Credit transactions

 include all transactions involving the loan of money and goods, or the purchase or delivery of
goods and services in the present, with a promise to pay or deliver in the future.
 Bailment contracts, together with the other related subjects such as usury (Act No. 2655, as
amended [The Usury Law].), the contracts of guaranty and suretyship, mortgage, antichresis, and
concurrence and preference of credits (Arts. 2236-2251.), all make up the so-called “credit
transactions.
SECURITY
 is something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an
obligation or of protecting some interest in property.
BAILMENT
 Signifies a situation in which one person holds personal property, the ownership of which is in
another
 Literally mean to deliver.
 As a GR, there is no requirement that the agreement be in writing.

ELEMENTS OF BAILMENT
1. The bailor retains title of the personal property;
2. The possession or temporary control of the property is delivered of transferred (actually or
constructively) to the bailee
3. The bailee accepts possession of the property;
4. The possession of the bailee is for specific purpose
5. The parties intend that the identical property will be returned to the bailor at the end of
bailment
Kinds of contractual bailment
1. Ordinary bailment
2. Extra-ordinary bailment
Types of ordinary bailments
1. Those for the sole benefit of the bailor
2. Those for the sole benefit of the bailee
3. Those for the benefit of both parties
4. Fortuitous bailments
Kinds of bailment for hire
1. Hire of things (locatio rei) –
2. Hire of service (locatio operas faciendi)
3. Hire for carriage of goods (locatio operas mercium vehendarum)
4. Hire of custody (locatio custodiae)
 LOANS
Article 1933.
By the contract of loan, one of the parties delivers to another, either something not consumable so that the
latter may use the same for a certain time and return it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower. (1740a)

Article 1934
 Delivery essential to perfection of loan
 Binding effect of accepted promise to lend
 An accepted promise to make a future loan is a consensual contract and, therefore,
binding upon the parties but it is only after delivery, will the real contract of loan arise.

COMMODATUM
Article 1935
CHARACTERISTIC OF COMMODATUM
1. A Real contract
2. A Unilateral contract
3. A nominate contract
4. It is a principal contract
5. An informal contract
6. A gratuitous contract
EXTINGUISHMENT OF THE CONTRACT OF COMMODATUM
ARTICLE 1956
INTEREST is either:
 Compensation for use of money (MONETARY INTEREST)
 Those impose by law o by courts as penalty or indemnity for breach of contractual obligation
(COMPENSATORY INTEREST) (6% based on art. 2209)
KIND OF INTEREST:
1. SIMPLE INTEREST
2. COMPOUND INTEREST
3. LEGAL INTEREST
4. LAWFUL INTEREST
5. UNLAWFUL OR USURIOUS INTEREST
REQUISITE TO RECOVER INTEREST
1. The payment of interest must be expressly stipulated.
2. The agreement to pay interest must be in writing.
3. The interest must be lawful.

LIABILITY FOR INTEREST EVEN IN THE ABSENCE OF STIPULATION

GENERAL RULE: Under article 1956, No interest shall be due unless it has been expressly stipulated in
writing.
EXCEPTIONS:
1. Indemnity for damages- here the debtor in delay is liable to pay legal interest (6%) as indemnity
even no stipulation. Under article 2209 of civil code.
2. Interest accruing from unpaid interest – it accrues interest from the time it is judicially demanded.
(Legal interest is 6%, under article 2212 of civil code)
- Here note the judicial demand.
- The RULE, if there is no accrued monetary interest, there will be no compensatory interest on
the monetary interest. Therefore, it must establish first the monetary interest in this kind of
exception.
- If court does not provide for payment of interest and become final, then no interest may be
awarded.
ESCALATION CLAUSE
 Is the stipulation allowing an increase in the rate originally agreed upon by the parties.
DE-ESCALATION CLAUSE
 Is the stipulation allowing a decrease in the interest rate originally agreed upon by the parties.
RULE ON ESCALATION CLAUSE IN A LOAN AGREEMENT
1. Escalation clause generally valid -REASON: to maintain the fiscal stability and to retain the value of
the money on long-term contracts.
2. Escalation must not be solely potestative- grant creditor unbridled right to adjust the interest
independently and upwardly, thus it will deprive debtor.
3. Escalation clause must be paired with de-escalation clause.

CONSEQUENCES OF INVALID ESCALATION CLAUSE

1. It does not affect the validity of loan agreement.
2. Creditor entitled to the payment of principal amount of loan.
3. Only the original interest stipulated shall be payable.

ARTICLE 1957
NOTE:
 Form of contract is not conclusive- because although legal in form but it shows that there is
existence of corrupt intention to violate the laws on usury.
 Contract is void only as to the interest, not entirely.

INSTANCES OF CONTRACTS DISGUISED TO COVER USURIOUS LOANS.

1. Credit sale of property at exorbitant price to loan applicant.
2. Purchase of lender’s property at an exorbitant price to be taken from loan.
3. Price of sale with right to repurchase clearly inadequate.
4. Pretended lease by borrower at usurious rental.
5. Rent free by lender of borrower’s property in addition to interest on loans.
6. Date for repayment of loan with interest ante-dates actual transaction.
7. Payment by borrower for lender’s services as additional compensation for loan.
ARTICLE 1958
EXAMPLE:
B borrowed P1,000.00 from L payable in palay in one (1) year which shall be appraised at the current
market price at the time and place of payment. When the contract was entered into, the price per cavan of
palay was P500.00. On the due date of the loan, the price increased to P600.00. In this case, the value of
the palay shall be appraised at P600.00 per cavan.

ARTICLE 1959
WHEN UNPAID INTEREST EARN INTEREST
GENERAL RULE: accrued interest (interest due and unpaid) shall not earn interest.
EXCEPTION:
1. When judicially demanded
2. When there is an express stipulation made by the parties

DEPOSIT
ARTICLE 1962
GOVERNING LAW: Title 12, book 4 of civil code

CHARACTERUSTIC OF CONTRACT OF DEPOSIT

1. REAL CONTRACT
2. NOMINATE CONTRACT
3. PRINCIPAL CONTRACT
4. INFORMAL CONTRACT
5. GRATUITOUS CONTRACT (If no compensation) ONEROUS (If depositary engaged in business of
storing goods).
ESSENTIAL REQUISITE OF THE CONTRAT OF DEPOSIT
1. CONSENT
2. OBJECT CERTAIN
3. CAUS OF THE OBLIGATION

CONSENT OF THE CONTRACTING PARTIES

  Meeting of the offer and acceptance upon the thing
 Consent may be express or tacitly
OBJECT OF THE CONTRACT OF DEPOSIT
 Only movable
 CONTRACT FOR THE CUSTODY AND SAFEKEEPING- if involves immovables
 GENERAL CONTRACT LAW requires:
1. must be within the commerce of man
2. must also determinate and not impossible
CAUSE OF THE CONTRACT OF DEPOSIT
1. GRATUITOUS- if free/ mere liberality of depositary
2. ONEROUS
- When the depositary is paid fees
- When depositary engaged in the business of storing goods.
NOTE:
 DEPOSIT is a contract of confidence.
 The depositor need not be the owner of the thing deposit. REASON is that deposit does not
transfer ownership

PARTIES TO DEPOSIT
1. DEPOSITOR
2. DEPOSITARY
EFFECT WHERE SAFEKEEPING ONLY AN ACCESSORY OBLIGATION
 deposit is not constituted but some other contract like lease, commodatum, or agency.
EXTINGUISHMENT OF DEPOSIT
1. Those general modes for the extinguishment of obligation
2. By loss or destruction
3. By death of either depositor or depositary
4. By return of the thing by depositary

DEPOSIT DISTINGUISHED FROM MUTUUM.

DEPOSIT MUTUUM
 1. the principal purpose is safekeeping or mere the consumption of the subject matter
custody
2. the depositor can demand the return of the the lender must wait until the expiration of the
subject matter at will period granted to the debtor
3. both movable and immovable property may be only money and any other
the object fungible thing.

DEPOSIT DISTINGUISHED FROM COMMODATUM.

DEPOSIT COMMODATUM
1. the principal purpose is safekeeping The transfer of use
2. may be gratuitous Always gratuitous
3. Only movable things may be the object Covers both movable and immovable property
4. Ownership remains in the owner Ownership remains in the owner
5. the same object shall be return the same object shall be return same value, quality
and quantity

ARTICLE 1963
BINDING EFFECT OF AGREEMENT TO DEPOSIT
1. IF WITH DELIVERY- it is perfected
2. IF NO DELIVERY- only binding and enforceable upon the parties

ARTICLE 1964

CREATION OF DEPOSIT
 A deposit may be created by virtue of a court order or by law and not by the will of the parties.
KINDS OF DEPOSIT
1. JUDICIAL- one which takes place when an attachment or seizure of property in litigation is
ordered. (ex. Property bail bond)

2. EXTRAJUDICIAL (ART. 1967.) which may be;

A. VOLUNTARY
- one wherein the delivery is made by the will of the depositor or by two or more
persons each of whom believes himself entitled to the thing deposited
 B. NECESSARY
- one made in compliance with a legal obligation,
- or on the occasion of any calamity,
- or by travellers in hotels and inns (Arts. 1996-2004.)
- or by travellers with common carriers. (Arts. 1734-1735.)
ARTICLE 1965
GR: A contract of deposit is generally gratuitous.
EXCEPTION:
1. Where there is contrary stipulation.
2. Where depositary engaged in business of storing goods.
3. Where property saved from destruction without knowledge of the owner.
ARTICLE 1966
SUBJECT MATTER OF DEPOSIT
ON EXTRAJUDICIAL DEPOSIT
- Only movable or personal property may be the object of extrajudicial deposit, whether voluntary or
necessary.
- Corporeal thing (is a thing that has a physical existence and is capable of being seen and
touched).
ON JUDICIAL DEPOSIT
- may cover movable as well as immovable property its purpose being to protect the rights of parties
to a suit.

ARTICLE 1967
EXTRAJUDICIAL (ART. 1967.) which may be;

VOLUNTARY
- one wherein the delivery is made by the will of the depositor or by two or more persons each of
whom believes himself entitled to the thing deposited

NECESSARY
- one made in compliance with a legal obligation,
- or on the occasion of any calamity,
- or by travellers in hotels and inns (Arts. 1996-2004.)
- or by travellers with common carriers. (Arts. 1734-1735.)
CHAPTER 2- VOLUNTARY DEPOSIT
SECTION 1- General Provisions

ARTICLE 1968
VOLUNTARY DEPOSIT- is one wherein the delivery is made by the will of the depositor.
VOLUNTARY DEPOSIT- has a freedom in choosing depositary.
NECESSARY DEPOSIT- lack of free of choice in the depositor.
 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.
ARTICLE 1969
FORMS OF CONTRACT OF DEPOSIT
 As a rule, contracts shall be obligatory in whatever form they may have been entered into provided
all the essential requisites for their validity are present.
 No required form, may be oral or written.
 Note: before delivery there must be an agreement to constitute a deposit, which is binding upon the
parties.
ARTICLE 1970
RULE IF DEPOSITARY IS CAPACITATED AND DEPOSITOR IS INCAPACITATED
 he is subject to all the obligations of a depositary whether or not the depositor is capacitated.
 the depositary must return the property to the legal representative of the incapacitated2 or to the
depositor himself if he should acquire capacity.
 Here depositary may be compelled to return a thing by guardian or parents or if depositary acquire
capacity.
NOTE:
VOIDABLE
- if one party is incapacitated to give consent
- applying the general provision of contract of law, status of contract is voidable
UNENFORCEABLE
- If both parties are incapable of giving consent
- If ratified by both parents or guardians- VALID FROM ITS INCEPTION
ARTICLE 1971
RULE IF DEPOSITARY INCAPACITATED AND DEPOSITOR CAPACITATED
  The incapacitated depositary (like a minor or an insane person) does not incur the obligation of a
depositary.
 However, he is liable:
1. to return the thing deposited while still in his possession
2. to pay the depositor the amount by which he may have benefited himself with the thing or
its price subject to the right of any third person who acquired the thing in good faith.
3. He can recover to third person if he acquired in badfaith
EXAMPLE:
A deposited a watch with B, a minor who sold it to C.
If C acted in bad faith, A may recover the watch from him. But if C acted in good faith, A’s only recourse is
against B to compel him to return the price received for the watch or the amount by which he may have
benefited himself.

SECTION 2- OBLIGATION OF THE DEPOSITARY

 GUARANTY AND SURETYSHIP
Contract of security
 means a contract which creates a security interest in personal property, being a written contract in
the case of a non-possessory security interest, but in the case of a possessory security interest
need not be in writing.
 Guaranty and suretyship are both PERSONAL SECUIRTY

Kinds of contract of security

1. Personal security
2. Real Security
ARTICLE 2047
GUARANTY
 By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so.
 guaranty includes pledge and mortgage because the purpose of guaranty may be accomplished
not only by securing the fulfillment of an obligation contracted by the principal debtor through the
personal guaranty of a third person but also by furnishing to the creditor for his security, property
with authority to collect the debt from the proceeds of the same in case of default.

GOVERNING LAW
 primarily regulated by Title XV of Book IV (Arts. 2047-2084.) of the new Civil Code
2 contracts in the Guaranty
1. Contract between creditor and debtor (loan)
2. Guarantor and creditor (guaranty)
CLASSIFICATION OF GUARANTEE
1. Guaranty in the broad sense:
a. Personal
b. Real
2. As to origin:
a. Conventional- by agreement of parties
b. Legal- imposed by law
c. Judicial- required by court
3. As to consideration:
a. Gratuitous- when no compensation
b. Onerous- when guarantor receives valuable consideration
4. As to person guaranteed:
a. Single
 b. Double or sub-guaranty
5. As to scope and extent:
a. Definite or (limited)
b. Indefinite or (unlimited)
Discreet guaranty

Characteristics of the contract of guaranty

1. Consensual contract
2. Unilateral contract
3. Nominate contract
4. Accessory contract
5. Subsidiary and conditional
6. Formal contract- it covered by statutes of fraud- in order to be enforceable.
7. Gratuitous contract but may be onerous
8. Conditional
Conditions in order guarantor to be liable
1.
Parties to the contract of guaranty
1. Creditor
2. Debtor
3. Guarantor
Scope of the guaranty
1. The principal obligation of the debtor
2. The accessory obligation pertaining to the principal obligation
3. Obligation arising from law such as payment of interest in case of delay occurs
4. The obligation to pay judicial cost incurred if guarantor was judicially required to pay.
Manner of payment by the guarantor
 Guarantor must pay in the manner provide in the contract
 In the absent of any express provision in the contract, following must be observed:
1. The payment must be made at the domicile of the debtor
2. In general, the guarantor must pay as soon the creditor was unsuccessful in the
exhausting the properties of the debtor.
 SURETYSHIP
 is a contractual relation resulting from an agreement whereby one person, the surety, engages to
be answerable to a third person for the debt, default, or miscarriage of another known as the
principal.
 If a person binds himself solidarily with the principal debtor, the contract is called SURETYSHIP
 In suretyship, the guarantor is called SURETY.
NOTE:
 In suretyship agreement, the surety guarantees the performance by the principal obligor of an
obligation or undertaking in favor of obligee.
PARTIES TO THE CONTRACT
1. Debtor
2. Creditor
3. Surety
TWO RELATIONSHIP INVOLVES IN SURETYSHIP
1. The principal relationship between the obligee and obligor
2. The accessory relationship between principal obligor and surety.

OBLIGEE is a person or entity to whom an obligation is owed.

OBLIGOR is a person who owes a legal obligation to another person.

LAW APPLICABLE TO SURETYSHIP

1. The second paragraph of Article 2047 states the law applicable to the contract of suretyship.
2. It covers Articles 1207 to 1222, Title I (Obligations), Chapter 3 (Different Kinds of Obligations),
Section 4 (Joint and Solidary Obligations), Book IV (Obligations and Contracts) of the Civil Code.
3. It has been held that the provisions of the Civil Code on guaranty, other than the benefit of
excussion, are applicable and available to the surety.

SC HAS APPLIED THESE PROVISIONS ON GUARANTY HAS APPLIED TO SURETYSHIP

1. Article 2066- pertains to right to indemnification
2. Article 2067- pertains to the right to subrogation
3. Article 2079- pertains to extension of the time granted by creditor to the debtor without the consent
of the surety will release the surety.
SC HAS APPLIED THESE PROVISIONS ON GUARANTY DO NOT APPLY TO SURETYSHIP
1. Article 2058- which the surety does not have the benefit of excussion.
2. Article 2063- pertains to compromise
3. Article 2071- pertains to the instances of guarantor to proceed against the principal debtor even
before having paid.
4. Article 2080- this pertains to instances where guarantors are release from obligation by some act of
the creditor which they cannot be subrogated to the rights of the creditor.
5. Article 2081- pertains to defenses
 Defenses derived from the principal obligation (nullity or voidable of contract)
 Defenses derived from the contract of guaranty (ex. Lack of consent or mistake)
 Defenses derived from the conduct of creditor (ex. Negligence)

Nature of surety’s undertaking.

1. Liability is contractual and accessory but direct.
 The creditor may proceed directly to the surety.
2. Liability is limited by terms of contract.
3. Liability arises only if principal debtor is held liable.

NOTE:
 An accommodation party- is a person who has signed the instrument as maker, drawer,
acceptor, or endorser, without receiving value therefor, and for the purpose of lending his
name to some other persons.
 A surety bond is void where there is no principal debtor.
4. Surety is not entitled to exhaustion of property of debtor.
 The reason is that a surety assumes a solidary liability for the fulfillment of the principal
obligation
 as an original promissor and debtor from the beginning.
5. Undertaking is to creditor, not to debtor
6. Surety is not entitled to notice of principal’s default.

GR: Demand or notice of default is not required to fix the surety’s liability.
EXCEPTION: Unless required by the contract of suretyship.

7. Prior demand by the creditor upon principal not required.

8. Surety is not exonerated by neglect of creditor to sue principal.
NOTE:
SURETYSHIP FOR FUTURE DEBTS
 The parties can agree that surety will be liable for debts incurred after the execution of the
suretyship agreement.
Guaranty distinguished from suretyship.
Guaranty Suretyship
Warrants the solvency of debtor Insurer of debt
liability of the guarantor depends upon an Assumes liability as a regular party to the
independent agreement to pay the obligation if the undertaking
primary debtor fails to do so
The engagement of the guarantor is a collateral A surety is charged as an original promisor
undertaking
The guarantor is secondarily or subsidiarily liable a surety is primarily liable
a guarantor is not bound to take notice of the non- A surety is ordinarily, held to know every default of
performance of his principal his principal
a guarantor is often discharged by the a surety will not be discharged either by the mere
mere indulgence of the creditor of the principal, indulgence of the creditor of the principal or by
and is usually not liable unless notified of the want of notice of the default of the principal, no
default of the principal matter how much he may be injured thereby,

Article 2048
GR: guaranty is gratuitous
EXO: it is onerous only when there is a stipulation to the contrary
Article 2049
Married woman may be a guarantor
1. Only her separate property
2. Binds only if with consent of the husband
3. Bind even without consent by husband incases provided by law
NOTE: NO law prohibiting married woman acting as guarantor for her husband.
 REAL MORTGAGE
Article 2085.
Article 2086.
Article 2087.
MORTGAGE MAY GUARANTEE THE FOLLOWING:
1. Valid, voidable, and unenforceable obligations.
2. Civil or natural obligations
3. Pure obligations and conditional obligations (whether suspensive or resolutory)
4. Present debts and debts to be incurred
5. Payment obligations and performance obligations.
CONSTITUTED BY THE ABSOLUTE OWNER.
GR: only absolute owner may constitute mortgage
EXCEPTION: those under the doctrine of mortgage in good faith
 A pledge or mortgage constituted by an impostor is void and the pledgee or mortgagee in such a
case acquires no right whatsoever in the property.

PROPERTY MORTGAGED
1. Future property
GR: future property cannot be mortgage
EXCEPTION: if the parties agree.
2. Property acquired subsequently
3. Share in a co-ownership
4. Property covered by torrens title.
Pledgor or mortgagor has free disposal of property or has legal authority
1. Free disposal of the property” means that the property must not be subject to any claim of a third
person
2. Capacity to dispose of property” means that the pledgor or mortgagor has the capacity or the
authority to make a disposition of the property.
ACCOMMODATION MORTGAGE.

Kinds of contract of security

1. Principal contract (loan)Personal security
2. Real Security
The elements for pactum commissorium to exist are as follows, to wit:
1. that there should be a pledge or mortgage wherein property is pledged or mortgaged by way of
security for the payment of the principal obligation; and
2. that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged
or mortgaged in the event of non-payment of the principal obligation within the stipulated period.