a
special kind of deposit, was decided under the
former General Banking Act. However, the Supreme
Court has not yet decided a case abandoning the
ruling in Sia v. CA, making it conform with the
General Banking Law of 2000.
2. If the depositary is incapacitated, he does not
incur the obligation of a depositary. However,
he is liable to:
(1) return the thing deposited while still in his
possession; or
(2) pay the depositor the amount by which he
may have benefited himself with the thing or its
price subject to the right of any third person
who acquired the thing in good faith, in which
case the depositor may only bring an action
against him for its recovery. (Art. 1971, NCC)
Fixed, savings and current deposits in banks
Fixed, savings and current deposits in banks and
other similar institutions are not true deposits but
are considered simple loans because they earn
interest. (Art. 1980, NCC) Bank deposits are in the
nature of irregular deposit but they are really loans
governed by the law on loans. (De Leon, 2013)
(1997, 1998, 2009 BAR)
As to Depositor
He can exercise a reinvindicatory action at any time
either against the depositary, if the thing deposited
is still in the latter’s possession, or against a third
person who acquired the thing provided that such
third person acted in bad faith.
If the thing can no longer be restored, the depositor
will have the right to demand payment by which the
depositary may have enriched himself with the
thing or its price.
NOTE: Where safekeeping is still the principal
purpose of the contract, and the use of the thing is
merely secondary. This is called irregular deposit.
(De Leon, 2021)
Nature of Advance Payment in a contract of sale
A so-called deposit of an advance payment in the
case of a sale is not the deposit contemplated under
Art. 1962. It is that advance payment upon which
ownership is transferred to the seller once it is given
subject to the completion of payment by the buyer
under an agreement. (Cruz v. Auditor General, G.R.
No. L-12233, 30 May 1959)
A guardian is not a depositary of the ward’s
property
He is not holding the funds of the ward merely for
safekeeping exclusively, but also intended for the
latter’s maintenance and support. Losses, if any,
without the fault of the guardian shall be deducted
from the funds of the ward. (Philippine Trust Co. v.
Ballesteros, G.R. No. L-8261, 20 Apr. 1956)
PARTIES TO A CONTRACT OF DEPOSIT
1.
2.
Depositary– to whom the thing is deposited;
and
Depositor – the one who deposits the thing.
Obligations of the Depositor
1.
Effects of Incapacity of the Depositary or
depositor
1.
If the depositary is capacitated, he is subject to
all the obligations of a depositary whether the
depositor is capacitated or not (Art. 1970, NCC);
and
Payment for necessary expenses for
preservation:
- If the deposit is gratuitous – depositor must
reimburse depositary (Art. 1992, NCC); and
- With compensation – no need for
reimbursement; expenses are borne by
depositary. (Pineda, 2006)
GR: Depositor must pay losses incurred by
depositary due to the character of the thing
deposited.
NOTE: Under the law, persons who are capable
cannot allege the incapacity of those with whom
533
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
proportionate interest in the mass. (Art. 1976, NCC)
XPNs:
1) When at the time of deposit, the
depositor was not aware of the
dangerous character of the thing or was
not expected to know it;
2) When the depositor notified the
depositary; or
3) When the depositary was aware of it
without advice from the depositor.
2.
DEPOSITARY’S RIGHT OF RETENTION
Right of the depositary to retain the thing in
pledge
The depositary has the right to retain the thing in
pledge until full payment of what may be due him by
reason of the deposit. (Art. 1994, NCC) This is an
example of pledge created by operation of law. (Art.
2121, NCC)
In case of an onerous deposit, to pay the
compensation agreed upon as consideration for
the deposit. (Art. 1993, NCC)
Duty of the depositary’s heir who sold the thing
deposited in good faith
Diligence required in a contract of deposit
The diligence required of a depositary is that agreed
upon by the parties, who may limit or expand the
degree of diligence required. In the absence of any
stipulation, the degree of diligence required is lower
if the deposit is gratuitous and higher if the deposit
is with compensation. (Art. 1972, NCC) Ordinarily,
the depositary must exercise over the thing
deposited the same diligence he would exercise
over his property.
The *depositor’s heir who in good faith may have
sold the thing he did not know was deposited, shall
only be bound to return the price he may have
received or to assign his right of action against the
buyer in case the price has not been paid him. (Art.
1991, NCC)
NOTE: The word “depositor’s” in this part should be
read as “depositary’s.” (De Leon, 2013) If the heir
acted in bad faith, he is liable for damages. The sale
or appropriation of the thing deposited constitutes
estafa. (Art. 315(b), RPC)
Loss through force majeure or expropriation
If the depositary by force majeure or government
order loses the thing and receives money or another
thing in its place, he shall deliver the sum or other
thing to the depositor. (Art. 1990, NCC)
The provision applies only when the depositary has
died and left heir/s who took possession of the thing
in the concept of an owner and sold it in good faith
to a third person.
Manner of deposit
To whom it must be returned
The depositary may change the manner of the
deposit if he may reasonably presume that the
depositor would consent to the change if the latter
knew of the facts of the situation. However, before
the depositary may make such change, he shall
notify the depositor thereof and wait for his
decision, unless delay would cause danger. (Art.
1974, NCC)
1.
2.
3.
Right of depositary to commingle
The depositary may commingle grain or other
articles of the same kind and quality, in which case
the various depositors shall own or have a
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
4.
534
The depositor, to his heirs and successors, or to
the person who may have been designated in
the contract (Art. 1972, NCC);
If the depositor was incapacitated at the time of
making the deposit, to his guardian or
administrator or to the depositor himself should
he acquire capacity (Art. 1970, NCC);
Even if the depositor had capacity at the time of
making the deposit but he subsequently loses
his capacity during the deposit, the thing must
be returned to his legal representative (Art.
1986, NCC); or
Two or more persons each claiming to be
Civil Law
without malice on the part of the depositary. (Art.
1987, NCC)
When it must be returned
entitled to a thing may deposit the same with a
third person. In such case, the third person
assumes the obligation to deliver to the one to
whom it belongs.
GR: The thing deposited should be returned upon
demand or at will, whether or not a period has been
stipulated.
NOTE: The action to compel the depositors to settle
their conflicting claims among themselves would be
in the nature of an interpleader. (Sec. 1, Rule 62, ROC)
XPNs:
1. The thing is judicially attached while in the
depositary’s possession;
2. The depositary was notified of the opposition of
a third person to the return or the removal of
the thing deposited (Art. 1988, NCC); or
3. In case of gratuitous deposit, if the depositary
has a justifiable reason for not keeping the
deposit. If the depositor refuses, the depositary
may secure its consignation from the court.
(Art. 1989, NCC)
Proving the ownership of the thing deposited
GR: The depositary cannot demand that the
depositor should prove his ownership of the thing
deposited. (Art. 1984, NCC)
XPN: Should he discover that the thing has been
stolen and who its true owner is, he must advise the
latter of the deposit.
NOTE: If the depositary has reasonable grounds to
believe that the thing has not been lawfully acquired
by the depositor, the former may return the same.
VOLUNTARY DEPOSIT
It is a contract or judicial relation wherein a thing is
delivered at the will of a person (depositor) to
another (depositary) for the purpose of safekeeping
by the latter coupled with the obligation of
returning it upon demand. (Pineda, 2006)
If the depositary knew the identity of the owner
of the thing deposited
The depositary may not return the thing to the
owner should he knew of the identity of the latter.
He is not authorized to return the thing
unceremoniously to the alleged owner without the
knowledge of the depositor. His duty is merely to
advise the owner of the deposit.
A voluntary deposit is that wherein the delivery is
made by the will of the depositor. (Art. 1968, NCC)
A deposit may also be made by two or more persons
each of whom believes himself entitled to the thing
deposited with a third person, who shall deliver it in
a proper case to the one to whom it belongs. (Art.
1968, NCC)
If the depositor insists on his ownership as against
the true owner, the depositary may file an
interpleader suit against both of them to avoid
responsibility. If the identity of the true owner
cannot be ascertained, the depositary may return
the thing to the depositor. (Pineda, 2006)
Form of contract of deposit
A contract of deposit may be entered into orally or
in writing. (Art. 1969, NCC)
Where it must be returned
GR: The thing deposited must be returned at the
place agreed upon.
NOTE: The above article follows the general rule
that contracts shall be obligatory in whatever form
they may have been entered into provided all the
essential requisites for their validity are present.
(Art. 1356, NCC) Thus, except for the delivery of the
thing, there are no formalities required for the
existence of the contract. (De Leon, 2013)
XPN: In the absence of stipulation, at the place
where the thing deposited might be, even if it should
not be the same place where the original deposit
was made provided the transfer was accomplished
535
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
Difference between Voluntary and Necessary
deposit
but a contract of loan or commodatum, as the
case may be.
In voluntary deposit there is a freedom of action
which is implied in the phrase “delivery is made by
the will of the depositor,” unlike in the case of a
necessary deposit. In other words, the depositor in
a voluntary deposit is free to choose the depositary.
(Pineda, 2006)
XPN: If the principal reason for the contract is
still safekeeping, it is still deposit.
6.
Obligations of a depositary in voluntary deposit
1.
To keep the thing safely and return it (Art. 1972,
NCC);
2.
Exercise same diligence as he would exercise
over his own property;
NOTE: However, the depositary is authorized to
open the seal or lock when:
a. There is presumed authority (i.e. the key
is delivered);
b. Out of necessity; (Art. 1982, NCC) or
c. When the instruction of the depositor as
regards the deposit cannot be executed
without opening the box or receptacle.
(Rabuya, 2015)
GR: Not to deposit the thing with a third person.
XPNs:
a. When expressly authorized by stipulation;
and
b. When the preservation of the thing
requires its use. (Art. 1977, NCC)
7.
NOTE: Depositary is liable for the loss if:
a. He deposits the thing to a third person
without authority, even though the loss is
due to fortuitous events; or
b. He deposits the thing to a third person who
is manifestly careless or unfit although
there is authority.
3.
If the thing should earn interest:
a. Collect interest as it falls due; and
b. Take steps to preserve the value and rights
corresponding to it.
4.
Not to commingle things if so stipulated;
5.
GR: Not to make use of the thing deposited;
GR: Pay for any loss or damage that may arise
due to his fault;
XPN: Liability of loss through fortuitous event.
XPNs to XPN: Even in case of loss through
fortuitous event, still liable if:
a. If it is so stipulated;
b. He uses the thing without depositor’s
permission;
c. He delays its return; or
d. He allows others to use it even if he himself
is authorized to use it. (Art. 1979, NCC)
XPNs:
3. When preservation of thing deposited
requires its use;
4. When authorized by depositor.
NOTE: GR: In such case, it is no longer a deposit
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
When the thing deposited is delivered sealed
and closed:
a. Return the thing in the same condition;
b. Pay damages if seal be broken through his
fault; and
c. Keep the secret of the deposit when seal is
broken with or without his fault. (Art.
1981, NCC)
536
8.
Return the thing deposited with all its fruits,
accessions, and accessories (Art. 1983, NCC);
and
9.
Pay interest on sums converted to personal
use if the deposit consists of money.
Civil Law
Extinguishment of voluntary deposit
a.
a.
b.
b.
c.
Loss or destruction of thing deposited;
In gratuitous deposit, upon death of either
depositor or depositary (Art. 1995, NCC); or
Other causes.
e.g., return of thing, novation, expiration of the
term, fulfillment of resolutory condition.
3.
NECESSARY DEPOSIT (2007 BAR)
A necessary (involuntary) deposit is one wherein
the deposit is not made by the will of the depositor
but created by force of the law or on occasion of a
calamity.
3.
4.
When it is in compliance with a legal obligation;
It takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or
other similar events (Art. 1996, NCC);
Made by passengers with common carriers; or
Made by travelers in hotels or inns. (Art. 1998,
NCC)
Posting of Notice of exempt from liability
Hotel/Inn-keepers cannot escape or limit liability by
stipulation or the posting of notices. Any stipulation
between the hotel keeper and the guest whereby the
responsibility of the former (Arts. 1998-2001, NCC)
is suppressed or diminished shall be void. (Art.
2003, NCC) The hotel or inn keepers are still liable
regardless of the posting of notices exempting
themselves from any liability.
Governing law in cases of necessary deposit
1.
2.
The keepers of hotels or inns are not liable for
loss of thing in case of deposit when:
a. Loss or injury is caused by force majeure;
(Art. 2000, NCC)
b. Loss due to the acts of guests, his family, his
employees, or visitors; (Art. 2002, NCC) and
c. Loss arises from the character of the goods.
(Art. 2002, NCC)
NOTE: Liability by the hotel or innkeeper
commences as soon as there is evident intention on
the part of the travelers to avail himself of the
accommodations of the hotel or inn. It does not
matter whether compensation has already been
paid or not, whether the guest has already partaken
of food and drink or not. (Paras, 2008)
When is deposit considered as necessary
1.
2.
Loss or injury is caused by his employees or
even by strangers; (Art. 2000, NCC) or
Loss is caused by act of thief or robber
when there is no use of arms or irresistible
force. (Art. 2001, NCC)
In compliance with a legal obligation –
Governed by the law establishing it, and in case
of deficiency, the rules on voluntary deposit;
and
On occasion of a calamity – Governed by the
provisions concerning voluntary deposit. (Arts.
1968 –1971, NCC)
Extent of liability of the hotel keepers in case of
loss
Keepers of Hotels or Inns
1.
1.
2.
The keepers of hotels or inns shall be held
responsible for loss of thing in case of deposit
when both are present:
a. They have been previously informed by
guest about the effects the latter brought in;
and
b. The guest has taken precautions prescribed
for their safekeeping.
2.
It covers liability in hotel rooms which comes
under the term “baggage” or articles such as
clothing as are ordinarily used by travelers; and
It includes lost or damages in hotel’s annexes
such as vehicles in the hotel’s garage. (Art. 1999,
NCC)
Q: Venus was the owner of Suzuki Grand Vitara
which was insured with Pioneer Insurance for
loss and damage. When she arrived and checked
in at Heaven’s Hotel before midnight, its parking
attendant, John, got the key to said Vitara. At
They are liable regardless of the degree of care
exercised when:
537
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
about one in the morning, Venus was awakened
in her room by a telephone call from the Hotel
Chief Security Officer who informed her that her
Vitara was carnapped while it was parked
unattended at the parking area of the bank near
the hotel. May the insurance company, by right
of subrogation, recover from the hotel the
damages it paid to Venus?
It is auxiliary to a case pending in court. The
purpose is to maintain the status quo during the
pendency of the litigation or to insure the right of
the parties to the property in case of a favorable
judgment. (De Leon, 2013)
Object of judicial deposit
The object of judicial sequestration may be
movables or immovable. (Art. 2006, NCC)
A: YES. The contract of necessary deposit existed
between the insured Venus and the hotel. Article
1962, in relation to Article 1998, of the Civil Code
defines this contract. Plainly, Venus deposited for
safekeeping her vehicle through the hotel’s
employee. From Venus’ delivery, when she handed
the keys to John, the contract was perfected. Thus,
there is the obligation of safely keeping it and
returning it. Ultimately, the hotel is liable for the
loss of Venus’ vehicle. (Durban Apartments Corp. v.
Pioneer Insurance Surety Corp., G.R. No. 179419, 12
Jan. 2011)
Q: When will the properties sequestered cease
to be in custodia legis?
A: They cease to be in custodia legis when the
insolvency proceedings of a partnership terminated
because the assignee in insolvency has returned the
remaining assets to the firm, said properties cease
to be in custodia legis. (Ng Cho Cio v. Ng Diong &
Hodges, L-14832, 28 Jan. 1961)
Obligation
property
Right to retain given to hotel-keeper or innkeeper
depositary
of
sequestered
The depositary of sequestered property is the
person appointed by the court. (Art. 2007, NCC) He
has the obligation to take care of the property with
the diligence of a good father of a family (Art. 2008,
NCC) and he may not be relieved of his
responsibility until the litigation is ended or the
court so orders. (Art. 2007, NCC; De Leon, 2013)
The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security for
credits on account of lodging, and supplies usually
furnished to hotel guests. (Art. 2004, NCC)
Reason: The right is given to hotel-keepers to
compensate them for the liabilities imposed upon
them by law. (De Leon, 2013)
Applicable Law
The law on judicial deposit is remedial or
procedural in nature. Hence, the Rules of Court are
applicable. The relevant provisions of the Rules of
Court are Rule 57 (Preliminary Attachment), Rule
59 (Receivership), and Rule 60 (Replevin). Rule 127
provides for attachment in criminal cases. (De Leon,
2013)
NOTE: This is in the nature of the pledge created by
operation of law. The act of obtaining food or
accommodation in a hotel or inn without paying
therefor constitutes estafa. (Art. 135, RPC)
A safety deposit box in a hotel is a contract of
necessary deposit. The existing relationship is one
of depositor and depositary. (YHT Realty Corp. v. CA,
G.R. No. 126780, 17 Feb. 2005)
JUDICIAL DEPOSIT
Judicial deposit (sequestration) takes place when an
attachment or seizure of property in litigation is
ordered by a court. (Art. 2005, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
of
538
Civil Law
The CA rendered a Decision holding that the RTC
committed grave abuse of discretion in issuing
the writ absent a clear legal right thereto on the
part of NSSC and Orimaco. Consequently, the
Writ of Preliminary Injunction issued by the RTC
was ordered dissolved. Respondents filed an
application for damages against the injunction
bond issued by CGAC in the amount of
P1,000,000.00. Is CGAC liable?
C. GUARANTY AND SURETYSHIP
Guaranty
Guaranty is a contract where 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. (Art 2047, NCC)
A: YES. That CGAC’s financial standing differs from
that of NSSC does not negate the order of execution
pending appeal. As the latter’s surety, CGAC is
considered by law as being the same party as the
debtor in relation to whatever is adjudged touching
the obligation of the latter, and their liabilities are
interwoven as to be inseparable. Verily, in a contract
of suretyship, one lends his credit by joining in the
principal debtor’s obligation to render himself
directly and primarily responsible with him, and
without reference to the solvency of the principal.
Thus, execution pending appeal against NSSC means
that the same course of action is warranted against
its surety, CGAC. The same reason stands for CGAC’s
other principal, Orimaco, who was determined to
have permanently left the country with his family to
evade execution of any judgment against him.
(Centennial Guaranty Corp. v. Universal Motors Corp.,
G.R. No. 189358, 08 Oct. 2014)
Suretyship
Suretyship is a contract where a person binds
himself solidarily with the principal debtor.
An undertaking that the debt shall be paid. (Pineda,
2006)
Q: The instant petition originated from a
Complaint for Breach of Contract with Damages
and Prayer for Preliminary Injunction and
Temporary Restraining Order filed by Nissan
Specialist Sales Corporation and its President
and General Manager, Reynaldo A. Orimaco,
against herein respondents Universal Motors
Corporation (UMC), Rodrigo T. Janeo, Jr.,
Gerardo Gelle, Nissan Cagayan de Oro
Distributors, Inc., Jefferson U. Rolida, and Peter
Yap.
Q: Doctors of New Millennium Holdings, Inc. is a
domestic corporation comprised of about 80
doctors. On March 2, 1999, it entered into a
construction and development agreement
(signed agreement) with Million State
Development Corporation, a contractor, for the
construction of a 200-bed capacity hospital in
Cainta, Rizal. According to the terms of the
signed agreement, Doctors of New Millennium
obliged itself to pay P10,000,000.00 to Million
State Development at the time of the signing of
the agreement to commence the construction of
the hospital. Million State Development was to
shoulder 95% of the project cost and committed
itself to secure P385,000,000.00 within 25
banking days from Doctors of New Millennium’s
initial payment, part of which was to be used for
the purchase of the lot where the hospital was to
be constructed. As part of the conditions prior to
The temporary restraining order (TRO) prayed
for was eventually issued by the RTC upon the
posting by NSSC and Orimaco of a P1,000,000.00
injunction bond issued by their surety, CGAC. The
TRO enjoined respondents from selling, dealing,
and marketing all models of motor vehicles and
spare parts of Nissan, and from terminating the
dealer agreement between UMC and NSSC and
restrained UMC from supplying and doing
trading transactions with NCOD, which, in turn,
was enjoined from entering and doing business
on Nissan Products within the dealership
territory of NSSC as defined in the Dealer
Agreement. The TRO was eventually converted
into a writ of preliminary injunction.
Respondents filed a petition for certiorari and
prohibition before the CA and assailed the
issuance of the aforesaid injunctive writ.
539
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
when there is a material alteration of the contract in
connection with which the bond is given, such as a
change which imposes a new obligation on the
promising party, or which takes away some
obligation already imposed, or one which changes
the legal effect of the original contract and not
merely its form. A surety, however, is not released
by a change in the contract which does not have the
effect of making its obligation more onerous.
Respondent was not privy to the terms of the surety
bond entered into by petitioner and Million State
Development. If there were any changes in the
contract that petitioner should have been aware of,
it was Million State Development, as its principal,
which had the duty to inform them about the
changes.
the initial payment, Million State Development
submitted a surety bond of P10,000,000.00 to
Doctors of New Millennium. The surety bond
was issued by People’s Trans-East Asia
Insurance Corporation, now known as People’s
General Insurance Corporation. Doctors of New
Millennium, on the other hand, made the initial
payment of P10,000,000.00.
Million State Development, however, failed to
comply with its obligation to secure
P385,000,000.00 within 25 banking days from
initial payment. Then Doctors of New
Millennium sent a demand letter from the time
remittance was due. When Million State
Development reneged on its obligations,
Doctors of New Millennium sent a demand letter
dated June 14, 1999 to People’s General
Insurance for the return of its initial payment of
P10,000,000.00, in accordance with its surety
bond. Whether or not the surety bond
guaranteeing respondent Doctors of New
Millennium’s initial payment was impliedly
novated by the insertion of a clause in the
principal contract, which waived the conditions
for the initial payment’s release?
Based on petitioner’s own admissions, the principal
contract of the suretyship is the signed agreement.
The surety, therefore, is presumed to have
acquiesced to the terms and conditions embodied in
the principal contract when it issued its surety
bond.
Accordingly, petitioner cannot argue that the
insertion of the clause in the signed agreement
constituted an implied novation of the obligation
which extinguished its obligations as a surety since
there was nothing to novate: In order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and
new obligation be in every point incompatible with
each other. Novation of a contract is never
presumed. In the absence of an express agreement,
novation takes place only when the old and the new
obligations are incompatible on every point
(People’s General Insurance Corporation v. Doctor
New Millenium Holdings, G.R. No. 172404, 13 Aug.
2014)
A: NO. In this case, the surety bond was executed “to
guarantee the repayment of the down payment” and
“to secure the full and faithful performance” of
Million State Development. According to the terms
of the bond, People’s General Insurance bound itself
to be liable in the amount of P10,000,000.00 if
Million State Development defaults in its
obligations. Petitioner, however, contends that the
inclusion of the clause “or the Project Owner’s
waiver” in Article XIII of the signed agreement made
its obligations more onerous and, therefore, the
surety must be released from its bond.
A suretyship consists of two different contracts: (1)
the surety contract and (2) the principal contract
which it guarantees. Since the insurer’s liability is
strictly based only on the terms stated in the surety
contract in relation to the principal contract, any
change in the principal contract, which materially
alters the principal’s obligations would, in effect,
constitute an implied novation of the surety
contract. A surety is released from its obligation
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
540
Civil Law
person cannot be both the primary debtor and the
guarantor of his own debt as this is inconsistent
with the very purpose of a guarantee which is for the
creditor to proceed against a third person if the
debtor defaults in his obligation.
Guaranty v. Suretyship (1992, 1997, 2010 BAR
GUARANTY
Liability
depends
upon an independent
agreement to pay the
obligation of the
principal if he fails to
do so.
Guarantor
secondarily liable.
SURETYSHIP
Surety
assumes
liability as a regular
party to the contract.
is
Surety is primarily
liable.
Guarantor
binds
himself to pay if the
principal cannot pay.
Surety undertakes to
pay if principal does
not pay.
Insurer of solvency of
debtor.
Insurer of the debt.
Guarantor can avail of
the
benefit
of
excussion
and
division
in
case
creditor
proceeds
against him. (Pineda,
2006)
Surety cannot avail of
the
benefit
of
excussion
and
division.
(Pineda,
2006)
Unilateral Character of Guaranty
The contract of guaranty may be undertaken
without the knowledge of the principal debtor. It
exists for the benefit of the creditor and not for the
benefit of the principal who is not a party to the
contract of guaranty. The creditor has every right to
take all possible measures to secure the payment of
his credit. Hence, it can be constituted without the
knowledge and even against the will of the principal
debtor. (Arts. 1236, 1237, & 1250, NCC)
The contract is unilateral because what arises
therefrom are solely obligations on the part of the
guarantor with relation to the creditor, although its
fulfillment or consummation gives rise to obligation
on the part of the person guaranteed with respect to
the guarantor. (Rabuya, 2017)
NOTE: A guarantor can recover from the debtor
what the former had to pay the creditor, even if the
guaranty was without the debtor’s consent or
against his will, but the recovery will only be to the
extent that the debtor had been benefited. (Arts.
1236 & 1237, NCC; De Guzman v. Santos, G.R. No.
45571; 30 June 1939)
Similarity between guaranty and suretyship
Both guarantor and surety promise or undertake to
answer for the debt, default, or miscarriage of
another person.
Guaranty v. Warranty
GUARANTY
WARRANTY
A contract by which
a person is bound to
another for the
fulfillment
of
a
promise
or
undertaking of a
third person.
An undertaking that the
title,
quality,
or
quantity of the subject
matter of a contract is
what it is represented
to be and relates to
some agreement made
ordinarily by the party
who
makes
the
warranty.
Gratuitous Character of Guaranty
A guaranty is gratuitous unless there is a stipulation
to the contrary. (Art. 2048, NCC)
Guaranty or surety agreement is regarded valid
despite the absence of any direct consideration
received by the guarantor or surety, such
consideration need not pass directly to the
guarantor; a consideration moving to the principal
will suffice. (Pineda, 2006)
Kinds of Guaranty
1.
NOTE: In case of guaranty, the guarantor must be a
person distinct from the debtor because a person
cannot be the personal guarantor of himself. A
541
General classification
a. Personal – A guaranty where an individual
personally assumes the fulfillment of the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
b.
4.
principal obligation of the debtor; or
Real – The kind of guaranty where a
property whether movable, or immovable
is formally committed to answer for the
principal obligation. (Pineda, 2006)
5.
2.
3.
4.
5.
As to its origin
a. Conventional– It is constituted by
agreement of the parties;
b. Legal – Imposed by virtue of a
provision of law; or
c. Judicial– Required by a court to
guarantee the eventual right of the
parties in a case. (Art. 2051(1), NCC)
Natural obligations – When the debtor himself
offers a guaranty for his natural obligation, he
impliedly recognizes his liability, thereby
transforming the obligation from a natural into
a civil one; (Art. 2052, NCC)
Conditional obligations – Only in case of
suspensive condition because upon its
happening, it gives rise to the principal and
hence, gives rise also to the accessory
obligation. (Art. 2053, NCC)
Guaranty for present and future debts
There can be a guaranty for:
1. Present debts; and
2. Future debts even if the amount is not yet
known (Art. 2053, NCC).
As to consideration
a. Gratuitous– The guarantor does not
receive any price or remuneration for
acting as such or
b. Onerous– One where the guarantor
receives valuable consideration for his
guaranty. (Art. 2048, NCC)
Liquidated debt – a debt is liquidated when it is for
a price fixed in a contract for the delivery of future
goods and the seller is now ready to deliver said
goods within the period stipulated. (Smith, Bell & Co.
v. National Bank, G.R. No. 16482, 01 Feb. 1992)
As to person
a. Single – It is constituted solely to
guarantee or secure performance by
the debtor of the principal obligation or
b. Double or sub-guaranty– It is
constituted to secure the fulfillment of
the obligation of a guarantor by a subguarantor. (Art. 2051(2), NCC)
Validity of the Principal Contract
A valid principal obligation is necessary in contract
of guaranty since guaranty is an accessory contract,
it is an indispensable condition for its existence that
there must be a principal obligation. Hence, if the
principal obligation is void, it is also void.
As to scope and extent
a. Definite – One where the guaranty is
limited to the principal obligation only,
or to a specific portion thereof; or
b. Indefinite or Simple – One where the
guaranty included all the accessory
obligations of the principal, e.g., costs,
including judicial costs. (Art. 2055 (2),
NCC)
Absence of Consideration to Guarantor
A guaranty or surety agreement is regarded as valid
despite the absence of any direct consideration
received by the guarantor or surety either from the
principal debtor or from the creditor; a
consideration moving to the principal alone will
suffice. (Garcia Jr., v. CA, G.R. No. 80201, 20 Nov.
1990)
Obligations that May be Secured in a Contract of
Guaranty
Absence of Direct or Personal Interest of
Guarantor
1.
2.
It is never necessary that he should receive any part
of benefit, if such there be, accruing to the principal.
(Willex Plastic Industries Corp v. CA, G.R. No. 103066,
25 Apr. 1996)
3.
Valid obligations;
Voidable obligations, unless it is annulled by
proper action in court; (Art. 1390, NCC
Unenforceable obligations; (Art. 1403, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
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Civil Law
Statute of Fraud in a Contract of Guaranty
Qualifications of a Guarantor
A contract of guaranty must be expressed and in
writing (Art. 1403(2), NCC); otherwise, it is
unenforceable unless ratified. It need not be in a
public instrument.
1.
2.
3.
NOTE: The Statute of Frauds does not require that
the contract of guaranty itself be in writing. What it
requires to be in writing for the contract of guaranty
to be enforceable is the under telling or special
promise of guarantor, which must be signed by him.
(Rabuya, 2017)
NOTE: The qualifications need only be present at the
time of the perfection of the contract. The creditor
can naturally waive the requirements, for rights in
general are waivable (Paras, 2008)
Acceptance of the creditor in a contract of
guaranty
GR: The qualification of the guarantor is lost
through conviction of a crime involving dishonesty
or insolvency. In this case, the creditor is given the
right to demand substitution of the guarantor.
Loss of Qualification of the Guarantor
GR: The acceptance of the creditor is not essential
in contract of guaranty.
XPN: When the guarantor had been selected by the
creditor. The supervening loss of required
qualifications will not generally end the guaranty.
(Art. 2057, NCC)
XPN: When there is a mere offer of a guaranty or a
conditional guaranty wherein the obligation does
not become binding until it is accepted by the
creditor and notice of such acceptance is given to
the guarantor.
Married Woman as a Guarantor
Construction of a contract of guaranty or surety
GR: A married woman can be a guarantor without
the consent of her husband but binds only her
separate property. (Art. 145, FC & Art. 2049, NCC)
GR: In case of doubt, a contract of guaranty or surety
should be strictly construed against the creditor and
liberally in favor of the guarantor or surety; terms
cannot be extended beyond the stipulation.
XPNs:
1. If with her husband’s consent, it binds the
community or conjugal partnership property.
2. Without husband’s consent, in cases provided
for by law, such as when the guaranty has
redounded to the benefit of the family. (Art. 121,
FC)
XPN: In cases of compensated sureties. (Pineda,
2006)
Ratio: A contract of guaranty is unilateral
Rights of a Third Person (guarantor or surety)
who pays for the debt guaranteed or secured
PARTIES TO A CONTRACT OF GUARANTY
1.
2.
Possesses integrity;
Capacity to bind himself; and
Has sufficient property to answer for the
obligation which he guarantees.
Guarantor; and
Creditor.
1.
Guarantor
The guarantor is the person who is bound to
another for the fulfillment of a promise or
undertaking of a third person.
543
If payment is made without the knowledge or
against the will of the debtor;
a. Guarantor can recover only insofar as the
payment has been beneficial to the
debtor; (Art. 1236(2), NCC) and
b. Guarantor cannot compel the creditor to
subrogate him in his rights.; (Art. 1237,
NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
2.
If payment is made with the knowledge or
consent of the debtor – The guarantor is
subrogated to all the rights which creditor had
against the debtor.
BENEFIT OF EXCUSSION
Benefit of Excussion
The benefit of excussion is a right by which the
guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the properties of
the principal debtor and has resorted to all legal
remedies against such debtor. (Art. 2058, NCC)
Extent of Guarantor’s Liability
1.
2.
Where the guaranty is definite – It is limited in
whole or in part to the principal debt to the
exclusion of accessories (11 Manresa 196;
Pineda, 2006); and
Where the guaranty is indefinite or simple – It
shall comprise not only the principal obligation
but also all its accessories, including the judicial
costs provided that the guarantor shall only be
liable for those costs incurred after he has been
judicially required to pay. (Art. 2055(2), NCC)
Requisites of benefit of exhaustion or excussion
1.
2.
Effect in case of Death of a Party
1.
Guarantor’s death – His heirs will still be liable
to the extent of the value of the inheritance
because the obligation is not purely personal
and is therefore transmissible. (Estate of
Hemady v. Luzon Surety & Ins. Co., G.R. No. L8437, 28 Nov. 1956)
NOTE: Excussion may only be invoked after legal
remedies against principal debtor have been
expanded. 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. (Rabuya, 2017)
NOTE: An action against a guarantor who dies
during pendency of the same, being one for the
recovery of money or debt, should be dismissed,
but may be instituted in the proceeding for the
settlement of his estate. (Villegas v. Zapanta, G.R.
No. L-11056, 28 Dec. 1958)
2.
Effect of the creditor’s negligence in exhausting
the properties of the debtor
He shall suffer the loss to the extent of the value of
the pointed property which was not exhausted by
the creditor. (Art. 2061, NCC)
Debtor’s death – his obligation will survive. His
estate will be answerable. If the estate has no
sufficient assets, the guarantor shall be liable.
(Pineda, 2006)
Action of the creditor against the debtor
GR: In an action of the creditor against the debtor,
only the principal debtor should be sued alone.
Jurisdiction in an action based on a contract of
guaranty
XPN: If the benefit of excussion is not available, the
guarantor can be sued jointly with the debtor.
The guarantor entitled to be notified of the
complaint against the debtor. If the guarantor
desires to set up defenses as are granted him by law,
he may have the opportunity to do so. (Art. 2062,
NCC)
The guarantor shall be subject to the jurisdiction of
the court of the place where the obligation is to be
complied with.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The guarantor must set up the right of
excussion against the creditor upon the latter’s
demand for payment from him; and
He must point out to the creditor the available
property of the debtor which is not exempted
from execution is found within the Philippine
territory. (Art. 2060, NCC)
544
Civil Law
indemnified by the latter.
NOTE: A debtor and a guarantor can be sued
together in one complaint, as permitted by the Rules
of Court on permissive joinder. However, if the
creditor obtains favorable judgment, the latter is
entitled to the deferment of judgment, before a writ
of execution can be implemented against a
guarantor, the creditor must first establish that the
debtor cannot pay.
The guarantor is entitled to be reimbursed by
debtor for:
1. Total amount of the debt paid;
2. Legal interest from the time payment was made
known to the debtor (even though it did not
earn interest for the creditor);
3. Expenses incurred after notifying debtor that
demand to pay was made upon him; and
4. Damages in accordance with law, if they are
due. (Art. 2066, NCC)
The consequences of the guarantor’s appearance or
non- appearance in the case against the debtor:
1. If he does not appear and judgment is rendered
against the debtor, he cannot set up defenses
which he could have set up had he appeared.
Moreover, he cannot question the decision
anymore;
2. If he appears such as by filing an answer in
intervention, he may lose or may win the case.
If he losses, he is still entitled to the benefit of
excussion; and
3. There is no waiver of his benefit of excussion by
his appearance in the case. (Pineda, 2006)
XPNs:
1. Guaranty is constituted without the knowledge
or against the will of the debtor.
Effect: Guarantor may only recover so much as
was beneficial to the debtor. If payment has not
benefitted the debtor at all, the guarantor does
not acquire any claim for reimbursement.
The remedy of the guarantor would be to go
against the creditor for the amount paid, if there
is still a legal basis for the claim. If the
guarantors suffer, it is due to his own fault.
Compromise agreement between the creditor
and the principal debtor
Compromise is a contract whereby the parties, by
making reciprocal concessions, avoid litigation or
put an end to one already commenced. (Pineda,
2006; Art. 2028, NCC)
2.
Payment by third persons who does not intend
to be reimbursed; and
Effect: It is deemed a donation and as such
requires the consent of debtor.
A compromise between the creditor and the
principal debtor is valid if the compromise is
beneficial to the guarantor; otherwise, it is not
binding upon him.
3.
In a compromise between the creditor and the
guarantor to the principal debtor, if compromise is
beneficial to the principal debtor, it is valid;
otherwise, it is not binding upon him. (Art. 2063,
NCC)
If the guarantor has paid without notifying the
debtor and the latter not being aware of the
payment, repeats it, the guarantor has no
remedy whatever against the debtor, but only
against the creditor. (Art. 2076, NCC)
XPNs to XPN:
a. In case of gratuitous guaranty;
b. If the guarantor was prevented by the
fortuitous event from advising the debtor of
the payment; and
c. The creditor becomes insolvent, the debtor
shall reimburse the guarantor for the
amount paid.
To be binding, it must benefit both the guarantor
and the debtor.
Right of Indemnity and Reimbursement of the
Guarantor who paid the debt
GR: The guarantor who pays for a debtor must be
545
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
Right of subrogation
6.
The guarantor has the right of subrogation after the
payment of the debt is made to the creditor. The
guarantor is subrogated to all the rights which the
creditor had against the debtor. (Art. 2067(1), NCC)
7.
ten years;
If there are reasonable grounds to fear that the
principal debtor intends to abscond; or
If the principal debtor is in imminent danger of
becoming insolvent. (Art. 2071, NCC)
NOTE: In all these cases, the cause of action of the
guarantor is either 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. (Art. 2071,
NCC)
If the guarantor pays without notice to the debtor,
the debtor may interpose against the guarantor
defenses available to the debtor as against the
creditor at the time payment was made. (Pineda,
2006; Art. 2068, NCC)
Purpose of the right of guarantor to proceed
against debtor before payment
Payment of the guarantor before maturity
GR: The guarantor cannot seek reimbursement
from the debtor until expiration of the period
stipulated. The guarantor must wait. For being
subsidiary in character, the guaranty is not
enforceable until the debt has become due. (Art.
2069, NCC)
The purpose of this right is to enable the guarantor
to take measures for the protection of his interest in
view of the probability that he would be called upon
to pay the debt. (De Leon, 2013)
NOTE: A guarantor cannot exercise the right of
subrogation until the principal obligation has been
fully extinguished. (Rabuya, 2017)
NOTE:
The
guarantor
cannot
demand
reimbursement or indemnity because he has not
paid the obligation. The proper remedy is to obtain
release from the guaranty or to demand a security.
(Pineda, 2006)
XPN: If the premature payment was ratified by the
debtor, he can now be compelled to reimburse.
(Pineda, 2006)
Remedy of a guarantor of a third person at
Request of Another
The remedy of a person who becomes a guarantor
at the request of another for the debt of a third
person who is not present may either:
1. Sue the requesting party; or
2. Sue the principal debtor (Art. 2072, NCC)
Right of the guarantor to proceed against debtor
before payment
GR: Guarantor cannot proceed against the principal
debtor even before having paid the creditor.
NOTE: The provision applies when the guarantor
has actually paid the debt.
XPNs:
1. When he is sued for 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 of
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 than
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The Article is based on the principle that no person
shall be enriched at the expense of another. (Pineda,
2006)
Sub-guaranty
Double or sub-guaranty is one constituted to
guarantee the obligation of the guarantor.
NOTE: In case of insolvency of the guarantor for
546
Civil Law
mortgage is constituted. (Marquez vs. Elisan Credit
Corporation, G.R. No. 194642, 06 Apr. 2015)
whom he bound himself, he is responsible to the coguarantors in the same terms as the guarantors.
(Art. 2075, NCC)
Note: Although a promise expressed in a chattel
mortgage to include debts that are yet to be
contracted can be binding commitment that can be
compelled upon, the security itself, however, does
not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted
debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract
conformably with the form prescribed by the
Chattel Mortgage Law. (Ibid.)
Entitlement to Right of Excussion
A sub-guarantor is entitled to the right of excussion
both with respect to the guarantor and to the
principal debtor. (Art. 2064, NCC)
Continuing Guaranty
A continuing guaranty or suretyship 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. (Fortune Motors
Ph. Corp. v. CA, G.R. No. 112191 07 Feb. 1997)
XPN to the XPN: In case of stocks in department
stores, drug stores, etc.
Note: R.A. No. 11057, otherwise known as the
“Personal Property Security Act” (PPSA), which was
enacted on August 17, 2018, repealed Sections 1 to
16 of Act No. 1508, otherwise known as “The Chattel
Mortgage Law.”
A guaranty may be given to secure even future
debts, the amount of which may not be known at the
time the guaranty is executed. This is the basis for
contracts denominated as continuing guaranty or
suretyship. It 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. (Dino v. CA, G.R. No. 89775, 26
Nov. 1995)
The PPSA is, however, not explicit as to whether a
“security interest” may secure the after-incurred
obligations of the debtor/grantor to the secured
creditor. Nevertheless, Section 10(c) of said law
provides that any stipulation limiting the grantor’s
right to create a security interest shall be void.
Q: PAGRICO submitted a Surety Bond issued by
R&B Surety to secure an increase in its credit
line with PNB. For consideration of the Surety
Bond, Cochingyan and Villanueva entered into
an Indemnity Agreement with R&B Surety and
bound themselves jointly and severally to the
terms and conditions of the Surety Bond. When
PAGRICO defaulted, PNB demanded payment to
R&B Surety; R&B Surety, in turn, demanded
payment to Cochingyan and Villanueva. R&B
sued them. Villanueva argued that the
complaint was premature because PNB had not
yet proceeded against R&B Surety to enforce the
latter's liability under the Surety Bond. Is the
contention correct?
Guaranty of Future Debts
Future debts, even if the amount is not yet known,
may be secured by a guarantee. However, there can
be no claim against the guarantor until the amount
of the debt is ascertained or fixed and demandable.
The reason is that a contract of guaranty is
subsidiary. (De Leon, 2016)
GR: It is not limited to a single transaction but
contemplates a future course of dealings, covering a
series of transactions generally for an indefinite
time or until revoked.
XPN: While a Pledge, Real Estate Mortgage, or
Antichresis may exceptionally secure after-incurred
obligations so long as these future debts are
accurately described, a chattel mortgage, however,
can only cover obligations existing at the time the
A: NO. Indemnity Agreements are contracts of
indemnification not only against actual loss but
against liability as well. While in a contract of
547
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
NOTE: Eviction revives the principal
obligation, but not the guaranty, for the
creditor here took the risk. (Paras, 2008)
indemnity against loss an indemnitor will not be
liable until the person to be indemnified makes
payment or sustains loss, in a contract of indemnity
against liability, as in this case, the indemnitor's
liability arises as soon as the liability of the person
to be indemnified has arisen without regard to
whether or not he has suffered actual loss.
4.
5.
Accordingly, R & B Surety was entitled to proceed
against petitioners not only for the partial payments
already made but for the full amount owed by
PAGRICO to the PNB. (Cochingyan, Jr. v. R&B Surety
and Ins. Co., G.R. No. L-47369, 30 June 1987)
6.
EXTINGUISHMENT OF GUARANTY
Q: Doctors of New Millennium Holdings, Inc
entered into a construction and development
agreement with Million State Development
Corporation for the construction of a 200-bed
capacity hospital in Cainta, Rizal. Million State
Development submitted a surety bond to
Doctors of New Millennium issued by People’s
Trans-East Asia Insurance Corporation, now
known as People’s General Insurance
Corporation. Million State Development,
however, failed to comply with its obligation
and so Doctors of New Millennium filed a
complaint for breach of contract with damages
with prayer for the issuance of preliminary
attachment against Million State Development
and People’s General Insurance with the
Regional Trial Court of Pasig City. Can a surety
bond which guarantees initial payment be
impliedly novated by an insertion of a clause in
the principal contract waiving the conditions for
the initial payment’s release?
Two Causes for Extinguishment of the guaranty
1.
Direct – when the guaranty itself is
extinguished, independently of the principal
obligation; or
2.
Indirect – when the principal obligation ends,
the accessory obligation of guaranty naturally
ends. (Shannon v. Phil. Lumber & Trans. Co., G.R.
No. 41795, 30 Aug. 1935)
Grounds for
guaranty
extinguishing
a
contract
of
1.
Principal obligation is extinguished;
2.
Same causes as all other obligations;
a. Payment or performance;
b. Loss of the thing due;
c. By condonation or remission of the debt;
d. By confusion or merger of the rights of the
creditor and debtor;
e. By compensation;
f. By novation; or
g. Other causes such as annulment, rescission,
fulfillment of a resolutory condition and
prescription.
3.
A: NO. The obligations of the surety to the principal
under the surety bond are different from the
obligations of the contractor to the client under the
principal contract. The surety guarantees the
performance of the contractor’s obligations upon
the contractor’s default, its client may demand
against the surety bond even if there was no privity
of contract between them and this is the essence of
a surety agreement. (People's Trans-East Asia
Insurance Corp., v. Doctors of New Millennium
Holdings, Inc., G.R. No. 172404, 13 Aug. 2014)
Release by acceptance of property by the
creditor;
If the creditor accepts payment in form of
immovable or immovable property, there is a
novation on the subject matter.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Release in favor of one of the guarantors,
without consent of the others, benefits all to the
extent of the share of the guarantor to whom it
has been granted (Art. 2078, NCC);
Extension granted to debtor by creditor
without consent of guarantor (Art. 2079, NCC);
or
When the guarantors through some act of the
creditor cannot be subrogated to the rights,
mortgages and preferences of the latter. (Art.
2080, NCC)
548
Civil Law
Q: Enriquez filed a replevin case against Asuten
for the recovery of the Toyota Hi-Ace van valued
at P300,000.00. She applied for a bond in the
amount of P600,000.00 with The Mercantile
Insurance Company, Inc. (Mercantile Insurance)
in Asuten's favor. The Regional Trial Court
(RTC) approved the bond and ordered the
sheriff to recover the van from Asuten and to
deliver it to petitioner. While the van was in
petitioner's custody, the RTC dismissed the case
without prejudice for failure to prosecute. Thus,
it ordered the sheriff to restore the van to
Asuten. When petitioner failed to produce the
van, the RTC directed Mercantile Insurance to
pay Asuten the amount of the bond. Is Enriquez
liable for the replevin bond despite her failure
to return the van, considering that its effectivity
has lapsed without any renewal?
LEGAL AND JUDICIAL BONDS
Bond
A bond, when required by law, is commonly
understood to mean an undertaking that is
sufficiently secured, and not cash or currency.
(Comm. of Customs v. Alikpula, G.R. No. L- 32542, 26
Nov. 1970)
Bondsman
A bondsman is a surety offered in virtue of a
provision of law or a judicial order. He must have the
qualifications required of a guarantor (Art. 2056,
NCC) and in special laws like the Rules of Court.
(Secs. 12 & 13, Rule 114, ROC; De Leon, 2013)
The necessary qualifications of sureties to a
property bond shall be as follows:
1. Each of them must be a resident owner of real
estate within the Philippines;
2. Where there is only one surety, his real estate
must be worth at least the amount of the
undertaking; and
3. In case there are two or more sureties, they may
justify severally in amounts less than that
expressed in the undertaking, if the entire sum
justified is equivalent to the whole amount of
bail demanded. (Sec. 12, Rule 114, ROC)
A: YES. A surety bond remains effective until the
action or proceeding is finally decided, resolved, or
terminated. This a rare instance where the writ of
seizure is dissolved due to the dismissal without
prejudice, but the bond stands because the case has
yet to be finally terminated by the Regional Trial
Court.
Forfeiture of the replevin bond requires first, a
judgment on the merits in the defendant's favor, and
second, an application by the defendant for
damages. Neither circumstance appears in this case.
When petitioner failed to produce the van, equity
demanded that Asuten be awarded only an amount
equal to the value of the van. The RTC would have
erred in ordering the forfeiture of the entire bond in
Asuten's favor, considering that there was no trial
on the merits or an application by Asuten for
damages. This judgment could have been reversed
had petitioner appealed the RTC's Order.
Unfortunately, she did not. Respondent was, thus,
constrained to follow the RTC's directive to pay
Asuten the full amount of the bond. (Enriquez v. The
Mercantile Insurance Co., Inc., G.R. No. 210950, 15
Aug. 2018)
Nature of bond
All bonds including “judicial bonds” are contractual
in nature. Bonds exist only in consequence of a
meeting of minds under the conditions essential to
a contract. (De Leon, 2021)
Judicial bond
Judicial bonds constitute merely as a special class of
contracts of guaranty, characterized by the fact that
they are given in virtue of a judicial order. (Gerardo
v. Plaridel Surety and Ins., Co., G.R. No. L-7807, 31 Oct.
1956)
E.g., A bond to stay execution of an appealed
judgment of a lower court is a judicial bond.
549
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
as “Vista Del Mar Executive Houses.” Philtrust
Bank (“Philtrust”) would finance the cost of
materials and supplies to the extent of P
900,000.00, while the Spouses would shoulder
the labor cost of P 300,000.00. Paragraph 7 or
the “whereas clause” of the said project contract
provided, however, that whether or not the
Spouses could provide the funds for the labor
costs, Dominguez would bind himself to finish
the project within 150 working days.
Furthermore, a clause for liquidated damages
amounting to P 1,000.00 per day was stipulated
against Dominguez in case of breach.
Liability of the surety if the creditor was
negligent in collecting the debt
A surety is still liable even if the creditor was
negligent in collecting from the debtor. The contract
of suretyship is not about the obligee seeing to it
that the principal pays the debt or fulfills the
contract, but that the surety will see that the
principal pays or performs. (PNB v. Manila Surety &
Fidelity Co., Inc., G.R. No. L-20567, 30 July 1965)
Violation by the creditor of the terms of the
surety agreement
On 24 May 1979, Dominguez secured a
performance bond from FGU Insurance
Corporation (“FGU”) wherein they both agreed
to jointly and severally pay Floro Roxas
(“Floro”) and Philtrust the amount of P
450,000.00 in the event of Dominguez’s nonperformance of his obligation under the
contract.
A violation by the creditor of the terms of the surety
entitles the surety to be released therefrom.
(Associated Ins. & Surety Co. v. Bacolod Murcia
Milling Co., G.R. No. L-12334, 22 May 1959)
When the performance of a bond is rendered
impossible
If the performance of a bond is rendered impossible,
it is the surety’s duty to inform the court of the
happening of the event so that it may take action or
decree in the discharge of the surety when the
performance of the bond is rendered impossible by
an act of God, or the obligee, or the law. (People v.
Otiak Omal & Luzon Co., Inc., G.R. No. L-14457, 30
June 1961)
However, the Spouses borrowed P 73,136.75 of
the project-allocated funds from Dominguez and
they also failed to make the promised payments
for the labor cost; hence, Dominguez refused
further work on the project. Thus, a complaint
was filed against Spouses and Philtrust before
the Court of First Instance of Manila (“CFI”).
a. Should FGU be liable for the full amount of
P 450,000 under the performance bond?
b. Should the liabilities of the Spouses to
Dominguez be set off against any liability of
FGU under the performance bond?
c. Should the Spouses be entitled to
liquidated damages under the contract for
building construction?
Remedy if Unable to Give a Bond
A pledgee or mortgage considered sufficient to
cover his obligation shall be admitted in case a
person bound to give a legal or judicial bond should
not be able to do so.
NOTE: A judicial bondsman cannot demand the
exhaustion of the property of the principal debtor.
This is to ensure that the fulfillment of the obligation
by the guarantor be not delayed or hindered.
(Rabuya, 2017)
A:
a. YES. FGU should be liable for the full amount of
P 450,000.00 solidarily with Dominguez. A
performance bond is a kind of suretyship
agreement that is designed to afford the project
owner security that the contractor will
faithfully comply with the requirements of the
contract and make good on the damages
sustained by the project owner in case of the
contractor’s failure to so perform. As a surety,
Q: Spouses Floro and Eufema Roxas (“Spouses”)
entered into a Contract of Building Construction
dated 22 May 1979 with Rosendo P. Dominguez,
Jr. (“Dominguez”), who undertook to be the
building contractor of a housing project known
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
550
Civil Law
c.
FGU’S liability is direct, primary, absolute, and
solidary with the principal debtor, and is
determined strictly in accordance with the
actual terms of the performance bond it issued.
The FGU Surety Bond was conditioned upon the
full and faithful performance by Dominguez of
his obligations, wherein FGU guaranteed to
solidarily pay the amount of P 450,000.00 in
case of Dominguez’ default. The terms of the
bond were clear; hence, the literal meaning of
its stipulation should control.
If it were true that FGU’s intention was to limit
its liability to the cost overrun or additional cost
to the Spouses to complete the project up to a
maximum cap of P 450,000.00, then it should
have included in the Surety Bond specific words
indicating this intention. Its failure to do so
must be construed against it, given the fact that
a suretyship agreement is a contract of
adhesion ordinarily prepared by the surety or
insurance company; thus, calling for a liberal
construction in favor of the insured and strict
application against the insurer, which insurer
as the drafter, had the opportunity to state
plainly the terms of its obligation.
b.
YES. The Spouses should be entitled to
liquidated damages under the contract for
building construction. The parties agreed and
articulated on the payment of liquidated
damages in case of breach; hence, the deciding
factor for the recovery of liquidated damages in
this case would be the fact of delay in the
completion of the works. A clause on liquidated
damages is normally added to construction
contracts not only to provide indemnity for
damages but also to ensure performance of the
contractor by the threat of greater
responsibility in the event of breach. Here, it
was clearly provided that liquidated damages
would be recoverable for delay in the
completion of the project; hence, there should
be more reason in case of non-completion. To
hold otherwise would be to diminish or
disregard the coercive force of this stipulation.
(FGU Insurance vs Spouses Roxas, G.R. 189526,
09 Aug. 2017)
Q: Doctors of New Millenium Holdings, Inc.
(DNMH) is a domestic corporation and entered
into a construction and development agreement
with the Million State Development Corporation
(MSD), a contractor for the construction of a
200-bed capacity hospital in Cainta, Rizal.
DNMH obliged to pay 10M to MSD and MSD was
to shoulder 95% of the project cost and
committed itself to secure 385k within 25
banking days from DNMH’s initial payment.
YES. The liabilities of the Spouses to Dominguez
could be set off against any liability of FGU
under the performance bond. Under Article
1280 of the NCC, a guarantor may set up
compensation as regards what the creditor may
owe the principal debtor.
Thus, MSD submitted a surety bond of 10M to
DNMH, which was issued by People’s Trans-East
Asia Insurance Corporation, now People’s
General insurance corporation. Upon failure of
MSD to comply, DNMH opted for payment of the
surety bond from Philippine General Insurance,
which however denied liability on the ground
that its liability was limited by the contract and
that the contract was novated upon execution of
an additional clause in the agreement. Is the
surety liable in this case?
While this provision specifically speaks of a
guarantor, it nevertheless applies to a surety as
well. Contracts of guaranty and surety are
closely related in the sense that in both, there is
a promise to answer for the debt or default of
another. The difference lies in that a guarantor
is the insurer of the solvency of the debtor and
thus binds himself to pay if the principal is
unable to pay, while a surety is the insurer of
the debt and he obligates himself to pay if the
principal does not pay. Hence, FGU could offset
its liability under the Surety Bond against
Dominguez’ collectibles from the Spouses.
A: YES. The liabilities of an insurer under the surety
bond are not extinguished when the modifications
in the principal contract do not substantially. The
surety is jointly and severally liable with its
551
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
principal when the latter defaults from its
obligations under the principal contract. (People’s
Trans-Eat Insurance Corp. v. Doctors of New
Millenium Holdings, G.R. No. 172404, 13 Aug. 2014)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
552
Civil Law
PLEDGE
CHATTEL MORTGAGE
REAL ESTATE
MORTGAGE
ANTICHRESIS
It is a contract
whereby the debtor
secures
to
the
creditor
the
fulfillment
of
a
principal obligation,
specially subjecting
to such security,
immovable property
or real rights over
immovable
property, in case the
principal obligation
is not paid or
complied with at the
time stipulated.
A contract whereby the
creditor acquires the
right to receive the
fruits of an immovable
of the debtor, with the
obligation to apply them
to the payment of
interest, if owing, and
thereafter
to
the
principal of his credit.
Definition
An
accessory
contract
whereby a debtor delivers to
the creditor or a third person
a movable or personal
property,
or
document
evidencing
incorporeal
rights,
to
secure
the
fulfillment of a principal
obligation with the condition
that when the obligation is
satisfied, the thing delivered
shall be returned to the
pledgor with all its fruits and
accessions, if any.
Note:
The
Civil
Code
provisions governing pledge
are now superseded by R.A.
No. 11057 or the Personal
Property Security Act (PPSA)
which
denominates
a
contract whereby personal
property is used to secure
payment
or
other
performance of an obligation
as a “security agreement.”
Chattel mortgage is a
contract by virtue of which
a personal property is
recorded in the Chattel
Mortgage Register as a
security
for
the
performance
of
an
obligation.
Note:
The
chattel
mortgage under Act No.
1508 is now superseded
by R.A. No. 11057 or the
Personal
Property
Security Act (PPSA) which
denominates a contract
whereby
personal
property is used to secure
payment
or
other
performance
of
an
obligation as a “security
agreement.”
Object of the contract
Movable
property,
evidencing
rights.
or
or
personal
document
incorporeal
Movable properties which
are within the commerce of
men provided it is susceptible
of
possession.
And
incorporeal rights evidenced
by proper documents may be
pledged.
Note: The object of a security
agreement under the PPSA is
personal property.
The object of a security
agreement under the PPSA
is personal property.
Note: Under the former
Chattel Mortgage Act, a
real property may be a
subject
of
chattel
mortgage as long as the
parties to the contract so
agree and no innocent
third party will be
prejudiced
thereby.
(Makati
Leasing
and
Finance Corp. v. Weaver
Textile Mills, Inc. G.R. No. L58469, 17 May 1983)
553
Immovable property
or real rights over
immovable
property.
Fruits of an immovable.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
Necessity of delivery
Property must be delivered.
Note: Under the PPSA,
delivery of the personal
property to and possession
thereof by the secured
creditor is one of the means
whereby a security interest
may be perfected. (Sec. 12(b),
R.A. No. 11057)
Delivery is not necessary.
Note: Under the PPSA,
delivery of the personal
property
to
and
possession thereof by the
secured creditor is one of
the means whereby a
security interest may be
perfected. (Sec. 12(b), R.A.
No. 11057)
2.
NOTE: The pledgor can sell the thing pledged with
the consent of the pledgee (Art. 2097, NCC), while
the mortgagor can sell the property mortgaged even
without the consent of the mortgagee. (Art. 2130,
NCC)
3.
2.
3.
4.
not
Property is delivered to
the creditor.
Where only a portion of the loan was released;
or
Where there was failure of consideration.
NOTE: All kinds of obligation may be secured by a
Pledge or Mortgaged as long as they are not void.
(Pineda, 2006)
Similarities of Pledge and Mortgage
1.
Delivery
is
necessary.
Future advancements or renewals may also be
secured by Pledge (China Banking Corporation v. CA,
G.R. No. 117604, 26 Mar, 1997)
Both are constituted to secure a principal
obligation; they are only accessory contracts; (Arts.
2086 & 2052, NCC)
Both pledgor and mortgagor must be the absolute
owner of the property; (Art. 2085(2), NCC)
Both pledgor and mortgagor must have the free
disposal of their property or be authorized to do so;
and
In both, the thing proffered as security may be sold
at public auction, when the principal obligation
becomes due and no payment is made by the
debtor. (Pineda, 2006)
Limited Liability of a Third Person as a pledgor
or mortgagor
GR: A third person who pledged and mortgaged his
property is not liable for any deficiency.
XPN: If the third party pledgor or mortgagor
expressly agreed to be bound solidarily with the
principal debtor. (Pineda, 2006)
and
Property Acquirable in the Future cannot be
mortgaged
GR: A pledge, mortgage or antichresis is indivisible.
Where the mortgagor mortgaged a property and
under the contract, he agreed to mortgage
additional properties which he may acquire in the
future, there was no valid mortgage as to the latter
because he was not yet the owner of the properties
at the time of the mortgage. (Dilag v. Heirs of
Ressurrecion, G.R. No. 48941, 06 May 1946)
Indivisibility
Antichresis
of
Pledge,
Mortgage
NOTE: The mortgage is indivisible even if the
obligation of the debtor is joint and not solidary.
Generally, the divisibility of the principal obligation
is not affected by the indivisibility of the pledge or
mortgage. (Art. 2089, NCC)
XPNs:
1. Where each one of several things guarantees
determinate portion of the credit (Art. 2089,
NCC);
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
554
Civil Law
Mortgage
Advances
Constituted
to
Secure
Future
PACTUM COMMISSORIUM
(1999, 2001, 2004, 2009 BAR)
Mortgage constituted to secure future advances is
valid. It is a continuing security and not discharged
by repayment of the amount named in the
mortgage, until the full amount of the advances is
paid. However, a chattel mortgage can only cover
obligations existing at the time the mortgage is
constituted and not to obligations subsequent to the
execution of the mortgage. (Lim v. Luter, G.R. No.
25235, 09 Dec. 1926)
Pactum Commissorium is a stipulation whereby the
thing pledged or mortgaged or subject of antichresis
shall automatically become the property of the
creditor in the event of non-payment of the debt
within the term fixed. Such stipulation is null and
void. (Art. 2085, NCC)
Elements of Pactum Commissorium
1.
Nature of an Assignment of Rights to Guarantee
an Obligation of a Debtor
2.
An assignment of rights to guarantee an obligation
of a debtor is in effect a mortgage and not an
absolute conveyance of title which confers
ownership on the assignee. (Manila Banking Corp. v.
Teodoro, Jr., G.R. No. 53955, 13 Jan 1989)
There is a pledge, mortgage or antichresis of a
property by way of security; and
There is an express stipulation for the
automatic appropriation by the creditor of the
property in case of non- payment of the
principal obligation. (Pineda, 2006)
NOTE: What are prohibited are those stipulations
executed or made simultaneously with the original
contract, and not those subsequently entered into.
ACCOMMODATION MORTGAGE
Pactum Commissorium when allowed
An accommodation mortgagor is a third person who
is not a party to a principal obligation and secures
the latter by mortgaging or pledging his own
property. (Art. 2085, NCC)
While the law prohibits the creditor from
appropriating to himself the things pledged or
mortgaged, and from disposing them, this does not
mean that a stipulation if prohibited whereby the
creditor is authorized, in case of nonpayment within
the term fixed by the parties, to sell the thing
mortgaged at public auction, or to adjudicate the
same to himself in case of failure of said sale, nor is
there any reason to prevent it; on the contrary, Art.
2112 of the NCC expressly authorizes this
procedure in connection with pledge, even if it may
not have been expressly stipulated. (Aquino, 2021;
El Hogar Filipino v. Paredes, G.R. No. L-19843, 03 Oct.
1923)
The liability of an accommodation mortgagor
extends up to the loan value of their mortgaged
property and not to the entire loan itself. Should
there be any deficiency, the creditor has recourse on
the principal debtor, not against accommodation
mortgage. (Rabuya, 2017)
NOTE: Accommodation is also applicable to pledge
since the law provides that “third parties who are
not parties to the principal obligation may secure
the latter by pledging or mortgaging their own
property.” (Art. 2085, NCC) It is also applicable to
antichresis since Art. 2139 of the New Civil Code
states that the last paragraph of Art. 2085 shall be
applicable to a contract of antichresis.
This is not against the law, since what the law
prohibits is only the acquisition by the creditor of
the property mortgaged after non-payment of debt,
and the above stated article simply authorizes him
to sell it with the aforesaid conditions, which
authorization is inherent in the ownership, and is
not against morals and public order. (Aquino, 2021)
555
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Credit Transactions
acquisition is automatic without need of any further
action. In the instant problem another act is
required to be performed, namely, the conveyance
of the property as payment (Dacion en pago)
Q: ABC loaned to MNO P40,000 for which the
latter pledged 400 shares of stock in XYZ Inc. It
was agreed that if the pledgor failed to pay the
loan with 10% yearly interest within four years,
the pledgee is authorized to foreclose on the
shares of stock. As required, MNO delivered
possession of the shares to ABC with the
understanding that the shares would be
returned to MNO upon the payment of the loan.
However, the loan was not paid on time. A month
after 4 years, may the shares of stock pledged be
deemed owned by ABC or not? Reason. (2004
BAR)
A: The shares of stock cannot be deemed owned by
ABC upon default of MNO. They have to be
foreclosed. Under Art. 2088 of the NCC, the creditor
cannot appropriate the things given by way of
pledge. And even if the parties have stipulated that
ABC becomes the owner of the shares in case MNO
defaults on the loan, such stipulation is void for
being a Pactum Commissorium.
Q: X borrowed money from Y and gave a piece of
land as security by way of mortgage. It was
expressly agreed between the parties in the
mortgage contract that upon nonpayment of the
debt on time by X, the mortgaged land would
already belong to Y. If X defaulted in paying,
would Y now become the owner of the
mortgaged land? Why?
A: NO, Y would not become the owner of the land.
The stipulation is in the nature of Pactum
Commissorium which is prohibited by law. The
property should be sold at public auction and the
proceeds thereof applied to the indebtedness. Any
excess shall be given to the mortgagor.
Q: Suppose in the preceding question, the
agreement between X and Y was that if X failed to
pay the mortgage debt on time, the debt shall be
paid with the land mortgaged by X to Y. Would
your answer be the same as in the preceding
question? Explain. (1999 BAR)
A: NO, the answer would not be the same. This is a
valid stipulation and does not constitute pactum
commissorium. In pactum commissorium, the
UNIVERSITY OF SANTO TOMAS
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556