 Commodatum;

Introduction  Contract of loan;

 Contract of lease of personal property; and
Credit  Deposit.
 Credit is any loan, mortgage, financial lease, deed of trust,
advance or discount, any conditional sales contract, Parties to a bailment
contract to sell, or sale or contract of sale of property or 1. Bailor – the giver or the party who delivers the
service, either for present or future delivery, under which, possession or custody of the thing bailed.
part of all or the price is payable subsequent to the making 2. Bailee – the recipient or the party who receives the
of such sale or contract. possession or custody of the thing thus delivered.
 Credit is the sum credited on the books of a company to a Note: Comodotario is also a term used to a party in a bailment.
person who appears to be entitled to it. It presupposes a
creditor-debtor relationship, and may be said to imply
ability, by reason of property or estates, to make a Loan
promised payment.

 The credit of an individual means his ability to borrow

Loan
money by virtue of the confidence or trust reposed by a Article 1933. By the contract of loan, one of the parties
lender that he will pay what he may promise. delivers to another, either something not consumable so
that the latter may use the same for a certain time and
 The concession of a credit involves the granting of loans return it, in which case the contract is called a
up to the limit of the amount fixed in the credit. commodatum; or money or other consumable thing, upon
the condition that the same amount of the same kind and
 Credit line means how much a creditor can afford to give quality shall be paid, in which case the contract is simply
you. called a loan or mutuum.

Commodatum is essentially gratuitous.

Credit transactions
 A transaction involving the purchase or loan of goods, Simple loan may be gratuitous or with a stipulation to pay
services, or money in the present with a promise to pay or interest.
deliver in the future.
In commodatum the bailor retains the ownership of the thing
 A transaction between a natural person and a creditor in
loaned, while in simple loan, ownership passes to the
which real or personal property, services or money is
borrower.
acquired on credit and the person’s obligation is payable in
installment.
A loan means the delivery by one party and the receipt by the
other party of a given sum of money, upon an agreement,
 Future element of the transaction.
express or implied, to repay the sum loaned, with or without
interest. (People vs. Concepcion)
Kinds of credit transactions
1. Secured credit – It is a transaction of which the fulfilment
of the obligation is ensured by a real or personal property.
Kinds of loan
1. Commodatum – where the bailor delivers to the bailee a
Those supported by a collateral or an encumbrance of
non-consumable thing so that the latter may use it for a
property.
certain time and return the identical thing.
a. Personal security – the security is a person. (ex:
2. Simple loan or mutuum – where the lender delivers to
guarantee or surety)
the borrower money or other consumable thing upon the
b. Real security – constituted over a real property or an
condition that the latter shall pay the same amount of the
interest in a real property. (ex: mortgage)
same kind and quality.
2. Unsecured credit – There is no property that stands as
an assurance for the fulfilment of the obligation. Those the Loan distinguished from other contracts
fulfillment of which by the principal debtor is secured or
supported only by a promise to pay or the personal Loan distinguished from lease and deposit
commitment of another such as a guarantor or surety. Loan Lease Deposit
Purpose Enjoyment/use of a thing For
Bailment safekeeping
Bailment is the delivery of property of one person to another in Compensation Free. With a With/without
trust for a specific purpose, with a contract, express or implied, price a price
that the trust shall be faithfully executed and the property Period Definite/at Definite or indefinite
returned or duly accounted for when the special purpose is will
accomplished or kept until the bailor reclaims it.

Juridical possession is given to one person by the other over Lease

a particular movable property that gives right to the recipient Article 1643. In the lease of things, one of the parties binds
even against the owner. himself to give to another the enjoyment or use of a thing for
It includes: a price certain, and for a period which may be definite or
 indefinite. However, no lease for more than ninety-nine purchased by, or assigned to, a financing company in an
years shall be valid. amount or for a consideration less than their face value.

Loan distinguished from irregular deposit

Deposit Loan Irregular deposit
Article 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the Cause Necessity of the The only benefit is
obligation of safely keeping it and of returning the same. If borrower that which
the safekeeping of the thing delivered is not the principal accrues to the
purpose of the contract, there is no deposit but some other depositor
contract. Demandability of Lender cannot Demanded at will
consumable seek restitution by the depositor
Loan distinguished from discount thing until time for for whose benefit
Loan Discount payment as the deposit has
stipulated been constituted
Delivery There is delivery No delivery of Preference over Creditors enjoy no Depositor has
of money money (wait until other creditors preference in the preference over
maturity of distribution of the other creditor with
receivables debtor’s property respect to the
before recovering thing deposited
of cash)
Interest Taken at the end Deduction in Rogers vs. Smith, Bell & Co.
of the period advance
Documentation On a single-name On a double- Three points of difference between a loan and an irregular
paper name paper deposit:
Repayment Has to be paid Does not have to 1. In an irregular deposit the only benefit is that which
be paid (deferred accrues to the depositor, while in loan the essential cause
until age of for the transaction is the necessity of the borrower.
maturity)
It is very apparent that is was not for the sole benefit of
 Single name – There is only one document that is Rogers. It, like any other loan of money, was for the
executed, usually the promissory note. benefit of both parties. The benefit which Smith, Bell & Co.
 Double name – There is a promissory note and another received was the use of the money; the benefit which
paper, which is a deed of assignment. Rogers received was the interest of his money.
Discount 2. In an irregular deposit the depositor has a preference over
- means the sale of receivable at less than its face value. other creditors in the distribution of the debtor’s property.
- to sell or to assign your receivables at a discount. This may also be true when it comes to loan.
- common in commercial transactions (financing).
3. In an irregular deposit, the depositor can demand the
Purpose of discounting line return of the article at any time, while a lender is bound by
The purpose is to enable a business entity to generate cash the provisions of the contract and cannot seek restitution
out of its receivables that are still to mature at a future date. until the time for payment,
The financing company which buys the receivables makes a
profit out of the difference between the face value of the Plaintiff could not demand his money at any time. He was
receivable and the discounting price. bound to give notice of his desire for its return and then to
wait for six months before he could insist upon payment.
Great Asian Sales vs. CA
Lastly, if the thing loaned is the value that the coins or the
Discounting line paper money represents, the obligation of the depository in this
Discounting line means a credit facility with a financing kind of contracts is to return the sum or amount therein
company or bank, which allows a business entity to sell, on a expressed, whatever may have been the increase or
continuing basis, its accounts receivable at a discount. depreciation suffered by the specific kind of coin or paper,
unless the contrary be stipulated. In this case, it is not
Distinction between a discounting line and a loan necessary that the exact thing and quality should be returned.
accommodation
If the accounts receivable, like postdated checks, are sold for a
consideration less than their face value, the transaction is one Characteristics of Loan
of discounting, and is subject to the provisions of the Financing 1. Real – the delivery of the thing loaned is necessary for the
Company Act. The assignee is immediately subrogated as perfection of the contract.
creditor of the accounts receivable. However, if the accounts 2. Nominate – it has a name which is commodatum or
receivable are merely used as collateral for the loan, the mutuum.
transaction is only a simple loan, and the lender is not
subrogated as creditor until there is a default and the collateral If commodatum:
is foreclosed.  Gratuitous – free;
 Purely personal; and
Discounting  For a period.
Discounting is a type of receivables financing whereby
evidences of indebtedness of a third party, such as installment 3. Principal – it can stand on its own.
contracts, promissory notes and similar instruments, are 4. Informal – it has no specific requirement as to its form.
5. Unilateral - once the subject matter has been delivered, it P500, and if the latter does not comply, then the former can file
creates obligations on the part of only one of the parties, an action for damages.
i.e., the borrower.
That is Article 1934. The accepted promise to deliver is binding
Loan as a real contract upon the parties, but the loan itself is not perfected until the
delivery of the thing.
Art. 1934. An accepted promise to deliver something by
way of commodatum or simple loan is binding upon the Binding effect of promise to lend
parties, but the commodatum or simple loan itself shall not It does not mean that a promise to lend would be without
be perfected until the delivery of the object of the contract. efficacy and judicial value. An accepted promise to make a
future loan is a consensual contract 5 and, therefore, binding
Loan is perfected upon delivery of the proceeds to the upon the parties but it is only after delivery, will the real
borrower contract of loan arise.
A perfected consensual contract can give rise to an action for
damages. However, said contract does not constitute the real Where an application for a loan of money was approved by
contract of loan which requires the delivery of the object of the resolution of the corporation (lender) and the corresponding
contract for its perfection and which gives rise to obligations mortgage was executed and registered, there arises a
only on the part of the borrower. (BPI Investment Corporation perfected consensual contract of loan. While a perfect contract
vs. CA and ALS Management) of loan can give rise to an action for damages, said contract
does not constitute the real contract of loan. (Saura Import and
Mere issuance of check does not result to perfection of Export Co., Inc. vs. Development Bank of the Phils.)
loan contract
The mere issuance of the checks did not result in the
perfection of the contract of loan. For the Civil Code provides Commodatum vs. Mutuum
that the delivery of bills of exchange and mercantile documents Commodatum Mutuum
such as checks shall produce the effect of payment only when Object or Non-consumable Money or
they have been cashed. It is only after the checks have subject matter things consumable
produced the effect of payment that the contract of loan may things
be deemed perfected. Cause Essentially Gratuitous or
gratuitous onerous (with an
A loan contract is a real contract, not consensual, and, as obligation to pay
such, is perfected only upon the delivery of the object of the interest)
contract. In this case, the objects of the contract are the loan Property Movable or Personal property
proceeds which Queaño would enjoy only upon the involved immovable
encashment of the checks signed or indorsed by Naguiat. If property
indeed the checks were encashed or deposited, Naguiat would
Title Retained by the Transferred to the
have certainly presented the corresponding documentary
owner debtor
evidence, such as the returned checks and the pertinent bank
Nature Purely personal There is nothing
records. Since Naguiat presented no such proof, it follows that
contract personal in it
the checks were not encashed or credited to Queaño’s
since the title to
account. (Naguiat vs. CA)
the property is
transferred to the
Delivery in a contract of loan
debtor
Delivery is the act by which the res or substance thereof is
placed within the actual or constructive possession or control of Ownership Bailor need not be Bailor must be the
another. Although Thio did not physically receive the proceeds the owner to owner of the thing
of the checks, these instruments were placed in her control and transfer the thing
possession under an arrangement whereby she actually re-lent because he only
the amounts to Santiago. needs to have a
possessory right
The Supreme Court here distinguished between actual and over the thing
constructive delivery. In other words, when money or the object Return Borrower must Borrower need
of the loan contact is actually delivered to the debtor, there is return the same only pay the same
actual delivery. However, in this case, when the checks were thing loaned amount of the
delivered to Thio, these instruments were placed in her control same kind and
and possession, this constituted constructive delivery. Thio quality
was able to re-lend the money to Santiago who was the named Purpose For use or For consumption
payee of the checks. She had constructive possession over it temporary
due to the fact that she was able to relend the same to possession
Santiago. (Garcia vs. Thio) Right of the Bailor may Lender may not
bailor demand the demand its return
return of the thing before the lapse
Promise to deliver loaned before the of the term
An accepted promise to deliver something by way of expiration of the agreed upon
commodatum or simple loan is binding upon parties. (Art. term in case of
1934, CC) urgent need
Loss Loss of the Borrower suffers
Illustration: subject matter is the loss even if
The promise to deliver, which has already been accepted, is suffered by the caused
already binding upon the parties. A can compel B to deliver the bailor since he is exclusively by a
 the owner fortuitous event commodatum is that it is gratuitous. Another feature of
and he is not, commodatum is that the use of the thing belonging to another
therefore, is for a certain period.
discharged from
his duty to pay. The Kasunduan reveals that the accommodation accorded by
Pajuyo to Guevarra was not essentially gratuitous. While the
Bailee acquires use of the thing and not the fuits Kasunduan did not require Guevarra to pay rent, it obligated
Article 1935. The bailee in commodatum acquires the use him to maintain the property in good condition. The imposition
of the thing loaned but not its fruits; if any compensation is of this obligation makes the Kasunduan a contract different
to be paid by him who acquires the use, the contract ceases from a commodatum.
to be a commodatum.
Things acquired in commodatum
Consumable goods may be subject of the commodatum
Article 1936. Consumable goods may be the subject of Producers Bank of the Philippines v. CA and Vives
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for Application of Article 1933 of the Civil Code
exhibition. Article 1933 was cited as it distinguished between two kinds of
loan. If the subject of the contract is a consumable thing such
Movable or immovable property as money, then the contract would be a mutuum. However,
Article 1937. Movable or immovable property may be the there are some instances where a commodatum may have for
object of commodatum. its object a consumable thing.

Commodatum is purely personal Determination of the actual character of the contract

Article 1939. Commodatum is purely personal in character. Under Article 1936, the rule is that the intention of the parties
Consequently: shall be accorded primordial consideration in determining the
(1) The death of either the bailor or the bailee extinguishes actual character of a contract. In case of doubt, the
the contract; contemporaneous and subsequent acts of the parties shall be
considered in such determination.
(2) The bailee can neither lend nor lease the object of the
contract to a third person. However, the members of the Fruits are not acquired in a commodatum
bailee’s household may make use of the thing loaned, The additional amount corresponds to the fruits of the lending
unless there is a stipulation to the contrary, or unless the of the Php 200,000. Following Article 1935 of the Civil Code,
nature of the thing forbids such use. the bailee does not acquire the fruits, it was only proper for
Doronilla to remit to Mr. Vives the interest accruing to the
Stipulation to use the fruits latter’s money deposited with him. The contract is a
Article 1940. A stipulation that the bailee may make use of commodatum despite the fact that the object is money, as it is
the fruits of the thing loaned is valid. only used as a “show money”. The fruits, or the Php 12,000
interest belongs to Vives.
Characteristics of commodatum
1. Essentially gratuitous – if any compensation is to be Commodatum vs. Usufruct
paid by him who acquires the use, the contract ceases to In Commodatum, it is only the use of the property that is given
be a commodatum. (Art. 1935, CC) to the bailee. If the fruits are acquired, then that could be a
separate contract, it can be a contract of usufruct.
2. Purely personal in nature. (Art. 1939, CC)
Usufruct
Effects of Commodatum being personal in nature Article 562. Usufruct gives a right to enjoy the property of
(1) Death of either party, bailor or bailee extinguishes the another with the obligation of preserving its form and
contract of commodatum; substance, unless the title constituting it or the law
otherwise provides.
(2) GR: the bailee can neither lend nor lease the object to a
third person.
Object of commodatum
XPN: Members of the bailee’s household may make use of - Non-consumable goods or consumable good for exhibition
the thing loaned. purposes. (Art. 1936, CC)
- Movable and immovable Property. (Art. 1937, CC)
XPN TO THE XPN:
a. Unless there is a stipulation to the contrary; or
b. Due to the nature of the thing, even members of the
Bailor need not be owner
Article. 1938. The bailor in commodatum need not be the
same household cannot make use of the thing. (ex:
owner of the thing loaned.
toothbrush)
It is sufficient if the bailor has such possessory interest in the
Pajuyo vs. CA and Guevarra
subject matter or right to its use which he may assert against
the bailee and the third persons although not against the
When commondatum not essentially gratuitous;
rightful owner.
consideration need not be in money
In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use Obligations of the bailee
the same for a certain time and return it. An essential feature of
1. The bailee can neither lend nor lease the object of the - The reason for imposing solidary liability where there are
contract to a third person. However, the members of the two or more borrowers is to safeguard effectively the rights
bailee’s household may make use of the thing loaned, of the lender.
unless there is a stipulation to the contrary, or unless the - This is an exception by express provision of law to the
nature of the thing forbids such use. (Art. 1939(2), CC) general rule that the concurrence of two or more parties in
2. The bailee is obliged to pay for the ordinary expenses the same obligation gives rise only to a joint obligation.
for the use and preservation of the thing loaned. (Art.
1941, CC)
Obligations of the bailor
1. To respect the contract term – the bailor cannot
3. To return the thing after its use.
demand the return of the thing loaned till after the
expiration of the period stipulated, or after the
When bailee is liable for loss of the thing
accomplishment of the use for which the commodatum
Article 1942. The bailee is liable for the loss of the thing,
has been constituted. However, if in the meantime, he
even if it should be through a fortuitous event:
should have urgent need of the thing, he may demand its
(1) If he devotes the thing to any purpose different from
return or temporary use.In case of temporary use by the
that for which it has been loaned;
bailor, the contract of commodatum is suspended while
(2) If he keeps it longer than the period stipulated, or after
the thing is in the possession of the bailor. (Art. 1946)
the accomplishment of the use for which the
commodatum has been constituted;
GR: The Bailor should respect the contract term.
(3) If the thing loaned has been delivered with appraisal of
its value, unless there is a stipulation exempting the
XPN:
bailee from responsibility in case of a fortuitous event;
a. In case of urgency – if he has urgent use of the thing,
(4) If he lends or leases the thing to a third person, who is
the bailor may demand for its return for temporary use.
not a member of his household;
b. When contract entered into is a Precarium – this is a
(5) If, being able to save either the thing borrowed or his
kind of commodatum where the bailor may demand the
own thing, he chose to save the latter.
return of the thing at will. (Art. 1947)
As a general rule, the bailee is not liable for loss or damage
Precarium
due to a fortuitous event. (see Art. 1174.) The reason is that
The bailor may demand the thing at will, and the contractual
the bailor retains the ownership of the thing loaned. Article
relation is called a precarium, in the following cases:
1942 specifies the instances when the bailee is liable even for
(1) If neither the duration of the contract nor the use to
a loss due to a fortuitous event.
which the thing loaned should be devoted, has been
stipulated; or
Catholic Vicar Apostolic of the Mountain Province vs. (2) If the use of the thing is merely tolerated by the owner.
CA, Heirs of Octaviano and Valdez (Art. 1947)
Failure to return does not mean adverse possession
The bailee’s failure to return the subject matter of c. Acts of ingratitude – The bailor may demand the
commodatum to the bailor did not mean adverse possession immediate return of the thing if the bailee commits any
on the part of the borrower. The bailee merely held in trust the acts of ingratitude specified in Article 765. (Art. 1948)
property which is the subject matter of the commodatum.
Acts of ingratitude under Article 765
The bailee declared the lots in question in its name for taxation (1) If the bailee should commit some offenses against the
purposes. It was held that the action of the bailee by such person, the honor or the property of the bailor, or of his
adverse claim could not ripen into title by way of ordinary wife or children under his parental authority;
acquisitive prescription because of the absence of just title. (2) If the bailee imputes to the bailor any criminal offense, or
any act involving moral turpitude, even though he should
Obligation to return thing loaned prove it, unless the crime or the act has been committed
Article. 1944. The bailee cannot retain the thing loaned on against the bailee himself, his wife or children under his
the ground that the bailor owes him something, even though authority; and
it may be by reason of expenses. However, the bailee has a (3) If the bailee unduly refuses the bailor support when the
right of retention for damages mentioned in Article 1951. bailee is legally or morally bound to give support to the
bailor.
GR: The bailee cannot retain it on the ground that the bailor
owes him something. Applicability of Article 765 in commodatum
Article 765 is applicable because like a donation,
XPN: When the bailor knowing the flaws, does not advise the commodatum is essentially gratuitous. (Art. 1933) The bailee
bailee of the flaws, and the bailee sustained damages by who commits any of the acts of ingratitude makes himself
reason thereof. (Art. 1951) unworthy of the trust reposed upon him by the bailor. Hence,
the right given to the bailor to demand the immediate return of
The bailor is made liable for his bad faith. The bailee is given the thing.
the right of retention until he is paid damages.
2. To refund extraordinary expenses – The bailor shall
Liability when there are two or more bailees refund the extraordinary expenses during the contract for
Article 1945. When there are two or more bailees to whom the preservation of the thing loaned, provided the bailee
a thing is loaned in the same contract, they are liable brings the same to the knowledge of the bailor before
solidarily. 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 - It involves the return of the equivalent only and not the
actual use of the thing by the bailee, even though he identical thing because the borrower acquires ownership
acted without fault, they shall be borne equally by both thereof.
the bailor and the bailee, unless there is a stipulation to - A loan of money, however, may be payable in kind.
the contrary. (Art. 1949)
Acquisition of ownership in mutuum
Article 1953. A person who receives a loan of money or any
Extraordinary expenses other fungible thing acquires the ownership thereof, and is
1. For the preservation of the thing loaned. bound to pay to the creditor an equal amount of the same
It is the bailor who profits by said expenses. If they are incurred kind and quality.
by the bailee, the bailor must refund them provided the bailee
brings the same to the knowledge of the bailor before incurring
Characteristics of mutuum
them. 1. Real contract;
2. Nominate;
GR: Notice is required because it is possible that the bailor 3. Principal;
may not want to incur the extraordinary expenses at all. He 4. Informal;
should be given discretion as to what must be done with his 5. Unilateral or bilateral; and
property. 6. Transfer of ownership (distinctive characteristic of
mutuum)
XPN: Where they are so urgent that the reply to the notification
cannot be awaited without danger. Mutuum distinguished from barter and
ex: Expenses for repairing borrowed house damaged by a commodatum
typhoon. Mutuum Barter Commodatum
Subject money or any non-fungible Non-consumable
2. Arising from actual use of the thing loaned. matter other fungible (non- goods or
The bailee pays onehalf because of the benefit derived from things consumable) consumable
the use of the thing loaned to him and the bailor pays the other things. good for
one-half because he is the owner and the thing will be returned exhibition
to him. purposes
Return the same the the bailee is
The parties, however, may, by stipulation, provide for a amount of the equivalent bound to return
different apportionment of such expenses, or that they shall be same kind and thing is the identical
borne by the bailee or bailor only. quality shall be given in thing borrowed
paid return for when the time
ex: Expenses for repairing a borrowed jeep damaged in a what has has expired or
collision. been the purpose has
received been served
No obligation to assume all other expenses Kind of gratuitous or onerous; always gratuitous
If, for the purpose of making use of the thing, the bailee incurs contract onerous mutual sale
expenses other than those referred to in Articles 1941 and
1949, he is not entitled to reimbursement. (Art. 1950)

Ordinary expenses in Article 1941 need not be refunded

All expenses other than those referred to in Articles 1941 and
1949 “for the purpose of making use of the thing” (e.g., Barter
borrower buys extra tire to be used as a reserve on a trip) that - A contract whereby one person transfers the ownership of
is, not necessary for the use and preservation of the thing, non-fungible things to another with the obligation on the
must be shouldered by the borrower. part of the latter to give things of the same kind, quantity,
and quality shall be considered a barter. (Art. 1954)
No right of abandonment for expenses and damages - By the contract of barter or exchange one of the parties
- The bailor cannot exempt himself from the payment of binds himself to give one thing in consideration of the
expenses or damages by abandoning the thing to the other’s promise to give another thing. (Art. 1638)
bailee. (Art. 1952)
- The reason for the above rule is that the expenses and/or Loan of money
damages may exceed the value of the thing loaned, and it - A person who receives a loan of money or any other
would be unfair to allow the bailor to just abandon the fungible thing acquires the ownership thereof, and is
thing instead of paying for said expenses and/or damages. bound to pay to the creditor an equal amount of the same
kind and quality. (Art. 1953)
- A loan of money may also be payable in kind. (Art. 1958)
Mutuum
Simple loan or mutuum Payment
Article 1955. The obligation of a person who borrows
- Simple loan or mutuum is a contract whereby one of the money shall be governed by the provisions of Articles 1249
parties delivers to another money or other consumable and 1250 of this Code.
thing with the understanding that the same amount of the
same kind and quality shall be paid. (Art. 1933)
If what was loaned is a fungible thing other than money, the
debtor owes another thing of the same kind, quantity and
 quality, even if it should change in value. In case it is obligation due and demandable even without notice or
impossible to deliver the same kind, its value at the time of demand. KT Constructions entire loan obligation became due
the perfection of the loan shall be paid. and demandable when it failed to pay an installment pursuant
to the acceleration clause.
Form of payment KT Construction in this case is liable for the entire obligation
1. Loan of money even without notice or demand and even before the maturity
- The payment must be made in the currency stipulated, if it date.
is possible to deliver such currency; otherwise, it is
payable in the currency which is legal tender in the
Philippines. (Art. 1249)
- In case of extraordinary inflation or deflation, the basis
of payment shall be the value of the currency at the time of
the creation of the obligation. (Art. 1250)
Note: All notes and coins issued by the Bangko Sentral ng
Pilipinas are legal tender in the Philippines for all debts, both
escalation clause
Sec. 7-a, of the Usury Law, as amended by P.D 1684
public or private. A check is not a legal tender and, therefore,
cannot constitute valid tender of payment. - Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that
2. Loan of fungible thing the rate of interest agreed upon may be increased in the
event that the applicable maximum rate of interest is
- The borrower is under obligation to pay the lender another
thing of the same kind, quality, and quantity. increased by law or by the Monetary Board;
- Provided, That such stipulation shall be valid only if there
- In case it is impossible to do so, the borrower shall pay its
value at the time of the perfection of the loan. is also a stipulation in the agreement that the rate of
interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or
Requisites of a valid payment by the Monetary Board;
(1) Integrity of payment – the obligation has been - Provided, further, That the adjustment in the rate of
completely delivered or rendered. (Art. 1233) interest agreed upon shall take effect on or after the
(2) Identity of payment – the debtor of a thing cannot compel effectivity of the increase or decrease in the maximum rate
the creditor to receive different one. (Art. 1244) or interest.
(3) Indivisibility of payment – the creditor cannot be
compelled partially to receive the prestations in which the Escalation clause in a loan agreement
obligation consists. (Art. 1248) - The unilateral determination and imposition of increased
interest by the lender will be violative of the principle of
extraordinary inflation -
mutuality of contracts. (Art. 1308)
Section 7-a applies to contractual stipulations providing for
Extraordinary inflation exists when there is a decrease or
adjustments in the interest rate agreed upon in the event
increase in the purchasing power of the Philippine currency
there is a change in the legal rate of interest effected by
which is unusual or beyond the common fluctuation in the
law or the Monetary Board as authorized by law. Such
value said currency, and such decrease or increase could not
change should benefit both the creditor and the debtor.
have reasonably foreseen or was manifestly beyond
contemplation the parties at the time of the establishment of
the obligation. Requisites for a valid escalation clause
(1) Escalation clause must not be solely potestative.
While appellant’s voluminous records and statistics proved that While the Usury Law ceiling on interest rates was lifted by
there has been a decline in the purchasing power of the Central Bank Circular No. 905, nothing in said circular grants a
Philippine peso, this downward fall of the currency cannot be lender carte blanche authority to raise interest rates to levels
considered extraordinary. Day-to-day changes in the currency which would either enslave the borrower or lead to a
is not considered as extraordinary inflation as it is considered hemorrhaging of their assets. Escalation clauses are not
as a universal trend in the currency market which affected our basically wrong or legally objectionable so long as they are not
economy as well. (Filipino Pipe and Foundry Corporation vs. solely potestative but based on reasonable and valid grounds.
National Waterworks and Sewerage Authority) (Almeda vs. CA)

Acceleration clause (2) De-escalation clause must also be stipulated.

An escalation clause can be valid only if it also includes a de-
- Acceleration clause is a stipulation in the agreement that
escalation clause or a stipulation that the rate of interest
on occasion of the debtor’s default the whole sum
agreed upon shall be reduced in the event that the maximum
remaining unpaid automatically becomes due and
rate of interest is reduced by law or by the Monetary Board.
payable. In other words, the debt is accelerated so that the
(Banco Filipino Savings and Mortgage Bank vs. Navarro)
maturity date is advanced.
- An acceleration clause is the option which gives the holder
The purpose of the law in mandating the inclusion of a
of the note (creditor) the option to accelerate the maturity
deescalation clause is to prevent one-sidedness in favor of the
date of the note in case of default of the maker (debtor).
lender which is considered repugnant to the principle of
(Mendoza vs. CA, Thomas Asuncion and Nena Asuncion)
mutuality of contracts ordained in Article 1308 14 of the Civil
Code. (Lloren, Jr. vs. CA)
KT Construction Supply vs. Philippine Savings Bank
(3) Increase or reduction of interest effected by law or the
An acceleration clause is valid and produces legal effects. In Monetary Board.
the case at bench, the promissory note explicitly stated that
default in any of the installments shall make the entire
A contract which embodies an escalation clause authorizing 2. Interest accruing from unpaid interest — Interest due
automatic increase in interest rates in the event a law shall earn interest from the time it is judicially demanded
increasing the rates of interest that may be charged is passed, although the obligation may be silent upon this point. (Art.
does not include a Central Bank Circular which, although 2212; Sec. 5, Usury Law.)
having the force and effect of law, is not strictly a statute or
law. Note: In cases where no interest had been stipulated by the
parties, no accrued conventional interest could further earn
The distinction is recognized in Section 7-a above which interest upon judicial demand.
speaks of interest increased or reduced by law or by the
Monetary Board. Administrative rules and regulations adopted Calilung vs. Paramount
pursuant to law have the force and effect of law but they do not
fall within the term “law.” (Banco Filipino Savings and Kinds of interest
Mortgage Bank vs. Navarro) Interest is a compensation fixed by the parties for the use or
forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called
compensatory interest. The right to interest arises only by
Sweetheart Loans virtue of a contract or by virtue of damages for delay or failure
to pay the principal loan on which interest is demanded.
To allay fears that respondent bank will inordinately be
prejudiced by being stuck with this "sweetheart loan" at
patently concessionary interest rates, which according to
respondent bank is the "sweetest deal" anyone could obtain
Requisites of Article 1956 of the Civil Code
and is an act of generosity considering that in 1985 lending
Article 1956 of the Civil Code, which refers to monetary
rates in the banking industry were peaking well over 30% p.a.,
interest, specifically mandates that no interest shall be due
we need only point out that the bank had the option to impose
unless it has been expressly stipulated in writing.
in its loan contracts the condition that resignation of an
As can be gleaned from the foregoing provision, payment of
employee-borrower would be a ground for escalation.
monetary interest is allowed only if:
(1) there was an express stipulation for the payment of
The fact is it did not. Hence, it must live with such omission.
interest; and
And it would be totally unfair to now impose said condition, not
(2) the agreement for the payment of interest was reduced
to mention that it would violate the principle of mutuality of
in writing.
consent in contracts. It goes without saying that such
escalation ground can be included in future contracts — not to
The concurrence of the two conditions is required for the
agreements already validly entered into.
payment of monetary interest. Thus, we have held that
collection of interest without any stipulation therefor in writing is
Let it be clear that this Court understands respondent bank's
prohibited by law.
position that the concessional interest rate was really intended
as a means to remunerate its employees and thus an
Exceptions to Article 1956 of the Civil Code
escalation due to resignation would have been a valid
There are instances in which an interest may be imposed even
stipulation. But no such stipulation was in fact made, and
in the absence of express stipulation, verbal or written,
thus the escalation provision could not be legally applied
regarding payment of interest. Article 2209 of the Civil Code
and enforced as against herein petitioners. (Sps. Florendo vs.
states that if the obligation consists in the payment of a sum of
CA and Landbank)
money, and the debtor incurs delay, a legal interest of 12% per
annum may be imposed as indemnity for damages if no
Interest stipulation on the payment of interest was agreed upon.
Kinds of interest Likewise, Article 2212 of the Civil Code provides that interest
1. Monetary interest – compensation for the use of money. due shall earn legal interest from the time it is judicially
(Art. 1956) demanded, although the obligation may be silent on this point.
2. Compensatory interest – imposed by law or by courts as
penalty or indemnity for damages. (Art. 2209 and Art. All the same, the interest under these two instances may be
2212) imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a
Rule on interest compensation for the use or forbearance of money. In other
Article 1956. No interest shall be due unless it has been words, the two instances apply only to compensatory interest
expressly stipulated in writing. and not to monetary interest.

Requisites for recovery of interest

(1) The payment of interest must be expressly stipulated;
Usury Law
(2) The agreement must be in writing (Art. 1956.); and
Herrera vs. Petrophil Corporation
(3) The interest must be lawful.
Usury
XPN: Liability for interest even in the absence of
To constitute usury, there must be loan or forbearance; the
stipulation
loan must be of money or something circulating as money; it
1. Indemnity for damages — The debtor in delay is liable to
must be repayable absolutely and in all events; and something
pay legal interest (6%/12%) as indemnity for damages
must be exacted for the use of the money in excess of and in
even in the absence of stipulation for the payment of
addition to interest allowed by law.
interest.
Elements of usury mortgage subsists, and this right can be exercised by the
It has been held that the elements of usury are: creditor upon failure by the debtor to pay the debt due.
(1) a loan, express or implied;
(2) an understanding between the parties that the money lent
shall or may be returned;
exorbitant interest
(3) that for such loan a greater rate or interest that is allowed
by law shall be paid, or agreed to be paid, as the case Imperial vs. Jaucian
may be; and
(4) a corrupt intent to take more than the legal rate for the use The records show that there was a written agreement between
of money loaned. the parties for the payment of interest on the subject loans at
the rate of 16 percent per month. As decreed by the lower
Unless these four things concur in every transaction, it is safe courts, this rate must be equitably reduced for being iniquitous,
to affirm that no case of usury can be declared. unconscionable and exorbitant. While the Usury Law ceiling on
interest rates was lifted by C.B. Circular No. 905, nothing in the
There is no usury in this case because no money was given by said circular grants lenders carte blanche authority to raise
Petrophil to Herrera, nor did it allow him to use its money interest rates to levels which will either enslave their borrowers
already in his possession. There was neither loan nor or lead to a hemorrhaging of their assets.
forbearance but a mere discount which Herrera allowed the
defendant-appellee to deduct from the total payments because
they were being made in advance for eight years.
In the present case, the rate is even more iniquitous and
The discount was in effect a reduction of the rentals which the unconscionable, as it amounts to 192 percent per annum.
lessor had the right to determine, and any reduction thereof, by When the agreed rate is iniquitous or unconscionable, it is
any amount, would not contravene the Usury Law. The considered contrary to morals, if not against the law. Such
difference between a discount and a loan or forbearance is that stipulation is void.
the former does not have to be repaid. The loan or forbearance
is subject to repayment and is therefore governed by the laws Medel vs. CA
on usury.
We agree with petitioners that the stipulated rate of interest at
As its title plainly indicates, the contract between the parties is 5.5% per month on the P500,000.00 loan is excessive,
one of lease and not of loan. It is clearly denominated a iniquitous, unconscionable and exorbitant. However, we cannot
“LEASE AGREEMENT.” Nowhere in the contract is there any consider the rate “usurious” because this Court has
showing that the parties intended a loan rather than a lease. consistently held that Circular No. 905 of the Central Bank,
The provision for the payment of rentals in advance cannot be adopted on December 22, 1982, has expressly removed the
construed as a repayment of a loan because there was no interest ceilings prescribed by the Usury Law 14 and that the
grant or forbearance of money as to constitute an Usury Law is now “legally inexistent”.
indebtedness on the part of the Herrera.
We find the interest at 5.5% per month, or 66% per annum,
On the contrary, the Petrophil was discharging its obligation in stipulated upon by the parties in the promissory note iniquitous
advance by paying the eight years rentals, and it was for this or unconscionable, and, hence, contrary to morals (“contra
advance payment that it was getting a rebate or discount. bonos mores”), if not against the law. The stipulation is void.

Advocates for Truth vs. Bangko Sentral Monetary Board Chua vs. Timan

The CB-MB merely suspended the effectivity of the Usury The stipulated interest rates of 7% and 5% per month imposed
Law when it issued CB Circular No. 905 on respondents’ loans must be equitably reduced to 1% per
The lifting of the ceilings for interest rates does not authorize month or 12% per annum. We need not unsettle the principle
stipulations charging excessive, unconscionable, and iniquitous we had affirmed in a plethora of cases that stipulated interest
interest. It is settled that nothing in CB Circular No. 905 grants rates of 3% per month and higher are excessive, iniquitous,
lenders a carte blanche authority to raise interest rates to unconscionable and exorbitant. Such stipulations are void for
levels which will either enslave their borrowers or lead to a being contrary to morals, if not against the law.
hemorrhaging of their assets.
Spouses Abella vs. Spouses Abella
Thus, according to the Court, by lifting the interest ceiling, CB
Circular No. 905 merely upheld the parties’ freedom of contract Even if it can be shown that the parties have agreed to monthly
to agree freely on the rate of interest. It cited Article 1306 of the interest at the rate of 2.5%, this is unconscionable. The
New Civil Code, under which the contracting parties may willingness of the parties to enter into a relation involving an
establish such stipulations, clauses, terms and conditions as unconscionable interest rate is inconsequential to the validity of
they may deem convenient, provided they are not contrary to the stipulated rate. The imposition of an unconscionable rate of
law, morals, good customs, public order, or public policy. interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a
Nullity of usurious interest stipulation does not affect the repugnant spoliation and an iniquitous deprivation of property,
lender’s right to recover repulsive to the common sense of man.
Stipulations authorizing iniquitous or unconscionable interests
have been invariably struck down for being contrary to morals, The imposition of an unconscionable interest rate is void ab
if not against the law. Nonetheless, the nullity of the stipulation initio for being contrary to morals, and the law. The legal rate of
of usurious interest does not affect the lender’s right to recover interest is the presumptive reasonable compensation for
the principal of a loan, nor affect the other terms thereof. Thus, borrowed money. While parties are free to deviate from this,
in a usurious loan with mortgage, the right to foreclose the any deviation must be reasonable and fair. Thus, in cases
where stipulated interest is more than twice the prevailing legal The New Civil Code permits an agreement upon a penalty
rate of interest, it is for the creditor to prove that this rate is apart from the monetary interest. If the parties stipulate this
required by prevailing market conditions. Here, petitioners have kind of agreement, the penalty does not include the monetary
articulated no such justification. interest, and as such the two are different and distinct from
each other and may be demanded separately.
In sum, Article 1956 of the Civil Code, read in light of
established jurisprudence, prevents the application of any A stipulation about payment of an additional interest rate
interest rate other than that specifically provided for by the partakes of the nature of a penalty clause which is sanctioned
parties in their loan document or, in lieu of it, the legal rate. by law, more particularly under Article 2209 of the New Civil
Here, as the contracting parties failed to make a specific Code.
stipulation, the legal rate must apply.
The penalty charge of two percent (2%) per month in the case
Legal rate of interest at bar began to accrue from the time of default by the
petitioner. There is no doubt that the petitioner is liable for both
Legal interest is that which the law directs to be charged
the stipulated monetary interest and the stipulated penalty
absent any agreement as to the rate between the parties.
charge. The penalty charge is also called penalty or
compensatory interest.
Under BSP Circular No. 799, series of 2013, the rate of interest
for the loan or forbearance of money, goods, or credit, and the
rate allowed in judgments, absent any express contract as to
such rate of interest, is 6% per annum, effective July 1, 2013.
The 6% per annum interest rate under Article 2209 of the Civil
Rivera vs. Spouses Chua
Code is modified into 6% per annum or as may be fixed by
the Monetary Board of the BSP, pursuant to the Usury Law,
Corollary thereto, Article 2209 solidifies the consequence of
as amended. If the legal rate of interest is fixed by BSP, the
payment of interest as an indemnity for damages when the
same would still be applicable. (Lara’s Gifts and Decors vs.
obligor incurs in delay:
Midtown Industrial Sales, Inc.)
Art. 2209. If the obligation consists in the payment of a sum of
Federal Builders, Inc. Vs. Foundation Specialists, Inc.
money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be
Forbearance of money
the payment of the interest agreed upon, and in the absence of
The term forbearance, within the context of usury law, has
stipulation, the legal interest, which is six percent per annum.
been described as a contractual obligation of a lender or
creditor to refrain, during a given period of time, from requiring
Article 2209 is specifically applicable in this instance where: (1)
the borrower or debtor to repay the loan or debt then due and
the obligation is for a sum of money; (2) the debtor, Rivera,
payable.
incurred in delay when he failed to pay on or before 31
December 1995; and (3) the Promissory Note provides for an
Forbearance of money, goods or credits, therefore, refers to
indemnity for damages upon default of Rivera which is the
arrangements other than loan agreements, where a person
payment of a 5%monthly interest from the date of default.
acquiesces to the temporary use of his money, goods or
credits pending the happening of certain events or fulfillment of
certain conditions. Compounded interest
Article 1959. Without prejudice to the provisions of article
Consequently, if those conditions are breached, said person is 2212, interest due and unpaid shall not earn interest.
entitled not only to the return of the principal amount paid, but However, the contracting parties may by stipulation
also to compensation for the use of his money which would be capitalize the interest due and unpaid, which as added
the same rate of legal interest applicable to a loan since the principal, shall earn new interest.
use or deprivation of funds therein is similar to a loan.
GR: Accrued interest (interest due and unpaid) shall not earn
In forbearance of money, there is a period of time for the use of interest.
money, allowing lender by creditor to use money for a certain
period of time. It is not a loan transaction, there is merely a XPN: When unpaid interest earns interest
period given by creditor to allow debtor to repay. 1. When judicially demanded. (Art. 2212); or
2. When there is an express stipulation made by the parties
Interest vs. Penalty to wit: that the interest due an unpaid shall be added to the
principal obligation and the resulting total amount shall
earn interest.
Antonio Tan vs. CA and CCP
Note: This practice is called compounding interest and it is
In the case at bar, the promissory note expressly provides for
allowed by the Usury Law if there is express stipulation.
the imposition of both interest and penalties in case of default
on the part of the petitioner in the payment of the subject
 The parties may stipulate on the imposition of both interest
restructured loan. The stipulated fourteen percent (14%) per
and penalty in case of default on the part of the borrower.
annum interest charge until full payment of the loan constitutes
(Art. 1226) Under Article 1959, the compounding of not
the monetary interest on the note and is allowed under Article
only of the monetary interest but also of the penalty
1956 of the New Civil Code. On the other hand, the stipulated
charge, also called penalty or compensatory interest is
two percent (2%) per month penalty is in the form of penalty
allowed.
charge which is separate and distinct from the monetary
interest on the principal of the loan.
 Hence, the borrower may be held liable to pay the interest
on the total amount of principal, the monetary interest and
Characteristics of Deposit
1. Real contract – it is perfected by the delivery of the
the penalty interest.
subject matter like commodatum and mutuum;
 In view of Article 1956, the stipulation as to compound
2. Unilateral or bilateral;
interest must be in writing.
 Unilateral – when the deposit is gratuitous because
only the depositary has an obligation.
Solutio indebiti  Bilateral – when the deposit is for compensation, the
Article 1960. If the borrower pays interest when there has juridical relation created becomes bilateral because it
been no stipulation therefor, the provisions of this Code gives rise to obligations on the part of both the
concerning solutio indebiti, or natural obligations, shall be depositary and depositor.
applied, as the case may be. 3. Nominate;
4. Principal;
Recovery of unstipulated interest paid 5. Informal;
- If unstipulated interest (not due) is paid by mistake, the 6. Gratuitous or onerous.
debtor may recover as this would be a case of solutio
indebiti or undue payment. GR: Contract of deposit generally gratuitous. (Art. 1965)
- But where the unstipulated interest, or interest stipulated, XPNs:
there being a stipulation but it is not in writing, is paid (1) Where there is contrary stipulation;
voluntarily because the debtor feels morally obliged to do (2) Where depositary engaged in business of storing goods
so, there can be no recovery as in the case of natural (ex: warehouseman for compensation and not out of pure
obligations. generosity);
(3) Where property saved from destruction without knowledge
of the owner – in involuntary deposit, where property is
Spouses Abella vs. Spouses Abella saved from destruction during a calamity by another
person without the knowledge of the owner, the latter is
Principle of solution inebiti bound to pay the former just compensation
The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the Future deposit
expense of another. As respondents had already fully paid the Article 1963. An agreement to constitute a deposit is
principal and all conventional interest that had accrued, they binding, but the deposit itself is not perfected until the
were no longer obliged to make further payments. Any further delivery of the thing.
payment they made was only because of a mistaken
impression that they were still due. Accordingly, petitioners are Binding effect of agreement to deposit
now bound by a quasi-contractual obligation to return any and - A deposit is a real contract and is, therefore, perfected
all excess payments delivered by respondents. only upon delivery of the object of the contract. Where
there has been no delivery, there is merely an agreement
Requisites of solution indebiti to deposit which, however, is binding and enforceable
(1) A payment is made when there exists no binding relation upon the parties.
between the payor who has no duty to pay, and the person - Hence, a contract of future deposit is consensual. (Art.
who received the payment; and 1934.)
(2) The payment is made through mistake, and not through
liberality or some other cause. Creation of deposit
Article 1964. A deposit may be constituted judicially or
extrajudicially.
Deposit
- A deposit may be created by virtue of a court order or by
Deposit defined law and not by the will of the parties.
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 Kinds of deposit
the safekeeping of the thing delivered is not the principal 1. Judicial – one which takes place when an attachment or
purpose of the contract, there is no deposit but some other seizure of property in litigation is ordered.
contract. 2. Extrajudicial (Art. 1967)
a. Voluntary – one wherein the delivery is made by the
Safekeeping as principal purpose of deposit will of the depositor or by two or more persons each of
The principal purpose of the contract of deposit is the whom believes himself entitled to the thing deposited.
safekeeping of the thing delivered so that if safekeeping is only b. Necessary – one made in compliance with a legal
an accessory or secondary obligation of the recipient of the obligation, or on the occasion of any calamity, or by
thing, deposit is not constituted but some other contract like travelers in hotels and inns or by travelers with
lease, commodatum, or agency. common carriers.

Parties to a contract of deposit Object of deposit

1. Depositor – The depositor need not be the owner of the Kind of deposit Subject matter
thing deposited. Mere possessory right is sufficient. Judicial Movable and immovable
2. Depositary – person obliged to keep the thing and return things
it. Extrajudicial Movable and corporeal
things (Art. 1966)
 Article 1966.Only movable things may be the object of a b. Specially Disqualified by Law – person suffering from
deposit. penalty of civil interdiction. (Art. 1329)

- Article 1966 proceeds from the object of a deposit which is Where depositary capacitated and depositor incapacitated
safekeeping of a thing. The possibility that the thing may Article 1970. If a person having capacity to contract accepts
disappear or may be lost or stolen is not present in real a deposit made by one who is incapacitated, the former
property. shall be subject to all the obligations of a depositary, and
- Thus, the delivery of the keys of a house cannot be may be compelled to return the thing by the guardian, or
considered as a deposit of the same, and entrusting its administrator of the person who made the deposit, or by the
care and custody is, juridically, an agency. latter himself if he should acquire capacity.
- Article 1966 does not embrace incorporeal or intangible
property, such as rights and actions, for it follows the - The depositary must return the property to the legal
person of the owner, wherever he goes, and is not, by representative of the incapacitated or to the depositor
reason of its incorporeality, susceptible of custody in the himself if he should acquire capacity. (Art. 1986)
tangible sense that deposit is juridically understood.
- True it is that the deeds or documents in which those Where depositary incapacitated and depositor capacitated
rights are contained can be the object of deposit, but in Article 1971. If the deposit has been made by a capacitated
such a case, they are only the materialized and person with another who is not, the depositor shall only
representative expression of the rights. have an action to recover the thing deposited while it is still
in the possession of the depositary, or to compel the latter to
Voluntary deposit pay him the amount by which he may be enriched or
benefited himself with the thing or its price. However, if a
Article 1968. A voluntary deposit is that wherein the
third person who acquired the thing acted in bad faith, the
delivery is made by the will of the depositor. A deposit may
depositor may bring an action against him for its recovery.
also be made by two or more persons each of whom
believes himself entitled to the thing deposited with a third
- The incapacitated depositary (like a minor or an insane
person, who shall deliver it in a proper case to the one to
person) does not incur the obligation of a depositary.
whom it belongs.
- However, he is liable:
Voluntary and necessary deposits distinguished
(1) to return the thing deposited while still in his
 Voluntary deposit – the depositor has complete freedom
possession; and
in choosing the depositary.
(2) to pay the depositor the amount by which he may
 Necessary deposit – there is lack of free choice in the
have benefited himself with the thing or its price
depositor.
subject to the right of any third person who acquired
the thing in good faith.
Depositor need not be owner of thing
- The depositary cannot demand that the depositor prove If depositary has already sold the thing:
his ownership of the thing deposited. (Art. 1984)  Buyer in good faith – the depositor may bring an action
- What is required is the possessory right. If he has the right against the third person for recovery.
to possess the property, then he has the right to deposit it.  Buyer in good faith – depositor can compel the
He does not have to be the owner of the property. incapacitated to return the price received for the thing or
- Thus, a carrier, commission agent, a lessee, etc. may the amount by which he may have benefited himself.
deposit goods temporarily in his possession considering
that the contract does not involve the transfer of
ownership.
Irregular deposit
- If the thing deposited is money or other consumable thing,
the permission to use it will result in its consumption and
Form of contract of deposit converts the contract into a simple loan or mutuum.
Article 1969. A contract of deposit may be entered into - But if safekeeping is still the principal purpose of the
orally or in writing. contract, it is still a deposit but an irregular one; hence, it is
called an irregular deposit.
- The above article follows the general rule that contracts - Bank deposits are in the nature of irregular deposits but
shall be obligatory in whatever form they may have been they are really loans governed by the law on loans. (Art.
entered into provided all the essential requisites for their 1980)
validity are present. (Art. 1356) - The relationship is that of debtor-creditor, with the bank as
- Thus, except for the delivery of the thing, there are no debtor, and depositor as creditor.
formalities required for the existence of the contract.
Article 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
Capacity of the parties provisions concerning simple loan.
Who can enter in contract of deposit
Generally, since this is a contract, then those persons who can Coverage of Article 1980
give valid consent can enter into a deposit. - Time Deposits;
- Savings Deposits;
Parties who can give valid consent - Dollar investments.
Those at least 18 years of age and above without
disqualifications such as: Bank deposits
a. Insane/Deaf Mutes who cannot read or write – they Bank deposits are in the nature of irregular deposits but they
cannot give valid consent, thus they cannot enter into a are really loans governed by the law on loans.
valid contract of deposit. (Art. 1327)
Deposit substitutes IEB vs. CIR
- Alternative forms of obtaining funds from the public, other
than deposits. Deposits are subject to Documentary stamp tax (DST)
- The issuance, indorsement, acceptance of debt A passbook representing an interest earning deposit account
instruments for the borrower's own account, for the issued by a bank qualifies as certificate of deposit drawing
purpose of relending or purchasing of receivables, or interest. A document to be deemed a certificate of deposit
financing their own needs, are the needs of their agents or requires no specific form, as long as there is some written
dealer. memorandum that the bank accepted and the positive money
from a depositor. What is important in controlling is the nature
Irregular deposit distinguished from mutuum of the means conveyed by the passbook, and at the particular
Irregular deposit Mutuum label attached to it.
Demandability The consumable The lender is
of consumable thing deposited bound by the The FSD, like a time deposit, provides for a higher interest rate
thing may be demanded provisions of the when the deposit is not withdrawn within the required fixed
at will by the contract and period; otherwise, it earns interest pertaining to a regular
irregular depositor cannot seek savings deposit. Having a fixed term and the reduction of
for whose benefit restitution until the interest rates in case of pre-termination are essential features
the deposit has time for payment, of a time deposit.
been constituted. as provided in the
contract. To claim that time deposits evidenced by passbooks should not
Benefit The only benefit is The essential be subject to DST is a clear evasion of the rule on equality and
that which accrues cause for the uniformity in taxation that requires the imposition of DST on
to the depositor. transaction is the documents evidencing transactions of the same kind, in this
necessity of the particular case, on all certificates of deposits drawing interest.
borrower. A loan
with a stipulation
to pay interest is
for the benefit of
both parties.
Preference The depositor in an Common
over other has preference creditors enjoy no CIR vs. Traders Royal Bank
creditors over other creditors preference in the
with respect to the distribution of the No proof presented of existence of trust indenture
thing deposited. debtor’s property. agreements
TRB the protested the assessments of the BIR, claiming that
the Special Savings Deposit being savings deposit accounts
Guingona vs. City Fiscal of Manila
are not subject to DST and the Trust Indenture Agreements are
not subject to DST because the relationship established
Bank deposit
between parties was one of Trustor-Trustee, not Debtor-
Bank deposits are in the nature of irregular deposits. They are
Creditor
really loans, because they have interest. Current and saving
deposits are loans to the bank because it can use the same.
Surprisingly, not a single copy of a Trust Indenture Agreement
Hence, the relationship between NLSA and David is that of
and/or the Certificate of Participation (issued to the client as
creditor and debtor; consequently, the ownership of the amount
evidence of the trust) could be found in the records of the case.
deposited was transmitted to the Bank upon the perfection of
the loan, and it can make use of the amount deposited for its
Therefore, it was still necessary for TRB to present the Trust
banking operations, such as to pay interest on deposits and to
Indenture Agreements to test the terms and conditions thereof
pay withdrawals.
against the standards set by Section X407 of the 1993 MORB.
Without the actual Trust Indenture Agreements, there would be
While the bank has the obligation to return the amount
no factual basis for concluding that the same were trusts under
deposited, it has no obligation to return or deliver the same
Section X407 of the 1993 MORB.
money that was deposited. And the failure of the bank to return
the amount deposited will not constitute estafa thru
The audit and investigation resulted in the issuance of
misappropriation but will only give rise to civil liability.
Assessment Notices against TRB for DST tax liabilities for
1996 and 1997, which were duly received by TRB. The tax
Time deposits, saving deposits, investments, dollar
assessments against TRB are presumed valid.
investments fall under the coverage of Art. 1980. So the
investment, a special account deposits with a special rate of
Sps. Panlilio vs. Citibank North America
interest above the legal rate, and all the other savings deposit
are considered as NOT strictly deposit. The relationship would
be one of debtor-creditor relationship, not one of depositor- Contract of agency
depositary by virtue of Art. 1980. All the documents signed by Amalia, including the DIMA and
Directional Letter, show that her agreement with respondent is
Nature of loan transaction one of agency, and not a trust.
There is transfer of ownership. The bank acquires title for the
thing. which is why the bank is able to lend it out to other The DIMA, Directional Letter, TIA and COIs, read together,
persons. When there is interest being paid for the use of the establish the agreement between the parties as an investment
money, then that is considered the nature of a loan transaction. management agreement, which created a principal-agent
relationship between petitioners as principals and respondent
as agent for investment purposes.
 which was made so that both renters could have access to the
The agreement is not a trust or an ordinary bank deposit; box.
hence, no trustor-trustee-beneficiary or even borrower-lender
relationship existed between petitioners and respondent with Neither could Article 1975, also relied upon by the respondent
respect to the DIMA account. Respondent purchased the Long Court, be invoked as an argument against the deposit theory.
term commercial papers (LTCPs) only as agent of petitioners; Obviously, the first paragraph of such provision cannot apply to
thus, the latter assumed all obligations or inherent risks a depositary of certificates, bonds, securities or instruments
entailed by the transaction. which earn interest if such documents are kept in a rented
safety deposit box. It is clear that the depositary cannot open
The bank was considered an agent in this case, and there is no the box without the renter being present.
Loan Transaction (Debtor-Creditor Relationship), nor a Trust
(Trustor-Trustee). LTCPs are not covered by Art. 1980. the Relationship between parties in a rent of safety deposit
relationship is not Debtor-Creditor, but Principal-Agent. box is bailor and bailee
Where a safe-deposit company leases a safe deposit box or
Safety deposit box safe, with respect to the contents of the box, the relation of
Bailee and Bailor is created. The contract for the rent of the
Article 1975. The depositary holding certificates, bonds, safety deposit box is not an ordinary contract of lease as
securities or instruments which earn interest shall be bound defined in Article 1643 of the Civil Code. However, the same is
to collect the latter when it becomes due, and to take such not a contract of deposit that is to be strictly governed by the
steps as may be necessary in order that the securities may provisions in the Civil Code on deposit. It is governed by the
preserve their value and the rights corresponding to them law on obligations and contracts.
according to law.
The guard key of the box remained with Security Bank; without
The above provision shall not apply to contracts for the this key, neither of the renters could open the box. On the other
rent of safety deposit boxes. hand, the respondent Bank could not likewise open the box
without the renter's key. It is not correct to assert that the Bank
Rent of safety deposit box has neither the possession nor control of the contents of the
- The Contract entered into is denominated as a lease of box since in fact, the safety deposit box itself is located in its
safety deposit box. premises and is under its absolute control; moreover, the
- Their relationship is one of bailor and bailee. respondent Bank keeps the guard key to the said box. As
- The fact that the safe-deposit company does not know, stated earlier, renters cannot open their respective boxes
and that it is not expected that it shall know, the character unless the Bank cooperates by presenting and using this guard
or description of the property which is deposited in such key.
safe-deposit box or safe does not change that relation. Stipulation in a contract for the use of a safety deposit box
- That access to the contents of the safe-deposit box can be relieving the Bank of liability, void
had only by the use of a key retained by the lessee Under the General Banking Act, the limits are the duty to
(whether it is the sole key or one to be used in connection exercise reasonable diligence is imposed on the bank.
with one retained by the lessor) does not operate to alter Therefore, they cannot totally disclaim any liability on the loss
the foregoing rule. the contents of the safety deposit box.
- It is not an ordinary contract of lease of things but a
special kind of deposit and it is not to be strictly governed However, there is no liability on the part of security bank. There
by the provisions on deposit. was no showing or proof that the bank was guilty of fraud,
negligence, delay, or breach of contractual obligations. In the
Bank’s Liability in Safety Deposit Box first place, the bank was not aware that there was such an
Those who in the performance of their obligations are guilty of agreement between CA Agro and Sps. Pugao. That in order to
fraud, negligence, or delay, and those who in any manner open the box, both of the parties should be present.
contravene the tenor thereof, are liable for damages. (Art.
1170)
Obligations of the depositary
Article 1972. The depositary is obliged to keep the thing
CA Agro-Industrial Dev’t Corp. vs. CA & Security Bank
safely and to return it, when required, to the depositor, or
to his heirs and successors, or to the person who may have
Contract of rent of safety deposit box not an ordinary
been designated in the contract. His responsibility, with
contract of lease
regard to the safekeeping and the loss of the thing, shall be
We agree with the petitioner's contention that the contract for
governed by the provisions of Title I of this Book.
the rent of the safety deposit box is not an ordinary contract of
lease as defined in Article 1643 of the Civil Code. However,
We do not fully subscribe to its view that the same is a contract If the deposit is gratuitous, this fact shall be taken into
of deposit that is to be strictly governed by the provisions in the account in determining the degree of care that the
Civil Code on deposit; 19 the contract in the case at bar is a depositary must observe.
special kind of deposit.
I. To keep the thing
It cannot be characterized as an ordinary contract of lease
under Article 1643 because the full and absolute possession Diligence required
and control of the safety deposit box was not given to the joint GR: The degree of diligence is that of a good father of a family.
renters — the petitioner and the Pugaos. The guard key of the (Art. 1163)
box remained with the respondent Bank; without this key, XPN:
neither of the renters could open the box. On the other hand, 1. Stipulation by parties; or
the respondent Bank could not likewise open the box without 2. When deposit is with compensation, degree of care is
the renter's key. In this case, the said key had a duplicate higher.
Commingling When depositary justified to open
Article 1976. Unless there is a stipulation to the contrary, a. There is presumed authority; or
the depositary may commingle grain or other articles of the b. Necessity.
same kind and quality, in which case the various depositors
shall own or have a proportionate interest in the mass. Refusal to keep
Article 1989. Unless the deposit is for a valuable
GR: The depositary is permitted to commingle grain or other consideration, the depositary who may have justifiable
articles of the same kind and quality. reasons for not keeping the thing deposited may, even
XPN: The depositary cannot commingle goods, even if they are before the time designated, return it to the depositor; and if
of the same kind and quality, if so stipulated. the latter should refuse to receive it, the depositary may
secure its consignation from the court.
Use by depositary
Article 1977. The depositary cannot make use of the thing Right of depositary to return thing deposited
deposited without the express permission of the depositor. Gratuitous deposit Onerous deposit
The depositary may return - Deposit with valuable
Otherwise, he shall be liable for damages. the thing deposited consideration.
notwithstanding that a - The depositary has no
period has been fixed for the right to return the thing
However, when the preservation of the thing deposited deposit if justifiable reasons deposited before the
requires its use, it must be used but only for that purpose. exist for its return. expiration of the time
designated even if he
GR: Depositary cannot use the thing. Deposit is for should suffer
safekeeping of the subject matter and not for its use. inconvenience as a
XPN: consequence.
1. Depositor expressly gives permission. - He is bound by the
2. When the preservation of the thing deposited requires its period and restitution
use. before its expiration
constitutes a breach of
Closed and sealed things his obligation.
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 II. To return the thing
the depositor shall be accepted, when the forcible opening
is imputable to the depositary, should there be no proof to Article 1983. The thing deposited shall be returned with all
the contrary. However, the courts may pass upon the its products, accessories and accessions.
credibility of the depositor with respect to the value claimed
by him. Should the deposit consist of money, the provisions relative
to agents in article 1896 shall be applied to the depositary.
When the seal or lock is broken, with or without the
depositary's fault, he shall keep the secret of the deposit. What to return
1. Thing deposited;
Where thing deposited delivered closed and sealed, 2. Products;
depositary has the obligation to: 3. Accessories; and
1. Return the thing deposited when delivered closed and 4. Accessions.
sealed, in the same condition.
2. Pay for damages should the seal or lock be broken XPN:
through his fault which is presumed unless proved 1. Commingling – unless there is a stipulation to the
otherwise. contrary, the depositary may commingle grain or other
3. Keep the secret of the deposit when the seal or lock is articles of the same kind and quality, in which case the
broken, with or without his fault. various depositors shall own or have a proportionate
interest in the mass. (Art. 1976)
- The courts may pass upon the credibility of the depositor 2. Force majeure or government order – if the depositary
with respect to the value of the thing deposited. The by force majeure or government order loses the thing and
statement of the depositor is prima facie evidence only. receives money or another thing in its place, he shall
This is necessary in view of the natural tendency to deliver the sum or other thing to the depositor. (Art. 1990)
exaggerate values. 3. Sale in good faith by depositary’s heir – when the
depositor's heir who in good faith may have sold the thing
Article 1982. When it becomes necessary to open a locked which he did not know was deposited, shall only be bound
box or receptacle, the depositary is presumed authorized to to return the price he may have received or to assign his
do so, if the key has been delivered to him; or when the right of action against the buyer in case the price has not
instructions of the depositor as regards the deposit cannot been paid him. (Art. 1991)
be executed without opening the box or receptacle.
4. Thing deteriorates without fault of the debtor – the only be authorized in case of conflicting claims to consign
impairment is to be borne by the creditor. (Art. 1189) the thing in court through an action of interpleader.

Where to return Consequences of failure to return

Article 1987. If at the time the deposit was made a place Those who in the performance of their obligations are guilty of
was designated for the return of the thing, the depositary fraud, negligence, or delay, and those who in any manner
must take the thing deposited to such place; but the contravene the tenor thereof, are liable for damages. (Art.
expenses for transportation shall be borne by the depositor. 1170)

If no place has been designated for the return, it shall be Depositary’s heir
made where the thing deposited may be, even if it should - Article 1991 envisions a situation where the depositary
not be the same place where the deposit was made, dies and the object of the deposit is left with his heir who,
provided that there was no malice on the part of the in good faith, sells it.
depositary. - The obligation of the heir is limited to the return of the
price received or to assign the right to collect the same if it
has not been paid.
The thing must be returned at the:
GR: Place agreed upon/stipulated by the parties. - If the purchaser who acquired the thing acted in bad faith,
the depositor may bring an action against him for its
XPN: In the absence of stipulation, at the place where the thing
deposited, provided the transfer was accomplished without recovery.
malice on the part of the depositary.
Obligations of the depositor
To whom to return
1. Depositor; I. To reimburse expenses and losses
2. His heirs and successors; or
3. To the person who may have been designated in the Expenses for preservation
contract. (Art. 1972) Gratuitous deposit Onerous deposit
- Depositor is obliged to - Borne by the depositary
 If the depositor was incapacitated at the time of reimburse the because they are
making the deposit – returned to his guardian or depositary. (Art. 1992) deemed included in the
administrator or the person who made the deposit or to the - The depositor would compensation.
depositor himself should he acquire capacity. (Art. 1970) have incurred them just XPN: Contrary stipulation.
the same had the thing
 Depositor he subsequently loses his capacity during remained with him.
the deposit – returned to his legal representative. (Art.
1986) Losses incurred due to character of thing deposited
GR: The depositary must be reimbursed for loss suffered by
him because of the character of the thing deposited.

XPN: At the time of the constitution of the deposit

1. Depositor was not aware of the dangerous character of
When to return the thing;
Article 1988. The thing deposited must be returned to the 2. Depositor was not expected to know the dangerous
depositor upon demand, even though a specified period or character of the thing; or
time for such return may have been fixed. 3. Depositor notified the depositary of the same; or
4. Depositary was aware of it without advice from the
This provision shall not apply when the thing is judicially depositor.
attached while in the depositary's possession, or should he
have been notified of the opposition of a third person to the II. To pay delivery expenses
return or the removal of the thing deposited. In these cases, - The expenses for the transportation shall be borne by the
the depositary must immediately inform the depositor of the depositor. (Art. 1987)
attachment or opposition. - The deposit is constituted for the benefit of the depositor
and not the depositary who assumes no more than the
GR: The depositor can demand the return of the thing safekeeping and the return of the thing.
deposited at will and this is true whether a period has been
stipulated or not. Depositary’s right of retention
- In a deposit, whenever a period is agreed to, the same is - The depositary may retain the thing in pledge until the full
for the benefit of the depositor, but it may be validly waived payment of what may be due him by reason of the deposit.
by him. (Art. 1984)
- But the period is generally binding upon the depositary. - Pledge created by law.
- The thing retained serves as security for the payment of
XPN: When the depositary is not obliged to return thing what may be due to the depositary by reason of the
deposited deposit.
1. Thing is subject to the judicial order of attachment – if
the depositor returns the thing, he would be disobeying the
judicial order of attachment. extinguishment of deposit
2. Opposition of a third person to the return or the Article 1995. A deposit its extinguished:
removal of the thing deposited – the depositary should (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.

- The causes mentioned in Article 1995 are not exclusive.

- There are other causes such as return of the thing,
novation, merger, expiration of the term, fulfillment of the
resolutory condition, etc. (Art. 1231)

Effect of death of depositor or depositary

Gratuitous deposit Onerous deposit
Extinguishes the deposit. - Not extinguished by the
death of either party.
- Onerous deposit is not
personal in nature.
- The rights and
obligations arising
therefrom are
transmissible to their
respective heirs.

*The heirs of either party

have a right to terminate the
deposit even before the
expiration of the term.

-----------------------END OF FIRST EXAM COVERAGE----------------------

Humility and
Perseverance ⚖️