Essentially the bailee has the obligation to restore the subject of
Nov. 15, 2013 Part I. Michelle Andoy
What is Credit Transactions?
Credit transactions include all transactions involving the purchase or loan
of goods, services, or money in the present with a promise to pay or
deliver in the future.
By the use of credit, more exchanges are possible, persons are able to
enjoy a thing today but pay for it later, and through the banking system,
actual money transfer is eliminated by cancellation of debts and credits.
So what are involved in credit transactions, we have payment of contracts,
the concept of usury, guarantee and suretyship, mortgage, antichresis,
concurrence and preference of credits.
Essentially the credit transactions involved contracts of security wherein
something is given, deposited or serves as a means where the fulfilment or
enforcement of an obligation or of protecting some interest in the
property.
They are of two types:
(a) Secured transactions or contracts of real security. — Those
supported by a collateral or an encumbrance of property;
What is involved here? We have mortgage, pledge, antichresis.
These are charges or lien upon the property.
(b) Unsecured transactions or contracts of personal security.—
Those the fulfilment of which by the principal debtor is secured
or supported only by a promise to pay or the personal
commitment of another such as a guarantor or surety.
Here, walang property involved, it is supported only by the
promise pay or the personal commitment of another such as a
guarantor or surety. We have guarantee and suretyship.
TERMS: The encumbrance is effected as follows:
- in pledge - by placing the movable property in the possession of
the creditor;
- in chattel mortgage - by the execution of the corresponding
deed substantially in the form prescribed by law;
- in real estate mortgage - by the execution of a public
instrument encumbering the real property covered thereby;
- in antichresis,- by a written instrument granting to the creditor
the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of the interest and
principal obligation.
What is bailment?
The word “bailment” comes from the French word “bailler,” meaning “to
deliver.”
It may be defined as the delivery of property of one person to another in
trust for a specific purpose, with a contract, express or implied, that the
trust shall be faithfully executed and the property returned or duly
accounted for when the special purpose is accomplished or kept until the
bailor reclaims it.
In general, bailment may be said to be a contractual relation.
To be legally enforceable, it must contain all the elements of a valid
contract.
So it involves contractual relation, these are all valid contracts. Now, who
are the parties?
The parties to a bailment are the:
(1) Bailor (Comodatario). — the giver; the party who delivers the
possession or custody of the thing bailed; and
As a general rule: He need not be the owner of the thing, what is
important that he has possessory interest over the property.
What would be an example of a possessory interest?
- LEASE - He has the right to use it but he does not own it. A lessee
can be the bailor in relation in the subject matter in a contract of
lease.
- USUFRUCTUARY – under your property so the one who is
entitled to his right is not the owner but he has the legal
possession of the subject property and therefore he can be the
bailor thereof
(2) Bailee (Comodante). — the recipient; the party who receives the
possession or custody of the thing thus delivered.
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the bailment in the same or in altered form or to the account
therefore
Now what are the kinds of bailment?
(1) Those for the sole benefit of the bailor - For the sole benefit
of the bailor examples here: gratuitous deposits as well as
mandatum.
(2) Those for the sole benefit of the bailee - For the sole benefit
of the bailee examples: commodatum as well as gratuitous
simple loan (mutuum)
(3) Those for the benefit of both parties - For the benfit of both
parties examples: deposit fro compensation, involuntary deposit,
pledge and other bailments for hire.
The first two kinds are the gratuitous bailments. In such bailments, there is
really no consideration for they are considered more as a favor by one
party to the party benefited; but the law imposes definite obligations upon
both the bailor and the bailee. The third kind, usually results from
bailments involving business transactions. These bailments are known as
mutual-benefit bailments. There is already a consideration.
What are the kinds of Bailment?
Bailment for hire (locatio et conductio) arises when goods are left with the
bailee for some use or service by him and is always for some
compensation. This specie of bailment has been subdivided as follows:
(1) Hire of things (locatio rei). — where goods are delivered for
the temporary use of the hirer ex. contract of lease
(2) Hire of service (locatio operis faciendi). — where goods are
delivered for some work or labor upon it by the bailee ex.
contract for a piece of work
(3) Hire for carriage of goods (locatio operis mercium
vehendarum). — where goods are delivered either to a common
carrier or to a private person for the purpose of being carried
from place to place ex. common carrier
(4) Hire of custody (locatio custodiae). — where goods are
delivered for storage. (Arts. 1507-ex. warehouse receipt laws
LOAN
This is the first credit transaction.
ARTICLE 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownerships of the thing loaned,
while in simple loan, ownership passes to the borrower. (1740a)
If you look at 1933 it gives us the two types of loan the commodatum and
the mutuum or simple loan. As we go along we see that the characteristics
of contract of loan are as follows:
(1) a real contract because the delivery of the thing loaned is
necessary for the perfection of the contract. It is perfected upon
delivery.
(2) a unilateral contract because once the subject matter has
been delivered, it creates obligations on the part of only one of
the parties, i.e., the borrower.
In a contract of loan, the cause or consideration in order to be valid is:
(1) as to the borrower, the acquisition of the thing; not in the
sense of owning the property but acquiring physical possession
over it
(2) as to the lender, the right to demand its return or its
equivalent.
Now do not confuse the term “loan” as defined in 1933 with the term
“credit”
The credit of an individual means his ability to borrow money or things by
virtue of the confidence or trust reposed by a lender that he will pay what
he may promise within a specified period.
A loan (mutuum) means the delivery by one party (lender/creditor), and
the receipt by the other party (borrower/debtor) who become the owner,
of a given sum of money or other consumable thing upon an agreement,
express or implied, to repay the same amount of the same kind and
quality, with or without interest.
Loan distinguished from discounting of paper:
To discount a paper is a mode of loaning money, with these distinctions:
(1) In a discount, interest is deducted in advance while in a loan, interest is
usually taken at the expiration of a credit; and
(2) A discount is always on a double-name paper,1 while a loan is
generally, on a single-name paper.
Ex: Thus, on a loan of P1,000.00 at 16% interest, the borrower would pay
P1,160.00 at the end of the year. If the note is discounted, the interest is
deducted from the principal in advance. The borrower would receive
P840.00 but would pay back P1,000.00 at the end of the year. The P160.00
is called the discount and P840.00 is called the proceeds. Discounting is
slightly more expensive for the borrower because interest is calculated on
the amount loaned (P1,000.00) and not on the amount actually received. In
general, discount and interest rates for similar loans are identical.
Going back to 1933 with regard to the concept of loan we have 2 kinds, we
have commodatum and mutuum.
DISTINCTIONS:
It is relatively simple to determine whether a given loan is commodatum or
mutuum by bearing in mind the following principal points of distinction:
(1) AS TO OBJECT: Commodatum ordinarily involves something not
consumable/non fungible (see Art. 1936.), while in mutuum, the
subject matter is money or other consumable/fungible thing; ex.
money, rice, fire wood, petroleum
(2) AS TO OWNERSHIP: In commodatum, ownership of the thing
loaned is retained by the lender (Art. 1933.), while in mutuum,
the ownership is transferred to the borrower;
(3) AS TO CAUSE: Commodatum is essentially gratuitous (ibid.),
while mutuum may be gratuitous or it may be onerous, that is,
with stipulation to pay interest;
(4) AS TO OBLIGATION: In commodatum, the borrower must return
the same thing loaned (ibid.), while in mutuum, the borrower
need only pay the same amount of the same kind and quality;
(5) AS TO PROPERTY: Commodatum may involve real or personal
property (Art. 1937.), while mutuum refers only to personal
property;
(6) AS TO PURPOSE: Commodatum is a loan for use or temporary
possession (Art. 1935.), while mutuum is a loan for consumption;
(7) WITH REGARDS TO THE DEMAND: In commodatum, the bailor
may demand the return of the thing loaned before the
expiration of the term in case of urgent need (Art. 1946), while
in mutuum, the lender may not demand its return before the
lapse of the term agreed upon;
(8) In commodatum, the loss of the subject matter is suffered by the
bailor since he is the owner (Art. 1942; Art. 1174.) [Principle of
Resperit Domino] – the owner bears the risk of loss], while in
mutuum, the borrower suffers the loss even if caused exclusively
by a fortuitous event and he is not, therefore, discharged from
his duty to pay. It may also be said that while commodatum is
purely personal in character (see Art. 1939.), mutuum is not so.
2 types of Commodatum:
(1) ordinary commodatum (Art. 1933.); and
(2) precarium. — one whereby the bailor may demand the thing loaned at
will. (see Art. 1947.)
ART. 1934. 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.
1934 tell us of the characteristics of a contract of being REAL perfected
upon delivery. Now if there say accepted promise to deliver something if
the subject matter has not yet been delivered walang contract of loan pero
meron paring simple contract alright? That acceptance of promise to
deliver is still a contract but it will be only considered to be contract of loan
upon delivery so again there is a real contract perfected upon delivery,
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absence of delivery will not negate the existence of a contract. Hindi lang
siya contract of loan but it is a simple contract perfected by mere consent.
Now, also take note you must also be able to distinguish from loan from
other terms like credit as we have mentioned. Also, loan from a lease.
Lease - one of the parties bind himself to give one another the enjoyment
or use for a price certain. How about deposit? Deposit – there is delivery
but without use. Usufruct – this refers to the enjoyment of good. This is the
main cause diba sa property. Now, barter – is an exchange for some
quantity, quality or kind or one that is considered as onerous. Now let’s go
to the first type of loan which is the commodatum.
We begin here in 1935.
ART. 1935. The bailee in commodatum acquires the use of the thing
loaned but not its fruits; if any compensation is to be paid by him who
acquires the use, the contract ceases to be a commodatum. (1941a)
Alright remember, commodatum is essentially gratuitous. You can read
that characteristics in 1935. If the use of the thing is subject for
compensation it is not commodatum anymore. It ceases to be a
commodatum and becomes a contract of lease. Because, there is an
enjoyment of thing for a price certain.
If the consideration is the rendering of some service, an innominate
contract will result.
Let’s take into consideration some cases here of
Case of Pajuyo vs. CA
Pajuyo paid P400 to a certain Perez for the rights over a lot. Pajuyo then
constructed a house thereon. Pajuyo and his family lived in the house from
1979 to 7 December 1985. On 8 December 1985, Pajuyo and Guevarra
executed a Kasunduan or agreement. Pajuyo, as owner of the house,
allowed Guevarra to live in the house for free provided Guevarra would
maintain the cleanliness and orderliness of the house. Guevarra promised
that he would voluntarily vacate the premises on Pajuyo’s demand.
Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused. Guevarra claimed that
Pajuyo had no valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed out that
from December 1985 to September 1994, Pajuyo did not show up or
communicate with him. Guevarra insisted that neither he nor Pajuyo has
valid title to the lot. MTC in favor of Pajuyo. RTC- affirmed MTC. CA -
reversed the decision
Held: NO, it was not a commodatum.
Definition: In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the same for
a certain time and return it.
Features: 1. it is gratuitous 2. the use of the thing belonging to another is
for a certain period
Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for
which the commodatum is constituted. [65] If the bailor should have
urgent need of the thing, he may demand its return for temporary use. [66]
If the use of the thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which case the contractual relation is called a
precarium (commodatum)
In the case at bar: 1. Kasunduan reveals that the accommodation accorded
by Pajuyo to Guevarra was NIT essentially gratuitous. While the Kasunduan
did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum.
2) With regard to the effects, Case law on ejectment has treated
relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the
termination of the lease. [69] The tenant’s withholding of the property
would then be unlawful.
With regard to obligations of bailee in commodatum:
ASSUMING that the relationship between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would still have the duty to turn over
possession of the property to Pajuyo, the bailor. The obligation to deliver
or to return the thing received attaches to contracts for safekeeping, or
contracts of commission, administration and commodatum. These
contracts certainly involve the obligation to deliver or return the thing
received.
What is the value of the Kasunduan? Valid contract between the parties.
Note: Guevarra turned his back on the Kasunduan on the sole ground that
like him, Pajuyo is also a squatter. Guevarra cannot now impugn the
Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is the undeniable evidence of Guevarra’s recognition of
Pajuyo’s better right of physical possession. Guevarra is clearly a possessor
in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
So Pajuyo’s withdrawal of his permission to Guevarra terminated the
Kasunduan. Guevarra’s transient right to possess the property ended as
well. Moreover, it was Pajuyo who was in actual possession of the
property because Guevarra had to seek Pajuyo’s permission to temporarily
hold the property and Guevarra had to follow the conditions set by Pajuyo
in the Kasunduan. Control over the property still rested with Pajuyo and
this is evidence of actual possession.
Atty. Sarona: It is clear that it is not essentially gratuitous. So therefore,
hindi siya commodatum. Bakit hindi siya essentially gratuitous? Kasi that
imposition to maintain the property in good condition. So there is an
onerous consideration. What could it be? It is a contract of lease subject to
a consideration allowing the lessee to make use of the said property.
Case of Republic of the Philippines vs. Bagtas
Jose Bagtas borrowed from the Bureau of Animal Industry three bulls for a
period of one year for breeding purposes subject to a government charge
of breeding fee of 10% of the book value of the books. Upon the expiration
of the contract, Bagtas asked for a renewal for another one year, however,
the Secretary of Agriculture and Natural Resources approved only the
renewal for one bull and other two bulls be returned. Bagtas then wrote a
letter to the Director of Animal Industry that he would pay the value of the
three bulls with a deduction of yearly depreciation. The Director advised
him that the value cannot be depreciated and asked Bagtas to either return
the bulls or pay their book value. Bagtas neither paid nor returned the
bulls. The Republic then commenced an action against Bagtas ordering him
to return the bulls or pay their book value. After hearing, the trial Court
ruled in favor of the Republic, as such, the Republic moved ex parte for a
writ of execution which the court granted.
Felicidad Bagtas, the surviving spouse and administrator of Bagtas’ estate,
returned the two bulls and filed a motion to quash the writ of execution
since one bull cannot be returned for it was killed by gunshot during a Huk
raid. The Court denied her motion hence, this appeal certified by the Court
of Appeals because only questions of law are raised.
Held: NO, it was not a commodatum.
A contract of commodatum is essentially gratuitous. Supreme Court held
that Bagtas was liable for the loss of the bull even though it was caused by
a fortuitous event.
If the contract was one of lease, then the 10% breeding charge is
compensation (rent) for the use of the bull and Bagtas, as lessee, is subject
to the responsibilities of a possessor. He is also in bad faith because he
continued to possess the bull even though the term of the contract has
already expired. If the contract was one of commodatum, he is still liable
because: (1) he kept the bull longer than the period stipulated; and (2) the
thing loaned has been delivered with appraisal of its value (10%). No
stipulation that in case of loss of the bull due to fortuitous event the late
husband of the appellant would be exempt from liability.
The original period of the loan was from 8 May 1948 to 7 May 1949. The
loan of one bull was renewed for another period of one year to end on 8
May 1950. But the appellant kept and used the bull until November 1953
when during a Huk raid it was killed by stray bullets. Furthermore, when
lent and delivered to the deceased husband of the appellant the bulls had
each an appraised book value, to with: the Sindhi, at P1,176.46, the
Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated
that in case of loss of the bull due to fortuitous event the late husband of
the appellant would be exempt from liability.
Atty. Sarona: So here, it emphasizes that the contract of commodatum is
essentially gratuitous. Here the, fee was considered as compensation and
therefore it is a contract of lease. Under the provision sa lease specifically
Art. 1671 subject to the responsibility of a possessor in bad faith because
she continued possession even if there is expiry of the contract. Here, SC
said that i-assume na lang natin na commodatum may liability parin. Wala
siyang “ikyas” [what a term!lol] wala parin siyang kawala. Meron liability sa
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contract of lease or commodatum. Kahit namatay ang bull through a
fortuitous event liable parin siya because he kept it longer than the period
agreed upon. Here, it was considered a contract of lease.
Contract similar to donation
Commodatum is similar to a donation in that it confers a benefit to the
recipient. The presumption is that the bailor has loaned the thing for
having no need therefor.
In donation, there is transfer of ownership. In commodatum, there is no
transfer of ownership.
Extent of bailee’s right of use
The right to use is limited to the thing loaned but not to its fruits unless
there is a stipulation to the contrary. (Art. 1940.) As owner of the thing
loaned (Art. 1933, last par.), the bailor is
naturally entitled to its fruits. Bakit ang bailor ang entitled of fruits?
Because of OWNERSHIP. There is an exception of there is a stipulation
between parties.
Purpose of the contract.
The purpose of the contract of commodatum must be the temporary use
of the thing loaned. If the bailee is not entitled to the use of the thing, the
contract may be a deposit (see Art. 1962.) not a commodatum.
It is an essential feature of the contract of commodatum that the use of the
property of another shall be “for a certain time.”(Art. 1933, par. 2.)
Compare it to deposit, doon ang purpose hindi use but to safe keep.
ART. 1936. Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as when it
is merely for exhibition. (n)
ART. 1937. Movable or immovable property may be the object of
commodatum.
Alright, general rule is that subject matter is non-consumable. When we
say consumable it cannot be returned anymore when it is used. So
therefore, general rule sa commodatum is NON COMSUMABLE. But 1936
gives us an exemption: Consumable goods may be the subject of
commodatum if the purpose of the contract is not the consumption of
the object, as when it is merely for exhibition.
Ex. L lends to B an oversized bottle of wine to be used as a sample or for
advertisement.3 If the intention of the parties is to have the consumable
goods loaned returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum. It is merely for EXHIBITION. The
intention to return is still there.
In 1937, movable or immovable property may be the object of
commodatum. Pwede real property pwede rin personal property.
Case of Producers Bank vs. CA
 Respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo
Doronilla, in incorporating his business, the Sterela Marketing and
Services (“Sterela”).
 Specifically, Sanchez asked respondent to deposit in a bank a certain
amount of money in the bank account of Sterela for purposes of its
incorporation. She assured respondent that he could withdraw his
money from said account within a month’s time.
 Relying on the assurances and representations of Sanchez and
Doronilla, respondent issued a check in the amount of P200,000.00 in
favor of Sterela.
 Respondent instructed his wife, to accompany Doronilla and Sanchez
in opening a savings account in the name of Sterela in petitioner
Producers Bank of the Philippines.
 However, only Sanchez and Mrs. Vives went to the bank to deposit
the check. They had with them an authorization letter from Doronilla
authorizing Sanchez and her companions, “in coordination with Mr.
Rufo Atienza,” to open an account for Sterela Marketing Services in
the amount of P200,000.00. In opening the account, the authorized
signatories were Vives and/or Sanchez. A passbook for Savings
Account No. 10-1567 was thereafter issued to Mrs. Vives.
 Subsequently, respondent learned that Sterela was no longer holding
office in the address previously given to him. Alarmed, he and his
 wife went to the Bank to verify if their money was still intact but they
were informed that part of the money in Savings Account had been
withdrawn by Doronilla, and that only P90,000.00 remained
therein. Mr. Atienza (the Asst. Mngr) likewise told them that Mrs.
Vives could not withdraw said remaining amount because it had to
answer for some postdated checks issued by Doronilla.
 Private respondent tried to get in touch with Doronilla through
Sanchez where he was reassured that his money was intact and would
be returned to him. Doronilla issued a postdated check for
P212,000.00 in favor of respondent. However, the check was
dishonored.
 Respondent instituted an action for recovery of sum of money against
Doronilla, Sanchez, and petitioner.
 The RTC ruled in favor of respondent Vives and CA affirmed.
 Bank’s contention: the transaction between respondent and Doronilla
is a simple loan (mutuum) since all the elements of a mutuum are
present: first, what was delivered by respondent to Doronilla was
money, a consumable thing; and second, the transaction was onerous
as Doronilla was obliged to pay interest, as evidenced by the check
issued by Doronilla in the amount of P212,000.00, or P12,000 more
than what respondent deposited in Sterela’s bank account.
 Petitioner asserts that Doronilla’s letter addressed to the bank,
authorizing Mrs. Vives and Sanchez to open a savings account for
Sterela, did not contain any authorization for these two to withdraw
from said account. Hence, the authority to withdraw therefrom
remained exclusively with Doronilla, who was the sole proprietor of
Sterela, and who alone had legal title to the savings account.
Issue: WON, the transaction between Doronilla and Vives was one of
simple loan (mutuum).
Ruling: No, it was a commodatum.
*Commodatum even if what is involved is a consumable thing.
A circumspect examination of the records reveals that the transaction
between them was a commodatum. Article 1933 of the Civil Code
distinguishes between the two kinds of loans (refer to provision).
The provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be
a mutuum. However, there are some instances where a commodatum may
have for its object a consumable thing. Article 1936 of the Civil Code
provides:
Consumable goods may be the subject of commodatum if the purpose of
the contract is not the consumption of the object, as when it is merely for
exhibition.
Thus, if consumable goods are loaned only for purposes of
exhibition, or when the intention of the parties is to lend consumable
goods and to have the very same goods returned at the end of the period
agreed upon, the loan is a commodatum and not a mutuum. The rule is
that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. In case of
doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination. The evidence shows that respondent
agreed to deposit his money in the savings account of Sterela specifically
for the purpose of making it appear “that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be
returned within 30 days.” Respondent merely “accommodated” Doronilla
by lending his money without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterela’s savings account and would be
returned to respondent after 30 days.
* The additional P12,000 did not convert commodatum to mutuum.
Doronilla’s attempts to return to respondent the amount of P200,000.00
which the latter deposited in Sterela’s account together with an additional
P12,000.00 allegedly representing interest on the mutuum, did not convert
the transaction from a commodatum into a mutuum because such was not
the intent of the parties and because the additional P12,000.00
corresponds to the fruits of the lending of the P200,000.00. Article 1935 of
the Civil Code expressly states that “the bailee in commodatum acquires
the use of the thing loaned but not its fruits.” Hence, it was only proper for
Doronilla to remit to respondent the interest accruing to the latter’s money
deposited with petitioner. The nature of said transaction, that is, whether
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it is a mutuum or a commodatum, has no bearing on the question of
petitioner’s liability for the return of respondent’s money because the
factual circumstances of the case clearly show that petitioner, through its
employee Mr. Atienza, was partly responsible for the loss of respondent’s
money and is liable for its restitution. Petition denied.
Atty. Sarona: So here, you have a commodatum even if the subject matter
is considered to be consumable. It is clear that ART. 1936. Consumable
may be the subject of commodatum if the purpose was not the
consumption of the object, as when it is merely for exhibition. So what are
you going to look at whether the subject is commodatum or mutuum. You
do not clearly look at the subject matter but more importantly look at the
INTENTION of the parties. The rule is that the intention of the parties
thereto shall be accorded primordial consideration in determining the
actual character of a contract. In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination.
The money that was deposited in the savings account of Sterela was for the
purpose making it appear that the company has sufficient capital for
incorporations and with the promise that it will be returned within 30 days.
It was merely an accommodation para palabasin na sa kanila para approve
ang articles of corporation of the company. With regard with the interest
of 12,000, it is a fruit. A civil fruit. Now, here since there was no transfer of
owner and the bailor owns the principal yung money then he is entitled to
the fruits or interest. It is proper for Doronilla to remit the respondent
accruing to the latter’s money deposited with the petitioner.
Case of Mina vs. Pacual
The property involved here is a lot in the center of the town of Laoag, the
capital of the Province of Ilocos Norte, the property having been awarded
to Francisco Fontanilla, brother of Andres fontanilla. Andres Fontanilla,
with the consent of his brother Francisco, erected a warehouse on a part of
the said lot. Francisco Fontanilla, the former owner of the lot, being dead,
the herein plaintiffs, Alejandro Mina, et al., were recognized as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died,
the children of Ruperta Pascual were recognized and consequently are
entitled to the said building, or rather, as Ruperta Pascual herself stated, to
only six-sevenths of one-half of it, the other half belonging, to the plaintiffs
themselves, and the remaining one-seventh of the first one-half to the
children of one of the plaintiffs, Elena de Villanueva.
Ruperta Pascual, as the guardian of her minor children, the herein
defendants, petitioned the Curt of First Instance of Ilocos Norte for
authorization to sell "the six-sevenths of the one-half of the warehouse,
together with its lot." The plaintiffs — that is Alejandra Mina, et al. —
opposed claiming that the lot occupied by the warehouse, which they
claimed was their exclusive property. All this action was taken in a special
proceeding in re guardianship.
The plaintiffs did requested the court, through motion, to decide the
question of the ownership of the lot before it pass upon the petition for
the sale of the warehouse. But the court before determining the matter of
the ownership of the lot occupied by the warehouse, ORDERED THE SALE
of this building. Subsequently, the warehouse, together with the lot on
which it stands, was sold to Cu Joco, the other defendant in this case, for
the price mentioned.
ISSUE:
1. WON the sale of Ruperta Pascual in representation of her minor children
can be null and void – NULL & VOID
2. WON there was a commodatum - NO
RULING:
1. He who has only the use of a thing cannot validly sell the thing itself.
The effect of the sale being a transfer of the ownership of the thing, it is
evident that he who has only the mere use of the thing cannot transfer its
ownership. The sale of a thing effected by one who is not its owner is null
and void. The defendants never were the owners of the lot sold. The sale of
it by them is necessarily null and void. On cannot convey to another what
he has never had himself.
2. By the contract of loan, one of the parties delivers to the other, either
anything not perishable, in order that the latter may use it during
the certain period and return it to the former, in which case it is called
commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the
thing belonging to another shall for a certain period. Francisco Fontanilla
did not fix any definite period or time during which Andres Fontanilla could
have the use of the lot whereon the latter was to erect a stone warehouse
of considerable value, and so it is that for the past thirty years of the lot
has been used by both Andres and his successors in interest. The present
contention of the plaintiffs that Cu Joco, now in possession of the lot,
should pay rent for it at the rate of P5 a month, would destroy the theory
of the commodatum sustained by them, since, according to the second
paragraph of the aforecited article 1740, "commodatum is essentially
gratuitous," and, if what the plaintiffs themselves aver on page 7 of their
brief is to be believed, it never entered Francisco's mind to limit the period
during which his brother Andres was to have the use of the lot, because he
expected that the warehouse would eventually fall into the hands of his
son, Fructuoso Fontanilla, called the adopted son of Andres, which did not
come to pass for the reason that Fructuoso died before his uncle Andres.
With that expectation in view, it appears more likely that Francisco
intended to allow his brother Andres a surface right; but this right
supposes the payment of an annual rent, and Andres had the gratuitous
use of the lot.
The Supreme Court held that it was not a commodatum. It is an essential
feature of commodatum that the use of the thing belonging to another
shall be for a certain period. The parties never fixed a definite period
during which Andres could use the lot and afterwards return it.
Atty. Sarona: Do you agree with the holding of the Supreme Court?
Brunx: No ma’am. CHAROT! HAHA We discussed in our contract of sale
that a party even if there is a void title can subsequently by virtue of
delivery vest ownership to another person the title of the said property.
Atty. Sarona: In this case there was no transfer of ownership but will that
affect the validity of the sale?
Brunx: No ma’am.
Atty. Sarona: Alright. Thank you. So here this is a 1913 case ha, there was a
sale of land belonging to another. What the SC stated here na null and void
siya kasi daw you cannot sell something that you cannot own but again
what you should have learn sa sales, ownership over the subject matter in
a contract of sale is not essential for its validity. But it is only essential upon
DELIVERY during the consummation stage. Notwithstanding the validity of
the sale, it is still the same thing over here. Walang transfer of ownership
which could give rise to a valid delivery by virtue of that sale. Now here,
remember again the essential feature of the commodatum is that it refers
with the use of the thing and it belongs to another person. And that it is for
a CERTAIN PERIOD and that contract is ESSENTIALLY GRATUITOUS. The
facts of the case it appears that more likely Francisco who had intended to
allow his brother Andres to use the property as to reserve his right. This
right presupposes as an annual rent and Andres has the gratuitous use of
the lot. For that reasons, the ruling of SC is to annul the sale of the said lot.
They were still allowed to use it but the contract of sale nevertheless na
annul. Pero hindi dapat sana yun ang remedy yung annulment kasi valid
ang sale as you learned in Sales. Hindi lang ma transfer ang ownership
right to Cu Joco the subsequent buyer kasi nga walang right kahit sila nag-
possess, walang transfer of ownership. Whether or nor commodatum yun
or contract of lease hindi sila ang may-ari. They cannot transfer ownership
of the said property.
ART. 1938. The bailor in commodatum need not be the owner of the thing
loaned.
Atty. Sarona: The one who lends the property need not to be the owner of
the property. Why is it not required? Because in commodatum, ownership
does not pass to the bailee. He must have possessory interest thereof so
that we can see that he has the right to other person to make use of the
subject matter. AS LONG THERE IS NO EXPRESS PROHIBITION. Same thing
with usufructuary, walang transfer of ownership pero the person is entitled
of the fruit and the use of the property. He can allow another person to
make use of the sale of the said fruits. Again, even if he is not the owner
thereof.
Nov. 15, 2013 Part II. Zar Gido
Article 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third
person. However, the members of the bailee's household may make use of
the thing loaned, unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use.
Purely Personal
5|F i r s t E x a m C o v e r a g e
(1) If you are the bailor, remember you’re lending your thing to another
person gratuitously. So essentially you are allowing it to be used by
somebody you trust , so personal. It is based on character, credit and
conduct of the borrower – these three characteristics are taken into
consideration by the bailor before he allows this bailee to make use of the
property. Being purely personal in character, if either the bailor or the
bailee dies then the contract of commodatum is extinguished. The right
and obligations arising from a contract of commodatum is not transferrable
to their respective heirs – so intransmissible.
Exemption is when admitted by the parties the right of the bailers and the
bailees can be transmitted to their heirs . If two or more bailees – if one of
the bailee dies it will not extinguish the contract as a general rule an
exemption is an agreement of the parties to the contrary.
Relate to this 1178 of the Civil Code
Article 1178. Subject to the laws, all rights acquired in virtue of an
obligation are transmissible, if there has been no stipulation to the
contrary.
Obligations And Contracts
General rule: Transmissible
Exemption : Stipulation to the contrary
But specifically in Commodatum
General rule: Intransmissible,
Exemption: Stipulation that it can be transmitted
(2) General rule here is the bailee cannot lend nor lease the object of the
contract to a third person. – so we said that a bailor can entertain
commoatum and allow another person to make use of another thing even
if he is not the owner thereof as long as he has possessory interest now
with regard to the bailee who enters into a contract of commodatum? –
can he allow another to use the said property or the subject matter? Can
he enter to a subsequent commodatum? Can he enter to a contract of
lease involving the same subject matter? – 1939 tells us General Rule, he
cannot do so. Bailee cannot lend or lease the object to a third person of
course subject to exemptions, stipulation to the contrary. However the
members of the bailee's household may make use of the thing loaned,
exemption: (1) stipulation to the contrary (2) unless the nature of the thing
forbids such use (example is a dress)
De Los Santos vs Jarra
What is involved here are carabaos. There is no issue regarding
commodatum, the issue is more so on what is the duty imposed upon the
bailee.
Ruling: The carabaos delivered to be used not being returned by the
defendant upon demand, there is no doubt that she is under obligation to
indemnify the owner thereof by paying him their value.
Although it is true that in a contract of commodatum the bailor retains the
ownership of the thing loaned, and at the expiration of the period, or after
the use for which it was loaned has been accomplished, it is the imperative
duty of the bailee to return the thing itself to its owner, or to pay him
damages if through the fault of the bailee the thing should have been lost
or injured.
Article 1940. A stipulation that the bailee may make use of the fruits of the
thing loaned is valid.
Right to use is distinct from the right to enjoy the fruits. There must be that
stipulation so that the bailee may be allowed to make use the fruits, in the
absence of that stipulation we have already discussed na hindi siya covered
sa commodatum. The use of the fruits must be incidental to the use of the
thing itself otherwise if the right to use the fruits is the main cause you do
not have a commodatum but you have a usufruct.
Obligations of the Bailee
Article 1941. The bailee is obliged to pay for the ordinary expenses for the
use and preservation of the thing loaned.
The reason is that the borrower acquires the use of the said thing so
therefore to be able to use it he has to enter the ordinary expenses – this is
in relation to the other duties imposed upon the debtors sa obligation, to
take good care of the thing with the diligence of a good father of a family.
Examples of ordinary expenses are pinahiram na sasakyan – the fuel,
washing, motor oil.
Article 1942. The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
General Rule
The Bailee is not liable for loss or damage of the thing due to a fortuitous
event we apply here the principle of resperi domino whrein the owner
therein bears the loss. 1942 gives us the instances wherein the bailee is
nevertheless libl even if the thing was loss due to a fortuitous event.
(1) If he devotes the thing to any purpose different from that for which it
has been loaned;
This is an improper act on the part of the bailee, this shows bad faith an
therefore he should still be held liable
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted;
In this case there is already delay. So basic rule in obligations and contract
– if there is already delay even if the thing is loss due to a fortuitous event
the debtor will still be liable, obligation will not be extinguish. Of course
when you say delay here again this is legal default, there is delay or legal
default upon demand whether judicial or extra judicial – so that’s the same
thing here
(3) If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exempting the bailee from responsibility in case of a
fortuitous event;
So exemption here is when there is appraisal because with that appraisal it
is clear that the intention here is to make the bailee liable. Bakit mo lagyan
ng value yung pinahiram mo? Because that intention that in case of loss
the borrower shall be liable, now when there is a stipulation wherein
despite appraisal the debtor will not be held liable in case of fortuitous
event then that is a valid exemption so that is an exemption to the
exemption
(4) If he lends or leases the thing to a third person, who is not a member of
his household;
This is in relation to commodatum made purely personal in character.
(5) If, being able to save either the thing borrowed or his own thing, he
chose to save the latter.
This is an act of ingratitude.
Article 1943. The bailee does not answer for the deterioration of the thing
loaned due only to the use thereof and without his fault.
This time it talks about deterioration which deals with the ordinary wear
and tear or the ordinary depreciation of the subject matter. In this case the
ordinary wear and tare will be borne by the bailor. The bailee will only be
liable if the deterioration in due only to his fault or negligence or it devotes
the thing to a different purpose as provided in 1942.
Article 1944. The bailee cannot retain the thing loaned on the ground that
the bailor owes him something, even though it may be by reason of
expenses. However, the bailee has a right of retention for damages
mentioned in article 1951.
General rule is clear in 1944 the bailee has no right to retain the thing
loaned as security for claims he has against the bailor.
Let us say the bailee was allowed to use a car of the bailor, it so happens
that the bailor has also barrowed money from the bailee – 2 contracts yun
(1) commodatum, subject matter is the car wherein the bailor allows the
bailee to make use of his car (2) simple loan, pinahiram ni bailee the
creditor si bailor the debtor – incase si bailor debtor hindi naka bayad ng
utang can the bailee creditor retain the car because the bailor debtor failed
to pay? 1944 is clear he has no right to retain as a form or security, the
exemption you will see that later on in 1951. Do not confuse this with the
concept of set-off or compensation. Remember one of the requisites of
compensation (oblicon) is that it is similar in nature (nag hiram napera ung
isa nag hiram din ng pera). Here it is not allowed since the nature of the
obligation in commodatum is different from that of a simple loan. In
commodatum to make use and to deliver sa loan in fact there is a transfer
of ownership.
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE vs. CA, HEIRS
OF EGMIDIO OCTAVIANO and JUAN VALDEZ
Here while it is true that they are in possession of the said lot, they were in
possession thereof as barrowers in commodatum and this commudatum is
up until 1951 wherein the petitioner repudiated the thrust by declaring
the property for taxation purposes.
Here it was important to determine whether or not there is a
commudaatum so that they can determine if the rules with regard to
6|F i r s t E x a m C o v e r a g e
acquisitive prescription is applicable as you may have learned already in
land titles ordinary acquisitive prescription requires 10 years with just title,
extra ordinary prescription in 30 years.
Private respondents were able to prove that their predecessors' house was
borrowed by Vicar after the church and the convent were destroyed. They
never asked for the return of the house, but when they allowed its free
use, they became bailors in commodatum and Vicar, the bailee. The
bailees' failure to return the subject matter of commodatum to the bailor
did not mean adverse possession on the part of the borrower. The bailee
held in trust the property subject matter of commodatum. The adverse
claim of Vicar came only in 1951 when it declared the lots for taxation
purposes.
So they were not in possession of the property for 30 years, may they be in
possession for 10 years but nonetheless there is no just title here there is
no possession in good faith wherein the 10 year period is applicable.
Article 1945. When there are two or more bailees to whom a thing is
loaned in the same contract, they are liable solidarily.
Why is that their liability is solidary? This is to safeguard the the rights of
the sender. We also take into account the personal interrity and
responsibility of aall the bailees since what we have here is a purely
personal contract. If you remember under your obligations and contract
the genral rule is that the liability would be joint now it is only considered
as solidary when it is provided by law orby nature of the obliagation or the
stipulation of the parties. You can see that o article 1207 and 1208
Article 1207. The concurrence of two or more creditors or of two or more
debtors in one and the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is a solidary liability
only when the obligation expressly so states, or when the law or the nature
of the obligation requires solidarity.
Article 1208. If from the law, or the nature or the wording of the
obligations to which the preceding article refers the contrary does not
appear, the credit or debt shall be presumed to be divided into as many
shares as there are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the Rules of Court
governing the multiplicity of suits.
1207 and 1208 applies to contracts in general do not cofuse that with
commodatum wherein the liability of the bailees is solidary and this is
imposed by law so even if the parties do not stipulate the liability would
still be solidary
Overview of the liability of the bailee
- He has the obligation to pay for ordinary expenses
- He has the obligation to return the thing and take good care of it with a
diligence of a good father of the family.
- As to the loss due to fortuitous event, not liable si bailee unless it is one
of those enumerated in 1942
- Deterioration as a general rule the bailee is not liable because this is
ordinary wear and tear exemption of course is if the bailee is negligent
or has mae use of the subject matter other than that stipulated
- The bailee has no right to retain the subject matter as a security
exemption later on in 1951
- The nature of the liability is solidary in regard to 2 or more more
bailees.
Obligations of the Bailor
ARTICLE 1946. The bailor cannot demand the return of the thing loaned till
after the expiration of the period stipulated, or after the accomplishment of
the use for which the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he may demand its
return or temporary use.
Now on the part of the bailor he must allow the bailee t use th thing loaned
for the duration of the period agreed by them or until the accomplishment
of the purpose. Exception: if there is an urgent need, the bailor can
demand for the return of the thing if he needs it urgently temporarily to
answer for his urgent need. It must only be temporarily and he must return
it to the bailee. So while the thing is in the temporary use of the bailor
commodatum if temporarily suspended.
Article 1947. The bailor may demand the thing at will, and the contractual
relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing
loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
There are 2 kinds of commodatum (1) ordinary commodatum (2)precarium
. this is what is provided in article 1947. Precarium is that kind of
commodatum where the bailore may demand the thing at will, not for a
specific period, not for a specific purpose but can demand the thing at will.
The contract by which loan of a thing at the request of another person
gives the latter (bailee) the thing for use as long as the loaner please.
Quintos vs Beck
Here there was a lease in regard of the house and a commodatum as to the
fornitures. It was a cmmodatum because in this case the plaintiff
gratuitously granted the use of furniture to the defendant reserving to
herself the ownership thereof it was considered and it should be
considered as a precarium because the defendant bound himself to return
the furniture upon the demand of the plaintiff.
As the defendant had voluntarily undertaken to return all the furniture to
the Plaintiff, upon the latter's demand, the Court could not legally compel
her to bear the expenses occasioned by the deposit of the furniture. The
bailee, was not entitled to place the furniture on deposit; nor was the
plaintiff under a duty to accept the offer to return the furniture, because
the defendant wanted to retain the three gas heaters and the four electric
lamps. The cost here must be borne by the defendant (bailee)
So precarium is subject to the revocation of the bailor at anytime, you
compare it to an ordinary commodatum possession of the bailee is more
secure for he has the right to return the thing loaned until the expiration
agreed upon or the accomplishment of the use for which the commodatum
had been constituted.
Article 1948. The bailor may demand the immediate return of the thing if
the bailee commits any act of ingratitude specified in article 765.
-----------
Article 765. The donation may also be revoked at the instance of the donor,
by reason of ingratitude in the following cases:
(1) If the done (bailee) should commit some offense against the person, the
honor or the property of the donor, or of his wife or children under his
parental authority;
(2) If the donee imputes to the donor any criminal offense, or any act
involving moral turpitude, even though he should prove it, unless the crime
or the act has been committed against the donee himself, his wife or
children under his authority;
(3) If he unduly refuses him support when the donee is legally or morally
bound to give support to the donor.
The premise here, commodatum is similar sa donation essentially
gratuitous, so if any of this acts ingratitude is committed then it shows that
the bailee is unworthy of the trust that the bailor has given upon him by
the bailor.
How about extra-ordinary expenses? as regard to the bailee the applicable
provision in 1949
Article 1949. The bailor shall refund the extraordinary expenses during the
contract for the preservation of the thing loaned, provided the bailee brings
the same to the knowledge of the bailor before incurring them, except
when they are so urgent that the reply to the notification cannot be
awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of the
thing by the bailee, even though he acted without fault, they shall be borne
equally by both the bailor and the bailee, unless there is a stipulation to the
contrary.
There are 2 extraordinary expenses (1) for the preservation of the thing
loaned, this is borne by the bailor,for example the subject matter has been
damaged by a calamity, the bailor profits from the said expenses because
again there is no transfer of ownership and therefore if the bailee has
incurred expenses the bailor must refund the bailee provided 1949 the
bailee informed the bailor before incurring them exemption bailor can still
be held liable or be compeled to make reimbursement even with the
absence of the notice if the extra ordinary expense was necessary for an
urgent need of preserving the property.
Extraordinary expenses arising from the actual use of the thing loaned for
example the cost of the rapair of a care which was damaged due to a
collision the rule here is hati sila – borne equally by the bailor and the
bailee because this is derived by the use of the bailee and this will
eventually be returned to the bailor, of course pwede hindi divided by 2 if
there is a different stipulation.
7|F i r s t E x a m C o v e r a g e
Article 1950. If, for the purpose of making use of the thing, the bailee incurs
expenses other than those referred to in articles 1941 and 1949, he is not
entitled to reimbursement.
This may refer to ostentatious or decoration expenses the bailee will
shoulder.
Article 1951. The bailor who, knowing the flaws of the thing loaned, does
not advise the bailee of the same, shall be liable to the latter for the
damages which he may suffer by reason thereof.
We mentioned earlier that with regard to the right to retain the thing 1944.
We said general rule cannot retain exemption is 1951. So if an instance in
1951 is present then the bailee has the right to retain the thing.
Requisites for 1951 to apply:
1. There is a flaw in the subject matter
2. The flaw or defect is hidden
3. Bailor must be aware thereof
4. Despite knowledge of the bailor, he did not advise the bailee of
such defect
5. Because of the defect the bailee suffered damages
In this case the bailor is in bad faith and 1944 gives the bailee to retain the
subject matter until the bailor pays damages to him. Take note that what
is given to the bailee is the right to retain but not the right to resell the said
property.
The rule in sale with regard to breach of warranty against hidden defects.
In hidden defect whether or not the vendor is aware h would still be liable
but here the hiden defect in 1951 if it turns out that the bailor is not aware
of the said flaw then he cannot be held liable since he is in good faith and it
was merely gratuitous.
Article 1952. The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the bailee.
For example a car retained by the bailee, then the bailor would say na hindi
na ako mag bayad sayo na yung car – then it turns out yung car sira na kasi
nga it met an accident. That cannot exempt the bailor from paying
damages. Expenses or damages may exceed the cost of the thing loaned,
therefore it would be unfair if you allow the bailor to abandon the thing
instead of paying the expenses or damages arising from the flaw or the
defect.
Overview
- General rule the bailor cannot demand the return of the thing before
the expiration of the period agreed upon of the accomplishment of the
purpose; exemption if there is an urgent need (rule is applicable only in
an ordinary commodatum)
- Because if you talk about precarium the bailor may demand its return at
anytime.
- The right to immediate return is given to the bailor in case of
ingratitude.
- Bailor also needs to refund the bailee for extraordinary expenses and
liabilities for damages in 1951 and no right of abandonment for
damages.
November 20, 2013. Danielle Miles
Art 1953: A person who receives a loan of money or any other fungible
thing acquires the ownership thereof and is bound to pay to the creditor an
equal amount of the same kind and quality.
A simple loan or mutuum is a contract where one of the parties delivers to
another money or other consumable thing with the understanding that the
same amount of the same kind and quality shall be paid. This contract
involves return of the equivalent only unlike in commodatum where
the obligation is to return the identical thing. That is the obligation in
mutuum. Remember we made a distinction that in mutuum there is
transfer of ownership. The obligation in mutuum is actually an obligation
to pay unlike in commodatum the obligation is to return since there is no
transfer of ownership.
Since there is a transfer of ownership in mutuum, the borrower in a simple
loan can therefore dispose the thing he borrowed since ownership has
been transferred to him. If he disposes it, he cannot be liable for estafa
since there is no misappropriation since he already owned the subject
matter.
Distinguished contract of loan (mutuum) as to a contract of lease (rent):
 1. Loan signifies delivery of money or some other
consumable thing to another with a promise to repay an
equivalent amount of the same kind and quality but not a
promise to return the same thing loaned which becomes the
property of the obligor.
2. The contract of rent is a contract by which one of the
parties delivers to another some non-consumable thing in order
that the latter may use it during a certain period and return it to
the former. In a contract of rent, the owner or lessor of the
property does not lose his ownership. He simply loses his over
the property rented during the period of the contract.
3. In a contract of loan, the relation between the parties is
that of obligor and oblige, while in a contract of rent the relation
is that of landlord and tenant
4. In a contract of loan, the creditor receives payment for his
loan, while in a contract of rent, the owner of the property
rented receives the compensation or price either in money,
provisions , chattels or labor from the occupant thereof in return
for its use.
So take a look at art 1953, the subject matter is money or any fungible
thing. Sa commadatum, ordinarily not consumable. Is there a difference
between fungible and consumable thing?
Technically, when we say a thing is fungible it usually deals with by
number, weight or measure such as rice, oil, sugar etc. so that any given
unit or portion is treated as the equivalent of any other unit or portion.
So here fungible things belong to common genus which includes several
species of the same kind.
No, there is no difference. They are used interchangeably. In 1953, the
term fungible actually refers to consumable thing.
BPI VS CA
HELD: A CONTRACT OF LOAN ( whether commadatum or mutuum) IS A
REAL CONTRACT. It must be perfected upon delivery. In this case, why is
important to determine if there is a perfected contract on march 31, 1981
so that it can be determined when the amortization will begin. The
contract of loan was only perfected on sept 13, 1982, that was only the
time respondent was liable for the monthly amortization when the full loan
was released to respondents. Respondent did not incurr in delay when it
did not pay on may 1, 1981. My question, what happen on march 31,
1981? Is there a perfected contract?
No perfected contract of loan but there was a valid contract of simple
contract but not a contract of loan since there was no delivery yet of the
subject matter.
Art 1954: A contract whereby one person transfers the ownership of non-
fungible things to another with the obligation on the part of the latter to
give things of the same kind, quantity and quality shall be considered a
barter.
Mutuum and commadatum distinguished from barter:
1. In subject matter, mutuum is money or other fungible
things while in barter , non fungible things.
2. In commadatum, the bailee is bound to return the identical
thing borrowed when the time has expired or the purpose has
been served. In barter, the equivalent thing is given in return for
what has been received.
3. Mutuum may be gratuitous and commadatum is always
gratuitous. Barter on the other hand is an onerous contract. It is
really a mutual sale.
Art 1955: The obligation of a person who borrows money shall be
governed by the provision of articles 1249 and 1250 of this code.
Art 1249: The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order or bills of exchange or
other mercantile documents shall produce the effect of payment only
when they have been cashed or when through the fault of the creditor
they have been impaired.
Art 1250 : In case of extraordinary inflation or deflation of the currency
8|F i r s t E x a m C o v e r a g e
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment unless there is
an agreement to the contrary.
So subject matter in mutuum is loan of money or fungible things.
If it’s a loan of money, payment must be made in the currency stipulated.
In case of extraordinary inflation, the basis of payment shall be the value of
the currency at the time of the creation of the obligation.
If loan for a fungible thing, the obligation is to pay the lender another thing
of the same kind , quality or Quantity. In case it is impossible to do so, it
shall pay its value at the time of the perfection of the loan.
ART 1956: No interest shall be due unless it has been expressly stipulated in
writing.
We’re talking about interest here. The requirement of interest to be in
writing only applies to contract of mutuum. The interest here is demanded
for the use of money .
KINDS OF INTEREST:
1. Simple interest - this is which is paid for the principal at a certain rate
as stipulated by the parties.
2. Compound interest - imposed upon interest due date and unpaid.
The accrued interest is added to the principal and the total is treated as the
new principal upon which the interest for the next period is due.
As a general rule, compound interest is not applicable if not stipulated by
the parties. A lender cannot demand compounded interest if they haven’t
agreed upon it.
3. Legal interest - which the law directs in the absence of any
agreement as to the rate between the parties.
As for the first two interest, wala na ito kasi suspended ang Usury Law.
Under 1956, for recovery of the interest, the following requisites are:
1. The payment of interest must be expressly stipulated
2. It must be in writing
3. The interest must be lawful (usury law has been suspended)
If the parties has stipulated the interest in writing, that is the imposable
interest. If the parties failed to indicate the interest , the applicable interest
would be the legal rate of interest.
We have two concepts of interest here:
1. Monetary interest – one mentioned in 1956.
2. Compensatory interest – interest imposed by law or by the
courts as penalty or indemnity for damages.
If there is delay in the performance of the obligation, there can be liability
for interest as indemnity for damages even in the absence of the
stipulation for payment of interest.
Now how about…
Art 2209. If the obligation consist in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon and in the absence of stipulation, the legal interest which is 6% per
annum.
It is not confined to loan or forbearance of money. It has been applied to
cases in default under a contract of sale or action for damages on injury
arising from insurance claims.
What is forbearance of money?
Here there is the contractual obligation of lender or creditor to refrain
during a given period of time from requiring debtor to repay the loan or
debt then due or payable.
PNB VS IBBAROLA
HELD: The rate to be imposed is 6%. There was no contract of loan. Plus
also compensatory interest of 12% as to the interest after the judgment
was rendered. Circular 416 issued by central bank imposes 12% for loans
or forbearance of money or cases where money is transferred from one
person to another and the obligation to return has already been adjudged
otherwise we impose the 6%.
Now, this circular 416 was issued on 1974. Now on july 1, 2013 , there is a
new circular – 299 series of 2013 took effect last july 1, 2013 - the rate of
interest for the loan or forbearance of money, goods or credits and the
rate allowed in judgements in the absence of express contract on the rate
of interest shall be 6%.
Note: We still have to consider Circular 416 for cases BEFORE July 1, 2013.

PILIPINAS BANK VS CA
HELD: As to the excess amount, it should be imposed with the 12% since
the obligation to return the excess is already a forbearance of money. As
to the main obligation to the contract of sale, we apply 6% since it was not
a contract of loan or forbearance of money.
November 22, 2013. Jase Tan
Last Wednesday, we already discussed the contract of mutuum. We
emphasized its distinction from the contract of commodatum as well as
other contracts. Take note that in the case of BPI vs CA, we have
emphasized that a contract of mutuum is a real contract perfected by
delivery. We also took into consideration, Article 1945(?!) in realtion to
Arts. 1249 and 1250 (?!) under your obligations and contracts. We have
also emphasized that unlike a contract of commodatum, there is a transfer
of ownership in a contract of mutuum. Since there is a transfer of
ownership, the borrower has a free disposal of the thing borrowed.
YONG CHAN KIM vs. PEOPLE
Yong Chan Kim was employed as a Researcher at the Aquaculture
Department of the Southeast Asian Fisheries Development Center
(SEAFDEC).
On 15 June 1982, petitioner was issued Travel Order No. 2222. Under this
travel order, he received P6,438.00 as cash advance to defray his travel
expenses.
Within the same period, petitioner was issued another travel order, T.O.
2268 and petitioner received a cash advance of P495.00.
On 14 January 1983, petitioner presented both travel orders for
liquidation, submitting Travel Expense Reports to the Accounting Section.
When the Travel Expense Reports were audited, it was discovered that
there was an overlap of four (4) days (30 June to 3 July 1982) in the two (2)
travel orders for which petitioner collected per diems twice. In sum, the
total amount in the form of per diems and allowances charged and
collected by petitioner under Travel Order No. 2222, when he did not
actually and physically travel as represented by his liquidation papers, was
P1,230.00.
In September 1983, two (2) complaints for Estafa were filed against the
petitioner before MTC and RTC which convicted him.
Issue: Whether or not Yong Chan is liable for estafa.
Held: No, there was a simple loan which ownership passes to barrower.
Since ownership of the money (cash advance) was transferred to Yong
Chan, no fiduciary relationship was created. Absent this fiduciary
relationship between petitioner and private respondent, which is an
essential element of the crime of estafa by misappropriation or conversion,
petitioner could not have committed estafa.
It is undisputed that petitioner received a cash advance from private
respondent SEAFDEC to defray his travel expenses under T.O. 2222. It is
likewise admitted that within the period covered by T.O. 2222, petitioner
was recalled to the head station in Iloilo and given another assignment
which was covered by T.O. 2268. The dispute arose when petitioner
allegedly failed to return P1,230.00 out of the cash advance which he
received under T.O. 2222. For the alleged failure of petitioner to return the
amount of P1,230.00, he was charged with the crime of Estafa under
Article 315, par. 1(b) of the Revised Penal Code, which reads as follows:
Art. 315. Swindling (Estafa). Any person who shall defraud another by any
of the means mentioned herein below shall be punished by:
xxxxxxxxx
1. With unfaithfulness or abuse of confidence, namely:
(a) xxxxxxxxx
(b) By misappropriating or converting, to the prejudice of another, money,
goods, or any other personal property received by the offender in trust or
on commission, or for administration, or under any other obligation
involving the duty to make delivery of; or to return, the same, even though
such obligation be fatally or partially guaranteed by a bond; or by denying
having received such money, goods, or other property.
In order that a person can be convicted under the abovequoted provision,
it must be proven that he had the obligation to deliver or return the same
money, good or personal property that he had received.
9|F i r s t E x a m C o v e r a g e
Was petitioner under obligation to return the same money (cash advance)
which he had received? We belive not. Executive Order No. 10, dated 12
February 1980 provides as follows:
B. Cash Advance for Travel
xxxxxxxxx
4. All cash advances must be liquidated within 30 days after date of
projected return of the person. Otherwise, corresponding salary deduction
shall be made immediately following the expiration day.
Liquidation simply means the settling of an indebtedness. An employee,
such as herein petitioner, who liquidates a cash advance is in fact paying
back his debt in the form of a loan of money advanced to him by his
employer, as per diems and allowances. Similarly, as stated in the assailed
decision of the lower court, "if the amount of the cash advance he received
is less than the amount he spent for actual travel . . . he has the right to
demand reimbursement from his employer the amount he spent coming
from his personal funds. In other words, the money advanced by either
party is actually a loan to the other. Hence, petitioner was under no legal
obligation to return the same cash or money, i.e., the bills or coins, which
he received from the private respondent.
Article 1933 and Article 1953 of the Civil Code define the nature of a simple
loan.
Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
The ruling of the trial judge that ownership of the cash advanced to the
petitioner by private respondent was not transferred to the latter is
erroneous. Ownership of the money was transferred to the petitioner.
Since ownership of the money (cash advance) was transferred to
petitioner, no fiduciary relationship was created. Absent this fiduciary
relationship between petitioner and private respondent, which is an
essential element of the crime of estafa by misappropriation or conversion,
petitioner could not have committed estafa.
Here the ownership of the money was transferred to the petitioner and
since there was transfer of ownership there could be no liability for estafa
because there was no fiduciary relationship was created. A fiduciary
relationship is an essential element in the crime of estafa and since there
was none established here the petitioner is not liable for estafa.
Another interesting case here is the case of
Spouses Tan vs. Villapaz
With regards to the existence of the contract of loan:
On February 6, 1992, Carmelito Villapaz (respondent) issued a Philippine
Bank of Communications (PBCom) crossed check in the amount of
P250,000.00, payable to the order of petitioner Tony Tan. On the same
day, the check was deposited at the drawee bank, PBCom Davao City
branch, to the account of petitioner Antonio Tan also at said bank.
On November 7, 1994, Villapaz filed before the Digos, Davao del Sur RTC a
Complaint for sum of money against the Spouses Tan, alleging that, on
February 6, 1992, the Spouses Tan repaired went to his place of business at
Malitaand obtained a loan of P250,000.00, hence, his issuance of the
February 6, 1992 PBCom crossed check which loan was to be settled
interest-free in six (6) months. He further alleges that on the maturity date
of the loan (August 6, 1992), petitioner Antonio Tan failed to settle the
same, and despite repeated demands, petitioners never did.
The Spouses Tan, denying having gone to Malita and having obtained a
loan from Villapaz, alleged that the check was issued by Villapaz in Davao
City on February 6, 1992 "in exchange for equivalent cash". They alleged to
have never received from Villapaz any demand for payment, be it verbal or
written, respecting the alleged loan. Since the alleged loan was one with a
period — payable in six months, it should have been expressly stipulated
upon in writing by the parties but it was not, hence, the essential requisite
for the validity and enforceability of a loan is wanting; and the check is
inadmissible to prove the existence of a loan for P250,000.00.
The CA held that the existence of a contract of loan cannot be denied
merely because it is not reduced in writing. Surely, there can be a verbal
loan. Contracts are binding between the parties, whether oral or written.
The law is explicit that contracts shall be obligatory in whatever form they
may have been entered into, provided all the essential requisites for their
validity are present. A loan (simple loan or mutuum) exists when a person
receives a loan of money or any other fungible thing and acquires the
ownership thereof. He is bound to pay to the creditor the equal amount of
the same kind and quality. Contracts are perfected by mere consent, and
from that moment the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which,
according to their nature, maybe in keeping with good faith, usage and law.
ISSUE: WON there was a contract of loan. YES.
RULING: That apart from the check no written proof of the grant of the
loan was executed was credibly explained by respondent when he declared
that petitioners’ son being his godson, he, out of trust and respect,
believed that the crossed check sufficed to prove their transaction.
As for petitioners’ reliance on Art. 1358 of the Civil Code, the same is
misplaced for the requirement that contracts where the amount involved
exceeds P500.00 must appear in writing is only for convenience.
At all events, a check, the entries of which are no doubt in writing, could
prove a loan transaction.
Alright here the issue was with the existence of the loan, the issuance of
the check proved that the grant of the loan was executed. The reliance on
Article 1358 (enumeration as to the contracts that needs to be in special
form in relation to Article 1357) to prove the existence of a loan is
misplaced since the requirement is merely for convenience and not for its
validity. There is no need to enter into a separate contract to prove the
existence of the loan. For those who are taking negotiable instruments one
of the principles there is that a nego instrument is proof of an
indebtedness and also a proof of payment. So that principle is also
applicable here. A check can prove the existence of a loan.
Last meeting we also talked about Article 1956 which provides that no
interest shall be due unless it has been expressly stipulated in writing. We
have emphasized that this requirement is also applicable to a contract of
loan. However there are cases where interest is demandable even if it is
not in writing. Now take note that we have two kinds of interests: 1.
Monetary interest and 2. Compensatory interest which deals with
indemnity for damages as well as penalties.
SEBASTIAN SIGA-AN vs. ALICIA VILLANUEVA
Facts: • Villanueva is a businesswoman engaged in supplying office
materials to the Phil. Navy Office (PNO) while Siga-an was a military officer
and comptroller of PNO.
• 1992 – Villanueva claimed that Siga-an offered to loan her the amount of
P540,000 which she accepted. The loan agreement was not reduced in
writing and there was no stipulation as to the payment of interest for the
loan.
• Aug 31, 1993 – Villanueva issued a check worth P500,000 as partial
payment of the loan
• Oct. 31, 1993 – Villanueva issued another check in the amount of
P200,000 as payment of the remaining balance of the loan.
• Siga-an told Villanueva that the excess amount would be applied as
interest for the loan and pestered her to pay additional interest. Siga-an
also threatened to disapprove her transactions with the PNO if she would
not comply with his demand. Thus, she paid additional amounts in cash
and checks as interests for the loan. The total amount she paid to Siga-an
accumulated to P1.2M.
• Upon being advised by her lawyer, Villanueva filed a complaint for sum of
money against Siga-an.
• Siga-an denied the averments of Villanueva.
• RTC rendered a decision ordering Siga-an to refund the excess amount to
Villlanueva. It concluded that since Villanueva made an excess payment to
Siga-an through mistake, Siga-an should return the said amount pursuan to
the principle of solution indebiti.
• CA affirmed in toto the RTC Decision.
ISSUE: WON the RTC and CA erred in applying the principle of solutio
indebiti. – NO
HELD:
• Art. 1960, CC provides that if the borrower of loan pays interest when
there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied.
• Article 2154 of the Civil Code explains the principle of solutio indebiti.
10 | F i r s t E x a m C o v e r a g e
Said provision provides that if something is received when there is no right
to demand it, and it was unduly delivered through mistake, the obligation
to return it arises. In such a case, a creditor-debtor relationship is created
under a quasi-contract whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the
person who has no right to receive such payment becomes obligated to
return the same.
• 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. We have held that the principle of solutio indebiti
applies in case of erroneous payment of undue interest.
• In the case at bar, it was duly established that respondent paid interest to
petitioner. Villanueva was under no duty to make such payment because
there was no express stipulation in writing to that effect. There was no
binding relation between Siga-an and Villanueva as regards the payment of
interest. The payment was clearly a mistake. Since Siga-an received
something when there was no right to demand it, he has an obligation to
return it
On the determination of WON there was a stipulated interest:
• Article 1956 of the Civil Code, which refers to monetary interest,
specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. As can be gleaned from the foregoing
provision, 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. Thus, we
have held that collection of interest without any stipulation therefore in
writing is prohibited by law.
• Petitioner presented a handwritten promissory note dated 12 September
1994 wherein respondent purportedly admitted owing petitioner "capital
and interest." Respondent, however, explained that it was petitioner who
made a promissory note and she was told to copy it in her own
handwriting. Unaware of the law on interest and fearing that petitioner
would make good of his threats if she would not obey his instruction to
copy the promissory note, she copied the promissory note in her own
handwriting. Thus, it was made without her consent.
• There are instances in which an interest may be imposed even in the
absence of express stipulation, verbal or written, regarding payment of
interest. Article 2209 of the Civil Code states that if the obligation consists
in the payment of a sum of money, and the debtor incurs delay, a legal
interest of 12% per annum may be imposed as indemnity for damages if no
stipulation on the payment of interest was agreed upon. Likewise, Article
2212 of the Civil Code provides that interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be
silent on this point.
So it’s very clear here that there was no compliance with Article 1956
which states that the interest rate must be expressly stipulated in writing.
So collection of interest without stipulation in writing is prohibited law.
Obviously petitioner and respondent entered into a contract loan but there
was no stipulation as to the rate of interest. Therefore Siga-an cannot
collect payment of the interest from Villanueva. Compensatory interest
cannot also be applied here because what is involved here was monetary
interest and Villanueva was not shown to have been in default.
Also last meeting we have discussed the different kinds of interests e.i.
simple, compounded and we gave important distinctions to them. We also
discussed that the Usury Law has been suspended and also CB Circular 416
which mandates a 12% rate to (1) loans; (2) forbearance of any money,
goods or credit; and (3) rate allowed in judgments (judgments spoken of
refer to judgments involving loans or forbearance of any money, goods or
credits) and is no longer in effect since we have a new Circular 799 which
lowered said rate to 6%.
Now how about penalties? We have the case here of
ANTONIO TAN vs. COURT OF APPEALS and the CULTURAL CENTER OF THE
PHILIPPINES G.R. No. 116285 October 19, 2001
Facts: On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained 2
loans each in the principal amount of P2,000,000.00, or in the total
principal amount of P4,000,000.00 from respondent Cultural Center of the
Philippines (CCP) evidenced by two (2) promissory notes with maturity
dates on May 14, 1979 and July 6, 1979, respectively.
Petitioner defaulted but after a few partial payments he had the loans
restructured by respondent CCP, and petitioner accordingly executed a
promissory note on August 31, 1979 in the amount of P3,411,421.32
payable in 5 installments. Petitioner Tan failed to pay any installment on
the said restructured loan, the last installment falling due on December 31,
1980
On August 29, 1984, respondent CCP filed a complaint for collection of a
sum of money against the petitioner after the latter failed to settle his said
restructured loan obligation.
In affirming the decision of the trial court imposing surcharges and interest,
the appellate court held that:
We are unable to accept appellant’s (petitioner’s) claim for modification on
the basis of alleged partial or irregular performance, there being none.
Appellant’s offer or tender of payment cannot be deemed as a partial or
irregular performance of the contract, not a single centavo appears to have
been paid by the defendant.
Issue: Whether there are contractual and legal bases for the imposition of
the penalty, interest on the penalty and attorney’s fees.
Ruling:Petitioner claims that there is no basis in law for the charging of
interest on the surcharges for the reason that the New Civil Code is devoid
of any provision allowing the imposition of interest on surcharges.
We find no merit in the petitioner’s contention. Article 1226 of the New
Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
In the case at bar, the promissory note expressly provides for the
imposition of both interest and penalties in case of default on the part of
the petitioner in the payment of the subject restructured loan. The
pertinent6 portion of the promissory note imposing interest and penalties
provides that:
For value received, I/We jointly and severally promise to pay to the
CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the sum of
THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED +
PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx xxx xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from the
date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon
default of payment of any portion of it when due, I/We jointly and
severally agree to pay additional penalty charges at the rate of TWO per
cent (2%) per month on the total amount due until paid, payable and
computed monthly. Default of payment of this note or any portion thereof
when due shall render all other installments and all existing promissory
notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
immediately due and demandable. (Underscoring supplied)
xxx xxx xxx
The stipulated fourteen percent (14%) per annum interest charge until full
payment of the loan constitutes the monetary interest on the note and is
allowed under Article 1956 of the New Civil Code.7 On the other hand, the
stipulated two percent (2%) per month penalty is in the form of penalty
charge which is separate and distinct from the monetary interest on the
principal of the loan.
Penalty on delinquent loans may take different forms. In Government
Service Insurance System v. Court of Appeals,8 this Court has ruled that the
New Civil Code permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of agreement, the
penalty does not include the monetary interest, and as such the two are
different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to
state that such a stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2209 of the
New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began
to accrue from the time of default by the petitioner. There is no doubt that
the petitioner is liable for both the stipulated monetary interest and the
stipulated penalty charge. The penalty charge is also called penalty or
compensatory interest. Having clarified the same, the next issue to be
resolved is whether interest may accrue on the penalty or compensatory
interest without violating the provisions of Article 1959 of the New Civil
Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and
11 | F i r s t E x a m C o v e r a g e
unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added principal,
shall earn new interest.
Penalty clauses can be in the form of penalty or compensatory interest.
Thus, the compounding of the penalty or compensatory interest is
sanctioned by and allowed pursuant to the above-quoted provision of
Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note permitting the
compounding of interest. The fifth paragraph of the said promissory note
provides that: "Any interest which may be due if not paid shall be added to
the total amount when due and shall become part thereof, the whole
amount to bear interest at the maximum rate allowed by law."10
Therefore, any penalty interest not paid, when due, shall earn the legal
interest of 12% per annum,11 in the absence of express stipulation on the
specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall
earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the filing of the
complaint in court by respondent CCP on August 29, 1984. Hence, the
courts a quo did not err in ruling that the petitioner is bound to pay the
interest on the total amount of the principal, the monetary interest and the
penalty interest.
In the case at bar, however, equity cannot be considered inasmuch as
there is a contractual stipulation in the promissory note whereby the
petitioner expressly agreed to the compounding of interest in case of
failure on his part to pay the loan at maturity. Inasmuch as the said
stipulation on the compounding of interest has the force of law between
the parties and does not appear to be inequitable or unjust, the said
written stipulation should be respected.
There appears to be a justification for a reduction of the penalty charge but
not necessarily to ten percent (10%) of the unpaid balance of the loan as
suggested by petitioner. Inasmuch as petitioner has made partial payments
which showed his good faith, a reduction of the penalty charge from two
percent (2%) per month on the total amount due, compounded monthly,
until paid can indeed be justified under the said provision of Article 1229 of
the New Civil Code. In other words, we find the continued monthly accrual
of the two percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been
compounded monthly.
Considering petitioner’s several partial payments and the fact he is liable
under the note for the two percent (2%) penalty charge per month on the
total amount due, compounded monthly, for twenty-one (21) years since
his default in 1980, we find it fair and equitable to reduce the penalty
charge to a straight twelve percent (12%) per annum on the total amount
due starting August 28, 1986, the date of the last Statement of Account.
We also took into consideration the offers of the petitioner to enter into a
compromise for the settlement of his debt by presenting proposed
payment schemes to respondent CCP. The said offers at compromise also
showed his good faith despite difficulty in complying with his loan
obligation due to his financial problems. However, we are not unmindful of
the respondent’s long overdue deprivation of the use of its money
collectible from the petitioner.
In this case there an imposition of loan interest and penalty 14% on the
principal loan and 2% on penalties. The 2% penalty charge is separate from
the principal interest of the loan. Remember that the Civil Code provides
for a payment of interest because of penalties apart from the principal
obligation. These stipulations are valid and they are separate and distinct
from each other as long as the parties voluntary agreed to this kind of
agreement. Now the 2% penalty is charge at the time the petitioner
defaulted on his payments. So that would from the time of the maturity of
the obligation. There is no doubt that petitioner is liable for both the 14%
monetary interest and the 2% penalty charge. Ang 14% per year yun tapos
ang 2% is per month. Now penalty clauses can be in the form of penalty or
compensatory interest. The compounding of penalty or compensatory
interest is sanctioned by the Civil Code. In this case the promissory note
clearly stipulated the compounding of the interest. There is a clause in the
promissory note that states: In case of non-payment of this note at
maturity/on demand or upon default of payment of any portion of it when
due, I/We jointly and severally agree to pay additional penalty charges at
the rate of TWO per cent (2%) per month on the total amount due until
paid, payable and computed monthly.
There is this case of National Power Corporation v. National Merchandising
Corporation,12 where the Court ruled that the imposition of interest on
the damages from the filing of the complaint is unjust where the litigation
was prolonged for twenty-five (25) years through no fault of the
defendant. However, the ruling in the said National Power Corporation
(NPC) case is not applicable to the case at bar inasmuch as our ruling on
the issue of interest in that NPC case was based on equitable
considerations and on the fact that the said case lasted for twenty-five (25)
years "through no fault of the defendant." In the case at bar, however,
equity cannot be considered inasmuch as there is a contractual stipulation
in the promissory note whereby the petitioner expressly agreed to the
compounding of interest in case of failure on his part to pay the loan at
maturity. Inasmuch as the said stipulation on the compounding of interest
has the force of law between the parties and does not appear to be
inequitable or unjust, the said written stipulation should be respected.
Nevertheless the Supreme Court reduced the interest rate not because it
was iniquitous and unconscionable but because petitioner was already in
good faith for having made partial payments. Again take note that there
should be a different agreement as to the principal interest and the penalty
interest compounded.
How about the increase in interest? If you remember in your obligations
and contracts the general rule is that the creditor cannot increase the
interest rate with his own will diba? No increase in the interest shall be due
unless such increase is expressly stipulated.
We have the case of
Pan Pacific Service Contractor & Ricardo vs. Equitable PCI Bank
• Pan Pacific Service Contractorsentered into a contract of mechanical
workswith Equitable PCI for around P20M and also agreed on 9 change
orders for P2M. Total consideration: P23,311,410.30.
• The contract stipulated, among others, that Pan Pacific shall be entitled
to “PRICE ADJUSTMENT” in case of increase in labor costs and material
prices under par. 70. 1 and 70.2 under General Conditions for the
Construction of PCIBank Tower II Extension. And in accordance to such
clause, Pan Pacific claimed price adjustment of P5.1M but to show goodwill
reduced it to P4.8M. The appointed engr. (TCGI Engrs.) of Equitable
however recommended that the price adjustment should be pegged at
P3.7M.
• Due to the continued extraordinary increases in the costs of labor and
materials, Pan Pacific’s operational capital became inadequate for the
project. Respondent however still withheld the payment of the price
adjustment under the escalation clause despite Pan Pacific’s repeated
demands.
• Instead, respondent offered Pan Pacific a loan of P1.8 MIL. Against its will
and on the strength of respondent’s promise that the price adjustment
would be released soon, Pan Pacific executed a promissory note in the
amount of P1.8Mand also posted a surety bond for the loan. Such amount
was released directly to laborers and suppliers and not a single centavo
was given to Pan Pacific.
• Respodent did not pay price adjustment and merely kept on promising.
Meanwhile the loan matured hence it was now respondent who demanded
such payment plus interest and penalty.
• Respondent’s contention:It won’t not release any amount of the price
adjustment to Pan Pacific but it would offset the price adjustment with Pan
Pacific’s outstanding balance of P3.2M representing the loan, interests,
penalties and collection charges.
• Pan Pacific’s contention: Such loan would not have been enterted into it
not for respondent’s refusal to release price adjustment on time. They
alleged that the promissory note did not express the true agreement of the
parties, as it really had no consideration; hence, it is null and void. Pan
Pacific maintained that the P1.8 million was to be considered as an
advance payment on the price adjustment. They refused offsetting but
agreed to receive the reduced amount of P3.7M as recommended by the
TCGI Engrs. for the purpose of extrajudicial settlement, less P1.8M and
P414K as advance payments.They maintained that respondent was already
estopped from disclaiming liability of at least P3.7M in accordance with the
escalation clause as recommended by the TCGI Engrs. The respondent itself
appointed.
• CASE: Complaint for declaration of nullity/annulment of the promissory
note, sum of money, and damages against the respondent Equitable PCI.
• RTC: In favor of PETITIONER Pan Pacific. Both parties appealed:
o Petitioners Pan Pacific: whether the RTC erred in deducting the amount
of P126K from the balance of the adjusted price and in awarding only 12%
annual interest on the amount due, instead of the bank loan rate of 18%
compounded annually beginning September 1992.
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o Respondent Equitable: whether the RTC erred in declaring the
promissory note void and in awarding moral and exemplary damages and
attorney’s fees in favor of petitioners and in dismissing its counterclaim.
• CA: Modified the RTC decision with respect principal amount due:
removed the deduction of P126K and ordered payment by respondent of
1.5M with interest at legal rate of 12%/annum.
o Still the petitioner PARTIALLY asked for recon on the decision with regard
imposition of 12% legal rate and not using the interest rate applicable
which is 18% bank lending rate.
o Respondent likewise filed a Motion for Recon.
• CA denied both.
ISSUE:What is the applicable INTEREST RATE?
HELD: Under Article 2209 of the Civil Code, the appropriate measure for
damages in case of delay in discharging an obligation consisting of the
payment of a sum of money is the:
1. Payment of penalty interest at the rate agreed upon in the contract of
the parties. In the absence of a stipulation of a particular rate of penalty
interest –
2. Payment of additional interest at a rate equal to the regular monetary
interest becomes due and payable. Finally, if no regular interest had been
agreed upon by the contracting parties –
3. Damages payable will consist of payment of legal interest which is 6%, or
in the case of LOANS or forbearances of money, 12% per annum.
It is only when the parties to a contract have failed to fix the rate of
interest or when such amount is unwarranted that the Court will apply the
12% interest per annum on a loan or forbearance of money.
The written agreement entered into between petitioners and respondent
provides for an interest at the current bank lending rate in case of delay in
payment and the promissory note charged an interest of 18%.
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge interest
thereon at the current bank lending rates, without prejudice to OWNER’S
recourse to any other remedy available under existing law.
General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate issued by
the Engineer pursuant to this Clause, or to any term of the Contract, shall,
subject to clause 47, be paid by the Owner to the Contractor within 28 days
after such interim certificate has been delivered to the Owner, or, in the
case of the Final Certificate referred to in Sub-Clause 60.8, within 56 days,
after such Final Certificate has been delivered to the Owner. In the event of
the failure of the Owner to make payment within the times stated, the
Owner shall pay to the Contractor interest at the rate based on banking
loan rates prevailing at the time of the signing of the contract upon all
sums unpaid from the date by which the same should have been paid. The
provisions of this Sub-Clause are without prejudice to the Contractor’s
entitlement under Clause.
To prove Pan Pacific’s entitlement to the 18% bank lending rate of interest,
they presented the promissory note prepared by respondentbank itself.
This promissory note, although declared void by the lower courts because
it did not express the real intention of the parties, is substantial proof that
the bank lending rate at the time of default was 18% per annum. Absent
any evidence of fraud, undue influence or any vice of consent exercised by
petitioners against the respondent, the interest rate agreed upon is binding
on them. Thus, the PETITION OF PAN PACIFIC was granted.
In this case there was a stipulation on the contract that Pan Pacific shall be
entitled to a price adjustment in case of increase in the prevailing labor
costs and prices of materials. That is an escalation clause. The increase
here is with regards to the costs of materials so they were charged
additional. So there were changes in the costs of labor and materials. These
escalation clauses need not refer to interest rates. So hindi kailangan na
mgfile pa ka bago mag-increase. Kasi this one is with regards to labor costs
and prices of materials.
What happened here was when there was an increase in the labor cost and
prices in materials the capital of Pan Pacific became inadequate for the
project. Nevertheless hindi pa rin sila binabayaran ng respondent Equitable
under the escalation clause despite demands. What was offered instead
was a loan in favor of Pan Pacific in the amount 1.8 million and this money
was used to pay the laborers and suppliers. Pan Pacific considered the loan
as an advance for the price adjustment. So therefore walang separate
consideration yung contract of loan. So the promissory note on the loan
was considered null and void.
How about the unpaid balance of Equitable arising from the price
adjustment? The issue here is with regards to what is the applicable
interest rate. Is it the 12% which is the legal interest or the 18% which is
the prevailing interest in the banking industry at the time? Now, there is a
provision in the contract wherein it provides that the consent of the
respondent is not needed for the imposition of interest at the current
banking rate which rests upon any delay in payment. So what do you have
here? There is an imposition of interest at the current banking rate.
Walang nakalagay kung magkano.
So here the consent of the respondent is not needed to impose the interest
rate. Remember in obligations and contracts this stipulation is supposed to
be void since the creditor cannot increase the interest rate with his own
will. But what happened here was that there was an imposition of the
increase in the interest rate when there was delay in the payment of the
price adjustment. So this is not really an interest for the payment of a loan.
Under Article 2209 of the Civil Code, the appropriate measure for damages
in case of delay in discharging an obligation consisting of the payment of a
sum of money is the payment of penalty interest at the rate agreed upon in
the contract of the parties. In the absence of a stipulation of a particular
rate of penalty interest, payment of additional interest at a rate equal to
the regular monetary interest becomes due and payable. Finally, if no
regular interest had been agreed upon by the contracting parties, then the
damages payable will consist of payment of legal interest which is 6%, or in
the case of loans or forbearances of money, 12% per annum. It is only
when the parties to a contract have failed to fix the rate of interest or
when such amount is unwarranted that the Court will apply the 12%
interest per annum on a loan or forbearance of money.
The written agreement entered into between petitioners and respondent
provides for an interest at the current bank lending rate in case of delay in
payment and the promissory note charged an interest of 18%.
How do you prove that the 18% is the correct interest rate? The promissory
note was presented as evidence. This promissory note, although declared
void by the lower courts because it did not express the real intention of the
parties, is substantial proof that the bank lending rate at the time of
default was 18% per annum. Absent any evidence of fraud, undue
influence or any vice of consent exercised by petitioners against the
respondent, the interest rate agreed upon is binding on them.
So again you first look at the stipulations of the parties as to the correct
interest rate to apply absent these stipulations you apply the legal interest.
We discussed about lawful and usurious interest. Usury is defined as
contracting for or receiving something in excess of the amount allowed by
law for the loan or forbearance of money. The Usury law is only to be
applied in a loan or forbearance of money. No usury then there is no loan
or forbearance of money. Forbearance is the act of refraining from acting
on something, for example, not asserting a legal right. For example, a
creditor can forbear pursuing a debtor who defaults in court and can
reduce the loan payments or restructure the debt.
Before usurious interest was therefore considered unlawful and illegal and
it was condemned here in the Philippines. The Usury Law was Act No. 2655
which was enacted in February 4, 1916 and took effect on May 1, 1916.
The purpose thereof was to protect borrowers from the imposition of
unscrupulous lenders who take advantage of the necessities of others.
Under the law, a monetary board was comprised to set the maximum rate
of interest for the loan or the forbearance of money. By virtue of that
authority under the Usury Law, the monetary board prescribed in 1974 the
12% legal interest as I mentioned before. I also mentioned that the Usury
Law has already been suspended by CB Circular No. 905.
Section 1 states: The rate of interest including commissions, premiums,
fees and other charges, on a loan or forbearance of any money, goods, or
credit, regardless of maturity and whether secured or unsecured, that may
be charged or collected by any person, whether natural or juridical, shall
not be subject to any ceiling prescribed under the Usury Law, as amended.
Section 2 states: The rate of interest for the loan or forbearance of any
money, goods, or credit and the rate allowed in the judgments, in the
absence of express contract as to such rate of interest, shall continue to be
12% per annum.
So 1916 may Usury Law and in 1974 the legal rate of interest was 12%. So
yun and ceiling at the time. But it was suspended effective January 1, 1983.
This law was suspended, it was not repealed or declared void or
unconstitutional. The effect is that there is no more ceiling as to what rate
of interest can be imposed. But the legal rate remains at 12%. According to
the Supreme Court, the said CB Resolution 905 in 1982, did not repeal or
amend the law but simply suspended its effectivity. That is why this law is
13 | F i r s t E x a m C o v e r a g e
still mentions in our discussion. Maybe by the time you take the bar the
suspension will be lifted so at least may idea kayo sa Usury Law. So the
Supreme Court emphasized that a circular cannot repeal a law but it
merely suspends its application. The circular merely upheld the freedom of
the parties to stipulate the rate of interest for themselves.
Article 1306 in the New Civil Code provides that the contracting parties can
establish such stipulations, clauses, terms and conditions as they deem
convenient provided they are not contrary to law, morals, good customs,
public order or public policy.
However the Supreme Court also emphasized that there is no carte
blanche authority, notwithstanding the suspension of the Usury Law, to
raise the interest rate without limit. The authority to raise interest rates is
not absolute. The Court said: Nothing in said circular grants lender carte
blanche authority to raise interest rates to levels which would either
enslave the borrowers or lead into the hemorrhage of their assets.
We have here the case of Dio vs. Spouses Jabor:
TERESITA DIO vs.SPOUSES VIRGILIO and LUZ ROCES JAPOR and MARTA
JAPOR
Facts: Spouses VirgilioJapor and Luz RocesJapor were the owners of a
residential lot and improvements in Lucena City. Adjacent to the Japor’s lot
is another lot owned by Marta Japor. The respondents obtained a loanof
P90,000 from the Quezon Development Bank (QDB), and as security, they
mortgaged the lots to QDB. Later, the respondents admitted the deed of
REM by increasing theloan to P128,000.
The respondents failed to pay their loans. However, before the bank could
foreclose on the mortgage, respondents, thru their broker, offered to
mortgage their properties to TeresitaDio. Dio prepared a Deed of Real
Estate Mortgage, whereby respondents mortgaged the two properties with
QDB to secure the timely payment of a P350,000 loan that respondents
had from Dio. Under the terms of the deed, respondents agreed to pay
Diointerest at the rate of 5% a month, within a period of two months. In
the event of default, an additional interest equivalent to 5% of the amount
then due, for every month of delay, would be charged on them.
The respondents failed to settle their obligation despite repeated
demands. Dio applied for extrajudicial foreclosure of the mortgage.
Meanwhile, respondents filed an action for Fixing of Contractual Obligation
with Prayer for Preliminary Mandatory Injunction/Restraining Order with
the RTC, praying that “judgment be rendered fixing the contractual
obligations of plaintiffs with Dio plus legal or allowable interests thereon.”
TC RULING: The trial court issued an order enjoining the auction sale of the
aforementioned mortgaged properties.
The respondents filed a motion to admit amended complaint praying that
the deed of real estate mortgage be declared null and void. The court
denied the motion.
CA RULING:The appellate court affirmed the decision of the trial court with
respect to the validity of the Deed of Real Estate Mortgage, but modified
the interest and penalty rates for being unconscionable and exorbitant.It
dissolved the writ of preliminary injunction previously issued by the Court.
During the auction, Dio was the sole bidder and was able to purchase the
property for P350,000.
ISSUE # 1: WON the Court of Appeals erred when it held that the
stipulations on interest and penalty in the Deed of Real Estate Mortgage
are contrary to morals, if not illegal. NO
Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity. However, nothing in said Circular
grants lenders carte blancheauthority to impose interest rates which would
result in the enslavement of their borrowers or to the hemorrhaging of
their assets.While a stipulated rate of interest may not technically and
necessarily be usurious under Circular No. 905, usury now being legally
non-existent in our jurisdiction,nonetheless, said rate may be equitably
reduced should the same be found to be iniquitous, unconscionable, and
exorbitant, and hence, contrary to morals (contra bonos mores), if not
against the law.What is iniquitous, unconscionable, and exorbitant shall
depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest rate per
month and 5% penalty rate per month for every month of default or delay
is in reality interest rate at 120% per annum. This Court has held that a
stipulated interest rate of 5.5% per month or 66% per annum is void for
being iniquitous or unconscionable. We have likewise ruled that an interest
rate of 6% per month or 72% per annum is outrageous and
inordinate.Conformably to these precedent cases, a combined interest and
penalty rate at 10% per month or 120% per annum, should be deemed
iniquitous, unconscionable, and inordinate. Hence, we sustain the
appellate court when it found the interest and penalty rates in the Deed of
Real Estate Mortgage in the present case excessive, hence legally
impermissible. Reduction is legally called for now in rates of interest and
penalty stated in the mortgage contract.
WHAT THEN SHOULD THE INTEREST BE?
The evidence shows that it was indeed the respondents who proposed the
5% interest rate per month for two (2) months. Having agreed to said rate,
the parties are now estopped from claiming otherwise. For the succeeding
period after the two months, however, the Court of Appeals correctly
reduced the interest rate to 12% per annum and the penalty rate to 1% per
month, in accordance with Article 222718 of the Civil Code.
ISSUE # 2: WON respondents are entitled to the "surplus" of P2, 247,326 as
a result of the "overpricing" in the auction. NO
In the instant case, however, there is no "surplus" to speak of. In adjusting
the interest and penalty rates to equitable and conscionable levels, what
the Court did was merely to reflect the true price of the land in the
foreclosure sale. The amount of the petitioner’s bid merely represented
the true amount of the mortgage debt. No surplus in the purchase price
was thus created to which the respondents as the mortgagors have a
vested right.
Now, remember class again, there is freedom to stipulate in a contract that
is the general rule. Absent any evidence of fraud, undue influence or any
vice of consent exercised by petitioners against the respondent, the
interest rate agreed upon is binding on them.
Considering that interest rates are no longer subject to a ceiling we cannot,
nevertheless use this as defense or use this as ground to impose any kind
of interest rate upon the borrower. The Supreme Court declared in this
case that stipulation on the interest rate is void. Why? Because it is
iniquitous and unconscionable. But even if the interest rate is iniquitous or
unconscionable it does not mean that the debtor is not liable to pay any
kind of interest. What happened here is that the interest was reduced by
the Court to the legal rate which is 1% per month or 12% per annum.
Take note class that in these cases, the imposition of an interest rate of 1%
per month is not a hard and fast rule. It doesn’t mean na pag may nakita
kayo na interest rate na unconscionable 1% na dapat ang e-apply. You also
have to take into consideration the circumstances of each case. Therefore
we cannot rule easily that a 3% per month or 4% or 5% per month na
interest rate is unconscionable na agad.
Another case dealing with the imposition of this kind of interest is the case
of:
Salvador Chua and Violeta Chua, Petitioners, -vs- Rodrigo Timan, Ma.
Lynn Timan and Lydia Timan
FACTS: In February and March 1999, petitioners Salvador and Violeta Chua
granted respondents Rodrigo, Ma. Lynn and Lydia Timan several loans.
These loans were evidenced by promissory notes with interest of 7% per
month, which was later reduced to 5% per month. Rodrigo and Ma. Lynn
issued five (5) postdated checks to secure the loans, except for one loan
which was secured by a postdated check issued by Lydia.
Respondents paid the loans initially at &5 interest per month until
September 1999 and then at 5% interest rate per month from October to
December 1999. Sometime in March 2000, respondents offered to pay the
principal amount of the loans through a Philippine National Bank
manager’s check worth P764,000, but petitioners refused to accept the
same insisting that the principal amount of the loans totalled P864,000
On May 3, 2000, respondents deposited P864,000 with the court and later,
they filed a case for consignation and damages.
Petitioners aver that the stipulated interest of 5% monthly and higher
cannot be considered unconscionable because these rates are not usurious
by virtue of Central Bank (C.B.) Circular No. 905-82 which had expressly
removed the interest ceilings prescribed by the Usury Law. They add that
respondents were in pari delicto since they agreed on the stipulated
interest rates of 7% and 5% per month. They further aver they honestly
believed that the interest rates they imposed on respondents’ loans were
not usurious.
Respondents counter that the stipulated interest rates of 7% and 5% per
month are iniquitous, unconscionable and exorbitant, thus, they are
entitled to the return of the excessive interest paid. They also contend that
14 | F i r s t E x a m C o v e r a g e
petitioners cannot raise the defense of in pari delicto for the first time on
appeal.
ISSUE: WON the stipulated interest rates of 7% and 5% equivalent to 84%
and 60% per annum are unconscionable. YES
HELD: The petition is patently devoid of merit. The stipulated interest rates
of 7% and 5% per month imposed on respondents’ loans must be equitably
reduced to 1% per month or 12% per annum. We need not settle the
principle we had affirmed in a plethora of cases that stipulated interest
rates of 3% per month and higher are excessive, iniquitous, unconscionable
and exorbitant. Such stipulations are void for being contrary to morals, if
not against the law.
While C.B. Circular No. 905-52, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said circular could
possibly be read as granting carte blance authority to lenders to raise
interest rates to levels which would either enslave their borrowers or lead
to a hemorrhaging of their assets.
Petitioners cannot also raise the defenses of in pari delicto and good faith.
The defense of in pari delicto was not raised in the RTC, hence, such an
issue cannot be raised for the first time on appeal. Petitioners must have
seasonably raised it in the proceedings before the lower court, because
questions raised on appeal are confined only within the issues framed by
the parties.
Again, let me emphasize that because the interest is 5% or 10% per month
it is already iniquitous. The Supreme Court always takes the circumstances
of each case. There is no hard and fast rule in ruling that a certain interest
is iniquitous and unconscionable.
In almost all cases however when the Court rules that the interest imposed
with regards to penalties or compensatory interest, it reduces such interest
to the legal rate which is 1% per month or 12% per annum. But the
reduction of the interest is not fixed. There was one case where the Court
reduced the interest rate to 14% per annum instead of the legal rate. The
cases that we have discussed, however, serve as your guide in determining
which interest rate is iniquitous or unconscionable.
PRISMA VS MENCHAVEZ (MARCH 9, 2010)
On December 8, 1993, Pantaleon, the President and Chairman of the Board
of PRISMA, obtained a P1,000,000.00 loan from the respondent, with a
monthly interest of P40,000.00 payable for six months, or a total obligation
of P1,240,000.00 to be paid within six (6) months. To secure the payment
of the loan, Pantaleon issued a promissory note.
Pantaleon signed the promissory note in his personal capacity, and as duly
authorized by the Board of Directors of PRISMA.The petitioners failed to
completely pay the loan within the stipulated six (6)-month period.
As of January 4, 1997, the petitioners had already paid a total of
P1,108,772.00. However, the respondent found that the petitioners still
had an outstanding balance of P1,364,151.00 as of January 4, 1997, to
which it applied a 4% monthly interest. Thus, on August 28, 1997, the
respondent filed a complaint for sum of money with the RTC to enforce the
unpaid balance, plus 4% monthly interest, P30,000.00 in attorney’s fees,
P1,000.00 per court appearance and costs of suit.
In their Answer dated October 6, 1998, the petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4% monthly interest,
arguing that the interest was not provided in the promissory note.
Pantaleon also denied that he made himself personally liable and that he
made representations that the loan would be repaid within six (6) months.
ISSUE:
The core issue boils down to whether the parties agreed to the 4% monthly
interest on the loan. If so, does the rate of interest apply to the 6-month
payment period only or until full payment of the loan?
RULING: We find the petition meritorious. Interest due should be
stipulated in writing; otherwise, 12% per annum
Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. When the
terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs.In such
cases, courts have no authority to alter the contract by construction or to
make a new contract for the parties; a court's duty is confined to the
interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material
stipulations or read into the contract words the contract does not
contain.It is only when the contract is vague and ambiguous that courts are
permitted to resort to the interpretation of its terms to determine the
parties’ intent.
In the present case, the respondent issued a check for P1,000,000.00. In
turn, Pantaleon, in his personal capacity and as authorized by the Board,
executed the promissory note quoted above. Thus, the P1,000,000.00 loan
shall be payable within six (6) months, or from January 8, 1994 up to June
8, 1994. During this period, the loan shall earn an interest of P40,000.00
per month, for a total obligation of P1,240,000.00 for the six-month period.
We note that this agreed sum can be computed at 4% interest per month,
but no such rate of interest was stipulated in the promissory note; rather a
fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall
be due unless it has been expressly stipulated in writing." Under this
provision, the payment of interest in loans or forbearance of money 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 interest at a stipulated rate. Thus, we held in Tan v. Valdehueza and
Ching v. Nicdao that collection of interest without any stipulation in writing
is prohibited by law.
Applying this provision, we find that the interest of P40,000.00 per month
corresponds only to the six (6)-month period of the loan, or from January
8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory
note. Thereafter, the interest on the loan should be at the legal interest
rate of 12% per annum, consistent with our ruling in Eastern Shipping
Lines, Inc. v. Court of Appeals:
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code."
The payment of the specific sum of money of P40,000.00 per month was
voluntarily agreed upon by the petitioners and the respondent. There is
nothing from the records and, in fact, there is no allegation showing that
petitioners were victims of fraud when they entered into the agreement
with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn
P40,000.00 per month for a period of six (6) months, or from December 8,
1993 to June 8, 1994, for a total principal and interest amount of
P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall
apply. The amounts already paid by the petitioners during the pendency of
the suit, amounting to P1,228,772.00 as of February 12, 1999, should be
deducted from the total amount due, computed as indicated above. We
remand the case to the trial court for the actual computation of the total
amount due.
As I have mentioned earlier, in the imposition of interest as well as that of
penalties is a case to case basis. We have to consider the circumstances.
Again, even if there is jurisprudence that a 60% per annum it does not
mean that it is already iniquitous. (Ma’am keeps on repeating this,
excessively)
Iniquitous and unconscionable interest in one maybe just and valid in
another.
A 4% interest per month in this case of Prisma was not considered as
iniquitous by the Supreme Court. Why? Aside from the fact that they
agreed voluntarily to the rate of interest but also probably because of the
shortness of the period of the obligation which is 6 months. I think that was
a factor. Another factor is that the 4% interest rate per month was never
put in issue by the petitioner but they only assailed the interest rate after
the six month period. This also matter noh, kung anong issue ang e-raise
mo before the Court.
Last time we have also discussed when to apply the 6% and 12% interest
rate. The case that really determined which interest rate is applicable is the
case of Eastern Shipping Lines vs. CA.
15 | F i r s t E x a m C o v e r a g e
EASTERN SHIPPING LINES v. COURT OF APPEALS (& Mercantile Insurance
Company)
Nature: This is an action against defendants shipping company, arrastre
operator and broker-forwarder for damages sustained by a shipment while
in defendants' custody, filed by the insurer-subrogee who paid the
consignee the value of such losses/damages.
FACTS: On December 4, 1981, two fiber drums of riboflavin were shipped
from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by
defendant Eastern Shipping Lines under Bill of Lading No. YMA-8. Upon
arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Service, Inc. The latter excepted
to one drum, said to be in bad order, which damage was unknown to
plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the
shipment from defendant Metro Port Service, Inc., one drum opened and
without seal. On January 8 and 14, 1982, defendant Allied Brokerage
Corporation made deliveries of the shipment to the consignee's
warehouse. The latter excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake.
Plaintiff contended that due to the losses/damage sustained by said drum,
the consignee suffered losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented against defendants who
failed and refused to pay the same. As a consequence of the losses
sustained, plaintiff was compelled to pay the consignee P19,032.95 under
the marine insurance policy, so that it became subrogated to all the rights
of action of said consignee against defendants.
Defendant Eastern Shipping it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that
any damage/losses incurred after the shipment was incurred after the
shipment was turned over to the latter, is no longer its liability.
Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order
Allied Brokerage alleged that plaintiff has no cause of action against it, not
having negligent or at fault for the shipment was already in damage and
bad order condition when received by it, but nonetheless, it still exercised
extra ordinary care and diligence in the handling/delivery of the cargo to
consignee in the same condition shipment was received by it.
Both RTC and CA ruled in favor of plaintiff.
ISSUES:
1. WON a claim for damages sustained on shipment of goods can be
solidary, or joint and several liability of the common carrier (Eastern
Shipping Lines) with the arrastre operator (Metroport) and the customs
broker (Allied Brokerage). Yes
2. WON the grant of the interest on the claim of Mercantile Insurance
should commence from the date of the filing of the complaint at the rate of
12% per annum or 6% per annum from the date of the decision of the trial
court. 6% computed from the decision of the trial court
HELD:
1. Yes, a claim for damages may be solidary.
The legal relationship between the consignee and the arrastre operator is
akin to that of a depositor and warehouseman. The relationship between
the consignee and the common carrier is similar to that of the consignee
and the arrastre operator. Since it is the duty of the ARRASTRE to take
good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with
the obligation to deliver the goods in good condition to the consignee.
We do not, of course, imply that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the
carrier, or vice-versa, nor that attendant facts in a given case may not vary
the rule.
The instant petition has been brought solely by Eastern Shipping Lines,
which, being the carrier and not having been able to rebut the
presumption of fault, is, in any event, to be held liable in this particular
case. A factual finding of both the court a quo and the appellate court, we
take note, is that "there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants" (the herein
petitioner among them). Accordingly, the liability imposed on Eastern
Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless
of whether there are others solidarily liable with it.
2. In Reformina vs. Tomol, the court ruled: Coming to the case at bar, the
decision herein sought to be executed is one rendered in an Action for
Damages for injury to persons and loss of property and does not involve
any loan, much less forbearances of any money, goods or credits. As
correctly argued by the private respondents, the law applicable to the said
case is Article 2209 of the New Civil Code which reads — Art. 2209. — If
the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of interest agreed upon, and in the
absence of stipulation, the legal interest which is six percent per annum.
Nakpil and Sons vs. Court of Appeals
The court ruled: There should be no dispute that the imposition of 12%
interest pursuant to Central Bank Circular No. 416 . . . is applicable only in
the following: (1) loans; (2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments
involving loans or forbearance of any money, goods or credits. It is true
that in the instant case, there is neither a loan or a forbearance, but then
no interest is actually imposed provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is delay in the
payment of such final judgment, that will cause the imposition of the
interest. It will be noted that in the cases already adverted to, the rate of
interest is imposed on the total sum, from the filing of the complaint until
paid; in other words, as part of the judgment for damages. Clearly, they are
not applicable to the instant case. (Emphasis supplied.)
The factual circumstances may have called for different applications,
guided by the rule that the courts are vested with discretion, depending on
the equities of each case, on the award of interest. Nonetheless, it may not
be unwise, by way of clarification and reconciliation, to suggest the
following rules of thumb for future guidance.
I. 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. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded.
In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code.
2. 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.
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, Civil Code) 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.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
In the instant case, the legal interest to be paid is 6% on the amount due
computed from the decision of the court a quo. A 12% interest, in lieu of
the 6% shall be imposed on such amount upon the finality of the decision
until payment thereof.
*The digests posted above covered comprehensively the discussion of Atty.
Sarona. Mostly she quoted what’s contained in the decision of the Supreme
Court.
Nov. 27, 2013. Marlie Muñoz
We have already discussed the landmark case of Eastern Shipping v CA.
In that case the SC laid down for guidance the guidelines regarding
imposition of the interest rate.
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OLD CB CIRCULAR
The following rules of thumb for future guidance:
I. 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. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. 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.
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, Civil Code) 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.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
As I have emphasized this was the rule prior to July 1, 2013, because in the
resolution mandated May 2013 of the Monetary Board it approved the
revision of the legal interest rate in the absence of stipulation. So In
relation thereto the BSP-MB Circular No. 799 series 2013 which took effect
on July 1, 2013.
So now it states the rate of interest for the loan or forbearance of any
money, goods or credit and the rate allowed in judgment in the absence
of an express contract as to such rate of interest shall be 6 % per annum.
LATEST BSP-MB CIRCULAR
As to the payment of legal interest, the guidelines laid down in the case of
Eastern Shipping Lines are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
I. 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. The provisions under Title XVIII on “Damages” of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of
 the Civil Code.
2. 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.
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, Civil Code), 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.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
So the first case wherein this circular was applied was the case of NACAR v
GALLERY FRAMES.
NACAR v GALLERY FRAMES
Petitioner Dario Nacar filed a complaint for constructive dismissal before
the National Labor Relations Commission (NLRC) against Gallery Frames
(GF) and/or Felipe Bordey, Jr.
On October 15, 1998, the Labor Arbiter rendered a Decision in favor of
petitioner and found that he was dismissed from employment without a
valid or just cause and was never afforded due process. Thus, petitioner
was awarded backwages and separation pay in lieu of reinstatement, in the
amount of P158,919.92, computed only up to promulgation of this
decision. Length of service was 8 yrs and 1 day.
On November 5, 2002, petitioner filed a Motion for Correct Computation,
praying that his backwages be computed from the date of his dismissal on
January 24, 1997 up to the finality of the Resolution of the Supreme Court
on May 27, 2002. Upon recomputation, NLRC arrived at an updated
amount in the sum of P471,320.31.
Respondents filed a Motion to Quash Writ of Execution, arguing that no
more recomputation is required after the decision becomes final and
executory, the same cannot be altered or amended anymore. Denied.
Reappealed and a recomputation was granted but only in the amount of
P147,560.19.
Nacar then filed a Motion praying for the re-computation of the monetary
award to include the appropriate interests.
The Labor Arbiter granted the motion, but reasoned that it is the October
15, 1998 Decision that should be enforced considering that it was the one
that became final and executory. However, the Labor Arbiter reasoned that
since the decision states that the separation pay and backwages are
computed only up to the promulgation of the said decision, it is the
amount of P158,919.92 that should be executed. Thus, since petitioner
already received P147,560.19, he is only entitled to the balance of
P11,459.73.
Nacar appealed to the CA. Denied. It opined that since petitioner no longer
appealed the October 15, 1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction thereof is no longer
allowed. The CA stated that there is nothing left to be done except to
enforce the said judgment.
ISSUE: WON in the absence of express stipulation the interest which
govern the parties’ the rate of legal interest with regard to loan or
forbearance of any money, goods or credit the rate of interest shall be 12
% per annum? NO.
HELD: The legal interest is not anymore 12% per annum. In the absence of
express stipulation as to the rate of interest that would govern the parties
the rate of legal interest for loan or forbearance of any money, goods or
credit is 6 % per annum.
Q: When was the decision become final and executory?
A: May 27, 2002.
Q: Do we have do we have a loan or forbearance of money here?
17 | F i r s t E x a m C o v e r a g e
A: The decision of the labor arbiter where it became final and executory
converted it into forbearance of money. From the time the judgment was
considered forbearance of money.
Q: So what’s the legal interest being imposed?
A: The SC held that the legal interest rate to be imposed by virtue of BSP-
MB Circular No. 799, should be 6% per annum.
Q: So is 6% per annum same? When would that 6% be applied?
A: The 6% per annum should be applied from the time of the finality of
judgment.
Q: So meaning May 27, 2002? When does BSP Circular 799 became
effective?
A: It became effective only in July 1, 2013.
Q: Therefore how much interest should be imposed?
A: The interest rate first should be imposed is 12% per annum before the
BSP Circular 799.
Q: During what period?
A: From May 27, 2002 until June 30, 2013, and onwards thereafter, 6% per
annum should be applied.
Q: In these two BSP Circulars, what is the change with regards to the rules
that was found or that was provided in the case of Eastern Shipping? Is it
still the same? What specific change in the rules that was mentioned?
A: The change in the interest rate from the finality of judgment instead of
12% now it is 6%.
Q: There are 3 paragraphs in Eastern Shipping, in the BSP Circular is the
only change is the 6% interest rate should be imposed in the judgment
which are already final and executory?
A: The SC held as to the payment of legal interest, the guidelines laid down
in the case of Eastern Shipping Lines are accordingly modified to embody
BSP-MB Circular No. 799, as follows:
I. 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. The provisions under Title XVIII on “Damages” of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil
Code.
2. 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.
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, Civil Code), 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.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a
forbearance of credit.
Q: In what you have just read compare it in what has been stated in
Eastern Shipping essentially what’s the difference?
A: Everything is the same, except, for the interest per annum from 12% to
6%.
Therefore in this NACAR case, you can see the guidelines, is exactly the
same except you cannot see anymore 12%, which has already been
replaced by the mutuum interest rate of 6%.
In addition, judgment which have already been final and executory, prior to
July 1, 2013 shall not be disturbed and shall continue to be implemented
applying the rate of the interest rates therein. So that is why it is important
to discuss how to apply the Eastern Shipping rules that have been found as
stipulated in this case.
It’s not sufficient na, ah na change naman to 6%, because that is only
effective in July 1, 2013. Any decisions or obligations incurred before that,
you apply the ruling as it was in the case of Eastern Shipping, the
modification will only apply effective July 1, 2013. So please take note of
that change, again you are the first batch for one. Starting July 1, 2013 pa,
you have here the case of NACAR please take note of the change of the
interest rate.
Let’s proceed to other Article of MUTUUM.
Article 1957. Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury shall be void. The
borrower may recover in accordance with the laws on usury.
Now, again the USURY LAW has already been suspended effective from
January 1, 1983. USURY LAW deals with prohibitive interest. It is still
important to know usurious interest contracting for and receiving
something in excess of the amount allowed by law for the loan or
forbearance of money. Again if there is NO LOAN OR FORBEARANCE OF
MONEY involved there can be NO USURIOUS INTEREST.
Now, the suspension of USURY LAW the interest rate is no longer subject
to ceiling, as what we have discussed there is no carte blanche authority
for them with regards to the imposition of higher rates, even if such rate is
based on the agreement of the parties.
Now, remember what’s the effect if you have usurious interest, even if its
suspended we still have to be familiar with our law because it did not
repeal, the suspension can be lifted anytime, maybe before you will take
the bar. Hopeful? YES 
The usurious interest, what is void is only the interest but of course the
borrower is still liable for the principal obligation.
Article 1958. In the determination of the interest, if it is payable in kind, its
value shall be appraised at the current price of the products or goods at
the time and place of payment.
We differentiate this from Article 1955 where in the subject matter is
money or fungible thing, remember the value thereof in case of
extraordinary deflation or inflation. This is the payment for the value of
money its currency at the time of the creation of obligation.
If it’s a FUNGIBLE THING, the obligation is to pay the same kind and quality,
if it is impossible to do so the value thereof at the time of the perfection of
the loan.
If when you are dealing with INTEREST AND IT’S PAYABLE IN KIND the
value thereof would be the current price of the products or goods at the
time and place of payment. So please take note of that distinction.
Article 1959. Without prejudice to the provisions of article 2212, interest
due and unpaid shall not earn interest. However, the contracting parties
may by stipulation capitalize the interest due and unpaid, which as added
principal, shall earn new interest.
You have here the concept of COMPOUNDING INTEREST.
Remember the general rule, accrued interest (interest already due but
unpaid) shall not earn interest except in two (2) instances:
1. The first one as provided in Article 2212 wherein it states that,
“Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this
point.”
2. The second exception is by express stipulation made by the
parties in which they can apply compounding interest.
If you remember the case of TAN v CA, it is also stated in the case that
parties may stipulate on the imposition of both interest and penalty in case
in default on the part of the borrower, let say prior agreement. But again
remember in the case of TAN v CA, the interest as well as the penalty were
reduced for being considered as unconscionable and iniquitous.
Article 1960. If the borrower pays interest when there has been no
stipulation therefor, the provisions of this Code concerning solutio indebiti,
or natural obligations, shall be applied, as the case may be.
So this was the Article which was applied in the case of Sigaan wherein
interest was collected but there was no express stipulation in writing in the
18 | F i r s t E x a m C o v e r a g e
payment thereof. So here is unstipulated interest made by mistake, the
debtor may collect based of the principle of solutio indebiti or natural
obligation.
If you remember under obligations and contracts, NATURAL OBLIGATION
is not based on the positive law but on equity and natural law. It is the
grant on right of action to enforce the performance that after voluntary
fulfillment of the obligor they authorized the redemption of what has been
delivered or rendered by reason thereof.
Article 1961. Usurious contracts shall be governed by the Usury Law and
other special laws, so far as they are not inconsistent with this Code.
So again this has already become legally inexistent, the interest legally
chargeable will now depends upon the agreement between the lender and
the borrower as long as it is not found to be iniquitous and unconscionable
wherein in that case the court may reduce the same based on equity or as
equity demands.
Now with regards to interest if you could remember, if there is an
agreement between the creditor and the debtor, wherein the creditor can
increase the interest rate, it is not valid unless he gets the consent of the
debtor.
Let see what happened in the case of
SOLID BANK v. PERMANENT HOMES
FACTS: PERMANENT HOMES is a real estate development company, and to
finance its housing project known as the “Buena Vida Townhomes” located
within Merville Subdivision, Parañaque City, it applied and was
subsequently granted by SOLIDBANK with an “Omnibus Line” credit facility
in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE
MILLION as time loan for a term of up to three hundred sixty (360) days,
with interest thereon at prevailing market rates, and subject to monthly
repricing. The remaining ONE MILLION was available for domestic bills
purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged
three (3) townhouse units within the Buena Vida project in Parañaque. At
the time, however, the instant complaint was filed against SOLIDBANK, a
total of thirty six (36) townhouse units were mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it availed of a total of
41.5 million pesos, covered by three (3) promissory notes, which contain
the following provisions, thus:
“xxx
5. We/I irrevocably authorize Solidbank to increase or decrease
at any time the interest rate agreed in this Note or Loan on the basis of,
among others, prevailing rates in the local or international capital
markets. For this purpose, We/I authorize Solidbank to debit any deposit
or placement account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I
shall prepay all amounts due under this Note or Loan within thirty (30) days
from the receipt by anyone of us of the written notice. Otherwise, We/I
shall be deemed to have given our consent to the interest rate
adjustment.”
Contrary, however, to the specific provisions as afore-quoted, there was a
standing agreement by the parties that any increase or decrease in
interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997, in
the amount of 19.6 MILLION, from the initial interest rate of14.25% per
annum (p.a.), the rate was increased to 30% p.a. on January 16, 1998.
For the second loan availment in the amount of 18 million, the rate was
initially pegged at 15.75% p.a. on June 24, 1997 increased 30% p.a. from
January 22, 1998 to February 20, 1998.
For the third loan availment on July 15, 1997, in the amount of 3.9 million,
the interest rate was initially pegged at 35% p.a., decreased at 29%
p.a. for the month of February.
It is Permanent’s stand that SOLIDBANK unilaterally and arbitrarily
accelerated the interest rates without any declared basis of such increases,
of which PERMANENT HOMES had not agreed to, or at the very least, been
informed of. This is contrary to their earlier agreement that any interest
rate changes will be subject to mutual agreement of the parties.
PERMANENT HOMES further admits that it was not able to protest such
arbitrary increases at the time they were imposed by SOLIDBANK, for fear
that SOLIDBANK might cut off the credit facility it extended to PERMANENT
HOMES.
Permanent filed a case before the trial court seeking the following: (1) the
annulment of the increases in interest rates on the loans it obtained from
SOLIDBANK, on the ground that it was violative of the principle of
mutuality of agreement of the parties, as enunciated in Article 1409 of the
New Civil Code, (2) the fixing of the interest rates at the applicable interest
rate, and (3) for the trial court to order SOLIDBANK to make an accounting
of the payments it made, so as to determine the amount of refund
PERMANENT is entitled to, as well as to order SOLIDBANK to release the
remaining available balance of the loan it extended to PERMANENT. In
addition, Permanent prays for the payment of compensatory, moral and
exemplary damages.
SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no
cause of action against it, in view of the pertinent provisions of the
Omnibus Credit Line and the promissory notes agreed to and signed by
PERMANENT HOMES. Thus, in accordance with said provisions,
SOLIDBANK was authorized to, upon due notice, periodically adjust the
interest rates on PERMANENT HOMES’ loan availments during the monthly
interest repricing dates, depending on the changes in prevailing interest
rates in the local and international capital markets.
SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar
Lugtu, who testified to the effect that, contrary to PERMANENT HOMES’
assertions that it was not promptly informed of the repriced interest rates,
SOLIDBANK’s officers verbally advised PERMANENT HOMES of the repriced
rates at the start of the period, and even added that their transaction[s]
were based on trust. Aside from these allegations, however, no written
memorandum or note was presented by SOLIDBANK to support their
assertion that PERMANENT HOMES was timely advised of the repriced
interests.
The trial court promulgated its Decision in favor of Solidbank. Permanent
filed an appeal before the appellate court. The appellate court granted the
appeal, and set aside the trial court’s ruling. The appellate court not only
recognized the validity of escalation clauses, but also underscored the
necessity of a basis for the increase in interest rates and of the principle of
mutuality of contracts.
ISSUE: WON the increases in the interest rates on Permanent’s loans are
void for having been unilaterally imposed without basis. YES.
HELD:The Usury Law had been rendered legally ineffective by Resolution
No. 224 dated 3 December 1982 of the Monetary Board of the Central
Bank, and later by Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on interest rates for
secured and unsecured loans regardless of maturity. The effect of these
circulars is to allow the parties to agree on any interest that may be
charged on a loan. The virtual repeal of the Usury Law is within the range
of judicial notice which courts are bound to take into account. Although
interest rates are no longer subject to a ceiling, the lender still does not
have an unbridled license to impose increased interest rates. The lender
and the borrower should agree on the imposed rate, and such imposed
rate should be in writing.
The stipulations, contained in the 3 promissory notes on interest rate
repricing are valid because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon Solidbank’s written notice
to Permanent of the new interest rate; and (3) Permanent has the option
to prepay its loan if Permanent and Solidbank do not agree on the new
interest rate. The phrases “irrevocably authorize,” “at any time”
and “adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent,” emphasize that Permanent
should receive a written notice from Solidbank as a condition for the
adjustment of the interest rates.
Solidbank’s range of lending rates were consistent with “prevailing rates in
the local or international capital markets.” The interest rate repricing
happened at the height of the Asian financial crises in late 1997, when
banks clamped down on lendings because of higher credit risks across
industries, particularly the real estate industry.
The SC also recognize that Solidbank admitted that it did not promptly
send Permanent written repriced rates, but rather verbally advised
Permanent’s officers over the phone at the start of the period. Solidbank
did not present any written memorandum to support its allegation that it
promptly advised Permanent of the change in interest rates. Solidbank
advised Permanent on the repriced interest rate applicable for the 30-day
interest period only after the period had begun. Permanent presented a
tabulation which showed that Solidbank either did not send a billing
statement, or sent a billing statement 6 to 33 days late. Solidbank’s
computation of the interest due from Permanent should be adjusted to
take effect only upon Permanent’s receipt of the written notice from
Solidbank.
Student reciting mentioned ACCELERATION CLAUSE referring to the
stipulation of the parties, “that any increase or decrease in interest rates
shall be subject to the mutual agreement of the parties”
19 | F i r s t E x a m C o v e r a g e
Q: Is that an acceleration clause? Is there a difference between an
ESCALATION CLAUSE and ACCELERATION CLAUSE? What do you mean by
acceleration clause? x x x
A: ESCALATION CLAUSE -> CORRECT ANSWER.
Q: Their stipulation of increasing the interest rate, is it valid?
A: The stipulation was valid but there should be a written notice.
Q: In other words, if it is considered as valid, what were the conditions here
in the imposition in the increase in the interest rate?
A: There must be a written notice and if the respondent here disagrees to
the petitioner it has the option to be paid all the interest.
Q: With the valid stipulation, can the increase in the interest be imposed?
You said that the stipulation with the increase interest rate is valid but can
Solid Bank impose it against Permanent Homes?
A: NO, because in the first place there was no written notice, secondly in
terms the USURY LAW, the lender has no unbridled license to impose
increased interest rates.
Q: Now what was the interest rate imposed?
A: There were three. For the first loan initial interest rate of 14.25% per
annum (p.a.), the rate was increased to 30% p.a. on January 16, 1998. For
the second loan availment in the amount of 18 million, the rate was initially
pegged at 15.75% p.a. on June 24, 1997 increased 30% p.a. from January
22, 1998 to February 20, 1998. For the third loan availment on July 15,
1997, in the amount of 3.9 million, the interest rate was initially pegged
at 35% p.a., decreased at 29% p.a. for the month of February.
Q: Is it considered as iniquitous and unconscionable?
A: Yes.
Q: Does the SC rule that the said interest rates were unconscionable?
A: The court ruled here, that despite the absence of the ceiling because of
the suspension of the USURY LAW the petitioner here has no unbridled
license to impose increased interest rates … na stop nangutana na pud si
ma’am…
Q: Was the interest rate here considered unconscionable?
A: Yes, it was considered as unconscionable.
Q: So was there imposed by the court?
A: …. Silence…
Thank You Mr. Student ^_^
Now, first there is a difference between ESCALATION CLAUSE and
ACCELERATION CLAUSE.
If you remember in you remember under your obligations and contracts,
what happens if there is an ACCELERATION CLAUSE? There is an
installment due upon default of one of the installment the whole shall
become due and demandable, that is ACCELERATION CLAUSE.
With regards to an agreement as to increase in the interest rate imposed
on the obligation what is involved is an ESCALATION CLAUSE.
Now in this case there is an agreement between the parties with regard to
the repricing of the interest rates but there were with conditions:
1. The parties must mutually agree of the said stipulation.
2. The repricing takes effect only upon Solid Bank’s written notice
to Permanent Homes of the new interest rate.
3. It gives Permanent Homes the option to repay its loan if
Permanent and Solid Bank would not agree on the new interest
rate.
With those conditions, the SC held that the agreement was valid.
Nevertheless Solid Bank could not impose it with the absence of a written
notice. Permanent should receive a written notice from Solid Bank as a
condition for the adjustment of the interest rates.
Now with the revised interest rate between December 12, 1997 up to
February 12, 1998, take note they were not unconscionably applied with
the average lending rate to other borrowers. You go back to the original
agreement as to how much is the interest rate will be imposed there was
no specific figure but it depended upon the prevailing market rate. So the
interest rate that was imposed was actually based on the range of the
lending rates that are imposed in the market.
Likewise, SC also put into consideration that the repricing happened at the
time that the ASIAN FINANCIAL CRISIS during 1997, wherein banks cropped
down the lending because of higher credit rates across industries.
Now, with the repricing, it cannot be imposed until there was a written
notice from the Solid Bank, considering that there was no written
memorandum and Permanent was only advised over the phone then the
repricing could not start immediately it will only be upon written notice by
Solid Bank in which the change in the interest rate will be imposed. Take
note also of this Solid Bank regarding the imposition of the interest.
Take note of the important provisions as well as any changes with regard
the imposition of interest rate and usury law.
Now, we go to another contract, which is the CONTRACT OF DEPOSIT,
Articles covered from 1962 to 2008.
DEPOSIT
Article 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit
but some other contract.
We have two (2) parties in a contract of deposit:
a. DEPOSITARY also known as the DEPOSITORIO- recipient of the
subject matter.
b. DEPOSITOR or referred as the DEPOSITANTE – the giver or the
one who gives the subject matter.
Now, the depositary must not be the owner because here he only receives
it. There is no requirement on the part of a depositor to be the owner of
the thing because in a contract of deposit there is no transfer of
ownership.
Depositor may not be the owner of the thing and the depositary does not
become the owner of the thing and of course the depositary must not be
the owner of the thing or a subject matter in a contract of deposit.
Take note that the contract of deposit is a REAL CONTRACT just like in a
contract of mutuum or commodatum wherein it is perfected by delivery.
Deposit can be UNILATERAL if it is gratuitous, and BILATERAL if it is subject
to compensation.
Please remember that the principal purpose of a contract of deposit is for
SAFEKEEPING. In other words, if the safekeeping is merely an accessory
obligation you do not have a contract of deposit but some other contract,
for example lease, commodatum or a contract of agency.
For example we have a case, I have submitted all the records to the lawyer,
what is the principal purpose? Is it really for safekeeping? No, it’s more like
a contract of agency because the lawyer will act for in behalf or in relation
to the case. Kung meron mang purpose na for safekeeping with regards to
the records of the case that is only ancillary but the principal purpose of
you delivering the records of the case to your lawyer is principally based on
a contract of agency.
Now, how about commission in agent’s position at principal’s disposal?
We distinguish it from the case that you have YONG CHAN KIM, remember
that case, what was demanded from him was to liquidate cash advances,
the cash advances were considered as a contract of loan, there was no
misappropriation in that case.
But here, what is involved is a contract of deposit and what was deposited,
for example to another person when demanded he did not return it, such
person can be held liable for estaffa if there is misappropriation or if he
diverts of what was entrusted to him for safekeeping.
Now, we have here the case of
BPI v IAC
FACTS: Zshornack deposited $3K in Comtrust Bank which was substituted
by BPI as a result of merger. He deposited $3K in a dollars savings account
and he also opened a peso current account of the same branch. As to his
first cause of action Zshornack and his wife demanded for the payment of
the $3K deposit which he alleged as a deposit merely for the purpose of
safekeeping. However despite demands the bank refused to return the
money and instead presented the deposit slips regarding the dollar account
converted into peso equivalent and said that Zshornack can no longer
recover $3K deposit because it was already been converted.
ISSUE: WON the $3K deposit was indeed a contract of deposit so as to
make BPI liable to return the deposit to the Zshornack’s?
HELD: The SC held YES, that it was a contract of deposit as it was stipulated
in the contract between Zshornack and Comtrust through one of its officer
Garcia that the deposit was merely for safekeeping and therefore cannot
be converted by the bank in relation to CB Circular No. 20.
Q: You know him? Zshornack was a celebrity sa panahon pa ni FPJ… LOL…
so young to know him… hahaha :D
A: No idea 
Q: What is the obligation here of the bank with regard to the dollars that
were given by the Zshornack’s?
A: $3K for safekeeping purposes.
Q: So for safekeeping purposes, so what is now the obligation of the bank?
20 | F i r s t E x a m C o v e r a g e
A: The bank was supposed to keep it and return it when the Zshornack’s
would demand.
Q: What happened when Zshornack demanded for the return of the $3K?
A: The bank refused to return the money and explained that the $2k was
sold and the peso proceeds were deposited to the peso current account of
the Zshornack’s.
Q: Did the court compel the bank to return the $3K to the Zshornack’s?
A: Yes.
Q: What was the purpose here, it’s correct that safekeeping that was
contract of deposit but nevertheless, is Comtrust or BPI liable to the
Zshornack’s?
A: They were ordered to restore the $1K deposited by the Zshornack’s as
well as the interest rate imposed by the bank for dollars saving deposit.
Q: What was CB Circular No. 20 provide as mentioned in this case?
A: CB Circular No. 20, it mentioned that:
“All receipts of foreign exchange by any resident person, firm,
company or corporation shall be sold to authorized agents of
the Central Bank by the recipients within one business day
following the receipt of such foreign exchange.
Any resident person, firm, company or corporation residing or
located within the Philippines, who acquires foreign exchange
shall not, unless authorized by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full
value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking
ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign
exchange to the authorized agents of the Central Bank.”
Q: Was there any violation in the part of the BPI of the said CB Circular?
A: Yes, because the Zshornack’s deposited the money not to be sold as
foreign exchange but only for safekeeping.
Q: So was the agreement between Zshornack and BPI safekeeping of his
$3K valid?
A: It is void based on CB Circular No. 20.
Q: If the said agreement is void what is now the effect thereof?
A: They will not have any cause of action against each other and therefore
the $3K deposit made by the Zshornack’s will not be returned anymore.
So what we have here is a contract of deposit. What will determine that it
was really a contract of deposit? The document, it stipulates that the $3K
was received by the bank for safekeeping. So the principal purpose was
safekeeping.
Of course here for safekeeping, the obligation actually here of the bank
was to return the exact subject matter that was deposited to them they
cannot convert it to peso because again it is not an ordinary bank deposit,
the purpose is for safekeeping.
However, even if they intended the bank to safe keep the said foreign
exchange and return it to the Zshornack’s, the SC pointed out that CB
Circular No. 20, the mere safekeeping of the greenbacks or the dollars
without selling it to the Central Bank within one business day from receipt
is a transaction not authorized therefore it is considered as a prohibited
transaction. Therefore the agreement here of safekeeping the dollar is
considered as void being executed against mandatory or prohibitory law, it
affords neither of the parties of a cause of action against each other and
being in pari delicto they shall have no cause of action against each other.
Take note the case of BPI v CA.
Please take note the distinctions of contract of deposit as against mutuum.
We already discussed the distinction between commodatum as against
mutuum.
Now, contract of deposit as against mutuum.
In deposit, it is for safekeeping. In mutuum, it is for consumption.
In deposit, the depositor can demand the return of the subject matter at
will. In mutuum, the lender must wait until the expiration of the period
granted to the debtor.
In deposit, a deposit involves movable and immovable subject matter. In
mutuum, only money and other consumable thing.
The depositor and depositary are parties in the contract of deposit. The
lender and the borrower are the parties in the contract of mutuum.
Deposit is generally gratuitous, while mutuum maybe subject to
compensation.
CONTRACT OF DEPOSIT CONTRACT OF MUTUUM
It is for safekeeping it is for consumption
the depositor can demand the the lender must wait until the
return of the subject matter at will expiration of the period granted to
the debtor
involves movable and immovable only money and other consumable
subject matter thing
depositor and depositary are the lender and the borrower are the
parties parties
is generally gratuitous maybe subject to compensation
Now, most probably in the discussion under your obligations and contracts,
as to what relationship involves when you deposit your money to the
bank? Ang tawag sa inyo is bank depositor, but is it really a contract of
deposit? It is not a contract of deposit but it is actually a contract of simple
loan or mutuum. In other words, if you put your money to the bank in a
deposit you are the lender, the bank is the borrower. So if you passed by
the bank, you can say that the bank owes me money… LOL…
You can go to the bank, I will demand the return of my deposit, I will
withdraw for example 10K, the bank has the obligation to give it back to
you, because essentially again even if you are called a depositor or even if
the bank account is called current account or savings account deposit or
time deposit, what is involved is not a contract of deposit as provided in
Article 1962 but a contract of loan. Because, why? Safekeeping mo sa
bank, E deposit mo para di mo magasto, kahit ayaw nila pwede mo e
withdraw. But essentially what happens? The money deposited is not the
exact money returned to you. Of course ibang money na yun. The money
that you actually deposited is used by the bank to grant loans to other
person, so your savings deposit will earn an interest of at least 1% per
annum (ka gamay) and then they use your money and loan it to another
person and at what interest rate? They earn 12% or 18% so the difference
between the interest they give to you and the interest income that they
earn, and the interest income that they earn from the contract of loan is
the income of the bank. Essentially that is their main source of income that
is why they encouraged you to loan. Magmatter man na maraming silang
pera pero pag wala sila masyadong loan doon sila maipit because they are
giving out the interest to the depositor but they are not earning.
Now the distinction between contract of deposit as against commodatum.
In deposit, is for safekeeping. In commodatum, is for the use.
In deposit, it maybe gratuitous. In commodatum, is essentially and always
gratuitous.
In contract of deposit, it is judicial or extrajudicial, in extrajudicial deposit
only movable subject matter is involved. In commodatum, involves
immovable and immovable subject matter.
CONTRACT OF DEPOSIT CONTRACT OF COMMODATUM
is for safekeeping is for the use
it maybe gratuitous is essentially and always gratuitous
It is judicial or extrajudicial, in involves immovable and immovable
extrajudicial deposit only subject matter
movable subject matter is
involved
Article 1963. An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the thing.
So similar sa commodatum and mutuum, if there is no delivery for the
subject matter in deposit it does not mean na walang contract. In the
absence of a delivery of a thing obviously no contract of deposit is
perfected, but there is already a simple contract, a consensual contract
that will constitute a deposit and that is already binding. In other words, if
there is already an agreement you can file an action for specific
performance to deliver what is involved or to accept of what is to be
deposited. But again a contract of deposit is a real contract perfected by
delivery. So it is only upon delivery that a contract of deposit is perfected.
21 | F i r s t E x a m C o v e r a g e
Nov. 29, 2013. Bai Charity Pandita & Camille Remoroza
So we have already discussed 2 articles. We have emphasized that real
contract of deposit is a sale contract perfected by delivery. And remember
that its principal purpose is for safekeeping. And we have also
distinguished the contract of deposit from a contract of mutuum.
ART. 1964. A deposit may be constituted judicially or extrajudicially.
 So judicial deposit – this takes place when attachment or seizure
of property is ordered.
 Extra-judicial deposit – under this, you have two kinds.
 Voluntary deposit – delivery is made by the will of the
depositor or by two or more persons each of whom
believes himself entitled to the thing deposited.
 Necessary deposit - 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.
Be able to distinguish judicial from extra-judicial.
 So judicial, involves the will of the court. If extra-judicial, will of
the parties of the contract.
 Judicial ensures the right of the party or to recover a property in
case of a favorable judgment. In extra-judicial, the purpose is
essentially for safekeeping.
 In judicial, generally, immovables. In extra-judicial, movables
only.
 In judicial, it is always onerous. In extra-judicial, generally,
gratuitous. So it is possible to have onerous extra-judicial.
 In judicial, the this is returned upon order of the court. In extra-
judicial, upon demand of depositor.
 In judicial, it is made on behalf of the person who has a right. In
extra-judicial, on behalf of the depositor, or person or thing that
are designated.
ART. 1965. A deposit is a gratuitous contract, except when there is an
agreement to the contrary, or unless the depositary is engaged in the
business of storing goods.
General rule: A deposit is a gratuitous
Exception: If there is a stipulation to the contrary, provided that it is not
contrary to law, morals and public policy.
Second Exception: the depositary is engaged in the business of storing
goods. So you store goods for compensation or when you stored goods it is
not out of your generosity.
Another exception: when property is saved from destruction without
knowledge of the owner. In this case, there is an involuntary deposit
wherein there is payment of just compensation. This is based on quasi-
contract, the kind of which is negotiorum gestio. Involuntary management
of the property of other people to avoid unjust enrichment. What would
happen? The effect would be involuntary deposit and there would be a
liability to pay just compensation.
ART. 1966. Only movable things may be the object of a deposit.
What is covered here is only extra-judicial deposit because in judicial
deposit, pwedeng subject ang immovable. Of course, the principal purpose
is for safekeeping. Why is it emphasized that the subject matter is
movable? The possibility that the thing may disappear or may be lost or
stolen is present in a movable unlike in immovable or real property. But sa
judicial deposit, again, pwede movable, pwede din immovable.
What happens if the property is intangible? Is it subject to deposit?
Obviously not. Paano mo ise-safekeep ang something na intangible?
Deposit does not embrace an incorporeal or intangible property since such
type of property follows the type of person.
ART. 1967. An extrajudicial deposit is either voluntary or necessary.
General rule: deposits are voluntary.
Exception: Necessary deposits which exist only in 3 situations.
 when made in compliance with a legal obligation,
 on the occasion of any calamity, or
 by travellers in hotels and inns.
ART. 1968. A voluntary deposit is that wherein the delivery is made by the
will of the depositor. 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.
Ordinarily, there are only 2 parties involved, the depositary and the
depositor. But if we take a look at 1968, it is possible that there are 3
persons involved. In such case, this is what happens: a third person
assumes the obligation who shall deliver it in a proper case to the one to
whom it belongs.
Example: A has a car. What would happen if he wants to deposit it to B but
the C would assert his right over the car? So, would A continue to deposit it
to B? Or would he give it to C who’s asserting his right over the property?
Here, the remedy is a special civil action called an interpleader. In
interpleader, a person has property in his possession or an obligation to
render fully or partially any right therein or ___ which is not disputed by
the claimant comes to court and asks that the persons who considered
themselves to demand compliance of the obligation be required to litigate
among themselves in order to determine who is entitled to the property.
So si A naglibog na sya kung kay kinsa niya ihatag, so what would happen
is that the thing deposited would be with the third person and he can also
file an action for interpleader. Remember, wala man naga-assert si A ug
right over the property pero na-confuse lang sya kug kanino nya ibalik ung
property. Now what would happen is that the third person would be
entitled to the deposit upon agreement of the parties and A can file for
interpleader. So si B and C lang ang maglalis kung kinsa ang naay better
right over the property.
Now, what is the difference between voluntary and involuntary?
Involuntary Necessary
The depositor has complete No free choice in the depositary
freedom in choosing the depositary.
Now, generally, the depositor must be the owner of the thing deposited.
But it may belong to a person other than the depositor. Thus, a carrier,
commission agent, a lessee, etc. may deposit goods temporarily in his
possession considering that the contract does not involve the transfer of
ownership.
ART. 1969. A contract of deposit may be entered into orally or in writing.
We are talking about form here, not perfection of a contract. So general
rule, contracts shall be obligatory in whatever form they may have been
entered into provided all the essential requisites for their validity are
present as provided for in Art. 1356 of Oblicon. So this article tells us that
there are no
formalities required for the existence of the contract. But remember, for its
perfection or validity there must be delivery of the thing if the contract of
deposit is a real contract. Other than that, wala na. as long as andun ang 3
essential requisites for a valid contract.
ART. 1970. If a person having capacity to contract accepts a deposit made
by one who is incapacitated, the former shall be subject to all the
obligations of a depositary, and may be compelled to return the thing by
the guardian, or administrator of the person who made the deposit, or by
the latter himself if he should acquire capacity.
The scenario is that the depositary is capacitated and the depositor is
incapacitated. Now if it is the depositary, so sya ang recipient, is
capacitated then his obligations as a depositary is the same, regardless of
the capacity or incapacity of the depositor. So he will be governed by the
obligations of the depositary as provided in the Civil Code. If the depositary
is incapacitated, then he has the obligation to return the property to the
legal representative, to the guardian or to the depositor himself if said
depositor has already acquired capacity. So we have here a voidable
contract of deposit. If one of the parties is incapacitated, then the contract
is valid until annulled. Remember: what is the obligation here of the
depositary? Return the property. Who can demand the return of said
property? Of course, si legal representative.
Now, relate here Article 1397 of the Civil Code. Remember that persons
who are capable cannot allege the incapacity of those with whom they
22 | F i r s t E x a m C o v e r a g e
have a contract. So remember, kahit incapacitated si depositor, meron pa
ring obligation si depositary.
Now, what happens if the depositary is incapacitated. You apply article
1971.
ART. 1971. If the deposit has been made by a capacitated person with
another who is not, the depositor shall only have an action to recover the
thing deposited while it is still in the possession of the depositary, or to
compel the latter to pay him the amount by which he may be enriched or
benefited himself with the thing or its price. However, if a third person who
acquired the thing acted in bad faith, the depositor may bring an action
against him for its recovery.
What are the liabilities of the incapacitated depositary?
 Must return the thing deposited while still in his possession. Of
course, this would through his legal representative or guardian
or if he has subsequently gained his capcity.
 To pay the depositor the amount by which he may have
benefited himself with a thing or a price, subject to a third
person who acquired the thing in good faith.
So again, you are the depositor and the depositary is incapacitated, can
you as the depositor demand for the return of the thing kahit incapacitated
the si depositary? Yes, that is still possible given the above remedies and
you course it through the legal representative, guardian, etc.
The problem is, what if the thing is not anymore in his possession, rather, it
is now possessed by a third person? First, you determine WON the third
person is in good faith or bad faith.
 If the thing deposited is in the possession of a third person in
bad faith, the depositor can recover the thing from the person.
 Remedy: to demand the thing only against the depositary.
Not to return the thing because it is already in the
possession of a third party but to demand the price of the
thing or the amount in which he may have benefited.
 So kelan walang magawa si depositor? If the thing deposited is in
the possession of a third person in good faith.
 Example: it was only given to the third person, walang
binayad kay depositary. Wala ding benefit sa part ni
depositary nung binigay nya kay third person. So what
would happen? Wala na. Walang remedy.
ART. 1972. The depositary is obliged to keep the thing safely and to return
it, when required, to the depositor, or to his heirs and successors, or to the
person who may have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
Primary obligation of the depositary – to safekeep the property and of
course, return the thing when required. What about the degree of care
required from the depositary? Same diligence as he would exercise over his
properties. Remember that contract of deposit is generally based on trust
and confidence. You do not deposit your thing to a person or entity which
you do not trust. The depositary takes into account in which the depositor
is accustomed with respect to his own property.
The depositary cannot excuse himself from the liability in case of loss by
saying that he has exercised the same amount of care toward the thing
deposited as he would toward his own if such care is less than that
required by the circumstances. If turns out that ___(makalat?) kaayo sya
when it comes to his own things and then he says na wala kang magawa
kasi ganyan talaga ako mag-alaga ng gamit ko. So the thing deposited to
him, he cannot raise that as a defense. It is not an excuse.
So let us relate this to obligations and contracts.
 1163 - The liability of the depositary for the care and delivery of
the thing is governed by the rules on obligations. (Arts. 1163, et
seq.)
 How do you determine the standard of care with regard to
what should be exercised by the debtor? Unsa tingnan nyo
ung degree of care provided by law. if the law does not
provide, you check if there is stipulation or agreement
between the parties. In the absence of law or stipulation,
proper diligence of a good father of a family.
  1170 - He is liable if the loss occurs through his fault or
negligence (Art. 1170.)
 If you remember, damages diba? Liability for loss if due to
his fault or negligence.
 1265 – The loss of the thing while in his possession, ordinarily
raises a presumption of fault on his part.
 What’s the presumption? If the thing was lost in the
possession of the depositary, it raises a disputable
presumption that it was the depositary’s fault. That’s the
same principle in Article 1265.
Now, in the 2nd paragraph of 1972, what is the effect if the deposit is
gratuitous? Can he now exercise a lower degree of care? Remember that
due care is still required. Now if it involves compensation, obviously, it
requires a higher degree of care as compared to a gratuitous contract.
Kalibo vs CA.
There is a contract of deposit between Mike and his father because when
Pablo delivered the car to his son, it was for safekeeping. So again, the
principal purpose of contract of deposit is for safekeeping. When the
tractor was delivered to Kalibo by Mike, it was ot for safekeeping but it was
to guaranty his indebtedness or liability of Mike. Nevertheless, it cannot be
considered as a pledge. Ang pledge kasi is a contract of security, you
deliver a movable to guarantee a principal obligation. Pero requirement
kasi sa pledge is that the pledgor must be the owner of the thing. Since si
Mike, the one who delivered, is not the owner, so walang contract of
pledge. Ang principal purpose is hindi rin safekeeping, so wala ding
contract of deposit. And with regard to the existence of agency, walang
representation that Kalibo is for and in behalf of Mike. Which means that
between the father and Kalibo, Pablo has a better right. Here, Kalibo has no
right to refuse the delivery of the property to its lawful owner who is Pablo.
Pablo Abella has every right to ___ the tractor including the filing of action
for replevin. Replevin is for the delivery or recovery of the subject matter
which is in the possession of another person. Nevertheless, if you look at
the facts, between Pablo and Mike, the purpose is for safekeeping. So as to
them, my contract of deposit.
Chan vs Maceda
Remember that here, the contract of deposit was perfected between
Norman and spouses Chan. It did not involve Maceda. There was no privity
of contract with regard to the contract of deposit between spouses Chan
and Norman. Hindi kasama si Maceda doon. If you remember article 1311:
contracts are binding upon the parties and their assignees and heirs (?)
who executed them. When there is no provity of contract, there is likewise
no obligation or liability at all. Therefore, no cause of action arises. So here,
in an action against the depositary because Maceda is claiming that he has
the right over the goods or materials deposited in the possession of Chan,
the burden is actually on Maceda to prove that the contract or payment of
deposit in the performance of conditions to the right of action. A
depositary is obliged to return the thing to the depositor or the heirs or
successors oor the persons who have been designated in the contract.
Under the facts of this case, Maceda is clearly not the depositor. He is not
an heir or successor of Norman. No assignment of rights were executed in
favor of Maceda and he has not been designated in the contract to return
the subject on demand. So here, there was no contract of deposit between
petitioners and respondent and that there is actually no more construction
materials in the petitioner’s warehouse when demand was made. And
when the goods were released by spouses Chan, they have issued the
released in favor of the proper depositor, Norman, or his proper heirs.
So here, the Supreme Court ruled that Maceda has no right whatsoever to
claim or demand the return of the thing as well as to claim for damages.
ART. 1973. Unless there is a stipulation to the contrary, the depositary
cannot deposit the thing with a third per-son. If deposit with a third person
is allowed, the depositary is liable for the loss if he deposited the thing with
a person who is manifestly careless or unfit. The depositary is responsible
for the negligence of his employees. (n)
So more or less similar rule with regard to commodatum. A commodatum
cannot generally allow another third person to use the thing. In contract of
deposit, the general rule is that the depositary is not allowed to deposit the
thing to the third person. Again, a contract of deposit is based on trust and
confidence. So if the depositary is allowed to deposit the thing with a third
person without consent from the original depositor, what happens is that
23 | F i r s t E x a m C o v e r a g e
the third person may be someone that the original depositor does not
trust. Exception: only if authorized by express stipulation by the parties.
Now, what happens if it was lost and it was deposited to a third person?
 If he transfers the deposit with a third person without authority
although there is no negligence on his part and the third person
 The depositary is still liable. For example, let us the subject
is selpon. Aw. So cellphone, binigay kay depositary. The
depositary subsequently deposited it to a third person.
Now let us say the cellphone was damaged through any
fortuitous event, so therefore, it was damaged without any
fault or negligence by either the depositary or the third
person. Nevertheless, the depositary is liable kasi dineposit
nya to the third person without any authority from the
depositor.
 If he deposits the thing with a third person who is manifestly
careless or unfit although authorized, even in the absence of
negligence.
 Depositary is still liable. Here, authority is given, sige,
pwede mo yan i-deposit for safekeeping to a third person.
Now if it turns out that the third person is careless,
danghagan, manifestly na danghagan, and unfit, meaning
he is not fit to be considered as a depositary and to take
due care of the thing deposited to him. the depositary is
nevertheless liable for the loss of the thing.
 If the thing is lost through the negligence of his employees
whether the latter are manifestly careless or not.
 Depositary is still liable regardless of the negligence of the
employees. This is based on the premise that employees
act under the supervision and control of their employer. In
this scenario, si depositary ang employer. Ang naka-cause
ng loss or damage kay employee nya. Now in this case,
depositary is till liable even if the employees are not
manifestly negligent or careless. So please be careful of
those nuances under 1973.
Now, the exemption from liability.
 The depositor is not responsible in case the thing is lost without
negligence of the third person with whom he was allowed to
deposit the thing if such third person is not “manifestly careless
or unfit.”
ART. 1974. The depositary may change the way of the deposit if under the
circumstances he may reasonably presume that the depositor would
consent to the change if he 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.
So the depositary, the one who is the recipient, may change the way or
manner of the deposit. In other words, when he __ it, what temperature,
what place, he may change the manner if there are circumstances
indicating that the depositor would consent to the change. But in this
scenario, it is very difficult to change, no? kung ikaw ang depositary,
magtantya ka ng circumsntaces. So kung makakuha ka ug consent, better
get the consent and not rely on these circumstances. Nevertheless that’s
the law.
Now, depositary, however, should first notify and wait for the depositor’s
decision before he changes.
Exemption: no need to notify if the delay would cause danger or damage to
the subject matter. This is in keeping with the obligation of the depositary
to exercise the diligence of a good father of a family.
ART. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter when it
becomes due, and to take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for the rent of safety
deposit boxes.
If the thing deposited should earn interest, 1975 specifies the obligations of
the depositary.
 Obligation to collect the interest as it becomes due – of course,
common sense, pati capital.
 Obligation to take such steps as may be necessary to preserve its
value and the rights corresponding to it
Now, the important thing that you have to consider for 1975 is actually the
last sentence. How is a contract of deposit different from contract of rent?
Is a safety deposit box different form a contract of lease?
CA Agro-Industrial vs CA
The contract for the rent of a safety deposit box is not an ordinary contract
of lease. In fact, it is not an ordinary kind of deposit, it is a special kind of
deposit as well. It cannot be characterized as an ordinary contract of lease
because under 1643, the full and absolute possession and control of the
safety deposit box was not given to the creditors, in this case the
petitioners as well as the Pugaos. The guard key remains in the respondent
bank and the bank could not likewise open it without the renter’s key.
Have you tired renting a safety deposit box?
In this case, what happened is that yung petitioner and Pugao may
agreement na hindi nila i-open ung safety deposit box and kunin yung title
unless silang dalawa yung andun. Hindi alam yun ng bangko, it did not
know that there was that kind of agreement. With regard to the bank, as
long as you have the key, pwede mo na i-open. This is a very old case, so
this is not the practice now. Karon you have to provide the names of the
person who may open it, magpadala ka pa ng picture, minsa may SPA pa.
But in this case, the Pugaos have their own key so the obligation of the
bank is to open it. With that, kinuha nila yung titles and the petitioners
were not aware of it. In this instance, the bank was not held liable. 1975 is
obviously not applicable as provided in its last paragraph. Depositary
cannot open the box without the depositary being present.
Now the relation between a bank renting out a safety deposit box and its
customers with respect to the contents of the box is that of a bailor and a
bailee or __ and mutual benefit. In fact pag maglagay ka sa safety deposit
box, hindi alam ng bank kung ano ang laman. Hindi ka magdisclose kung
ano ang nilagay mo or kinuha mo, and record lang nila is the date and the
time. So pasagdan ka lang nila.
The primary function is still found, however, within the parameters of a
contract of deposit. As emphasized, a contract of deposit may be entered
into orally and in writing and the parties may establish such obligations,
terms and conditions provided it is not contrary to law, morals, public
policy and public order.
So if you take a look at this case no, there were provisions there stating
that the bank is not a depositary and that the bank has no interest, please
take note that those stipulations are void for being against law and public
policy. As emphasized a while ago, this is a special kind of deposit because
the deposit box is located in the premises. The bank, although it can open
it, it is still limited by the fact there is another person who has the key.
SIA vs. CA
In this case, again the stipulation as mentioned in the CA-Agro case are the
same conditions provided here. Parang naging standard sya sa mga
bangko. Now the SC is clear that stipulations limiting the liability of the
bank as to the exercise of an ordinary diligence is not valid as well as the
bank could not be considered a depository, that is not valid, considering
that what is entered into is really a rent of a safety deposit box. So you
have here a stamp collection kept in the safety deposit box (SDB), the bank
was aware of the flood, it knew that the flood would reach the room where
the SDB was. So therefore, it should have lost no time in notifying the
petitioner that the box should be opened to retrieve the stamps to prevent
any further damage. However, it failed to exercise the reasonable care and
prudence expected of a good father of a family. That is why, the bank was
held liable.
ART. 1976. Unless there is a stipulation to the contrary, 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 proportionate interest in
the mass.
General rule: The depositary is permitted to commingle grain or other
articles of the same kind and quality.
Various depositaries of commingled goods shall own the entire mass in
common and each depositor shall be entitled to such portion of the entire
mass as the amount deposited by him bears to the whole.
Exemption: by stipulation.
Let us say you have sacks of rice and you deposited it in a warehouse. So
generally, it can be commingled with other rice of the same kind and
quality. What happens if the rice were damaged partially? So yung
proportion lang since it was commingled, so it was not physically
24 | F i r s t E x a m C o v e r a g e
segregated, you will only proportion the said sacks of rice. For example you
have 5 sacks of rice in the warehouse and there is no stipulation against
commingling, total number of sacks is 100 and half of it were damaged, can
you say na, ay wala ng obligation kasi sa kanya yung andito sa baba? No,
since this is commingling, ownership is in realtion to the whole, so
proportionate to the ownership. So kung 100 lahat ung sacks, 50 yung na-
damage, 5 ung dineposit mo, so dun sa 50, ang sayo na share is 5% of the
50 which is one half sack of rice.
What happens if it is not of the same kind and quality?
It is the duty of the depositary to keep them separate or at least
identifiable as he must return to each depositor the identical article
delivered.
ART. 1977. The depositary cannot make use of the thing deposited without
the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires its use, it
must be used but only for that purpose.
Yung sa 1973 kanina, to deposit the same thing with the third person. Eto
naman, to allow another person to use. Again, the purpose of contract of
deposit is for safety-keeping and not for use. Therefore, there is
unauthorized use of the subject matter, the depositary shall be liable for
damages.
What is the instance where the depositary may use the thing without
express permission?
When the use is necessary for preservation. Example, car, kelangan
ipaandar talaga. Pero hindi naman pwede i-drive mo yan hanggang Tagum.
In that case, because it is not anymore for the purpose of preservation, he
is liable.
ART. 1978. When the depositary has permission to use the thing deposited,
the contract loses the concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the principal purpose of the
contract.
The permission shall not be presumed, and its existence must be proved.
What happens if the depositary was given permission to use the thing?
It can be converted to a contract of loan or commodatum kasi nga, the
principal purpose nun is for use. Except, again, if the purpose is for safety-
keeping. Please take note that permission is not presumed, you have the
burned of proof that you have been permitted to use the subject matter.
Baron vs David
So there is no contract of sale in this case. The defendant was at liberty to
convert the rice to palay and dispose of it at his desire. It was impossible to
segregate the plaintiff’s palay segregated. What’s the difference between
rice and palay? Palay is i-harvest pa. pag na-mill na sya, rice na. so anong
tagalog ng rice? Palay. Eh ano ang kanin? Cooked rice. (Lol).
In this case, the palay which has been previously delivered has long been
milled and disposed of before the fire of January 1991. Considering the fact
that the defendant has thus milled and doubtless, sold the plaintiff’s palay
prior to the date of the fire, he is bound to account for its value and his
liability is not extinguished by the occurrence of the fire. Kung ano man yan
yung rice na kept there and damaged by the fire, it did not already include
the palay which was previously delivered. Even supposing that the palay
may have been delivered in a character of a deposit, subject to future sale
or withdrawal at ___, nevertheless, the defendant might mill the palay and
he has in fact appropriated it for his own use, so he is bound to account for
its own value as provided in article 1977: When the depositary has
permission to use the thing deposited, the contract loses the concept of a
deposit and becomes a loan or commodatum. But if you look at the nature
of the transaction, it may be a contract of sale but again, meron pa ring
liability. Kasi parang agreement ata nila ditto, i-mill mo tapos ibigay mo sa
akin ang sale or bigyan mo ako ng share sa sale. And of course, by
appropriating the thing, the bailee becomes responsible for its value.
So what happens if the thing is not consumable and the depositary is
allowed to use it?
 It would lose the character of a deposit and becomes a
commodatum despite being denominated as a contract of
deposit.
Exception: if safekeeping is the principal purpose.
What if the thing deposited is money or a consumable thing and the
depositary is allowed to use?
 It would result to consumption and will result to a simple loan or
mutuum. But here, there was an agreement naman talaga sa
facts ng case na sale sya. So hindi sya ma-apply na naconvert sya
to mutuum. Pero kung sya lang talaga ang gumamit nun, hindi
talaga nabenta, so here you have the rice that is consumable and
he was permitted to use, then it would be converted to simple
loan or mutuum. If safekeeping is still the principal purpose, it
would be a deposit but an irregular one (Art 1988).
Differentiate a contract of loan from a contract of irregular deposit:
 Consumable thing demandable at will by depositor.
 In an irregular deposit (supra.),the consumable thing
deposited may be demanded at will by the irregular
depositor for whose benefit the deposit has been
constituted, while in mutuum, the lender is bound by the
provisions of the contract and cannot seek restitution until
the time for payment, as provided in the contract, has
arisen.
 Benefit accrues to depositor only.
 Another point of difference consists in the fact that in an
irregular deposit, the only benefit is that which accrues to
the depositor, while in a loan, the essential cause for the
transaction is the necessity of the borrower. A loan with a
stipulation to pay interest is for the benefit of both parties
 Depositor has preference over other creditors.
 The third one is that the depositor in an irregular deposit
has preference over other creditors with respect to the
thing deposited while common creditors enjoy no
preference in the distribution of the debtor’s property.
Compania Agricola de Ultramar vs. Nepomuceno
Here, the company maintained that the amount deposited with Mariano
Velasco and company be declared as a deferred claim. If you look at the
receipt, the amount of P10000 deposited was with an interest of 6%
annually. So what was really involved based on the intention of the parties
is that the P10000 cannot be regarded as a technical deposit. But can it be
regarded as an irregular deposit? Again distinctions between a loan and an
irregular deposit:
First, the only benefit is that it accrues to the depositor. Sa loan, the
essential cause of that transaction is the necessity of the borrower. The
contract in question does not fulfill the contract of an irregular deposit.
 In a regular deposit, the depositor can demand the return of the
thing at anytime. Sa lender, he is bound by the provisions of the
contract and cannot seek restitution until the time of the
contract has expired.
 From the terms of the document, the plaintiff could not demand
his money at anytime. He was bound to give notice for his desire
of its return and to wait for 6 months before he can _ for his
payment. In the present case, the benefit was for both parties.
Neither could demand payment until the expiration of the term
of 3 months. Therefore, the contract is a loan and neither could
demand preferred claim.
Preferred claim – eto yung last topic natin sa credit transactions on
concurrence and preference of credit wherein is the assets of the debtor
are not sufficient to pay all his creditors, kinsa ang preferred? A deposit is
preferred to an ordinary contract of loan. That is why, in this case, it was
important to determine what kind of contract was involved.
Javellana vs Lim
So with regard to the second document, it was a real loan of money with
interest as it appears. Notwithstanding that in the original document, the
parties therein considered it as a contract of deposit. It cannot be
considered as a contract of deposit because the parties did not agree to
return the same coins (?) received of which the same amount deposited
consisted and it could have accomplished the return agreed upon by the
delivery of the sum equal to the one received by them. Therefre, this gives
the debtor the authority to make use of the amount described or
deposited, so yung sa first, which they have done. So with that intention, it
25 | F i r s t E x a m C o v e r a g e
was not a deposit but a real contract of loan. And from the very beginning
it was really a contract of loan. You cannot say the yung nakalagay dun sa
first agreement nila, it is a contract of deposit without interest tapos
naging loan lang sya kasi meron ng subsequent agreement tapos meron ng
interest. In this case, again, we go back to the intention of the parties. In
fact, in the second document, the creditor, by granting them the extension,
confirmed the express permission previously given to them to use and
dispose the amount stated as having been deposited. There was no
renewal of the contract of deposit converted to a contract of loan because
as stated, the defendants receive the said amount by virtue of a real loan
under the name of a deposit.
Now, remember that permission to use is not assumed when such use is
for the preservation of the thing as provided in 1977. The burden is on the
depositary to prove that the permission has been given.
ART. 1979. The depositary is liable for the loss of the thing through a
fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor’s permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he him-self may have been
authorized to use the same.
As you remember in Obli, if the loss or damage of the thing or subject
matter is due to the fortuitous event, the general rule is that it will
extinguish the obligation. so with regard to a contract of deposit, that is
still the general rule.
Exception: Provided for in 1979 in which the depositary is still liable even if
the loss is due to a fortuitous event.
 If it is so stipulated;
 This is the same in 1169.
 If he uses the thing without the depositor’s permission;
 This is one of the things which we previously discussed,
diba?
 If he delays its return;
 Again, this is another exemption provided by law.
 If he allows others to use it, even though he himself may have
been authorized to use the
same.
 Again, also take note that if the depositary is given consent
or authority to use the thing, it does not necessary mean
that he is allowed to have another person to use the said
thing. This is based on trust and confidence.
December 4, 2013. Jetro Pinili
What are the distinctions between an ordinary loan and an irregular
deposit?
- First, in an irregular deposit the only benefit is that which
accrues to the depositor while in a regular loan the essential
cause of the transaction is the necessity of the borrower
- Second, in an irregular deposit the depositor has preference
over other creditors and the distribution of the debtors
property;
- Third, in an irregular deposit the depositor can demand the
return of the article deposited at anytime while in a contract of
loan the lender is bound by the provisions of their contract and it
cannot seek restitution until the time of payment as provided in
the contract.
In this case of Rogers v. Smith, we have there the three distinction
between a contract of loan and an irregular deposit. The first distinction
is as whose the benefit the contract was entered into. In an irregular
deposit the only benefit accrues only to that of the depositor while in a
loan the essential cause of the transaction is the necessity of the
borrower. Now in this case, it was not for the sole benefit of Rogers, just
like any other loan of money like a simple loan or mutuum it was a
benefit of both parties on the part of Smith Bell and Co. they receive the
use of money and on the part of Rogers the interest of his money. A
second distinction is with regard to preference of things: In an irregular
deposit the depositor has a preference over other creditors in the
distribution of debtors property while ordinary loan is not given
preference. Third distinction: In an irregular deposit the depositor can
demand the article at anytime but the lender of a simple loan is bound
by the provisions of the contract and cannot seek restitution until the
time of payment as provided in the contract has risen. Here plaintiff by
mere agreement as provided in the document, plaintiff should not
demand his money at anytime so despite the fact that under the
document they repeatedly stated rather it was repeatedly stated by
Smith Bell and Co. that 12000 has been deposited in their hands, it was
clear that what was entered into was a contract of loan.
BPI v. CA
Now do we have a contract of deposit here? There was a contract of
loan. Who is the debtor? The debtor is BPI. Creditor? Lim and Eastern.
But isn’t it the deposit account was in the name of Lim and Velasco? Yes
but Velasco died.
Remember what is involved here is an irregular deposit. The bank
deposit was an irregular deposit, a loan which earns interest and
therefore the relationship between a bank and a depositor is one of a
debtor and creditor. The deposit under the peso account was an
ordinary bank deposit and it was payable on demand by the depositor.
The issue is: Who is really the depositor? Of course, with banking rules
kung sino yung registered account holder sa kanya i-release ang pera. In
this case, this is an exception in the sense that although the account was
registered in the name of Velasco and Lim. Velasco’s heirs when he died
has no right to said account. Why? Because it was acknowledged here in
the bank, they know that the amount therein did not really pertain to
Velasco but in fact remains to be with Eastern. With that hold-up
agreement there is an acknowledgement that they know they are aware
that the owner or depositor thereof is actually Lim and Eastern
therefore having knowledge who are the rightful owners thereto then
the petitioner BPI should not have allowed such withdrawal in favor of
the heirs because it was already admitted in the hold-up agreement the
question to ownership in the money deposited in the account.
Metrobank v. BA Finance
When the bank released the proceeds of the check in favor of Bitanga
without the authority of BA Finance, what is the effect thereof?
Negligence. What is the standard of diligence in this kind of transaction?
Highest degree of diligence. What contract is involved here? Contract of
Agency. Who is the principal? BA Finance. Agent: Bank. Can we apply the
highest degree of diligence when what is involved is an irregular
deposit? What is the nature of a contract of Agency? TRUST.
In this case, Bitanga alone endorsed the check, the bank allowed the
deposit and released the proceeds thereof in favor of Bitanga. The
amounts were deposited in his account and despite the absence of the
authority of Bitanga’s co-payee BA Finance to endorse it. Clearly, this is
one of irregularity and shows the negligence on the part of the Bank.
Banking business is imbued with public interest such that the highest
degree of diligence and the highest standards of integrity and
performance are expected of banks in order to maintain the trust and
confidence of the public in general in the banking sector.
Art. 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple
loan. (n)
Is article 1980 applicable here? No. Because what is involved is not a
contract of irregular deposit or a simple loan but rather a contract of
agency. Keep in mind whether what is involve is a contract of agency or
irregular deposit, the bank has to still exercise the highest degree of
diligence because the premise of these two types of contracts agency and
irregular deposit is TRUST AND CONFIDENCE or FIDUCIARY RELATIONSHIP.
Moreover, 1980 does not find application in this case since the nature of
relationship is one of Agency. The bank is a collecting bank as an agent its
obligation is to collect for BA Finance the corresponding proceeds from the
check. In addition this is also important because not being a loan or
forbearance of money the interest should only be 6% per annum until
finality and from finality 12% until payment. Again this is based on the
previous circular because it is now 6% effective July 1, 2013.
Reyes v. CA
What is the required diligence from the bank here? Only Diligence of a
26 | F i r s t E x a m C o v e r a g e
good father of a family.
As I mentioned earlier what is involved is an irregular deposit. What is
required from the bank is the highest degree of diligence because it
involves a banking transaction imbued with public interest. In this case,
what is involved is not a contract of deposit or irregular deposit but
rather a contract of sale. You pay to the bank and the bank will issue a
draft and you will have a demand draft and transmit it to in this case to
Australia. The bank exercised ordinary diligence of a good father of a
family and that is enough for them to be not held liable for damages
because they need not require the highest degree of care, only ordinary
diligence under the circumstances. So the employees of the bank did
everything they could under the circumstances and actually the error
was not on their part but rather on the employee of West-Pac Sydney in
Australia by having made the SWIFT CODE erroneously transmitted. So
here, what is involve is a contract of sale or contract or purchase,
respondent bank is not required to exert the diligence more than that of
a good father of a family. This case does not involve of the handling of
the petitioners deposit as what is involve is that of a buyer and a seller.
Respondent Bank acted in good faith and therefore it would not be held
liable for damages.
Guingona v. City Fiscal
Again if what is involved is an irregular deposit which is considered as a
contract of simple loan there could be no Estafa because there is a
transfer of ownership. So if you’re demanding for payment, you are not
demanding for the return of what you have deposited. Sino na ang may-
ari? Si debtor and in this case is the Bank. The bank will have its
obligation but only civil in nature, there is no estafa because there was
no misappropriation. However in this case the bank is civilly liable but
considering that there was already novation of the contract, it is now
Guingona and Martin in their respective personal capacity which should
be held civilly liable otherwise if there is no novation the bank will be
liable.
Province of Bataan v. PCGG
An escrow is a legal instrument which purports to a legal obligation
which is deposited by the grantor, promissor or obligor or his agent with
a stranger or third party which is in this case Landbank. Rentals were
deposited in Landbank to be kept by the depositary until the
performance of the obligation or the happening of the event and to
deliver to the grantee, promisee or obligee so since there was a dispute
as to his entitlement to such rentals then the court order for the deposit
in escrow the said rental payments. Please take note that escrow is not
really limited in the application to lease but is applied to any written
instrument with a third person, this will include bonds or covenants,
lease, mortgages, oil and gas leases, contracts for the sale of land or
purchase for the sale of personal property, corporate stocks, stock
subscriptions, and other commercial paper, insurance application and
policies, and so forth. All of those are written documents or contracts
however the court emphasizes that money may be delivered in escrow
as was in this case. As to the order of the escrow SC found it proper as
the order was incident in the main proceeding regarding the dispute as
to the entitlement of the said rental proceeds.
December 6, 2013. Part I. Zar Gido
Article 1981. When the thing deposited is delivered closed and sealed, the
depositary must return it in the same condition, and he shall be liable for
damages should the seal or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there is proof to the
contrary.
As regards the value of the thing deposited, the statement of the depositor
shall be accepted, when the forcible opening is imputable to the depositary,
should there be no proof to the contrary. However, the courts may pass
upon the credibility of the depositor with respect to the value claimed by
him.
When the seal or lock is broken, with or without the depositary's fault, he
shall keep the secret of the deposit. (1769a)
Article 1982. When it becomes necessary to open a locked box or
receptacle, the depositary is presumed authorized to do so, if the key has
been delivered to him; or when the instructions of the depositor as regards
the deposit cannot be executed without opening the box or receptacle. (n)
What is involved in this two articles is, subject matter of the deposit is
delivered to the depositary close and sealed.
Obligations of the depositary:
- Return the thing deposited when delivered closed and sealed in
the same condition
- Must pay for damages should the seal or lock be broken through
his fault (in case it is broken there is a prima facie presumption
that it is through his fault and he has the burden of proof to
prove otherwise.)
- To keep secret of the deposit, when the seal or lock is broken
with or without the depositary’s fault. ( when the seal or lock is
broken it is not sufficient for the depositary to keep secret the
deposit, by exercising the diligence as required from a depositary
he must also inform the depositor with regard the condition of
the said subject matter.)
These are the obligations of the depositary because based from trust and
confidence.
Article 1982 authorized to open under what circumstances:
- When it is presumed to the party, it is presumed if the
depositary is given a key.
- By virtue of necessity.
Article 1983. The thing deposited shall be returned with all its products,
accessories and accessions.
Should the deposit consist of money, the provisions relative to agents in
article 1896 shall be applied to the depositary.
Depositor in this sense is considered not really the owner but is in the
concept **** over the thing. Therefore the thing deposited by virtue in
relation to the right of ownership; return the thing itself plus the fruits,
accessories and accessions which are consequence of ownership.
The money deposited is a money the depositary has no right to make use
of, otherwise it shall be considered as a loan and therefore he may be
liable for interest. If the depositary is on delay or has make use of the
money he shall be liable for interest as indemnity, he owes interest in the
sums as he has apply for his own use from the day he did so not from the
day of demand and those which he still owes after the extinguishment of
the deposit.
If the subject matter is not consumable, nevertheless the depositary has no
right to make use thereof, otherwise if the use thereof is the principal
purpose it will be considered as a commodatum .
Article 1984. The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen and who its
true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the
period of one month, the depositary shall be relieved of all responsibility by
returning the thing deposited to the depositor.
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.
Remember that ownership is not required of the depositor because again a
contract of deposit does not involve a transfer of ownership an
encumbrance in relation to the property. Therefore the depositary cannot
require the depositor to prove his ownership over the property, he cannot
refuse to release the thing deposited to him by the depositor if the
depositor fails to prove or show evidence that he is really the owner of the
thing deposited. Ownership is not essential.
Steps that may be taken by the depositary when a 3 rd person appears to be
the owner, and what should the depositary do to be relieved from the
responsibility or obligation.
If it appears that a 3rd person is the owner of what has been deposited the
depositary has the obligation to advise the true owner and the true owner
can claim the same within 1 month from notice.
This one month period to claim even if it had been given to the 3 rd person
is for the protection of the depositary. After this one month period
essentially what would happened is that the depositary would have no
liability unless he’d be found to be in bad faith.
Directly available to the 3rd person is to recover it in other legal process.
What happens here after the 1 month period? return the thing if there is
reasonable grounds to believe that the thing has not been lawfully
acquired by the depositor.
Ex.
Rolex watch with serial number , said was published in a newspaper to
have been stolen then you realized that you have in your possession as a
27 | F i r s t E x a m C o v e r a g e
deposit the said watch. This would of course give rise that the one who
deposited it to you is not the owner thereof.
What are your responsibilities as depositary?
Inform the real owner and give the real owner one month to claim it. If he
fails to claim it, considering that you have reasonable grounds regarding
the right of the depositor over the thing, your obligation is to return in back
to the depositor because again you now have a reasonable ground to
believe that the thing has not been lawfully acquired by the depositor.
What happened in the interim? What happened when the depositor
demands for the return of the thing before the 30 days period.
It is in the discretion of the depositary. There is no exact provision for it.
Atty. Sarona’s submission: the most logical thing to do is wait for 30 days
period to expire. the depositor may file for damages because the
depositary refused to release the deposit upon demand but nonetheless
the depositary can raise 1984 as a defense.
Article 1985. When there are two or more depositors, if they are not
solidary, and the thing admits of division, each one cannot demand more
than his share.
When there is solidarity or the thing does not admit of division, the
provisions of articles 1212 and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to one of the depositors, the
depositary shall return it only to the person designated.
First paragraph covers: thing deposited is divisible and the depositors are
not solidarily liable or their tie is not solidary. If those two are present each
one of the depositor can demand only his respective share. (ex. 10 Sacks of
rice – 2 persons being joint depositors – what would happen if only one
depositor claims for the return of the thing? - he can only claim his
respective share which in our example is 5 sacks of rice.)
What happens if obligation is solidary or the the thing deposited is not
divisible? – in other words one of the two requisites we mentioned earlier
is missing. Rule: you apply the rule on acting solidarity, those you had in
obligations and contracts.
Article 1212. Each one of the solidary creditors may do whatever
may be useful to the others, but not anything which may be
prejudicial to the latter.
Article 1214. The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial, has been
made by one of them, payment should be made to him.
However, if there has been a stipulation that the subject matter be
returned to one of the depositors then the depositary is bound to return it
to the person designated although said person did not make any demand
for its return.
Example:
10 sacks of rice - the depositors are A and B - in the absence of any
stipulation if only A demands for the return the depositary is obliged to
return to him his share which is 5 sacks of rice.
What if there is an agreement that all 10 sacks of rice will be returned only
to A?
So with that stipulation even if B make the demand depositary should not
deliver it to B regardless of the nature of the subject matter (divisible or
indivisible) and regardless of nature of the liability (solidary or joint). The
stipulation will prevail.
Article 1986. If the depositor should lose his capacity to contract after
having made the deposit, the thing cannot be returned except to the
persons who may have the administration of his property and rights.
In 1986 the depositor was capacitated of the perfection of the deposit but
what happened here is that after having made the deposit, the depositor
became incapacitated. The rule is that the thing cannot be returned to the
said depositor except through those persons whi have administrator of his
property or rights
Ex: the depositor became insane and then demands for the return of the
thing deposited. The obligation of the depositary is to return the thing to
the persons who have administration of the property of the depositor, not
to the incapacitated depositor himself. Pr to the depositor after he has
become capacitated again. Distinguish this to 1970, in 1970 the depositor
was incapacitated at the time of the making of the deposit
Article 1987. If at the time the deposit was made a place was designated
for the return of the thing, the depositary must take the thing deposited to
such place; but the expenses for transportation shall be borne by the
depositor.
If no place has been designated for the return, it shall be made where the
thing deposited may be, even if it should not be the same place where the
deposit was made, provided that there was no malice on the part of the
depositary.
Place to return the subject of the deposit
1. Place on the stipulation of the part – expenses shall be borne by
the depositor as a general rule.
2. In the absence of a stipulation, the place to return the thing is
where the thing deposited might be even if it should not that
same place where the original deposit was made. Provided
however that the transfer was accomplished without malice on
the part of the depositary.
Example: sacks of rice deposited in Matina, subsequently
because of flooding the thing was transferred into another
warehouse in Toril – in the absence of any agreement the place
of return would now be that warehouse in Toril – again the
transfer must be without malice on the part of the depositary, if
there is malice the depositary would be held liable for the
expenses.
This is somehow similar with article 1251 in obligations and
contracts.
Article 1251. xxx
There being no express stipulation and if the
undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be
at the moment the obligation was constituted.
xxx
Article 1988. The thing deposited must be returned to the depositor upon
demand, even though a specified period or time for such return may have
been fixed.
This provision shall not apply when the thing is judicially attached while in
the depositary's possession, or should he have been notified of the
opposition of a third person to the return or the removal of the thing
deposited. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition.
This article deals with the demand of the depositor of the thing – as a
general rule the depositor can demand the return of the thing deposited at
will whether a period has been stipulated or not. However whenever a
period is agreed to the same is for the benefit of the depositor, and it may
be validly waived by him.
Now you have to consider whether or not the deposit is gratuitous or for
compensation.
Example:
The depositor will deposit the thing for one year.
If it is gratuitous; even if it has not reached the 1 year period stipulated the
depositor can still demand the return at any time.
If it is subject to compensation; the depositor can still demand the return
of the thing even before the 1 year period but he will be liable to the
depositary for the compensation corresponding to the entire period.
Exemption to the general rule:
- If the thing is judicially attached while in the depositary’s
possession – here the depositor could not just demand the
return of the thing, otherwise the depositary would be clearly
disobeying the judicial order of attachment.
- If the depositary is notified of the opposition a third person to
the return or the removal of the thing deposited – in this case
the best thing the depositary could do is to file an action for
interpleader , because in this case the depositary gets confused
to whom he would return the thing so the best thing to do for
the depositary is to consignee the thing through an action of
interpleader
Article 1989. Unless the deposit is for a valuable consideration, the
depositary who may have justifiable reasons for not keeping the thing
deposited may, even before the time designated, return it to the depositor;
28 | F i r s t E x a m C o v e r a g e
and if the latter should refuse to receive it, the depositary may secure its
consignation from the court.
Compare this with article 1988. 1988 talks about when can the depositor
demand the return of the thing. Under 1989 when can the depositary
return the thing deposited.
You consider whether the deposit is gratuitous or not. If it is gratuitous
depositary may likewise return the thing deposited notwithstanding that a
period has been fixed by the party, subject to the limitation that the return
must be for a justifiable reason. If the depositor refuse to receive the thing
the remedy for the depositary is to have the thing consign.
If the deposit is subject to a valuable consideration – depositary has no
right to return the thing deposited before the expiration of the time
designated by the parties. Even if he would suffer inconvenience as a
consequence.
Article 1990. 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.
In 1972 if you remember, depositary has the obligation to return the thing
deposited but under 1990 he will not be liable for the loss of the thing, if
the thing was lost through a force majeure or by a government order (ex.
Expropriation).
Nevertheless, if the depositary received money or thing in place of the
thing subject of the deposit, the depositary has the duty to deliver what he
received to the depositor, otherwise he would unjustly enriched himself at
the expense of the depositor.
Article 1991. The depositor's heir who in good faith may have sold the thing
which 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.
“The depositor's heir…” should be read as “the depositary’s heir…” .
Situation:
The depositary dies – the object is left with th heir – the heir in good faith
sold the thing because he thinks its valuable.
The obligation here of the heirs is to return the price received or assign the
right to collect the same if it has not been prayed and not the real value of
the thing – the purchase price need not be equal to the value of the subject
matter.
However if there is bad faith on the part of the heir then aside from – to
return the price received or assign the right to collect, the heir will also be
liable for damages.
Review of the obligation of the depositary:
Under 1972. Primary obligation is to keep the thing safely as well as to
return the thing
When to return?
General rule : Upon demand
When can you return it even without demand?
If it is gratuitous. There must be a justifiable reason, otherwise you cannot
return it before the expiration of the period.
If you return the subject matter it must include all the fruits, accession and
accessories.
If the thing is lost through force majeure or government order – in replace
of the thing lost the depositary receives money or another thing in place of
that was lost, you return the same to the depositor
Where do you return the thing?
In the place agreed or in the absence of an agreement , where the thing is
currently
A depositary has the obligation not to deposit it to a third person unless
authorized
Under article 1974 also take note of the changing of the contract of deposit
In case it earns interest the depositary also has the obligation to collect the
interest and preserve its value
With regard to co-mingling subject matter , general rule you can only co-
mingle if stipulated or if it involve matters of the same kind and quality.
Use. The depositary is not to make use of the thing deposited unless
authorized
General rule in obligations and contracts, depositary will not be liable for
loss in case of fortuitous event subject to the exemptions under 1174.
Obligations of the Depositor
There are two principal obligations on the part of the depositor.
1. To pay for the expenses for reservation.
2. To pay for losses incured by depositary due to the character of
the thing deposited.
Article 1992. If the deposit is gratuitous, the depositor is obliged to
reimburse the depositary for the expenses he may have incurred for the
preservation of the thing deposited.
1992 is applicable only to gratuitous deposit. This is based on equity,
because the depositor would nevertheless incur the same if the deposit is
in his possession. Because the expenses here are for the preservation of
the thing deposited otherwise if you make the depositary liable for this the
depositor would be unjustly enriched at the expense of the depositary.
Take note of 1992 which different that of commodatum – in commodatum
the expenses (necessary) is borne by the bailee. Likewise there is a
distinction here in deposit where unlike that of commodatum in where we
made distinctions whether the necessary expenses is ordinary or extra-
ordinary, here in 1992 there is no distinction; all expenses necessary for
the preservation of the thing deposited so this would include both ordinary
and extra-ordinary expenses.
Useful expense or ostentatious expenses merely for luxury r[leasure , they
are not covered by 1992. However since 1992 covers only gratuitous
deposit what happns for deposit for compensation – the general rule is
expenses for the preservation is borne by the depositary these expenses
are deemed included to that compensation to be paid by the depositor.
Exception again is by agreement of the depositary.
Article 1993. The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, unless at the time of the
constitution of the deposit the former was not aware of, or was not
expected to know the dangerous character of the thing, or unless he
notified the depositary of the same, or the latter was aware of it without
advice from the depositor.
A depositary must be reimbursed for loss suffered by him because of the
character of the thing deposited. The exemptions are those mentioned in
1993
1. At the time of the constitution of the deposit the depositor was
not aware of it.
2. The depository was not expected to know the dangerous
character of the thing deposited.
3. Depositary was notified of the same
4. He was aware of it without advise from the depositor.
The effect with this 4 exemptions is that there would be no liability on the
part of the depositor even if the depositary incures expenses. but again the
general rule is that the depositary must be reimbursed for loss suffered by
him because of the thing deposited.
Article 1994. The depositary may retain the thing in pledge until the full
payment of what may be due him by reason of the deposit.
This is a pledge created by operation of law. A pledge is a form of security
to secure a principal obligation, it is an accessory contract.
The thing retained serves as a security for the payment of what must be
due to the depositary by reason of the deposit.
This rule is obviously different from commodatum. In commodatum you
cannot retain the thing unless it falls under article 1951 which deals with
“hidden defects”
Article 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the depositor or
the depositary.
Take note that the list is not exclusive as to where the contract of deposit is
extinguished; you can apply the other instances (ex. Novation. Merger)
Also take note if the deposit is subject to compensation or not; if it is
gratuitous – if either the depositor of the depositary dies as a general rule
it extinguishes the deposit, depositary is not obliged to continue with the
contract of deposit. Unless if there is a stipulation.
29 | F i r s t E x a m C o v e r a g e
If it is subject to compensation it is not extinguished by the death of either
party. Remember here that the contract is onerous so you respect that
agreement between the original parties and the rights and obligations as a
general rule under 1178. Rights and obligations are transmissible to their
respective heirs. However, the heirs of the one who died are given the right
to terminate the deposit even before the expiration of the term, even if it
is subject to compensation, even if it is subject to a term the heir of any of
the party who died can ask for the termination of the contract of deposit.
Necessary Deposit
Article 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire, storm,
flood, pillage, shipwreck, or other similar events. (1781a)
Article 1997. The deposit referred to in No. 1 of the preceding article shall
be governed by the provisions of the law establishing it, and in case of its
deficiency, by the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be regulated
by the provisions concerning voluntary deposit and by article 2168.
2 types of extra-judicial deposit
1. Voluntary (based from the free will of the depositor)
2. Necessary (there is no freedom of choice)
3 Kind of necessary deposit
Art. 1996
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other similar
events.
Art. 1998
(3) deposit of effects made by travellers in hotels or inns
Art. 1754
(4) common carriers
Art. 1996 (1)
- this is a deposit by virtue of law
ex.
Art. 538. Judicial deposit of a thing the possession of which is
being disputed in litigation by 2 or more persons – the action
there would be an interpleader, in the mean time it can be in the
possession of the 3rd person who filed the inter pleader or to a
separate 3rd person.
Art. 586. Deposit to the bank or public institution public bonds,
instruments of credit payable to order or to bearer
Art. 2104. The creditor cannot use the thing pledged,
without the authority of the owner, and if he should do so, or
should misuse the thing in any other way, the owner may ask
that it be judicially or extra judicially deposited
Art. 1996 (2)
- deposit by accident or fortuitous event, the law imposes to the
recipient the obligations of a bailee. The main object is to save
the property rather than its safekeeping, nonetheless it is
considered as a necessary deposit. This is also known as a quasi
bailment, involuntary bailment, involuntary deposit.
Here there must be a quasi relation between the calamity and
the constitution of the deposit
Governing rules here are the rules in voluntary deposit as well as
the good value quasi contract in Art. 2168
December 6, 2013. Part II. Michelle Mae Andoy
Quasi contract in:
Art. 2168. 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.
So remember Quasi contract, we have two kinds:
1. negotiorum gestio
2. solutio indebiti
Essentially what is covered here is negotiorum gestio.
Nakita mo nasusunog ang bahay niya, wala naman kayo nag agree na
bantayan ang bahay niya but voluntarily you try to save noh his appliances
or his properties. Now when you save the appliances of your neighbour
there was no contract diba kaya quasi contract voluntary yung act at the
same time your purpose is to save them from the fire. From saving until it
will be claim from you, what would happen there is that there is a deposit
because you keep it safe until it will be claim by your neighbour. But here,
it is not necessarily deposit kasi nga the owner did not get to choose kung
kanino niya i deposit ang kanyang gamit. The law states 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. Otherwise, there will be unjust
enrichment.
ART. 1998. The deposit of effects made by travellers in hotels or inns shall
also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of their
effects.
ART. 1999. The hotel-keeper is liable for the vehicles, animals and articles
which have been introduced or placed in the annexes of the hotel.
The words “travellers” and “guests,” as used by law, are synonymous. It
refers to transients and not to boarders. Nontransients are governed by
the rules on lease. Ex. dormers(haha!)
The terms “hotel-keeper” and “inn-keeper” are also synonymous.
Hotel. — It has been defi ned as “a building of many rooms chiefly for
overnight accommodation of transients and several fl oors served by
elevators, usually with a large open street-level lobby containing easy
chairs, with a variety of compartments for eating, drinking, dancing,
exhibitions, and group meetings, with shops having both inside and street-
side entrances and offering for sale items of particular interest to a
traveller, or providing personal services, and with telephone booths,
writing tables, and wash rooms freely available.” (Webster’s Third New Int.
Dictionary, p. 1095.)
Inn. — It has been defined as “a public house for the lodging of travellers
for compensation and until capacity is reached; a place of public
entertainment that does not provide lodging.” (Ibid., p. 1165.)
Motel. — It has been defined as “an establishment which provides lodging
and parking and in which the rooms are usually accessible from an outdoor
parking area.”
Ang motel galing yan sa word na motorist hotel ha! paglabas parking
space na, medyo iba na ang nasa isip ng tao ngayon pag makarinig ng
motel. HAHA
Before keepers of hotels or inns may be held responsible as depositaries
with regard to the effects of their guests, the following elements must
concur:
(1) They have been previously informed about the effects
brought by the guests; and
(2) The latter have taken the precautions prescribed regarding
their safekeeping.
If these two instances exist and what would happen is nawala yung gamit
ni guest the effect is the hotel keepers or inn keepers will be held
responsible as depositories.
Extent of liability of keepers of hotels and inns
The liability is not limited to effects lost or damaged in the hotel rooms
which come under the term “baggage” or articles such as clothing as are
ordinarily used by travellers but include those lost or damaged in hotel
annexes such as vehicles in the hotel’s garage The responsibility imposed
extends to all those who offer lodging for a compensation, whatever may
be their character. (11Manresa 759.)
Let’s take a look in the case of:
Durban Apartments vs. Pioneer
Facts: On July 22, 2003, [respondent] Pioneer Insurance and Surety
Corporation x x x, by right of subrogation, filed a Complaint for Recovery of
Damages against [petitioner] Durban Apartments Corporation, doing
business under the name and style of City Garden Hotel, and Vicente
Justimbaste. [Respondent averred] that: it is the insurer for loss and
damage of Jeffrey S. See’s [the insured’s] 2001 Suzuki Grand Vitara in the
amount of P1,175,000.00; on April 30, 2002, See arrived and checked in at
30 | F i r s t E x a m C o v e r a g e
the City Garden Hotel beforemidnight, and its parking attendant,
defendant Justimbaste got the key to said Vitara from See to park it.
On May 1, 2002, at about 1:00 o’clock in the morning, See was awakened
in his room by [a] telephone call from the Hotel Chief Security Officer who
informed him that his Vitara was carnapped while it was parked
unattended at the parking area of Equitable PCI Bank (the parking area of
the said bank was being used by the hotel at night since the latter only has
12 available parking slots) between the hours of 12:00 [a.m.]
and 1:00 [a.m.].
The Vitara has not yet been recovered since July 23, 2002 as evidenced by
a Certification of Non- Recovery issued by the PNP TMG. Respondent paid
the P1,163,250.00 money claim of See and mortgagee ABN AMRO Savings
Bank, Inc. as indemnity for the loss of the Vitara. It was discovered during
the investigation that this was the second time that a similar incident of
carnapping happened in the valet parking service of [petitioner] Durban
Apartments as admitted by Horlador and Justimbaste (hotel’s employees).
Issue: W/N petitioner is liable to respondent for the loss of See’s vehicle.
Ruling: Yes. In this case, respondent substantiated the allegations in its
complaint, i.e., a contract of necessary deposit existed between the
insured See and petitioner.
Article 1962, in relation to Article 1998, of the Civil Code defines a contract
of deposit and a necessary deposit made by persons in hotels or inns:
Art. 1962. A 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. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract.
Art. 1998. The deposit of effects made by travelers in hotels or inns shall
also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel-
keepers or their substitutes advised relative to the care and vigilance of
their effects.
Plainly, from the facts found by the lower courts, the insured See
deposited his vehicle for safekeeping with petitioner, through the latter’s
employee, Justimbaste. In turn, Justimbaste issued a claim stub to See.
Thus, the contract of deposit was perfected from See’s delivery, when he
handed over to Justimbaste the keys to his vehicle, which Justimbaste
received with the obligation of safely keeping and returning it.
Ultimately, petitioner is liable for the loss of See’s vehicle.
Atty. Sarona: Remember here the one filing the case is the insurance
company based on subrogation. If you take a look of Article 1999 The
hotel-keeper is liable for the vehicles, animals and articles which have
been introduced or placed in the annexes of the hotel. You compare it in
the case of Durban, the parking space is not an annex of their premises.
Nevertheless, they are bound to this Article 1998. Why? Because there was
an extension of their premises in the sense that they asked permission
from equitable pci that the said premises would be use by them at night.
What is also relevant here is that there have been already carnapping in
that vicinity so they should have exercised the diligence required
concerning the circumstances of the case. Either di na sila nagpark doon or
they had added security. There was an extension of the liability of the hotel
or obligation of the depositary in this case of the hotel because ni receive
nila yung keys. They are already responsible as depositaries in that case.
Alright.
We now proceed to next Articles.
ART. 2000. The responsibility referred to in the two preceding articles shall
include the loss of, or injury to the personal property of the guests caused
by the servants or employees of the keepers of hotels or inns as well as by
strangers; but not that which may proceed from any force majeure. The
fact that travellers are constrained to rely on the vigilance of the keeper of
the hotel or inn shall be considered in determining the degree of care
required of him.(1784a)
ART. 2001. The act of a thief or robber, who has entered the hotel is not
deemed force majeure, unless it is done with the use of arms or through an
irresistible force. (n)

ART. 2002. The hotel-keeper is not liable for compensation if the loss is due
to the acts of the guests, his family, servants or visitors, or if the loss arises
from the character of the things brought into the hotel. (n)
When hotel-keeper liable:
In the following cases, the hotel-keeper is liable regardless of the amount
of care exercised:
(1) The loss or injury is caused by his servants or employees as well as by
strangers (Art. 2000.) provided that notice has been given and proper
precautions taken (Art. 1998.); and
(2) The loss is caused by the act of a thief or robber done without the use
of arms and irresistible force. (Art. 2001.) for in this case, the hotel-keeper
is apparently negligent.
When hotel-keeper is NOT liable:
The hotel keeper is not liable in the following cases:
(1) The loss or injury is caused by force majeure, like flood, fire (Art. 2000.),
theft or robbery by a stranger (not by hotelkeeper’s servant or employee)
with the use of arms or irresistible [emphasis supplied] force (Art. 2001.),
etc., unless he is guilty of fault or negligence in failing to provide against
the loss or injury from his cause (see Arts. 1170, 1174.);
(2) The loss is due to the acts of the guests, his family, servants, or visitors
(Art. 2002.); and
(3) The loss arises from the character of the things brought into the hotel.
ART. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest whereby
the responsibility of the former as set forth in Articles 1998 to 2001 is
suppressed or diminished shall be void. (n)
The rule in this article is similar to the rule on common carriers which does
not allow a common carrier to dispense with or limit his responsibility by
stipulation or by posting of notices. (see Art.
1760.) Such stipulation is deemed contrary to law, morals, and public
policy. (Art. 1306.)
This is contrary to law, moral and public policy so even if there are signs
not only in hotels but also in number of restaurants. Pero kasi wala tayong
law regarding restaurants you cannot apply this because they are not
considered as depositaries. But if you see like, if you check in a hotel may
makita ka na “the hotel will not be liable for any loss or damaged to your
things” Take note of these Article 2003. Those post or notices are not
sufficient for the to evade their liability. Why? Because these are within the
premises of the hotel or the inn therefore they are considered to have
supervision and control of their inns and the premises thereof. For example
sa lobby nawala mo ang gamit mo, it is an area where different people
meet kahit hindi sila naka check in so in that instance you are considered as
negligent you cannot use Article 2003 to collect damages or loss that you
have suffered. But however, if what you have is gamit in the rooms. Again,
this can be use as a basis. Same case in the depositary box of the hotel.
(1) Hotel-keepers and inn-keepers in offering their accommodations to the
public, practically volunteer as depositaries, and as such, they should be
subject to an extraordinary degree of responsibility for the protection and
safety of travellers who have no alternative but rely on the good faith and
care of those with whom they take lodging. (Art. 2000.)
(2) Furthermore, inn-keepers, by the very nature of their business, have
supervision and control of their inns and the premises thereof. As a matter
of fact, authorities are to the effect that it is not necessary in order to hold
an inn-keeper liable that the effects of the guests be actually delivered to
him or his employees; it is enough that they are within the inn.
YHT Realty vs. CA
FACTS: Private respondent McLoughlin, an Australian businessman-
philanthropist, used to stay at Sheraton Hotel during his trips to the
Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by
showing him around, introducing him to important people, accompanying
him in visiting impoverished street children and assisting him in buying gifts
for the children and in distributing the same to charitable institutions for
poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel
to Tropicana where Lainez, Payam and Danilo Lopez were employed. Lopez
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served as manager of the hotel while Lainez and Payam had custody of the
keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlin's booking at the Tropicana where he started staying during his
trips to the Philippines from December 1984 to September 1987.
Respondent McLoughlin then stays in Tropicana Hotel everytime he is in
the Philippines and would then rent a safety deposit box for his articles
that he need to be secured while in the country or on a short business trip
abroad.
The safety deposit box could only be opened through the use of 2 keys, one
of which is given to the registered guest, and the other remaining in the
possession of the management of the hotel. McLoughlin allegedly placed
the following in his safety deposit box – 2 envelopes containing US Dollars,
one envelope containing Australian Dollars, Letters, credit cards,
bankbooks and a checkbook.
When he went abroad, a few dollars were missing and the jewelry he
bought was likewise missing.
Eventually, he confronted Lainez and Paiyam who admitted that Tan
opened the safety deposit box with the key assigned to him. McLoughlin
went up to his room where Tan was staying and confronted her. Tan
admitted that she had stolen McLouglin’s key and was able to open the
safety deposit box with the assistance of Lopez, Paiyam and Lainez. Lopez
also told McLoughlin that Tan stole the key assigned to McLouglin while
the latter was asleep.
McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered.
Lopez refused to accept responsibility relying on the conditions for
renting the safety deposit box entitled “Undertaking For the Use of Safety
Deposit Box” which states that:
"Undertaking For the Use Of Safety Deposit Box," specifically
paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any loss in the
contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use
thereof by any other person should the key be lost;
4. To return the key and execute the RELEASE in favor of
TROPICANA APARTMENT HOTEL upon giving up the use of the
box.
ISSUE: Whether the hotel’s Undertaking is valid?
HELD: NO. Article 2003 was incorporated in the New Civil Code as an
expression of public policy precisely to apply to situations such as that
presented in this case. The hotel business like the common carrier’s
business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty constitutes the
essence of the business. The law in turn does not allow such duty to the
public to be negated or diluted by any contrary stipulation in so-called
“undertakings” that ordinarily appear in prepared forms imposed by
hotel keepers on guests for their signature.
In an early case (De Los Santos v. Tan Khey), CA ruled that to hold
hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their
employees. It is enough that such effects are within the hotel or inn. With
greater reason should the liability of the hotelkeeper be enforced when the
missing items are taken without the guest’s knowledge and consent from a
safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the “undertaking” manifestly contravene Article
2003, CC for they allow Tropicana to be released from liability arising from
any loss in the contents and/or use of the safety deposit box for any cause
whatsoever. Evidently, the undertaking was intended to bar any claim
against Tropicana for any loss of the contents of the safety deposit box
whether or not negligence was incurred by Tropicana or its employees.
Atty. Sarona: What was there any suspicious circumstance which should
have lead to inquire further as to the authority given to Tan to access the
safety deposit box? Aside that the fact that Tan is not depositor. At what
time would Tan access to the deposit box? When McLoughlin asleep, early
hours kadlawon. Suspicious na aside from the fact that it was not the
depositor who tried to access, it is not sufficient na may susi siya. The
hotels obligation was that of his guest in this case to the one who availed
with this safety deposit boxes. They should have exercised the diligence
required and the absence thereof they should be held liable.
ART. 2004. 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. (n)
More or less similar to voluntary deposit, right to retain the things.
Hotel-keeper’s right to retain:
The right of retention recognized in this article is in the nature of a pledge
created by operation of law. (see Arts. 2121-2122.) It is given to hotel-
keepers to compensate them for the liabilities imposed upon them by law.
Remember, there is no transfer of ownership. There is only a pledge which
is a guaranty of the obligation. The bailee in commodatum may likewise
retain the thing loaned for damages by reason of defects thereof. (Arts.
1944, 1951.)
Incidentally, the act of obtaining food or accommodation in a hotel or inn
without paying therefor constitutes estafa. (Arts.315, Sec. 2[e], Revised
Penal Code.)
So those are the provisions of necessary deposits.
SEQUESTRATION OR JUDICIAL DEPOSIT
ART. 2005. A judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered. (1785)
ART. 2006. Movable as well as immovable property may be the object of
sequestration. (1786)
ART. 2007. The depositary of property or objects sequestrated cannot be
relieved of his responsibility until the controversy which gave rise thereto
has come to an end, unless the court so orders. (1787a)
ART. 2008. The depositary of property sequestrated is bound to comply,
with respect to the same, with all the obligations of a good father of a
family. (1788)
When judicial deposit takes place:
A deposit may be constituted judicially or extrajudicially. (Art. 1964.)
Necessary and voluntary are sub classification under extra judicial.
Judicial deposit or sequestration takes place when an attachment or
seizure of property in litigation is ordered by a court.1 (Art. 2005.) For
example, properties may be attached by the sheriff upon the filing of a
complaint (Rule 57, Rules of Court.), or a receiver (a disinterested party)
may be appointed by the court to administer and preserve the property in
litigation2 (Rule 59, ibid.), or personal property may be seized by the sheriff
in suits of replevin or manual delivery of personal property. (Rule 60, ibid.)
Nature and purpose of judicial deposit:
The deposit is judicial because it is auxiliary to a case pending in court.3
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.
Obligation of depositary of sequestrated property:
The depositary of sequestrated property is the person appointed by the
court. (Art. 2007.) He has the obligation to take care of the property with
the diligence of a good father of a family (Art. 2008.) and he may not be
relieved of his responsibility until the litigation is ended or the court so
orders. (Art. 2007.)
Los Baños Rural Bank, Inc. vs. Africa
Pacita Africa requested Macy Africa to work for the reconstitution of the
TCT of the former’s conjugal property after the Register of Deeds of
Quezon City was razed by fire. Allegedly, Macy forged a Deed of Absolute
Sale purporting to transfer ownership of the subject property to Macy and
issuance of a TCT under her name. Macy was able to mortgaged the subject
property to the respondent bank. Pacita then filed an application of
preliminary injunction to stop the Los Banos Bank from consolidating title
to the subject property.
Issue: W/N the appellate court erred in issuing a writ of preliminary
injunction to stop petitioner’s consolidation of its title to the subject
property.
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Held: Injunction is a preservative remedy aimed at no other purpose than
to protect the complainant’s substantive rights and interests during the
pendency of the principal action. It is proper only when the plaintiff
appears to be entitled to the relief demanded in the complaint; Thus, there
are two requisite conditions for the issuance of a preliminary injunction,
namely, (1) the right to be protected exists prima facie, and (2) the acts
sought to be enjoined are violative of that right.
Lis Pendens
Petitioner further contends that respondents are not entitled to the relief
prayed for, because they caused a notice of lis pendens to be annotated at
the back of TCT No. 81519, registered in the name of Macy P. Africa; thus,
that notice provided ample protection of their rights and interests.
We are not persuaded. A notice of lis pendens serves as an announcement
to the whole world that a particular real property is in litigation and as a
warning that those who acquire an interest in the property do so at their
own risk -- they gamble on the result of the litigation over it. However,
the cancellation of such notice may be ordered by the court that has
jurisdiction over it at any given time. Its continuance or removal -- like the
continuance or the removal of a preliminary attachment or injunction -- is
not contingent on the existence of a final judgment on the action and
ordinarily has no effect on the merits thereof. Thus, the notice of lis
pendens does not suffice to protect herein respondents’ rights over the
property. It does not provide complete and ample protection.
Atty. Sarona: A notice of lis pendens is an announcement to the whole
world that a particular real property is in litigation and serves as a warning
that one who acquires an interest over said property does so at his own
risk, or that he gambles on the result of the litigation. So in this case it
could not be considered as a judicial deposit because it is not on the
existence of a final judgment on the action and ordinarily has no effect on
the merits thereof. Unlike doon sa concept ng judicial deposit. Thus, the
notice of lis pendens does not suffice to protect herein respondents’ rights
over the property. Which is the purpose if you have a judicial deposit. It
does not provide complete and ample protection.
Also take note of the distinctions of judicial and extrajudicial deposits:
The differences between judicial and extrajudicial deposits are:
(1) Cause or origin. — judicial, by the will of the court;
extrajudicial, by the will of the parties; hence, there is a contract;
(2) Purpose. — judicial, as security and to secure the right of a
party to recover in case of a favorable judgment; extrajudicial,
custody and safekeeping of the thing;
(3) Subject matter. — judicial, either movable or immovable
property but generally immovable property; extrajudicial, only
movable property;
(4) Remuneration. — judicial, always remunerated (onerous);
extrajudicial, may be compensated or not, but generally
gratuitous; and
(5) In whose behalf it is held. — judicial, in behalf of the person
who, by the judgment, has a right; extrajudicial, in behalf of the
depositor or third person designated.
ART. 2009. As to matters not provided for in this Code, judicial
sequestration shall be governed by the Rules of Court. (1789a)
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).
The Rules of Court provide also for attachment in criminal cases. (Rule 127
thereof.)
December 11, 2013. Danielle Miles
WAREHOUSE RECEIPTS LAW
This is not part of civil law but under commercial law.
It is a deposit under ACT 2137 as amended. What are the purposes
thereof?
1. To regulate the status, rights and liabilities of the parties in a
warehousing contract
2. To protect those who in good faith and for value, acquire
negotiable warehouse receipts by negotiation
3. To render the title to and right of possession of property
stored in warehouses more easily convertible
 4. To facilitate the use of warehouse receipts as documents of
title
5. In order to accomplish these, to place much greater
responsibility on the warehouseman.
What is the scope of the law? It covers all types of warehouses whether
public or private warehouses bonded or not bonded. What do you mean
bonded or not? Because there is also another special law the general
bonded warehouse act. It applies to warehouses which are bonded.
Sometimes they include this in the review. It also governs warehouse
receipts but specific to bonded warehouse.
Warehouse receipts law prescribes mutual duties and rights of a
warehouseman who issues warehouse receipts and his depositor and
covers all warehouses whether bonded or not. General bonded warehouse
act on the other hand regulates and supervises the warehouses which put
up a bond. You apply the warehouse receipts law to warehouse receipts
issued by a warehouse man as defined in the warehouse receipts law and
the civil code will apply on other cases where receipts are not issued by a
warehouseman.
The purpose is still safekeeping, a contract of deposit. So what happens if
there was no issuance of receipt, you apply the law on deposit as provided
by the civil code.
The difference here is in the warehouse receipts law , the depositor is not
necessary the holder of warehouse receipt. As discussed in sales,
warehouse receipts is a document of title. Remember that a document of
title can be negotiable or non-negotiable. That’s the same thing here in
warehouse receipts, what would happen is that yung actual person na
nagdeposit might not be the subsequent holder for it might be possible
that the warehouse receipt has already been negotiated.
Who issues the warehouse receipt?
Warehouseman- person lawfully engaged in the business of storing goods
for profit.
Warehouse- means the building or place where the goods are deposited
and stored for profit.
So the warehouse receipt is defined as a written acknowledgement by a
warehouse man that he has received and holds certain goods therein
described in store for the person to whom it is issued.
As mentioned, it is a document of title provided under article 1636 of the
new civil code. A warehouse receipt is a contract of deposit. And it also
serves as an evidence of receipt of the goods that the warehouse man has
received the goods and operates as a document of title. When we say
negotiable or non negotiable, do not confused this with your negotiable
instruments law. You will apply only negotiable instruments law if it
conforms to sec 1 of the negotiable instruments law.
Distinguished from negotiable instruments law
1. As to the subject matter – in NIL, it involves money but in negotiable
warehouse receipt , it refers to goods
2. As to the object of value- in NIL, it refers to instrument itself, in NWR- it
refers to the goods deposited
3. Under NIL, there are parties secondarily liable while in NWR- there are
no parties secondarily liable
4. Under NWR, we also have the term bearer or order while in NIL
remember that an original bearer instrument will always be considered a
bearer instrument and can be negotiated by mere delivery. In warehouse
receipts, if it was an original bearer instrument once it was endorsed, it
becomes an order instrument in which to be negotiated to a subsequent
holder it must be endorsed aside from delivery notwithstanding that it was
an original bearer instrument.
5. In NIL, we have the concept of holder in due course while NWR , there is
no such concept.
Essential terms in warehouse receipt
Sec 2. Warehouse receipts need not be in any particular from but every
such receipt must embody within its written and printed terms:
a. The location of the warehouse where the goods are stored
b. The date of issue of the receipt
c. The consecutive number of the receipt
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d. A statement whether the goods received will be delivered to bearer, to
a specified person or to a specified person or his order
e. The rate of storage charges
f. A description of the goods or of the packages containing them
g. The signature of the warehouseman which may be made by his
authorized agent
h. If the receipt is issued for goods of which the warehouseman is owner,
either solely or jointly or in common with others, the fact of such
ownership and
i. A statement of the amount of advances made and of liabilities incurred
for which the warehouseman claims as lien. If the precise amount of such
advances made or of such liabilities incurred is , at the same time of the
issue of the receipt, unknown to the warehouseman or to his agent who
issues it, a statement of the fact that advances have been made or
liabilities incurred and the purpose thereof is sufficient.
A warehouseman shall be liable to any person injured thereby for all
damages caused by the omission from a negotiable receipt of any of the
terms herein required.
Take note, if there is an incorrect description of the goods it does not make
the warehouse receipt ineffective as long as the identity of the goods can
be established by evidence.
What is the effect of omission of these essential terms? The negotiability
of the warehouse receipt will not be ineffective but it is possible that the
warehouseman is liable for damages. It also possible that the contract will
be converted into a contract of deposit. Just like any contract, there must
be no stipulation that the warehouseman exempted himself from liability
due to his negligence.
Kinds of warehouse receipts- negotiable and non negotiable
A negotiable warehouse receipt is where the goods are deliverable to
bearer or order. A provision in the warehouse receipt that the instrument
is non-negotiable is void. What do you mean by this?
You have a warehouse receipt nakalagay dun deliverable to bearer or order
and at the same time nakalagay non negotiable. What is the effect? Void
yung stamp ng non negotiable and the deliverable to bearer or order will
prevail. So a provision in a negotiable warehouse receipt that the
instrument is non negotiable is void.
We also have a non negotiable warehouse receipt - in this instance, goods
are deliverable to the depositor or any specified person. It should be stamp
on its face as non negotiable therefore it cannot be negotiated but merely
transferred or assigned. Stepping into the shoes of the transferor.
Now failure to mark the receipt as negotiable does not render it non-
negotiable as long as we have terms of negotiability deliverable to bearer
or order. Failure to mark it non negotiable will render the document
negotiable.
NWR, if its bearer receipt- negotiated by delivery but again an original
bearer instrument if endorsed will be converted to an order instrument
thus you need an endorsement plus delivery for it to be negotiated even if
it was an original bearer instrument.
Who may negotiate a warehouse receipt?
1. The owner
2. Any person to whom the possession or custody of the receipt has been
entrusted by the owner
It is possible that the holder maybe a thief or a person who defrauds
another referring to a bearer instrument.
What are the warranties of warehouse receipt?
1. That the receipt is genuine
2. That he has a legal right to negotiate or transfer it
3. That he has knowledge of no fact which would impair the
validity or worth of the receipt
4. That he has a right to transfer the title to the goods and that
the goods are merchantable or fit for a particular purpose,
whenever such warranties would have been implied, if the
contract of the parties had been to transfer without a receipt of
the goods represented thereby.
Take note as well that the warehouse receipt can be the subject of pledge The warehouseman has a lien over the property only up to extent of the
or mortgage. It would serve as security. You will only deliver the obligation of the depositor.
warehouse receipt to the pledgee. The warehouse receipt is sufficient to
be valid subject of mortgage or pledge. If the mortgagor cannot pay, the
goods will only be sold and the proceeds will be applied to the principal
amount. No automatic transfer of ownerhip.

Remember in sales, there is special remedy in stoppage in transitu and

possessory lien. What is the effect if have this warehouse receipt?
No seller’s lien or right of stoppage in transitu shall defeat the rights of any
purchaser for value in good faith to whom such receipt has been
negotiated. So with the warehouse receipt subsequently negotiated to
person or third person in good faith and for value, such purchaser has a
better right than the unpaid seller.

If the instrument is non-negotiable, the transferee of a non-negotiable

warehouse receipt must notify the warehouseman of the transfer to him of
such receipt. Notice is required in this case bec the receipt is not
negotiable. Again notice is required. However if the goods is subject to
attachment or levy of execution, prior notice does not affect the
attachment or execution.

Now if the instrument is negotiable, notice is not required as long as there

is valid negotiation. With regards to attachment or execution, if it is a
negotiable receipt, it is necessary that the receipt be surrendered or
impounded by the court. Take note, for execution to take place in the
negotiable instrument, there must be a valid negotiation for it there is no
valid negotiation, the creditor has no right the attached the goods.

What are the rights of the warehouseman?

1. He has the right to be paid
2. He has the right to exercise his lien on the goods if he is not
paid known as warehouseman lien
3. He can refuse delivery if proper legal circumstances

Essentially, the warehouseman is not liable for misdelivery if he delivers

the goods enumerated in Sec. 9
1. Persons lawfully entitled to the possession of the goods or his agent; or
those whom by court order or attaching creditor or purchaser in case of
sale of the goods to enforce his lien or where the goods are perishable or
hazardous
2. A person who is either himself entitled to delivery by the terms of a non-
negotiable receipt issued for the goods, or who has written authority from
the person so entitled either indorsed upon the receipt or written upon
another paper
3. A person in possession of a negotiable receipt by the terms of which the
goods are delivered to him or order, or to bearer or which has been
indorsed to him or in blank by the person to whom delivery was promised
by the terms of the receipt or by his mediate or immediate indorser

Obligations of the warehouseman

1. He has to issue a receipt upon deposit of the goods
2. He has to care of the goods with the diligence of a good father
of a family
3. He has to deliver the goods to the persons lawfully entitled as
stated in sec 9
4. He has the obligation not to co-mingle the goods unless the
goods are fungible and of the same kind
5. In proper circumstances or as agreed by the parties, the
warehouseman has to insure the goods deposited to him
6. He has to mark the non negotiable warehouse receipts, to
mark the duplicates of the negotiable warehouse receipts, give
proper notice in case sale of goods and to take up and cancel the
warehouse receipts if the goods has been delivered.

If for instance, there are several claimants to the goods, the remedy
available for the warehouseman is the remedy of interpleader for them to
litigate as who has a better right.

Now as a general rule, before the goods will be release, you have to
surrender the warehouse receipt. What if it got lost or destroyed?
The remedy available here for the depositor upon order of court of
competent jurisdiction goods will be delivered to him upon proof of the
loss or the destruction of the warehouse receipt and he gives a bond or
sufficient sureties to be approved by the court.

Concept of warehouseman’s lien (Section 27)

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