SGS QUESTIONS: (and other notes from class appear in this CREDIT: is the debtors ABILITY to borrow money

borrow money by virtue of

box) the confidence or trust reposed by the creditor that the debtor
1. Which is the best security transaction that should govern the will pay what he promised.
situation?
2. What would you do if you were counsel for: It mitigates the risk of loss using SECURITY.
a. Debtor
b. Creditor - Civil Code does not have a definition of credit
c. Others who may be parties/involved - Under the Truth in Lending Act, RA No. 3765, Sec. 3(2):
(surety/guarantor/etc) "Credit" means any loan, mortgage, deed of trust,
3. In a case, what would the remedy have been (for the losing advance, or discount; any conditional sales contract; any
party)? contract to sell, or sale or contract of sale of property or
services, either for present or future delivery, under which
INTRODUCTION: THE CONCEPT OF CREDIT part or all of the price is payable subsequent to the making
of such sale or contract; any rental-purchase contract; any
A. Credit, Debt and Security contract or arrangement for the hire, bailment, or leasing of
property; any option, demand, lien, pledge, or other claim
- Credit, which means belief or trust is from Latin against, or for the delivery of, property or money; any
Credere = I believe/to trust or to believe purchase, or other acquisition of, or any credit upon the
- Greek law: non-payment of a debt was categorized as a security of, any obligation of claim arising out of any of the
capital crime similar to murder foregoing; and any transaction or series of transactions
- Roman law: creditor was allowed to seize the debtor and sell having a similar purpose or effect. ! this is primarily an
or kill him in foreclosure, since a sum of money owed was enumeration
equated with human life - Jurisprudence defined credit as a sum credited on the
- Judaic law: creditor was allowed to take the children of the books of a company to a person who appears to be entitled
debtor for nonpayment of a debt to it. It presupposes a creditor-debtor relationship, and may
- Constitutional mandate now: No person shall be be said to imply ability, by reason of property or estates, to
imprisoned for debt ! shows that concepts of credit make a promised payment It is the correlative to debt or
and debt have been dramatically altered indebtedness, that which is due to any person, as
- Concept of security was devised to have a rational and distinguished from that which he owes.
kinder, system of ensuring the payment of debt security - Debt has been defined as a demand for an amount actually
is a transaction by which a creditor mitigates the risk of non- ascertained. There must be an ascertained amount and not
payment of debt by equating a sum of money owed with a mere unliquidated demand or liability, a certain sum that a
property or another persons undertaking to pay person may recover in numero and not to be repaired in
- Without credit, and without a rational system of dealing with damages
non-payment of debt, trade and commerce would not have
flourished in the 14th to 19th century People v. Concepcion (1922)
- By the 20th century, modern-day merchants were translating Plaintiff: People of the Phils.
concepts of credit, debt and security into increasingly Defendant: Venancio Concepcion
complicated and sophisticated transactions required by the Concept: Credit & Credit Transactions Defined
global economy
Doctrine:
B, Credit and Credit Transactions Defined Credit is the ability to borrow money by virtue of the
confidence or trust reposed by a lender that he will pay what he
RA 3765, Sec. 3 (2) "Credit" means any loan, mortgage, deed may promise. Loan, on the other hand, is the delivery by one
of trust, advance, or discount; any conditional sales contract; party and the receipt by the other party of a given sum of
any contract to sell, or sale or contract of sale of property or money, upon an agreement, express or implied, to repay the
services, either for present or future delivery, under which part sum of money, upon an agreement, express or implied, to repay
or all of the price is payable subsequent to the making of such the sum loaned, with or without interest.
sale or contract; any rental-purchase contract; any contract or
arrangement for the hire, bailment, or leasing of property; any Brief Facts:
option, demand, lien, pledge, or other claim against, or for the Concepcion, president of PNB, issued a special authorization for
delivery of, property or money; any purchase, or other an extension of credit in favor of copartnership Puno y
acquisition of, or any credit upon the security of, any obligation Concepcion, with his wife being one of the copartners. The line
of claim arising out of any of the foregoing; and any transaction of credit was issued with no other securities demanded. He was
or series of transactions having a similar purpose or effect. charged with violation of Sec. 35 of Act No. 2747, which prohibits
the granting of loans to members of the board of directors of the
bank, and was found guilty.

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ISSUES: 3. YES; it constitutes an indirect loan.
WON the grant of a line of credit of P300k by the defendant to - What may not be done directly, cannot be done indirectly.
the copartnership - The object of Congress in enacting the provision in the said
1. a loan within the meaning of Sec. 35? (NO) question was to prevent the director of a bank from being
2. a loan or a discount? (LOAN) tempted to serve his financial interests.
3. an indirect loan within the meaning of Sec. 35? (YES) - Making the grant of credit in question to a copartnership
4. WON defendant may be convicted of the offense even if the where the defendants own wife is a shareholder is an
same were already repealed before the information was filed indirect circumvention of the provision and therefore, also
and judgment was rendered (YES) falls under its prohibition; it amounts to an indirect loan by
5. was covered of the prohibition by the law? (YES) the defendant to himself.
6. WON good faith is a defense (NO)
4. YES; he may still be convicted
RATIO: - The past cases of US v. Cuna, Ong Chang Wing and Kwong
1. NO; record shows that authority was not for a loan Fok v. US, etc., have already ruled that the repeal of the
but only for a concession of credit penal provision for which a defendant is being held
- Court finds that the documents on the record only speak of responsible for, does not deprive the courts of their
credit (credito), and not of a loan (prestamo). jurisdiction to try the case and sentence him the appropriate
- Credit is the ability to borrow money by virtue of the penalty, if found guilty.
confidence or trust reposed by a lender that he will pay
what he may promise. 5. YES; the provision covers him.
- Loan, on the other hand, is the delivery by one party and - While the provision talks of the National Bank being
the receipt by the other party of a given sum of money, prohibited to do a certain act, such prohibition extends to
upon an agreement, express or implied, to repay the sum of the board of directors, and to each director, separately and
money, upon an agreement, express or implied, to repay individually.
the sum loaned, with or without interest. - Defendant, being the President of the bank is, therefore,
- However, the Court also points out that the concession of a properly covered by the provision as well.
credit necessarily results to the grant of loans up to the limit
of the amount fixed in the credit. 6. NO; good faith is not a defense
- Definition provides a conceptual framework for - The Court holds that since the penal provision in question is
understanding credit in relation to credit transactions malum prohibitum, it does not matter if the defendant acted
- J. Malcolm borrowed from Bouviers Law Dictionary and in good faith or that the loans that came about from the
defined credit as a persons ability to borrow money by extension of credit were already paid. The law punishes the
virtue of the confidence or trust reposed by a lender that he very commission of the crime and not the intent behind it,
will pay what he may promise. on account of public interest and policy.
- Credit, therefore, is an evaluation, made in the present, by
virtue of the trust and confidence reposed by a creditor, DISPOSITIVE: CFI affirmed.
of a debtors future worth or ability.
- All obligations, that is, the juridical necessity to give, to do
or not to do, that arise as a consequence of this evaluation,
are credit transactions.

2. The grant was one of loan and is therefore covered

by the penal provision.
- A 1916 ruling by the Insular Auditor held that the provision
prohibits loans but not discount transactions; it now, then,
becomes important to determine the nature of the
transaction in question.
- The grant by the defendant was a loan and NOT a discount
transaction:
o Discounts (1) involves a deduction of the interest in
advance, and (2) is written on a double-name paper
o The transaction however, did not involve such a
deduction at the said point in time and was written on a
single-name paper. These are characteristic of a loan.

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C. Commercial Credit Transactions LOAN

COC, Art. 1 The following are merchants for the purposes of I. THE CONCEPT OF LOAN
this Code:
1. Those who, having legal capacity to trade, customarily The concept of loan is a question of civility. It came from Roman
devote themselves thereto. cdasia law, a contract of neighborliness.
2. Commercial or industrial associations which are formed in
accordance with this Code. A. General Concepts

COC, Art. 2 Commercial transactions, be they performed by Art. 1933 By the contract of loan, one of the parties delivers
merchants or not, whether they are specified in this Code or to another, either something not consumable so that the latter
not, shall be governed by the provisions contained in the may use the same for a certain time and return it, in which case
same; in the absence of such provisions, by the commercial the contract is called a commodatum; or money or other
customs generally observed in each place; and in the absence consumable thing, upon the condition that the same amount
of both, by those of the common law. of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commercial transactions shall be considered those Commodatum is essentially gratuitous.
enumerated in this Code and any others of a similar character.
Simple loan may be gratuitous or with a stipulation to pay
interest.
COC, Art. 3 The legal presumption of a customary
engagement in commerce exists from the time the person who
In commodatum the bailor retains the ownership of the thing
desires to trade gives notice through circulars, newspapers,
loaned, while in simple loan, ownership passes to the
handbills, posters exhibited to the public, or in any other
borrower.
manner whatsoever, of an establishment, the purpose of which
is to conduct any commercial transaction.
Art. 1305 A contract is a meeting of minds between two
- Most credit transactions are commercial in nature, generally persons whereby one binds himself, with respect to the other,
entered into by merchants to give something or to render some service.
- Commercial credit transactions usually take the form of
ready-made contracts contracts of adhesion, - Art. 1933 defines loan as a contract where one party
agreements where one party imposes a ready-made form of delivers to another either something not consumable so
contract on the other who is free to reject it entirely, or if it that the latter may use the same for a certain time and
adheres, to give its consent; just as binding as ordinary return it (commodatum), or money or other
contracts; in case of ambiguity, it will be construed against consumable thing, upon the condition that the same
the party who prepared it amount of the same kind and quality shall be paid
(mutuum)
D. Relevance of Trust and Confidence - A loan is an obligation that always arises from a contract
- A loan, whether commodatum or mutuum, is a contract
- Money: anything generally accepted as payment in a for permissive use
transaction, recognized as a standard of value, and
authorized or adopted by a State as part of its currency. It is The source of the obligation is a contract.
viewed as trust inscribed, a matter of belief in the State
issuing it. Money approximates absolute credit as it Essential Elements:
represents the trust and confidence reposed in the State Mutuum Commodatum
- A common view arose (only those with money could procure Object Consumable or Non-consumable
more money on credit): by 2007, debtors lured by deferred money
payment terms failed to make payments; securities became Consideration Creditor: Liberality Bailor: Liberality
worthless; 21st cen. witnessed first global credit crisis Debtor: Permissive Bailee: Permissive
- By late 20th century microfinance and microcredit gained use use
recognition as poverty alleviation strategies. As a credit and Consent Consent
savings mobilization program exclusively for the poor, the
avowed purpose is to improve their asset base and expand
their access to savings.
o Underlying credit transaction quite simply a loan is
unique because of the small amount of money involved,
the general absence of security over property, and the
partnering of private and public sector entities
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1. Obligation to Deliver
ISSUE: WON there was a contract of loan; if so, W it was Thio or
Art. 1934 An accepted promise to deliver something by way Santiago who borrowed money from Garcia [YES, Thio]
of commodatum or simple loan is binding upon parties, but
the commodatum or simple loan itself shall not be perfected RATIO: YES, there was a contract of loan, where Thio
until the delivery of the object of the contract. borrowed money from Garcia.
(On existence of a loan)
- Primary obligation of the creditor in a loan is the delivery, - A loan is a real contract, not consensual, and is perfected
that is, the formal act of transferring, or the giving or only upon the delivery of the object of the contract
yielding of possession or control, of property for permissive o Art. 1934: An accepted promise to deliver something by
use by the debtor way of commodatum or simple loan is binding upon
- Reason why a loan is considered a real contract, a parties, but the commodatum or simple loan itself
contract in which property passes from one party to another, shall not be perfected until the delivery of the
requiring something more than mere consent object of the contract. (n)
- Delivery is essential for perfection o Upon delivery of the object of the contract of loan
(money received by the debtor when the checks were
The obligation to DELIVER makes it a REAL CONTRACT encashed), the debtor acquires ownership of such
because it is perfected upon the delivery of the object. money or loan proceeds and is bound to pay the
creditor an actual amount
Consent is still necessary because consent is still an essential - Undisputed that the checks were delivered to Thio, but the
element of a CONTRACT. checks were crossed and payable, not to Thio, but to
Santiago
MUTUUM: Obligations of the Parties (On identity of borrower)
- Creditor: To DELIVER - Garcia: Thio insisted that both checks be made payable to
- Debtor: To PAY the same amount of the same kind and Santiago; and once Thio received the checks, she had
quality possession and control of them such that she had the choice
to either forward them to Santiago (who was already her
COMMODATUM: Obligations of the Parties debtor), to retain them or to return them to Garcia
- Bailor: To DELIVER - SC: We agree with Garcia
- Bailee: To RETURN o Delivery is the act by which the res or substance
thereof is placed within the actual or constructive
Difference in the obligation of the DEBTOR arises from the possession or control of another
nature of the object of the contract: o Although she did not physically receive the proceeds,
- CONSUMABLE (mutuum): consumed by its use the instruments were placed in her control and
- NON-CONSUMABLE (commodatum): not consumed by its possession under an arrangement whereby she actually
use re-lent the amounts to Santiago
- Several factors that support conclusion that instruments
Garcia v. Thio (2007) Corona were placed in Thios control and possession:
Petitioners: Carolyn Garcia o That Garcia did not personally know Santiago, and it
Respondents: Rica Marie Thio was highly improbable that Garcia would grant 2 loans
Concept: Loan - Obligations to Deliver to a complete stranger without requiring promissory
notes or acknowledgment of the debt. Thio already had
Doctrine: transactions with Santiago back then
A loan is a real contract, not consensual, and is perfected only o A friend of both Garcia and Thio testified that Thios
upon the delivery of the object of the contract. Delivery is the plan was for Garcia to lend her money at 3% monthly
act by which the res or substance thereof is placed within the interest, after which Thio would lend the same amount
actual or constructive possession or control of another. to Santiago at 5% and realize profit of 2%
o Thio admitted issuing her own checks in the amount of
Brief Facts: P76,000, but she merely accommodated Garcias
Garcia gave Thio 2 crossed checks in Feb and June 1995, and request that Thio use her own checks since Garcia was
Thio gave Garcia amounts of money for several months not personally acquainted with Santiago; difficult to
thereafter. Garcia filed a complaint for sum of money and believe Thio would put herself in a position where she
damages against Thio, alleging that Thio borrowed money from would be compelled to pay interest, from her own
her but failed to pay on the maturity dates. Thio denied funds, for loans she allegedly did not contract
contracting the 2 loans, and alleged that it was a Santiago who o In petition for insolvency by Santiago, Thio (not Garcia)
contracted the loans and Thio was merely tasked to deliver said was listed as one of Santiagos creditors
checks to her.

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 o Thio never presented Santiago as a witness to Commodatum Mutuum
corroborate story Non-consumable, whether Money or other consumable
- SC: Thio should be liable for the principal amounts of the movable or immovable property
loans (US$100,000 and P500,000) but she shouldnt be liable Purpose of the delivery by the Purpose of the delivery by the
for the 3% and 4% monthly interest because there was no creditor is for the permissive creditor is for the permissive
written proof of the interest payable except for the verbal use of the property by the use of the property by the
agreement AND Art. 1956 states that [n]o interest shall be debtor for a certain time debtor by taking ownership
due unless it has been expressly stipulated in writing (use of consumable property
(On interest) results in its extinguishment)
- No stipulated interest, but there can be legal interest Creditor retains ownership Debtor takes ownership
pursuant to Art. 2209 (breach of an obligation which consists Obligation on the part of the Consequent obligation of the
in the payment of a sum of money, i.e., a loan or debtor to return the very same debtor is to pay the same
forbearance of money) in the amount of 12% per annum property to the creditor amount, or kind and quality to
o 12% from Nov. 21, 1995, when Thio received Garcias the creditor
demand letter
3. Consideration of a Loan
DISPOSITIVE: Petition GRANTED.
Art. 1933 By the contract of loan, one of the parties delivers
Garcia v. Thio to another, either something not consumable so that the latter
From one crossed check, there are 2 contracts of loan: may use the same for a certain time and return it, in which case
1. Garcia giving check to Thio: delivery the contract is called a commodatum; or money or other
2. Thio passes on to Santiago (presumably) consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the
2. Object of a Loan contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Art. 1933 By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter Simple loan may be gratuitous or with a stipulation to pay
may use the same for a certain time and return it, in which case interest.
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount In commodatum the bailor retains the ownership of the thing
of the same kind and quality shall be paid, in which case the loaned, while in simple loan, ownership passes to the
contract is simply called a loan or mutuum. borrower.
Commodatum is essentially gratuitous.
- Contract of loan is a reciprocal obligation, not a unilateral
Simple loan may be gratuitous or with a stipulation to pay contract
interest. - The promise of the debtor to pay is the consideration of the
obligation of the creditor to furnish the loan
In commodatum the bailor retains the ownership of the thing - COMMODATUM: essentially gratuitous, that is, the only
loaned, while in simple loan, ownership passes to the consideration for the creditor is always liberality
borrower. - MUTUUM: may be gratuitous or with a stipulation to pay
interest
Art. 418 Movable property is either consumable or
nonconsumable. To the first class belong those movables
which cannot be used in a manner appropriate to their nature
without their being consumed; to the second class belong all
the others.

- Object is either property that is non-consumable, or

money or other consumable property:

Consumable object is extinguished by its use.

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4. Obligation to Return or Pay B. Contract to Loan

Art. 1933 By the contract of loan, one of the parties delivers Art. 1934 An accepted promise to deliver something by way
to another, either something not consumable so that the latter of commodatum or simple loan is binding upon parties, but
may use the same for a certain time and return it, in which case the commodatum or simple loan itself shall not be perfected
the contract is called a commodatum; or money or other until the delivery of the object of the contract.
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the Contract to loan and contract of loan, distinguished.
contract is simply called a loan or mutuum. Contract To Loan Contract Of Loan
Commodatum is essentially gratuitous. Consensual contract perfected Real contract perfected upon
by mere consent delivery
Simple loan may be gratuitous or with a stipulation to pay A binding obligation arising Once the debtor in a contracts
interest. from contract between a to loan delivers the property
debtor, the party who promises to the creditor, a contract of
In commodatum the bailor retains the ownership of the thing to deliver the property, and the loan is perfected and the roles
loaned, while in simple loan, ownership passes to the creditor, the party who of the parties are reversed
borrower. accepted the promise

Art. 1232 Payment means not only the delivery of money but Saura Import and Export Co. Inc. v. Development Bank of the
also the performance, in any other manner, of an obligation. Philippines (1972) Makalintal, J.
Plaintiff-appellee: Saura Import & Export Co., Inc.
Art. 1233 A debt shall not be understood to have been paid Defendant-appellant: Development Bank of the Philippines
unless the thing or service in which the obligation consists has (DBP)
been completely delivered or rendered, as the case may be. Concept: Contract to Loan

- COMMODATUM: Primary obligation of the debtor is to Doctrine:

return the very same property delivered An accepted promise to deliver something by way of
- MUTUUM: Obligation of the debtor is to pay the same commodatum or simple loan is binding upon the parties, but the
amount, or kind and quality to the creditor commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract. There was an offer and
MUTUUM COMMODATUM acceptance (a perfected consensual contract to loan).
May be gratuitous or may have Essentially gratuitous wherein
Brief Facts:
a stipulation to pay interest the only consideration for the
Saura applied to the Rehabilitation Finance Corp. (before its
creditor is always liberality
conversion into DBP) for an industrial loan of P500k with a
Obligation of the debtor is to Primary obligation of the
mortgage as security, which RFC approved. Later, Saura wrote to
pay the same amount, kind debtor is to return
RFC requesting a modification, while RFCs Board of Governors
and quality to the creditor
reexamined the advisability of financing the project. Eventually,
Consumable/fungible Non-consumable/non-fungible
despite the initial cancellation of the loan (per Sauras request),
Returned upon the expiration Returned in case of urgent
the loan was reinstated with a proviso that a certification from
of the term only need and commission of any
the DANR was required based on the original intention of the
acts of ingratitude, even
loan. Saura wrote to RFC saying that the raw materials would be
before expiration of term
unavailable, but RFC reiterated that the basis of the approval
For consumption For use or temporary
was the use of raw materials. Negotiations came to a standstill,
possession
and Saura requested that the mortgage be cancelled. 9 years
Personal property Any property
later, Saura filed a complaint for damages for RFCs failure to
Debtor bears risk of loss Bailor bears risk of loss comply with its obligations.
Ownership passes to the Ownesrhip retained by bailor
debtor ISSUES:
(From A2015 Reviewer) 1. WON there was a perfected contract (YES)
2. WON RFC failed to fulfill its obligation thereby entitling
Saura Inc. to a claim for damages (NO)

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RATIO: Brief Facts:
1. There was a perfected consensual contract Roa obtained a loan from Ayala (BPIs predecessor) for the
- Art. 1954: An accepted promise to deliver something by construction of a house and lot, with the house and lot securing
way of commodatum or simple loan is binding upon the the loan by a mortgage. Roa sold the house and lot to ALS and
parties, but the commodatum or simple loan itself shall Litonjua, with the latter assuming the balance of Roas debt to
not be perfected until the delivery of the object of the Ayala. Ayala proposed to grant a P500k loan to ALS and Litonjua
contract which would be applied to Roas debt (that they assumed), which
- There was an offer and acceptance the application of the 2 parties accepted. ALS updated Roas debt by paying
Saura Inc. was approved and the corresponding P190k, reducing the balance to P457k, to which the P500k loan
mortgage was executed and registered was applied. BPI initiated foreclosure proceedings for failure to
pay the mortgage indebtedness. ALS claimed that they were not
2. Obligation was extinguished by mutual desistance behind on payments, and that the amortization period began
of parties when the P500k loan was actually released, not the stipulated
- It is undisputed that RFC entertained the loan date. Both lower courts held that the perfection of the loan
application of Saura Inc. on the assumption that it will occurred when the P500k was released.
utilize local raw materials
- Saura Inc. realized that it could not meet the conditions ISSUE:
- When RFC turned down Saura Inc.s request to permit WON a contract of loan is a consensual contract, per the ruling
the use of imported raw materials, the negotiations in Bonnevie v. CA (NO)
reached an impasse
- And so, Saura Inc. requested for the cancellation of the RATIO: A contract of loan is a real contract, perfected
mortgage executed in favor of RFC by delivery of the object of the contract.
- The action taken by both parties was in the nature of - What the Court declared as a consensual contract in
mutual desistance which is a mode of extinguishing Bonnevie was not a contract OF loan but a contract TO
obligations loan; it was an accepted promise to deliver something by
- Subsequent conduct of Saura Inc. confirms desistance way of simple loan.
o Its request for cancellation of mortgage did not o A contract to loan does not constitute the real contract of
contain any reservation of rights it believed it might loan, which requires delivery of the object and gives rise
have against RFC to obligations only on the part of the borrower.
o It even applied with DBP for another loan to - In the present case, what is involved is a contract of loan.
finance a rice and corn project, which application And such contract was only perfected on September 1982,
was disapproved when BPI released the balance of the P500k loan after
applying it to the debt. And following the parties intent on
DISPOSITIVE: Judgment appealed from is reversed and how amortization should proceed, ALS was only required to
complaint is dismissed pay amortization on October 1982, a month after the
contracts perfection.
There is a perfected consensual contract to loan. Its breach can - The Court also agrees with the contention of ALS that a
give rise to damages. contract of loan is a reciprocal obligation. And one of the
rules regarding reciprocal obligations is that neither party
This case shows the importance of definite acceptance of an incurs in delay if the other is not ready to comply. It is only
offer, as opposed to a counter-offer, for the perfection of the when one party has performed his obligation that he can
consensual contract to loan. demand the performance of the other partys obligation. If
the latter fails, that is when delay sets in.
Court cites mutual desistance between the parties. o While the mortgage deed does state that the
amortization were supposed to begin on May 1981, it was
BPI Investment Corp v. CA and ALS Mgmt. (2002) not until September 1982 that the loan was released. BPI,
Petitioner: BPI Investment Corp (BPI) then, could not have demanded that ALS start to pay its
Public Respondent: Court of Appeals amortization since it had not even released the loan at
Private Respondent: ALS Management & Devt Corp. the time of May 1981.
Concept: Contract to Loan
DISPOSITIVE: CA affirmed.
Doctrine:
A contract of loan is a real contract, perfected by the delivery of Following the money:
the object of the contract. Bank --(loan)-> ALS&Litonjua --(sale)-> Roa --(loan payment)->
bank

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Pantaleon v. American Express International, Inc. (2010) Brion fee for the privilege of being a cardholder of the
Petitioner-Plaintiff: Polo S. Pantaleon company, unlike the City Scores case.
Respondent-Defendant: American Express International Inc. - As a rule, we adhere to the Gray ruling where the
(AMEX) relationship between holder and company is contractual in
Concept: Contract to Loan nature and bound by the terms and conditions found in the
card membership agreement, which provides the rights and
Doctrine: liabilities of a credit card company to its cardholders and
Focusing particularly on the LOAN contract, the new creditor- vice-versa.
debtor relationship will only exist once there is offer (holder o Due to practice, the rule on contract of adhesion is
swipes the card for his payment) and acceptance (company applied and such terms are construed strictly against
approves the use of the credit card for the transaction). Only the companies since they are the ones who draft the
after the company approves the purchase requests that the card membership agreement.
parties enter into a binding loan contracts, pursuant to Article
1319, NCC. RATIO: NO, AMEX is not liable.
- Pantaleon presumes that he has two privileges as
Brief Facts: cardholder of AMEX: first, for AMEX to approve his charges
Pantaleon was a holder of an AMEX card. While he and his family since he has no preset spending limit and second, even if
were in Europe, they experienced difficulty transacting with the AMEX were to reject the same, it was still obligated to act
Coster Diamond House. They were on a guided tour, and during on his charges within a specific period of time.
the stopover at the Diamond House, they were supposed to be - While the Court notes that we follow the Gray ruling, it
ready to leave by 9:30. However, when they tried to purchase, distinguished that there is a separate creditor-debtor
the transaction took 78 minutes, delaying their tour group and relationship (besides that of acceptance by the cardholder
missing the next destination. Upon request for an apology, of the terms of the card membership) that arises ONLY after
AMEX refused, so Pantaleon filed an action for damages. In a credit card company has approved the charge request of
2009, the Court ruled that AMEX was guilty of mora solvendi, the holder.
then this MR was filed. o The first one merely an agreement to provide credit
facility to the cardholder while the latter involves the
ISSUE: actual credit loaned by the company to the holder, in
WON AMX is liable for damages for violation of the credit card view of the 3 contracts involved: the SALES contract,
membership agreement (NO) the LOAN contract and the PROMISE to pay.
o Focusing particularly on the LOAN contract, the new
The Nature of Credit Card Transactions creditor-debtor relationship will only exist once there is
- A credit card is defined as any card, plate, coupon book, or offer (holder swipes the card for his payment) and
other credit device existing for the purpose of obtaining acceptance (company approves the use of the credit
money, goods, property, labor or services or anything of card for the transaction). Only after the company
value on credit. approves the purchase requests that the parties enter
- Every credit card transaction involves 3 contracts: into a binding loan contracts, pursuant to Article 1319,
o SALES contract between the holder and the NCC.
store/business which accepted the credit card - Now, under Par. 10 of the card membership agreement, it is
o LOAN contract between the holder and the credit card clearly stated that AMEX reserves the right to deny
company authorization for any requested charge. Hence, the first
o PROMISE to pay between credit card company and the privilege claimed by Pantaleon does not exist; AMEX is
aforementioned store/business under no obligation to approve any and all charges made
- Now, as to the relationship of the holder of the credit card by its card holders.
and the company, there are two opposing schools of - There being no obligation to approve, there can also be no
thought, represented by two rulings from American delay, per Article 1169, NCC. Hence, the second privilege
jurisprudence: claimed also must be rejected. To be in delay, the first
o City Scores Co. v. Henderson: That a credit card is requisite is that the obligation must be liquidated and
issued only amounts to an offer to extend an open line demandable. However, since no such obligation exists in
of credit. The offer may be withdrawn and such the first place, no delay can exist as well. The use of a credit
withdrawal is not a breach and violates no rights. Each card to pay for a purchase is only an offer to the credit card
use of the credit card is considered as a separate offer company to enter a loan agreement with the cardholder.
and acceptance. - Even if in the past, Pantaleons charge requests were always
o Gray v. American Express: The card issuance is a approved timely, it could not have been done in this case
binding contract between the holder and the company. since every time Pantaleon has a charge request, the
However, in this Gray case, the holder pays an annual company would still have to evaluate whether they will
approve it, based on the credit history/charge pattern of

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 Pantaleon. And in this specific case, the amount was Art. 1939 Commodatum is purely personal in character.
problematic since it did not fit his credit history. Consequently:
- Also, no specific provision of law exists that requires credit
card companies to act on all charge requests within a (1) The death of either the bailor or the bailee extinguishes the
specifically defined period of time. As a general rule, a contract;
practice or custom is not a source of a legally demandable (2) The bailee can neither lend nor lease the object of the
or enforceable right. contract to a third person. However, the members of the
- Neither was there any provision in the credit card bailee's household may make use of the thing loaned, unless
membership agreement that obligates AMEX to act on all there is a stipulation to the contrary, or unless the nature of the
cardholder purchase requests within a specifically defined thing forbids such use.
period of time.
- Commodatum is the gratuitous lending of goods to be
DISPOSITIVE: CA affirmed. used by the borrower and then return undamaged to the
lender.
Pantaleon v. AMEX
This is a flawed analysis by the SC. Commodatum is entered into regularly in ordinary life.

Focus on the loan agreement between the credit card issuer and It came from Roman law as one of the contracts of
the credit card holder. neighborliness.
- There was a contract of loan (upon approval), which was
perfected upon delivery. Delivery occurs WHEN money is It is a contract where the creditor (or bailor) gratuitously delivers
delivered to the merchant. to the debtor (or bailee) non-consumable property so that the
- If there is no delivery, it should not be considered a contract latter may use the same for a certain time and return it.
of loan UNLESS it has been shown that there was
constructive delivery to Pantaleon. Two Kinds of Commodatum:
- In reality, there was no delivery (physically) to Pantaleon. 1. Ordinary Commodatum (Art. 1933)
2. Precarium one whereby the bailor may demand the thing
II. COMMODATUM loaned at will; exists in cases where:
a. Neither the duration of the contract nor the use to
A. General Concepts which the thing loaned should be devoted has been
stipulated
Art. 1933 By the contract of loan, one of the parties delivers b. If the use of the thing is merely tolerated by the owner
to another, either something not consumable so that the latter (Art. 1947)
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other 1. Consideration in Commodatum
consumable thing, upon the condition that the same amount
of the same kind and quality shall be paid, in which case the - It is a contract that is essentially gratuitous in nature,
contract is simply called a loan or mutuum. - The liberality on the part of the bailor is the consideration
for the contract.
Commodatum is essentially gratuitous. - It is for this reason that this contract is highly personal
and that the death of either party will suffice in its
Simple loan may be gratuitous or with a stipulation to pay extinguishment.
interest. - Once a compensation to be paid by the bailee exists, the
contract ceases to be one of commodatum and becomes
In commodatum the bailor retains the ownership of the thing some other contract (ex. lease).
loaned, while in simple loan, ownership passes to the
borrower.

Art. 1935 The bailee in commodatum acquires the used of

the thing loaned but not its fruits; if any compensation is to be
paid by him who acquires the use, the contract ceases to be a
commodatum.

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2. Object of Commodatum issued by Doronilla in the amount of P212,000 (P12K
more than what was deposited)
Art. 1937 Movable or immovable property may be the object o Moreover, Vives sued Sanchez for failure to recover this
of commodatum. money ! shows that the transaction was not merely
gratuitous, but had a business angle
- VIVES: The transaction is not a mutuum but an
Art. 1936 Consumable goods may be the subject of
accommodation, since he didnt part with the ownership of
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition. his money; he asked his wife to open the account, and he
retained some degree of control because of his wife who
was made a signatory and in whose possession the
- GR: The object of commodatum is a non-consumable
passbook was given
property, whether movable or immovable
- SC: No error by the CA when it ruled that the transaction
- EX: The object may be a consumable if the purpose of
was a commodatum and not a mutuum
the contract is NOT the consumption of the object (i.e.,
- Art. 1933, NCC distinguishes the two kinds of loans:
display).
o Art. 1933: By the contract of loan, one of the parties
delivers to another, either something not consumable
Producers Bank v. CA (2003) Callejo, Sr.
so that the latter may use the same for a certain time
Petitioners: Producers Bank of the Philippines (now First
and return it, in which case the contract is called a
International Bank)
commodatum; or money or other consumable thing,
Respondents: CA and Franklin Vives
upon the condition that the same amount of the same
Concept: Object of Commodatum
kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Doctrine:
Commodatum is essentially gratuitous.
The object of a commodatum is non-consumable thing.
Simple loan may be gratuitous or with a stipulation to
However, there are instances when a commodatum may have for
pay interest.
its object a consumable thing. If consumable goods are loaned
In commodatum the bailor retains the ownership of the
only for the purposes of exhibition, or when the intention
thing loaned, while in simple loan, ownership passes to
of the parties is to lend consumable goods and to have the
the borrower. (1740a)
very same goods returned at the end of the period agreed
o Provision seems to imply that if the subject is a
upon, the loan is a commodatum, not a mutuum
consumable thing, such as money, the contract would
be a mutuum
Brief Facts:
- BUT there are instances where a commodatum may have for
Vives was asked for help by Sanchez in incorporating Col.
its object a consumable thing
Doronillas business. Sanchez asked Vives to deposit money in
o Art. 1936: Consumable goods may be the subject of
Sterelas (the companys) bank account for purposes of
commodatum if the purpose of the contract is not the
incorporation, but assured Vives that he could withdraw the
consumption of the object, as when it is merely for
money within a months time. Vives issued a check, relying on
exhibition. (n)
the assurances and representations of Sanchez and Doronilla,
o SC: If consumable goods are loaned only for the
and Vives wife deposited the check. Vives filed a complaint for
purposes of exhibition, or when the intention of
recovery of sum of money.
the parties is to lend consumable goods and to have
the very same goods returned at the end of the
ISSUE/S:
period agreed upon, the loan is a commodatum, not a
1. W the transaction between Vives and Doronilla is a simple
mutuum
loan (mutuum) or commodatum [COMMODATUM]
- Rule is that the intention of the parties shall be accorded
2. WON Mr. Atienza could be faulted for allowing Doronilla to
primordial consideration in determining the actual character
withdraw from the savings account [YES]
of a contract. In case of doubt, the contemporaneous and
3. WON Producers should be held liable to Vives [YES]
subsequent acts of the parties shall be considered in such
determination
RATIO: No merit in the petition.
- Vives agreed to deposit his money specifically for the
1. The transaction between Vives and Doronilla is
purpose of making it appear that said firm had sufficient
commodatum.
capitalization for incorporation, with the promise that the
- PRODUCERS: The transaction is a simple loan (mutuum)
amount shall be returned within thirty (30) days.
because all the elements are present:
o He merely accommodated Doronilla by lending his
o First, what was delivered was money, a consumable
money without consideration, as favor to Sanchez
thing
o But it WAS CLEAR that the money would not be
o Second, the transaction was onerous as Doronilla was
removed from Sterelas savings account and would be
obliged to pay interest, as evidenced by the check
returned to Vives after thirty (30) days

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- Doronillas attempt to return the P200,000 with an additional 3. Producers should be held solidarily liable with
P12,000, allegedly representing interest on the mutuum, did Doronilla and Dumagpi as Atienzas employer.
not convert the transaction from a commodatum into a - PRODUCERS: It cannot be held liable for the return of the
mutuum because such was not the intent of the parties P200,000 because it is not privy to the transaction between
o P12,000 also corresponds to the fruits of the lending of Vives and Dornilla; since there was no wrongful act or
the P200,000 omission on its part, it cannot be held liable for actual,
o Art. 1935: The bailee in commodatum acquires the used moral, or exemplary damages and attorneys fees
of the thing loaned but not its fruits; if any - VIVES: Producers should be liable for the return of the
compensation is to be paid by him who acquires the money because of Mr. Atienzas behavior
use, the contract ceases to be a commodatum. (1941a) - Under Art. 2180, ERs shall be primarily and solidarily liable
o It was proper for Doronilla to remit to Vives the interest for damages caused be their EEs acting within the scope of
their assigned tasks
2. Mr. Atienza should be faulted for allowing - SC: Atienza was an EE of Producers and was acting within
Doronilla to withdraw the money from the savings the scope of his authority as Asst. Branch Manager when he
account. assisted Doronilla, which were done in furtherance of
- PRODUCERS: Mr. Atienza cannot be faulted for allowing Producers interests, while violating some of its rules
Doronilla to withdraw because he was the sole proprietor of - SC: Under Art. 2180, Producers should be held liable for the
the company, and who alone had legal title to the savings return since it failed to prove that it exercised due diligence
account to prevent the unauthorized withdrawals and that it was not
- VIVES: Mr. Atienza connived with Doronilla in defrauding negligent in the selection and supervision of Atienza
him since it was Atienza who facilitated the opening of the
account as well as the approval of the authority to debit the DISPOSITIVE: Petition DENIED.
account
- Producers rules for savings deposits written on the Producers Bank v. CA
passbook states that neither a deposit nor a withdrawal will THIS IS WRONG.
be permitted except upon the production of the depositor
savings bank book BUT Doronilla was permitted to Reasons why it was considered a Commodatum:
withdraw even without presenting the passbook, not 1. Purpose of the contract: for the corporation
just once, but several times 2. P12,000 are the fruits ! it is not for the bailee, so it pertains
- Both CA and TC found that Atienza allowed the withdrawals to the bailor and was rightly returned
because he was party to Doronillas scheme to defraud 3. Vives would be able to retrieve the money
Vives
o It was made in the branch where Atienza was a key SGS says this is a MUTUUM because the obligation is to repay
officer because it will be easier for them to get a the owner. Ownership passes to Doronilla in order for the him to
certification present it to the SEC (as proof). Inevitably, he becomes the
o Atienza knew that the money didnt belong to Doronilla owner. The result of the case wouldve still been the same
or Sterela because of the coordination he had with because the obligation wouldve still been to repay Vives.
Doronilla AND because he was explicitly told by Mrs.
Vives that the money belonged to her and her husband Questions from A2015 reviewer:
and the deposit was just to accommodate Doronilla 1. If the object of the commodatum was money, then was it
o Although the only ones empowered to withdraw from the intention of the parties for the bailee to return the very
the savings account were Mrs. Vives and Sanchez same notes delivered?
(authorized signatories), it was admitted by Atienza that 2. If the bailor in commodatum retained ownership of the
the procedure wasnt followed because Sterela was money delivered, then what was the relationship between
owned by Doronilla, and Doronilla had the full authority Sterela and Producers Bank?
to withdraw 3. Is the use of money for purposes of incorporation even if
o It was an accepted practice to present the passbook only for accommodation, the same as exhibition?
whenever a withdrawal is made in a savings deposit, but 4. How is the case reconciled with Art. 1980, which provides
the procedure was dispensed with; instead, a that fixed, savings, and current deposits of money in banks
certification for a duplicate passbook was issued are governed by the provisions on mutuum?
because the original was allegedly surrendered to a
branch, but the original was never surrendered because
it remained in the possession of Mrs. Vives
- SC: Atienzas active participation in the perpetration of the
fraud and deception caused the laws; he committed
wrongful acts

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B. Parties to a Commodatum 2. Use by Bailee

- The parties to a contract of commodatum are called the Art. 1935 The bailee in commodatum acquires the used of
bailor (creditor) and the bailee (debtor). the thing loaned but not its fruits; if any compensation is to be
- These terms find their root from the common law concept of paid by him who acquires the use, the contract ceases to be a
bailment, where there is a delivery of personal property by commodatum.
the bailor to the bailee who shall hold the same for a certain
purpose under an express or implied contract. Art. 1940 A stipulation that the bailee may make use of the
fruits of the thing loaned is valid.
1. Ownership by Bailor

Art. 1939 Commodatum is purely personal in character.

Art. 1938 The bailor in commodatum need not be the owner
Consequently:
of the thing loaned.

(1) The death of either the bailor or the bailee extinguishes the
Art. 1933 By the contract of loan, one of the parties delivers contract;
to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case (2) The bailee can neither lend nor lease the object of the
the contract is called a commodatum; or money or other contract to a third person. However, the members of the
consumable thing, upon the condition that the same amount bailee's household may make use of the thing loaned, unless
of the same kind and quality shall be paid, in which case the there is a stipulation to the contrary, or unless the nature of the
contract is simply called a loan or mutuum. thing forbids such use. (n)

Commodatum is essentially gratuitous. - GR: The bailee acquires the permissive use of the property
loaned but NOT its fruits.
Simple loan may be gratuitous or with a stipulation to pay
- EX: Unless the parties stipulate otherwise; such stipulation
interest.
is considered valid.

In commodatum the bailor retains the ownership of the thing

- GR: The contract of commodatum is personal in character
loaned, while in simple loan, ownership passes to the
and the bailee cannot lend nor lease the property loaned to
borrower.
a third person
- EX: However, members of the bailees household may
- The bailor in a commodatum need NOT be the owner of the make use of the property loaned.
property being loaned. - EX to EX: Unless there is a stipulation to the contrary or
- However, as against the bailee, the bailor shall be the nature of the property forbids its use by anyone other
considered to have retained ownership over the property than the bailee.
loaned.
3. Solidary Liability of Bailees
A commodatum MUST BE gratuitous.
Art. 1945 When there are two or more bailees to whom a
thing is loaned in the same contract, they are liable solidarily.

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C. Liability for Expenses and Damages - While there was no obligation to pay rent, the agreement
was still not essentially gratuitous as it imposed an
1. Ordinary Expenses obligation upon Guevarra to maintain the property in good
condition
Art. 1941 The bailee is obliged to pay for the ordinary - The effects of the agreement are also different from that of
expenses for the use and preservation of the thing loaned. a commodatum
- Case law on ejectment has treated relationship based on
Art. 1943 The bailee does not answer for the deterioration of tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would
the thing loaned due only to the use thereof and without his
result in the termination of the lease. The tenants
fault.
withholding of the property would then be unlawful
- Even assuming that the relationship was a commodatum,
- Having acquired the permissive use of the property loaned,
Guevarra as bailee would still have the duty to return
the bailee is the one liable for ordinary expenses for its use
possession of the property
and preservation.
- The obligation to deliver or to return attaches to contracts
- However, the bailee is not liable for ordinary wear and tear
for safekeeping, or contracts of commission, administration,
or deterioration of the property.
and commodatum

Pajuyo v. CA (2004) Carpio, J.

DISPOSITIVE: Petition granted
Petitioner: Colito T. Pajuyo
Respondents: CA and Eddie Guevarra
In a commodatum, there is permissive use of the property
Concept: Commodatum; liability for expenses and damages;
loaned and the obligation to return the very same property. It is
ordinary expences
the bailee who is liable for the ordinary expenses for its use and
preservation. This does not mean that the bailee is only liable for
Doctrine:
deterioration of the property due to the use and without fault.
The imposition of an obligation makes the contract different
Bailee will be liable for property loaned that will suffer ordinary
from a commodatum. A contract that is not essentially gratuitous
wear and tear that arises from actual use by the bailee.
is not a commodatum.

Pajuyo v. CA
Brief Facts:
A commodatum MUST BE gratuitous. In this case, there was an
Pajuyo, who paid P400 for rights over land to Perez, constructed
obligation to maintain the cleanliness and orderliness of the
a house of light materials on said land and resided there with his
house. The obligation to maintain cleanliness and orderliness of
family. Pajuyo and Guevarra executed an agreement whereby
the property loaned was equated/considered by the Court
Guevarra would live in the house for free, provided Guevarra
with/as compensation. The contract was considered a
would maintain the cleanliness and orderliness of the house, and
commodatum, which is essentially gratuitous.
that he would vacate upon demand. Pajuyo demanded Guevarra
Question: How is this case reconciled with Art. 1941?
to vacate but the latter refused, so Pajuyo filed an ejectment
case against Guevarra.

ISSUE:
WON the agreement between the parties is a commodatum
(NO)

RATIO: The agreement is not a contract of

commodatum as it was not purely gratuitous
- Aside from being essentially gratuitous, a commodatum
involves the use of a thing belonging to another for a certain
period
o Thus, the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated, or
after accomplishment of the use for which the
commodatum is constituted
o If the bailor should have urgent need of the thing, he
may demand its return for temporary use
o If the use of the thing is merely tolerated by the bailor,
he can demand the return of the thing at will, in which
case the contractual relation is called a precarium, a
kind of commodatum
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2. Extraordinary Expenses 5. Right of Retention by Bailee

Art. 1949 The bailor shall refund the extraordinary expenses Art. 1944 The bailee cannot retain the thing loaned on the
during the contract for the preservation of the thing loaned, ground that the bailor owes him something, even though it
provided the bailee brings the same to the knowledge of the may be by reason of expenses. However, the bailee has a right
bailor before incurring them, except when they are so urgent of retention for damages mentioned in Article 1951.
that the reply to the notification cannot be awaited without
danger. Art. 1951 The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable
If the extraordinary expenses arise on the occasion of the to the latter for the damages which he may suffer by reason
actual use of the thing by the bailee, even though he acted thereof.
without fault, they shall be borne equally by both the bailor
and the bailee, unless there is a stipulation to the contrary.
- The primary obligation on the part of the bailee is to return
the property loaned.
- GR: Since the bailor retains the ownership of the property,
he is liable for the extraordinary expenses for the - GR: Bailee has no right of retention over the property
preservation of the property. loaned if the bailor refuses to pay for expenses and
- EX: The bailor is not liable for these expenses if the bailee damages that pertain to it. The former has a right of action
incurs them without informing the bailor before incurring to demand payment for such expenses incurred
them. - EX: When the bailor, knowing the flaws of the property
- EX to EX: If the need for these extraordinary expenses are loaned, does not advise the bailee of the same, and the
so urgent that waiting for the bailors approval would bailee suffers damages by reason thereof, bailee shall have
endanger the property loaned, then the general rule applies a right of retention over the property until the bailor answers
(bailor is liable) for damages.

- GR: As for the extraordinary expenses arising from use, - The object of the right to retention is to guarantee payment
both bailor and bailee are liable. of what may be due.
- EX: Unless it is stipulated otherwise - It has an accessory character, which means it is an accessory
o Because bailor retains ownership of the property to a principal obligation, which is the payment of the
loaned and the bailee acquires its use incurred expenses.
- Such right is considered not as a coercive measure to oblige
3. Other Expenses the debtor to pay, but as a means of obtaining
compensation for the debt and as a means of extinguishing
Art. 1950 If, for the purpose of making use of the thing, the an obligation
bailee incurs expenses other than those referred to in Articles
1941 and 1949, he is not entitled to reimbursement.

- The bailee is liable for all other expenses incurred for

purposes of making use of the property loaned, other than
ordinary and extraordinary expenses for use and
preservation

Question: What would these other expenses cover?

4. Abandonment by Bailor

Art. 1952 The bailor cannot exempt himself from the payment
of expenses or damages by abandoning the thing to the
bailee.

- The bailee has a right to compel the bailor to pay for the
pertinent expenses

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D. Liability for Loss Republic v. Bagtas (1962)
Plaintiff: Republic of the Phils.
Art. 1942 The bailee is liable for the loss of the thing, even if Defendant: Felicidad Bagtas
it should be through a fortuitous event: Concept: Liability for Loss

(1) If he devotes the thing to any purpose different from that Doctrine:
for which it has been loaned; The bailee is liable for the loss of the thing, if he keeps it longer
that the stipulated period and if the thing loaned was delivered
(2) If he keeps it longer than the period stipulated, or after the with an appraisal of its value (unless a stipulation provides that
accomplishment of the use for which the commodatum has the bailee is exempt from liability in case of a fortuitous event),
been constituted; among others.

(3) If the thing loaned has been delivered with appraisal of its Brief Facts:
value, unless there is a stipulation exemption the bailee from Jose Bagtas borrowed from the Republic 3 bulls, subject to
responsibility in case of a fortuitous event; charging of breeding fees. When the contract expired, there was
a request to renew it, but the Sec. of Agriculture and Natural
(4) If he lends or leases the thing to a third person, who is not a Resources approved only the renewal of the contract for 1 bull,
member of his household; while the other 2 were requested to be returned. Bagtas was
compelled to return the bulls or pay their value. The TC ruled
(5) If, being able to save either the thing borrowed or his own that Jose should pay the value of the bulls and the unpaid
thing, he chose to save the latter. breeding fees. The Republic moved ex parte for a writ of
execution, which was granted. Bagtas (Felicidad), administratrix
- GR: Since the bailor retains ownership of the property of deceased Jose, alleged that the bulls were already returned
loaned, generally, it is the bailor who bears the liability for (but 1 bull was killed during the Hukbalahap raid).
loss of the property loaned due to fortuitous events.
- EX: However, such liability whether due to fortuitous events ISSUE:
or not is shifted to bailee in the following instances: WON Felicidad is still liable under the writ of execution (YES)
o If bailee devotes the property to a different purpose, for
this constitutes breach of the conditions of the RATIO: Felicidad is liable for the loss of the third bull.
commodatum - The Court found that it is true that the other two bulls were
o If the bailee keeps the property after the accomplishment already returned to the plaintiff. Hence, she cannot be held
of the stated use, for this amounts to delay. liable for them.
o If the bailee keeps the property longer than the - For the third bull, she contends that its death was caused by
stipulated period, also delay. force majeure. Now, since the contract was one of
o If the property loaned was delivered with an appraised commodatum, the Republic retained of ownership and
value, unless there is a stipulation that exempts the bailee therefore bears the loss on its own.
from loss due to fortuitous event. - This contention was found by the Court to be without merit.
o If the bailee lends or leases the property to a third person o If it was indeed a contract of commodatum, then the
that is not a member of the household, for this also contract should essentially be gratuitous. However, there
constitute breach. was a breeding fee, a form of compensation. The Court
o If being able to save the property loaned or property then considered the contract to be one of lease and not
owned by the bailee, the bailee chooses to save the of commodatum.
latter. Since the consideration of a commodatum is the o And even if it was a contract of commodatum, Felicidad
liberality of the bailor, this amounts to an act of would have still been held liable under Art 1942, which
ingratitude. states that the bailee is liable for the loss of the thing, if
he keeps it longer that the stipulated period and if the
Art. 1942(5) amounts to ingratitude. Similar to donation because thing loaned was delivered with an appraisal of its value
liberality is also the consideration. (unless a stipulation provides that the bailee is exempt
from liability in case of a fortuitous event), among others.
o The original period off the loan was only from May 1948
to May 1949 and was renewed for one year to end May
1950, with respect to one bull. But they kept the bull until
1953, when it was gunned down during the raid.
Moreover, the bulls were loaned with an appraisal of their
value. There was also no stipulation exempting the bailee
from liability from loss through fortuitous event.

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- Felicidads contention that the court lost jurisdiction over - EX: The bailor may demand for the return of the property
Jose when his civil personality ceased to exist due to his loaned at any time if:
death, is untenable. Moreover, their counsel failed to inform o The bailor has an urgent need for the property, in which
the trial court of his death, as was required by the rules of case he may:
civil procedure. The notice by the probate court and its " Demand the return of the property, thereby
publication in a newspaper was not sufficient notice, as per extinguishing the commodatum; or
the rule. " Demand the temporary use of the property,
- However, the Court ruled that that the demand for the suspending the commodatum while the property is in
payment of the value of the third bull should be presented the possession of the bailor.
in the intestate proceedings o If the commodatum is a precarium, (whereby one allows
another the use of a thing or the exercise of a right
DISPOSITIVE: Writ of execution appealed from is SET ASIDE. gratuitously till revocation) or a contractual relation where
the bailor may demand the property loaned at will,
Republic v. Bagtas specifically if
The contract here was not a commodatum, but the SC made " Neither the duration nor the use has been stipulated.
pronouncements on the case based on the concepts in a " Where the use of the bailee is merely tolerated by the
commodatum. bailor.
o If the bailee commits any acts of ingratitude:
E. Obligation to Return " The bailee commits some offense against the person,
the honor, or property of the bailor, or the bailors
Art. 1946 The bailor cannot demand the return of the thing wife, or the children under parental authority.
loaned till after the expiration of the period stipulated, or after " The bailee imputes to the bailor any criminal offense,
the accomplishment of the use for which the commodatum has or any act involving moral turpitude, even though it
been constituted. However, if in the meantime, he should have be proved, unless the crime or act has been
urgent need of the thing, he may demand its return or committed against the bailee, or the bailees wife, or
temporary use. children under parental authority.
" The bailee unduly refuses the bailor support when the
In case of temporary use by the bailor, the contract of former is legally or morally bound to give support to
commodatum is suspended while the thing is in the possession the latter.
of the bailor.
Quintos v. Beck (1939) Imperial
Plaintiffs-Appellants: Margarita Quintos and Angel Ansaldo
Art. 1947 The bailor may demand the thing at will, and the
Defendant-Appellee: Beck
contractual relation is called a precarium, in the following
Concept: Commodatum Obligation to Return
cases:

Doctrine:
(1) If neither the duration of the contract nor the use to which
Under a contract of commodatum, a party assumes the
the thing loaned should be devoted, has been stipulated; or
obligation to return the object upon demand. Placing them at
the disposal of the demanding party is not compliance with this
(2) If the use of the thing is merely tolerated by the owner.
obligation.

Art. 1948 The bailor may demand the immediate return of the Brief Facts:
thing if the bailee commits any act of ingratitude specified in Bent was a tenant of Quintos in her house. When their contract
Article 765. of lease was novated, Quintos gratuitously granted Beck the use
of the furniture, subject to the condition that Beck would return
- GR: The primary obligation of the bailee in a commodatum them upon demand. Later, Quintos sold the property so Sps.
of returning the property only arises: Lopez, notifying Beck and giving him 60 days to vacate the
o After the expiration of the period stipulated. premises and return the furniture. Beck informed them that he
o After the accomplishment of the use for which the could not give up 3 gas heaters and 4 electric lamps because he
commodatum was constituted. would use them until the expiry of the lease. When Beck
informed them that they may proceed to recover the properties
at the house, Quintos refused to get them in view of the fact that
Beck refused to make delivery of them.

ISSUE:
WON Beck breached the contract between them (YES)

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RATIO: YES, Beck breached the contract. A. General Concepts
- To decide the case, it is only necessary to decide whether
Beck complied with his obligation to return the furniture Art. 1933 By the contract of loan, one of the parties delivers
upon the plaintiffs demand. to another, either something not consumable so that the latter
- The contract between the two of them is one of may use the same for a certain time and return it, in which case
commodatum, because under it, Quintos gratuitously the contract is called a commodatum; or money or other
granted the use of the furniture to Beck, reserving for consumable thing, upon the condition that the same amount
himself the ownership thereof, and at the same time, bound of the same kind and quality shall be paid, in which case the
Beck to return them upon Quintos demand. contract is simply called a loan or mutuum.
- The obligation assumed by Beck upon the demand of
Quintos means that he should return all of the furniture to Commodatum is essentially gratuitous.
the plaintiff at the latters residence or house, which he
failed to do. Simple loan may be gratuitous or with a stipulation to pay
- The obligation was not complied with by merely placing the interest.
furniture at the disposal of Quintos and even retained for his
benefit 3 gas heaters and 4 electric lamps. In commodatum the bailor retains the ownership of the thing
- Quintos cannot also be legally compelled to bear the loaned, while in simple loan, ownership passes to the
expenses of the deposit made by Beck since the latter was borrower.
not entitled to place the furniture on deposit; nor is the
former under any duty to accept the offer to return the
Art. 1953 A person who receives a loan of money or any
furniture, because Beck refused to return all of them.
other fungible thing acquires the ownership thereof, and is
- Costs borne by Beck because Quintos is winning party. bound to pay to the creditor an equal amount of the same kind
and quality.
DISPOSITIVE: CFI reversed

Art. 1954 A contract whereby one person transfers the

Quintos v. Beck
ownership of non-fungible things to another with the
There were 3 contracts involved:
obligation on the part of the latter to give things of the same
1. A contract of lease: Quintos to Beck
kind, quantity, and quality shall be considered a barter.
2. A contract of sale: Quintos to Sps. Lopez
3. A contract of commodatum: Quintos to Beck
Art. 1980 Fixed, savings, and current deposits of money in
Here, there was a perfected contract of commodatum because banks and similar institutions shall be governed by the
there was delivery. Therefore, the obligation to return arose. provisions concerning simple loan.

Legal advice to Beck: Constructive notice that the objects are Act 2137, Sec. 58 (a) "Fungible goods" means goods of
under the DISPOSAL AND CONTROL of Quintos, and that the which any unit is, from its nature by mercantile custom, treated
latter may take over and take possession at any time. as the equivalent of any other unit.

III. SIMPLE LOAN - Simple loan, mutuum, or loan for consumption the
creditor delivers to the debtor money or other consumable
A contract of simple loan is the most common credit property upon the condition that the same amount of the
transaction. same kind and quality shall be paid.
- Borrower acquires ownership of the money or consumable
The most common object is money. property for the permissive use of the property loaned. As
owner, the borrower can dispose of the property loaned and
Interest is the consideration paid for the permissive use of the this act of disposition will not be considered
money. misappropriation.
- The use of the property generally results in its
extinguishment, which is why the obligation of the borrower
is to pay an equal amount of the same kind and quality,
effectively replacing or substituting the property loaned
- It is for this reason that the provisions on simple loan also
refer to the object of a simple loan as fungible property,
that is, property commercially interchangeable with other
property of the same kind.

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- In a simple loan, the primary purpose of the contract is RATIO:
still the permissive use of the money or consumable 1. Yes; the bank acquires ownership of the money
property. deposited by its clients and hence is the real
o Since the use of a consumable property generally party-in-interest in the criminal case
results in its consumption, ownership is transferred as a - As correctly pointed out by petitioner, the bank is the owner
necessary consequence of the permissive use of the of the monies allegedly misappropriated
property loaned. o Art. 1953 NCC: A person who receives a loan of
- If the primary purpose of the contract is the transfer of money or any other fungible thing acquires ownership
ownership of a non-fungible property and payment is made thereof, and is bound to pay to the creditor an equal
by giving something of the same kind, quantity, and quality, amount of the same kind and quality.
it is a contract of barter. o Art. 1980 NCC: Fixed, savings, and current deposits
- The most common of all commercial credit transactions is a of money in banks and similar institutions shall be
simple loan: the deposit by a depositor of money in a fixed, governed by the provisions concerning simple loans.
savings, or current deposit account with a bank. - Hence, the element of taking without the consent of
o Fixed deposit account: Interest on a fixed deposit is owners was sufficiently alleged in the information
paid in accordance with the prices displayed in all bank - The Court has consistently considered the allegations in the
branches. Interest is payable at maturity date. Information that such employees acted with grave abuse of
o Savings deposit account: If you have a credit balance in confidence, to the damage and prejudice of the Bank,
a savings account you may be entitled to receive without particularly referring to it as owner of the money
interest depending on the type of account. The rate of deposits, as sufficient to make out a case of Qualified Theft
interest may be fixed or varied as the bank determines.
o Current deposit account: Interest is not payable on a 2. Yes; the exact phrase dependence, guardianship
current account unless specified otherwise for the or vigilance between the respondents and the
particular type of current account. offended party that would have created a high
degree of confidence between them which the
Fungible goods respondents could have abused, need not be
alleged in the information
People v. Puig and Porras (2008) Chico-Nazario, J. - It is beyond doubt that tellers, cashiers, bookkeepers and
Petitioners: People of the Philippines other employees of a Bank who come into possession of the
Respondents: Teresita Puig and Romeo Porras monies deposited therein enjoy the confidence reposed in
Concept: Simple loan; general concepts them by their employer.
- It is sufficient that the following be alleged in the complaint
Doctrine: or information:
The relationship between bankds and depositors has been held o The positions held by Puig and Porras
to be that of creditor and debtor. A bank acquires ownership of o That the crime was committed with grave abuse of
the money deposited by its clients; hence, it is the bank, and not confidence, with intent to gain and without the
its depositors, who is the real party-in-interest in a complaint for knowledge and consent of the Bank
Qualified Theft against the banks cashier and bookkeeper.
DISPOSITIVE: Petition for Review on Certiorari granted. RTC
Brief Facts: order reversed. RTC Judge in criminal case ordered to proceed
112 cases of Qualified Theft was filed by the Rural Bank of with the trial.
Pototan, Inc. against Puig and Porras but was dismissed by the
judge due to lack of probable cause. The judge found that the Fungible things are those which are capable of being substituted
element of taking without the consent of the owners was by others of the same kind, not having a distinct individuality.
lacking since it is the depositors-clients, and not the bank, who There are qualifications as to the object to make them of the
are the owners of the money stolen, and are the real parties-in- same kind and quality.
interest.
People v. Puig and Porras
ISSUES: The depositor is actually the CREDITOR of the bank. The bank
1. WON the bank acquires ownership of the money deposited owns the money.
by its clients, thereby rendering it as the real party-in-
interest in the complaint for Qualified Theft filed against its
cashier and bookkeeper (YES)
2. WON the information sufficiently alleged the abuse of trust
and confidence (YES)

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BPI Family Bank v. Franco Nachura, J. Basis of Mutuum (Simple Commodatum
Petitioner: BPI Family Bank (BPI) Comparison Loan)
Respondent: Amado Franco Object Money or other Ordinarily non-
Concept: Simple Loan; General Concepts consumable thing consumable
Ownership of Ownership is Ownership is
Doctrine: the thing transferred to the retained by the
In the contract of simple loan, the debtor acquires ownership of borrower lender
the money or consumable loaned. This ownership, however, has Cause Gratuitous or onerous Essentially gratuitous
the obligation to pay what has been loaned.. (w/stipulation to pay
interest)
Brief Facts: Thing to be Borrower need only Borrower must return
Franco opened an account with BPI. When it was learned that returned pay the same maount the same thing
the funds for these accounts were purportedly the result of of the same kind and loaned
unauthorized transfers, BPI refused to release the funds to quality
Franco, claiming ownership over such funds. Subject Only personal property May involve real or
matter personal property
ISSUE: Purpose Loan for consumption Loan for use or
WON Franco had a right to amount in the frozen accounts? (YES) temporary
possession
RATIO: YES. Franco was entitled to those amounts. When to Lender may not Bailor may demand
- BPI: The bank owns the amounts. The situation applicable, return demand its return the return of the
therefore, is that of an owner of a personal property whose before the lapse of the thing loaned before
possession he regains after it was stolen, pursuant to Art. term agreed upon the expiration of the
559. term in case of
- SC: Theory is incorrect and Art. 559 is inapplicable as well. urgent need
o What is involved in Art. 559 is a specific/determinate Who bears Borrower suffers the Loss of the subject
thing. In this case, the property involved is money,
risk of loss loss (even if caused matter is suffered by
which is generic and fungible; it is capable of being
exclusively by a the bailor since he is
substituted by others of the same kind and does not
fortuitous event and the owner
have distinct individuality he is not therefore
o BPI, therefore, only claims ownership of the discharged from his
equivalent amount of money, unlike the situation
duty to pay
contemplated in the said article, which involves an
Nature Not purely personal Purely personal
owner trying to recover a distinct movable from the
(From A2015 reviewer)
current possessor.
o Money, by its very function, is to pass from hand to
Basis Mutuum Commodatum Barter
hand as a medium of exchange, without other evidence
(Simple Loan)
of its title.
Subject Money or any Personal or real Non-
- SC: BPI does own the money, but not as a
matter other fungible property fungible or
consequence of the unauthorized transfer of FMICs
things/personal (generally non- non-
deposit. Rather, it is a consequence of the cont ract
property consumable) consumable
of simple loan or mutuum, between BPI (bank) and
things
Franco (account holder).
Obligation Pay or deliver Return the The
o BPI is the debtor and Franco is the creditor, in this
of the the same kind identical thing equivalent
contract of simple loan.
bailee or quality borrowed when thing is
o And since the relationship of BPI and Franco is
loaned to the the time has given in
governed by the provisions on the contract of simple
bailee expired or the return for
loan, BPIs ownership of the amounts comes with a
purpose has what has
corresponding obligation to pay Franco the amount
been served been
equal to what he deposited, upon the latters demand.
received
o Thus, Franco had every right, as the creditor, to expect
Nature of May be Always Onerous
that the checks he issued would be honored. And
the gratuitous gratuitous
consequently, BPI had no right to dishonor the checks
contract
as they had the obligation to pay the amount
demanded when such demand was made. (From A2015 reviewer)

DISPOSITIVE: Decision AFFIRMED with MODIFICATION.

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B. Obligation to Pay bearing or discounted government or corporate
securities.
Art. 1955 The obligation of a person who borrows money - An investor who purchases a bond is lending
shall be governed by the provisions of Articles 1249 and 1250 money to the issuer, and the bond represents the
of this Code. issuers contractual promise to pay interest and
repay principal according to specific terms.
If what was loaned is a fungible thing other than money, the 3) Debenture an instrument acknowledging a debt
debtor owes another thing of the same kind, quantity and secured only by the issuers earning power and not by a
quality, even if it should change in value. In case it is lien, or legal right or interest that a creditor has, on any
impossible to deliver the same kind, its value at the time of the specific asset, or an unsecured bond.
perfection of the loan shall be paid.
Notes, bonds, and debentures are all promises to pay. They are
Art. 1249 The payment of debts in money shall be made in evidence of indebtedness and are commercial forms of contracts
the currency stipulated, and if it is not possible to deliver such of simple loan.
currency, then in the currency which is legal tender in the
Philippines. NOTE BOND DEBENTURE
Promise to pay Promise to pay Promise to pay
The delivery of promissory notes payable to order, or bills of To specified To holder To holder
exchange or other mercantile documents shall produce the person
effect of payment only when they have been cashed, or when On demand or on The principal at
through the fault of the creditor they have been impaired. a specified date maturity and
specified sums at
In the meantime, the action derived from the original specific intervals
obligation shall be held in the abeyance.
C. Interest
Art. 1250 In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency SGS classifies interest as:
at the time of the establishment of the obligation shall be the 1. Conventional by agreement
basis of payment, unless there is an agreement to the contrary. - Interest on interest
2. Compensatory seeks to make the party whole
- The primary obligation of the borrower is to pay.
INTEREST RULES:
- If the object of the simple loan is money (principal), then
- GR: Must be expressly stipulated in writing (what is
the general rules on payment in money apply.
stipulated is a rate or fixed amount, or even in kind)
o The value of payment in money, or payment of the
- XPN: No rate, but with express stipulation ! legal interest
principal, is generally determined at the time of the
(which is currently at 6%)
establishment of the obligation, that is, the time of the
delivery of the principal.
Beda Reviewer Notes (From A2015)
- If the object of the simple loan is any other consumable
Interest
property, then the borrower owes payment in kind, that
Compensation allowed by law or fixed by the parties for the loan
is, another property of the same kind, quantity and quality.
or forbearance of money, goods, or credits
o The value of payment in kind is determined at the time
of perfection of the simple loan, that is, the time of
Requisites for Demandability
delivery of the object of the simple loan.
1. Must be expressly stipulated
- The obligation to pay may be evidenced by a written
- XPNS:
promise to pay. The following are evidences of
o Indemnity for damages
indebtedness and are the commercial forms that contracts
o Interest accruing from unpaid interest
of simple loan take:
2. Must be lawful
1) Note a written promise by the maker to the payee or
3. Must be in writing
to bearer, or a written promise to pay a specified
amount to a certain person on demand or on a
Compound Interest
specified date
- GR: Unpaid interest shall not interest
2) Bond a written promise by the issuer to pay money to
- XPN:
the holders, or a written promise, issued by a
o When judicially demanded
government or corporation to holders, to pay the
o When there is an express stipulation (must be in writing
principal amount of the loan at maturity and a specified
in view of Art. 1956)
sum of money usually at specific intervals. Interest-

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1. Conventional Interest Central Bank Circular 416-74 By virtue of the authority
granted to it under Section 1 of Act No. 2655, as amended,
Art. 1933 By the contract of loan, one of the parties delivers otherwise known as the "Usury Law," the Monetary Board, in
to another, either something not consumable so that the latter its Resolution No. 1622 dated July 29, 1974, has prescribed that
may use the same for a certain time and return it, in which case the rate of interest for the loan or forbearance of any money,
the contract is called a commodatum; or money or other goods or credits and the rate allowed in judgments, in the
consumable thing, upon the condition that the same amount absence of express contract as to such rate of interest, shall be
of the same kind and quality shall be paid, in which case the twelve per cent (12 %) per annum.
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous. This Circular shall take effect immediately.

Simple loan may be gratuitous or with a stipulation to pay Act 2655, Sec. 7 All covenants and stipulations contained in
interest. conveyances, mortgages, bonds, bills, notes, and other
contracts or evidences of debts, and all deposits of goods or
In commodatum the bailor retains the ownership of the thing other things, whereupon or whereby there shall be stipulated,
loaned, while in simple loan, ownership passes to the charged, demanded, reserved, secured, taken, or received,
borrower. directly or indirectly, a higher rate or greater sum or value for
the loan or renewal or forbearance of money, goods, or credits
Art. 1956 No interest shall be due unless it has been than is hereinbefore allowed, shall be void: Provided, however,
expressly stipulated in writing. That no merely clerical error in the computation of interest,
made without intent to evade any of the provisions of this Act,
Art. 1253 If the debt produces interest, payment of the shall render a contract void: Provided, further, That parties to a
principal shall not be deemed to have been made until the loan agreement, the proceeds of which may be availed of
interests have been covered. partially or fully at some future time, may stipulate that the rate
of interest agreed upon at the time the loan agreement is
entered into, which rate shall not exceed the maximum
Art. 1958 In the determination of the interest, if it is payable
allowed by law, shall prevail notwithstanding subsequent
in kind, its value shall be appraised at the current price of the
changes in the maximum rates that may be made by the
products or goods at the time and place of payment.
Monetary Board: And Provided, finally, That nothing herein
contained shall be construed to prevent the purchase by an
Art. 1960 If the borrower pays interest when there has been innocent purchaser of a negotiable mercantile paper, usurious
no stipulation therefor, the provisions of this Code concerning or otherwise, for valuable consideration before maturity, when
solutio indebiti, or natural obligations, shall be applied, as the there has been no intention on the part of said purchaser to
case may be. evade the provisions of this Act and said purchase was not a
part of the original usurious transaction. In any case, however,
Art. 2154 If something is received when there is no right to the maker of said note shall have the right to recover from said
demand it, and it was unduly delivered through mistake, the original holder the whole interest paid by him thereon and, in
obligation to return it arises case of litigation, also the costs and such attorney's fees as
may be allowed by the court.
Art. 1423 Obligations are civil or natural. Civil obligations give
a right of action to compel their performance. Natural Sec. 7-a Parties to an agreement pertaining to a loan or
obligations, not being based on positive law but on equity and forbearance of money, goods or credits may stipulate that the
natural law, do not grant a right of action to enforce their rate of interest agreed upon may be increased in the event
performance, but after voluntary fulfillment by the obligor, they that the applicable maximum rate of interest is increased by
authorize the retention of what has been delivered or rendered law or by the Monetary Board: Provided, That such stipulation
by reason thereof. Some natural obligations are set forth in the shall be valid only if there is also a stipulation in the agreement
following articles. 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 by the Monetary Board: Provided, further, That the
Act 2655, Sec. 1 The rate of interest for the loan or
adjustment in the rate of interest agreed upon shall take effect
forbearance of any money goods, or credits and the rate
on or after the effectivity of the increase or decrease in the
allowed in judgments, in the absence of express contract as to
maximum rate of interest.
such rate of interest, shall be six per centum per annum or such
rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in accordance
with the authority hereby granted.

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Simple Loan - To avoid one-sidedness, there must be a de-escalation
- May be gratuitous or onerous clause that authorizes a corresponding reduction in the
- Onerous: compensation to be paid by borrower is called interest rates
interest - To be valid, the clause cannot give the creditor the
unbridled right to adjust interest rates unilaterally; it must
Interest still be the result of an agreement or a meeting of the minds
- Payable in money or payable in kind on the actual increase in interest rates
o Payable in money: a stated amount or a computed
amount based on an interest rate (percentage of the ESCALATION CLAUSES
principal payable for a given period) - Not per se invalid
o Payable in kind: value appraised at the time of payment - J. Serenos Concurring Opinion laid down 3 rules:
1. As a matter of equity and consistent with P.D. 1684, the
Conditions for Payment of Interest to Be Allowed: escalation clause must be paired with a DE-
1. There is an express stipulation for the payment of ESCALATION CLAUSE
interest, and 2. The escalation clause must be PEGGED to the
2. The stipulation for the payment of interest is in writing PREVAILING MARKET RATES (not merely a generalized
reference to any increase or decrease in the interest
If the conditions do not concur and the borrower pays interest: rate in the event of a law or Central Bank regulation
- If the borrower paid by mistake, the creditor is obliged to 3. Proposed modification must be the RESULT OF AN
return what was delivered AGREEMENT between the parties
- If the borrower voluntarily paid, the creditor is authorized to
retain Spouses Juico v China Banking Corp (2013) Villarama, Jr., J.
Petitioner: Sps. Juico
Conventional Interest Respondents: China Banking Corporation
- Interest paid as compensation in simple loan Concept: Conventional Interest
- It is the interest agreed to by the parties themselves as
distinguished from that prescribed by law Doctrine:
Escalation clauses are valid provided that changes made shall
Monetary Interest (Regular Interest) be mutually agreed upon by both parties to not violate the
- Conventional interest in a simple loan of money principle of mutuality essential to contracts.
- Payment of both principal and interest is made in money
gradually extinguishing the loan Brief Facts:
- It is viewed as the cost of money Sps. Juico obtained a loan from China Banking Corp secured by
a Real Estate Mortgaged on the spouses property in White
Usury Law (Act No. 2655) applies the concept of interest to: Plains, QC. Spouses failed to pay amortization due upon
1. The loan of money, goods, or credits, which must be demand, and the mortgaged property was foreclosed. The Bank
understood as simple loan or mutuum; and filed an action for the collection of sum of money for the
2. The forbearance, that is, the act of refraining, tolerating or deficiency after applying the proceeds of the foreclosure.
abstaining from enforcing a right or obligation of money,
goods, or credits, even if the principal obligation or ISSUE:
agreements is not a simple loan WON the Bank unilaterally increased the interest rates (YES)

The applicable interest to the 2 enumerated above shall be RATIO: NO; the bank did not comply with the notice
determined as follows: requirement, violating the rule on mutuality of
1. Conventional interest: If there is an interest amount or contracts
rate stipulated, then the interest stipulated - Article 1308. The contract must bind both contracting
2. Legal interest: If there is no stipulation on interest parties; its validity or compliance cannot be left to the will of
amount or rate then the interest prescribed by statute one of them. Article 1956 of the Civil Code likewise ordains
that "no interest shall be due unless it has been expressly
Escalation Clauses stipulated in writing."
- Clauses in long-term credit transactions that authorize the - The binding effect of any agreement between parties to a
increase in conventional interest rates as a means of contract is premised on two settled principles: (1) that any
maintaining fiscal stability and retaining the value of money obligation arising from contract has the force of law
- GR: they are valid as they do not contravene public policy between the parties; and (2) that there must be mutuality
- XPN: unconsented increase in interest rates, which between the parties based on their essential equality.
transgresses the principle of mutuality of contracts

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- Escalation clauses refer to stipulations allowing an increase note without any advance notice to me/us in the event a law
in the interest rate agreed upon by the contracting parties. or Central Bank regulation is passed or promulgated by the
The Court has long recognized that there is nothing Central Bank of the Philippines or appropriate government
inherently wrong with escalation clauses, which are valid entities, increasing or decreasing such interest rate or
stipulations in commercial contracts to maintain fiscal service charge.
stability and to retain the value of money in long term - Such escalation clause is similar to that involved in the case
contracts. Such stipulations are not void per se. of Floirendo, Jr. v. Metropolitan Bank and Trust Company
- Nevertheless, an escalation clause "which grants the where this Court ruled: The provision in the promissory note
creditor an unbridled right to adjust the interest authorizing respondent bank to increase, decrease or
independently and upwardly, completely depriving the otherwise change from time to time the rate of interest
debtor of the right to assent to an important modification in and/or bank charges "without advance notice" to
the agreement" is void. A stipulation of such nature violates petitioner, "in the event of change in the interest rate
the principle of mutuality of contracts. prescribed by law or the Monetary Board of the Central
- In Banco Filipino Savings & Mortgage Bank v. Navarro, the Bank of the Philippines," does not give respondent bank
Court ruled that escalation clauses in general are unrestrained freedom to charge any rate other than that
considered valid, we ruled that Banco Filipino may not which was agreed upon. Here, the monthly
increase the interest on respondent borrowers loan, upward/downward adjustment of interest rate is left to the
pursuant to Circular No. 494 issued by the Monetary Board will of respondent bank alone. It violates the essence of
on January 2, 1976, because said circular is not a law mutuality of the contract.38
although it has the force and effect of law and the escalation - Escalation clauses are not basically wrong or legally
clause has no provision for reduction of the stipulated objectionable as long as they are not solely potestative but
interest in the event that the applicable maximum rate of based on reasonable and valid grounds. Obviously, the
interest is reduced by law or by the Monetary Board" (de- fluctuation in the market rates is beyond the control of
escalation clause). private respondent.
- Subsequently, in Insular Bank of Asia and America v. - Here, the escalation clause in the promissory notes
Spouses Salazar, the Court reiterated that escalation clauses authorizing the respondent to adjust the rate of interest on
are valid stipulations but their enforceability are subject to the basis of a law or regulation issued by the Central Bank of
certain conditions. The increase of interest rate from 19% to the Philippines, should be read together with the statement
21% per annum made by petitioner bank was disallowed after the first paragraph where no rate of interest was fixed
because it did not comply with the guidelines adopted by as it would be based on prevailing market rates. While the
the Monetary Board to govern interest rate adjustments by latter is not strictly an escalation clause, its clear import was
banks. that interest rates would vary as determined by prevailing
- In 1996, the Court invalidated escalation clauses authorizing market rates. Evidently, the parties intended the interest on
PNB to raise the stipulated interest rate at any time without petitioners loan, including any upward or downward
notice, within the limits allowed by law. The Court observed adjustment, to be determined by the prevailing market rates
that there was no attempt made by PNB to secure the and not dictated by respondents policy.
conformity of respondent borrower to the successive - There is no indication that petitioners were coerced into
increases in the interest rate. The borrowers assent to the agreeing with the foregoing provisions of the promissory
increases cannot be implied from their lack of response to notes. In fact, petitioner Ignacio, a physician engaged in the
the letters sent by PNB, informing them of the increases. medical supply business, admitted having understood his
- It is now settled that an escalation clause is void where the obligations before signing them. At no time did petitioners
creditor unilaterally determines and imposes an increase in protest the new rates imposed on their loan even when their
the stipulated rate of interest without the express property was foreclosed by respondent.
conformity of the debtor. Such unbridled right given to - This notwithstanding, we hold that the escalation clause is
creditors to adjust the interest independently and upwardly still void because it grants respondent the power to impose
would completely take away from the debtors the right to an increased rate of interest without a written notice to
assent to an important modification in their agreement and petitioners and their written consent. Respondents monthly
would also negate the element of mutuality in their telephone calls to petitioners advising them of the
contracts. While a ceiling on interest rates under the Usury prevailing interest rates would not suffice. A detailed billing
Law was already lifted under Central Bank Circular No. 905, statement based on the new imposed interest with
nothing therein "grants lenders carte blanche authority to corresponding computation of the total debt should have
raise interest rates to levels which will either enslave their been provided by the respondent to enable petitioners to
borrowers or lead to a hemorrhaging of their assets."35 make an informed decision. An appropriate form must also
- The two promissory notes signed by petitioners be signed by the petitioners to indicate their conformity to
provide:IWe hereby authorize the CHINA BANKING the new rates. Modifications in the rate of interest for loans
CORPORATION to increase or decrease as the case may be, pursuant to an escalation clause must be the result of an
the interest rate/service charge presently stipulated in this agreement between the parties.

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- Based on the August 29, 2000 demand letter of China Bank, Central Bank, leaving the determination thereof at the sole will
petitioners total principal obligation under the two and control of petitioner.
promissory notes which they failed to settle is P10,355,000.
However, due to China Banks unilateral increases in the While it may be acceptable, for practical reasons given the
interest rates from 15% to as high as 24.50% and penalty fluctuating economic conditions, for banks to stipulate that
charge of 1/10 of 1% per day or 36.5% per annum for the interest rates on a loan not be fixed and instead be made
period November 4, 1999 to February 23, 2001, petitioners dependent upon prevailing market conditions, there should
balance ballooned to P19,201,776.63. Note that the original always be a reference rate upon which to peg such variable
amount of principal loan almost doubled in only 16 months. interest rates. An example of such a valid variable interest rate
The Court also finds the penalty charges imposed excessive was found in Polotan, Sr. v. Court of Appeals. In that case, the
and arbitrary, hence the same is hereby reduced to 1% per contractual provision stating that "if there occurs any change in
month or 12% per annum. the prevailing market rates, the new interest rate shall be the
- Petitioners Statement of Account, as of February 23, 2001, guiding rate in computing the interest due on the outstanding
the date of the foreclosure proceedings, should thus be obligation without need of serving notice to the Cardholder
modified as follows: In the case at bar, it is explicitly other than the required posting on the monthly statement
provided that all correspondence relative to the mortgage served to the Cardholder" was considered valid. The
shall be sent to the mortgagor. However, no such notice was aforequoted provision was upheld notwithstanding that it may
sent by the bank to the spouses. partake of the nature of an escalation clause, because at the
- In spite of said breach, however, the spouses may not same time it provides for the decrease in the interest rate in case
recover the property sold since the Asaje Realty appears to the prevailing market rates dictate its reduction. In other words,
be an innocent purchaser in good faith. It purchases the unlike the stipulation subject of the instant case, the interest rate
property when the title was already in the name of the bank involved in the Polotan case is designed to be based on the
and was under no obligation to look beyond what appears prevailing market rate. On the other hand, a stipulation
therein. ostensibly signifying an agreement to "any increase or decrease
in the interest rate," without more, cannot be accepted by this
DISPOSITIVE: Petition Partially Granted Court as valid for it leaves solely to the creditor the
determination of what interest rate to charge against an
CONCURRING OPINION: Sereno, J. outstanding loan.

SERENO, J.: Evidently, the point of difference in the cited escalation clauses
lies in the use of the phrase "any increase or decrease in the
Sereno clarifies that not all escalation clauses in loan agreements interest rate" without reference to the prevailing market rate
are void per se. It is actually the rule that "escalation clauses are actually imposed by the regulations of the Central Bank.
valid stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term Based on jurisprudence, therefore, these points must be
contracts." In The Consolidated Bank and Trust Corporation v. considered by creditors and debtors in the drafting of valid
Court of Appeals, citing Polotan, Sr. v. Court of Appeals, this escalation clauses. Firstly, as a matter of equity and consistent
Court already accepted that, given the fluctuating economic with P.O. No. 1684, the escalation clause must be paired with a
conditions, practical reasons allow banks to stipulate that de-escalation clause. Secondly, so as not to violate the principle
interest rates on a loan will not be fixed and will instead depend of mutuality, the escalation must be pegged to the prevailing
on market conditions. In adjudging so, we differentiated a valid market rates, and not merely make a generalized reference to
escalation clause from an otherwise invalid proviso in this wise. "any increase or decrease in the interest rate" in the event a law
or a Central Bank regulation is passed. Thirdly, consistent with
Neither was error when the lower court and the Court of Appeals the nature of contracts, the proposed modification must be the
set aside as invalid the floating rate of interest exhorted by result of an agreement between the parties. In this way, our
petitioner to be applicable. The pertinent provision in the trust credit system would be facilitated by firm loan provisions that
receipt agreement of the parties fixing the interest rate states: not only aid fiscal stability, but also avoid numerous disputes and
litigations between creditors and debtors.
I, WE jointly and severally agree to any increase or decrease in
the interest rate which may occur after July 1, 1981, when the
Central Bank floated the interest rate, and to pay additionally the
penalty of I% per month until the amount/s or installments/s due
and unpaid under the trust receipt on the reverse side hereof
is/are fully paid.

The respondent Court of Appeals that the foregoing stipulation

is invalid, there being no reference rate set either by it or by the

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Sps. Juico v. China Banking Corp. - PNB: Spouses are estopped because they failed to question
- There is no dispute as to the loan or as to the mortgage the imposed rates and they continued to pay without
- It is difficult to dispute the principal, but it is ALWAYS the opposition
interest that is always the bone of contention - In a number of decided cases, the Court struck down
Banco Filipino Sps. Juico provisions in credit documents issued by PNB to, or
No de-escalation With de-escalation clause required of, its borrowers which allow the bank to increase
Violates mutuality principle Violates mutuality principle or decrease interest rates within the limits allowed by law
Increased based on Circular Increased without following a at any time depending on whatever policy it may adopt in
(invalidated in its law or Central Bank Circular the future
implementation because it (no pegging) a) PNB v. CA (1991): stipulation and similar ones were
based it on a circular, NOT a declared in violation of Art. 1308 NCC
law) b) PNB v. CA (1994): again invalidated
- Bank relied on the escalation clause, which is
Advise of maam: PEG A MARGIN; Follow Polotan, follow a authorized by Sec. 2 of PD 1684, which amended
margin Act No. 2655 (The Usury Law)
- Sec. 1 of PD 1684 also empowered the Monetary
Spouses Silos v. PNB (2014) Del Castillo Board to prescribe maximum rates of interest for
Petitioner: Sps. Eduardo and Lydia Silos loans and certain forbearances and the Central
Respondent: Philippine National Bank Bank Circular (issued by the Monetary Board)
Concept: Conventional Interest provides that the rate of interest shall not be
subject to any ceiling prescribed under or pursuant
Doctrine: to the Usury Law
Escalation clauses providing for unilateral increases made by one - Court here held that while PD 1684 and CB Circular
party violates the principle of mutuality of contracts. Although No. 905 allowed contracting parties to stipulate
these provisions are deemed part of the contract, there cannot freely regarding adjustments in the interest rate,
be a unilateral increase by one party because there must still be the law and circular did not authorize either
assent by the other party. In a loan contract, since interest rates party to unilaterally raise the interest rate
are an essential part, any changes to it must be mutually without the others consent
assented to by both parties. - There can be no contract in the true sense in the
absence of the element of agreement or of mutual
Brief Facts: assent of the parties
Spouses Silos secured a credit line with PNB involving a Credit - Contract changes must be made with the consent
Agreement and a mortgage to secure such an agreement. The of the contracting parties, especially when it affects
spouses also issued several promissory notes to cover their an important aspect of the agreement; rate of
payment. In all documents, there were escalation interest is always a vital component of loan
clauses/provisions allowing PNB to increase or reduce interest contracts
rates unilaterally. These were found to be violative of the - Cannot countenance PNBs posturing that the
principle of the mutuality of contracts. escalation clause gives it unbridled right to
unilaterally upwardly adjust the interest because it
ISSUE: would take away the respondents right to assent
WON the interest rate provision in the Credit Agreement and to an important modification in their agreement
the Amendment to Credit Agreement is null and void for giving and would negate the element of mutuality of
PNB the sole power to fix the rates [YES] contracts
c) Sps. Almeda v. CA (1996): court invalidated the same
RATIO: The provision giving PNB the sole unilateral provisions as in the instant cases Credit Agreement
determination to fix the interest is void. - Here, PNB unilaterally altered the terms of its
- Spouses: The provision relegates to PNB the sole power to contract by increasing the interest rates on the loan
fix the rates based on arbitrary criteria and the promissory without the prior assent of the petitioners
notes were left blank for PNB to unilaterally fill ! violates - Escalation clauses are not basically wrong or legally
the principle of mutuality of contracts objectionable so long as they are not solely
- PNB: Since the Credit Agreement and promissory notes potestative but based on reasonable and valid
contained both an escalation clause and a de-escalation grounds
clause, the bank did not violate the principle of mutuality;
plus, the parties mutually agreed, as shown by the
continuous payment without protest by the spouses
- Spouses: Principle of estoppel doesnt apply because no
estoppel can proceed from an illegal act

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 d) PNB v. CA (1996): thereof must be mutually agreed upon; otherwise, it has no
- The Court in Banco Filipino Savings & Mortgage binding effect.
Bank v. Navarro said that there must be a de- o The stipulations here dont even provide that the
escalation clause to mitigate the one-sidedness of parties will agree upon the interest rate they are
the escalation clause because of concern for the worded in such a way that the borrower shall agree to
unequal status of borrowers vis--vis the banks and whatever interest rate PNB fixes (ABSURD)
any increase in the rate of interest made pursuant - SC: with the present credit agreement, the element of
to an escalation clause must be the result of consent or agreement by the borrower is now completely
agreement between the parties lacking, which makes respondents unlawful act all the more
- Court, citing a PNB v. CA case, declared that reprehensible.
increases unilaterally imposed by PNB are in - SC: petitioners are correct in arguing that estoppel should
violation of the principle of mutuality as embodied not apply to them, for estoppel cannot be predicated on
in Art. 1308, NCC an illegal act.
- Court cited another PNB v. CA case which stated o Since PNB violated the Truth in Lending Act (RA 3765),
that while the Usury Law ceiling on rates was lifted, which was enacted to protect citizens from a lack of
nothing could be read as granting the bank carte awareness of the true cost of credit to the user by using
blanche authority to raise interest rates to levels a full disclosure of such cost
which would either enslave its borrowers or lead to o By requiring the spouses to sign the documents and
a hemorrhaging of their assets; Court found that notes in blank, and then unilaterally filling them up later
there was no attempt by PNB there to secure the on, PNB violated the Truth in Lending Act, and was
conformity of the borrowers, and the assent to the remiss in its disclosure obligations
increases CANNOT be implied from the lack of o BUT the 1-year period to file a case prescribed already
response to the letters of PNB informing them of - SC: Cannot subscribe to PNBs argument that in every
increases repricing, the spouses are given the right to question the
e) New Sampaguita Builders Construction, Inc. v. PNB interest rates ! if only one questions PNBs practice, the
(2004): court said that excessive interests, penalties and rest will still be victim to the questionable practice and the
other charges not revealed in disclosure statements Court cannot condone this
issued by banks, even if stipulated in the promissory - Since the escalation clause is annulled, the principal amount
notes, cannot be given effect under the Truth in of the loan is subject to the original or stipulated rate of
Lending Act interest, and upon maturity, the amount due shall be subject
f) PNB v. Sps. Rocamora (2009): above pronouncements to legal interest at the rate of 12% per annum
were reiterated to debunk PNBs repeated reliance on o Interests to be applied first to the payment of the
its invalidated contract stipulations stipulated or legal and unpaid interest, and later, to the
- PNBs argument that the spouses failure to contest capital or principal
the increased interest rates amounted to implied o Because only the interest rates are found to be
acceptance increase should fail improper, the obligation to pay interest subsists, fixed
- All the cases, including the present one, involve identical or at the legal rate of 12% per annum (only until June 30,
similar provisions 2013). Starting July 1, 2013, it shall be 6% per annum,
- SC: These stipulations must be once more invalidated, as pursuant to Nacar v. Gallery Frames and Monetary
was done in previous cases. The common denominator in Board Circular No. 799
these cases is the lack of agreement of the parties to the
imposed interest rates DISPOSITIVE: Petition granted. CA Decision ANNULLED and
o Lack of consent: spouses signed the promissory notes SET ASIDE.
in blank (credible testimony by Lydia)
o PNB Branch Manager even admitted that interest rates
were fixed solely by its Treasury Department, and the
factors considered do not include factors which affect
PNBs borrowers
o PNBs method of fixing interest rates is arbitrary based
on one-sided, indeterminate, and subjective criteria
- SC: any modification in the contract, such as the interest
rates, must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if
not the most important component. Thus, any modification

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Procedure outlined by the SC for the remand to the lower court 12. Likewise, if the overpayment exceeds the total amount of
for proper accounting and computation: interest (4.) and award of 1% attorneys fees (6.), the trial
1. The 1st Promissory Note with the 19.5% interest rate is court shall INVALIDATE THE EXTRAJUDICIAL
deemed proper and paid; FORECLOSURE AND SALE;
2. All subsequent promissory notes (from the 2nd to the 26th 13. HOWEVER, if the total amount of interest (4.) and award of
promissory notes) shall carry an interest rate of only 12% per 1% attorneys fees (6.) exceed petitioners overpayment,
annum.104 Thus, interest payment made in excess of 12% then the excess shall be DEDUCTED from the bid price of
on the 2nd promissory note shall immediately be applied to P4,324,172.96;
the principal, and the principal shall be accordingly 14. The difference in (13.) [P4,324,172.96 LESS sum total of the
reduced. The reduced principal shall then be subjected to interest (4.) and 1% attorneys fees (6.)] shall be DELIVERED
the 12%105 interest on the 3rd promissory note, and the TO THE PETITIONERS;
excess over 12% interest payment on the 3rd promissory 15. Respondent may then proceed to consolidate its title to
note shall again be applied to the principal, which shall TCTs T-14250 and T-16208. The outstanding penalties, if
again be reduced accordingly. The reduced principal shall any, shall be collected by other means.
then be subjected to the 12% interest on the 4th promissory
note, and the excess over 12% interest payment on the 4th From the above, it will be seen that if, after proper accounting, it
promissory note shall again be applied to the principal, turns out that the petitioners made payments exceeding what
which shall again be reduced accordingly. And so on and so they actually owe by way of principal, interest, and attorneys
forth; fees, then the mortgaged properties need not answer for any
3. After the above procedure is carried out, the trial court shall outstanding secured amount, because there is not any; quite the
be able to conclude if petitioners a) still have an contrary, respondent must refund the excess to petitioners. In
OUTSTANDING BALANCE/OBLIGATION or b) MADE such case, the extrajudicial foreclosure and sale of the properties
PAYMENTS OVER AND ABOVE THEIR TOTAL shall be declared null and void for obvious lack of basis, the case
OBLIGATION (principal and interest); being one of solutio indebiti instead. If, on the other hand, it
4. Such outstanding balance/obligation, if there be any, shall turns out that petitioners overpayments in interests do not
then be subjected to a 12% per annum interest from exceed their total obligation, then the respondent may
October 28, 1997 until January 14, 1999, which is the date of consolidate its ownership over the properties, since the period
the auction sale; for redemption has expired. Its only obligation will be to return
5. Such outstanding balance/obligation shall also be charged the difference between its bid price (P4,324,172.96) and
a 24% per annum penalty from August 14, 1997 until January petitioners total obligation outstanding except penalties
14, 1999. But from this total penalty, the petitioners after applying the latters overpayments.
previous payment of penalties in the amount of P202,000.00
made on January 27, 1998106 shall be DEDUCTED; Sps. Silos v. PNB
6. To this outstanding balance (3.), the interest (4.), penalties - Lack of an agreement violates the mutuality of contracts
(5.), and the final and executory award of 1% attorneys fees - Depends on its own policy (solely on the will of the PNB;
shall be ADDED; purely potestative) ! no pegging
7. The sum total of the outstanding balance (3.), interest (4.) - Only some had de-escalation clauses
and 1% attorneys fees (6.) shall be DEDUCTED from the bid - Signed in blank by the spouses
price of P4,324,172.96. The penalties (5.) are not included
because they are not included in the secured amount; Valid de-escalation clauses
8. The difference in (7.) [P4,324,172.96 LESS sum total of the - In Solidbank
outstanding balance (3.), interest (4.), and 1% attorneys fees o There is a de-escalation
(6.)] shall be DELIVERED TO THE PETITIONERS; o It is pegged (but Maam is iffy about among others)
9. Respondent may then proceed to consolidate its title to o Consent (prepayment)
TCTs T-14250 and T-16208; - In Polotan benchmark for valid escalation clauses
10. ON THE OTHER HAND, if after performing the procedure in o Change = increase/decrease
(2.), it turns out that petitioners made an OVERPAYMENT, o Pegged at prevailing market rate (3%)
the interest (4.), penalties (5.), and the award of 1% - PEGGING: at any other rate fixed by a third party
attorneys fees (6.) shall be DEDUCTED from the
overpayment. There is no outstanding balance/obligation Question: Is it enough to get assent/consent from the signing if
precisely because petitioners have paid beyond the amount other 2 requisites are present?
of the principal and interest; SGS: Consent can be manifested upon signing, PROVIDED
11. If the overpayment exceeds the sum total of the interest (4.), escalation clause is very clear and leaves no doubt (there is
penalties (5.), and award of 1% attorneys fees (6.), the margin/tracking) and notice would be enough
excess shall be RETURNED to the petitioners, with legal
interest, under the principle of solutio indebiti;107

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PNB v. CA and Ambrosio Padilla (1991) Grino-Aquino, J (1) That there can be an increase in interest if increased by
Petitioner: Philippine National Bank law or by the Monetary Board
Respondents: CA and Ambrosio Padilla (2) It must include a provision for reduction of the interest
Concept: Simple Loan; interest in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board
Doctrine: ! The unilateral increases is likewise violative of the mutuality
- In order for an escalation clause to be valid, the ff. must of contracts
concur: o Art. 1308 CC: The contract must bind both
(1) That there can be an increase in interest if increased by contracting parties; its validity or compliance cannot be
law or by the Monetary Board left to the will of one of them
(2) It must include a provision for reduction of the interest ! The increases were likewise violative of their Credit
in the event that the applicable maximum rate of Agreement which provided that its terms may be amended
interest is reduced by law or by the Monetary Board only by an instrument in writing signed by the party to be
- Increases in interest rate shall likewise not be made oftener bound as burdened by such amendment.
than once every 12 months. ! The increases also contravene Art. 1956 CC which
- Unilateral increases is likewise violative of mutuality of provides that no interest shall be due unless it has been
contracts. expressly stipulated in writing
o Padilla never agreed in writing to pay the interest
Brief Facts: increases beyong 24%
Padilla contracted a loan with PNB for P1.8M. He was charged
with 18% interest per annum. Upon renewal of his loan, PNB DISPOSITIVE: CA Affirmed
informed him that the interest will be increased to 32%. Padilla
did not express his conformity to said increase. PNB further PNB v. CA (1994) Puno, J.
increased the interest rate to 41% and again to 48%. Said Petitioner: Philippine National Bank
increases were all made within 4 months. Padilla filed a Respondents: CA, Remedios Jayme-Fernandez and Amado
complaint against PNB, contending that said unilateral increases Fernandez
were illegal and not valid or binding to him Concept: Simple Loan; interest

ISSUE: Doctrine:
WON the unilateral increases of interest were valid (NO) Increase in interest rate cannot be made without both parties
agreeing to it.
RATIO: PNB cannot unilaterally increase interest rates.
It is likewise prohibited from increasing interest rates Brief Facts:
more than once within a period of 12 months. Fernandez obtained two loans from PNB with 12% interest per
! PD 116 grants the Monetary Board of the Central Bank the annum. PNB unilaterally increased the interest rate to 25%; and
authority to increase rates of interest for loans or renewals again to 30%; and again to 42%. Fernandez filed a complaint
thereof but expressly provided that such changes shall not against PNB contending that said increases were unilaterally
be made oftener than once every twelve months made and this illegal.
o PNB increase interest rates 3 times; if the Monetary
Board itself was not authorized to make changes ISSUE:
oftener than once in a year, even less so may a bank WON unilateral increases of interest were valid (NO)
which is subordinate to the Board
! Even if Padilla did agree in the Deed of Real Estate RATIO: The unilateral increases made by PNB is
Mortgage that the interest rate may be increased to such violative of the mutuality of contracts
increase within the rate allowed by law, as the Board of - The validity of escalation clauses is affirmed by PD 1684.
Directors of PNB may prescribe, no law was ever passed in o Said PD provides that parties may stipulate that interest
July to November 1984 increasing the intrest rates on loans rates may be increased in the event that the applicable
or renewals thereof to 32%, 41% and 48% per annum, and max. rate of interest is increased by law or by the
no documents were executed and delivered by Padilla to Monetary Board
effectuate the increase (such documents were agreed upon o Said increases shall be valid only if there is also a
by the parties to be made prerequisites for any increase in stipulation that the rate of interest shall be reduced in
interest) the event that the applicable max. rate of interest is
! The escalation clause agreed upon by the parties was reduced by law or by the Monetary Board.
likewise invalid as it did not contain a de-escalation clause - Central Bank Circular No 905, Series of 1982 provides that
that permits a decrease in interest rate. In order for an the rate of interest on any loan or forbearance shall not be
escalation clause to be valid, the ff. must concur: subject to any ceiling prescribed under or prescribed
pursuant to the Usury Law

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- PD 1684 and CB Circular No. 905 allowed contracting merely to pay 21% interest, subject to a possible escalation
parties to freely stipulate interest rate which they may agree or de-escalation, when 1) the circumstances warrant such
to increase or decrease. However, changes in interest rates escalation or de-escalation; 2) within the limits allowed by
cannot be made unilaterally as the same would violate the law; and 3) upon agreement.
mutuality of contracts under Art. 1308 - PNB also violated the terms of its own credit agreement
o There can be no contract in the true sense in the with the spouses. By express provision, Section 9.01
absence of the element of agreement provides that its terms may be amended only by an
o Similarly, contract charges must be made with the instrument in writing signed by the party to be bound as
consent of the contracting parties burdened by such amendment.
- Sps. Fernandez are likewise not estopped from assailing the - Central Bank Circular No. 905 which lifted the Usury Law
unilateral increases made by PNB; their silence cannot be ceiling - cannot be used by bank as carte blanche authority
construed as an acceptance to raise interest rates to such an unbelievable and
- Circumstances do not show that Fernandez agreed to the burdensome amount.
proposed increases in interest rate - While escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but
DISPOSITIVE: CA affirmed. are based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only the increases of the interest
Sps. Almeda v. CA (1997) Kapunan, J. rates on the basis of the escalation clause patently
Petitioner: Sps. Almeda unreasonable and unconscionable, but also there are no
Respondents: Court of Appeals; and Philippine National Bank valid and reasonable standards upon which the increases
(PNB) are anchored.
Concept: Interest
DISPOSITIVE: CA reversed. PNB unilateral increases null and
Doctrine: void. REMANDED to TC.
While escalation clauses are not basically wrong or legally !
objectionable so long as they are not solely potestative but are PNB v. CA (1996) Mendoza, J.
based on reasonable and valid grounds Petitioner: PNB
Respondents: Court of Appeals; Sps. Bascos
Brief Facts: Concept: Interest
Sps. Almeda loaned P18M from PNB. Credit agreement
provided for an escalation clause. PNB raised the original 21% Doctrine:
interest rate to as high as 68% within 4 years. Escalation clauses are valid provided that changes made shall
be mutually agreed upon by both parties to not violate the
ISSUE: principle of mutuality essential to contracts.
WON PNB authorized to increase the interest rate to as high as
68% (NO) Brief Facts:
Sps. Concepcion loaned P1.4M from HSTBC. In the promissory
RATIO: NO; such increases contravene the mutuality note executed to secure the loan, the spouses authorized the
principle of contracts, Art. 1956, as well as the terms bank to increase the interest rate without advance notice if the
and conditions of its own credit agreement Central Bank increases the interest rate. The bank increased the
- The binding effect of any agreement between parties to a interest rate thrice, spouses eventually defaulted, and the real
contract is premised on two settled principles: (1) that any estate mortgage they executed was foreclosed and sold to
obligation arising from contract has the force of law another corporation.
between the parties; and (2) that there must be mutuality
between the parties based on their essential equality. ISSUE:
- Any contract which appears to be heavily weighed in favor WON the increases made by PNB are valid (NO)
of one of the parties so as to lead to an unconscionable
result is void, and any stipulation regarding the validity or RATIO: NO; the absence of a de-escalation clause is
compliance of the contract which is left solely to the will of not only against P.D. 1684 but it made the clause so
one of the parties, is likewise, invalid one-sided as to make it unreasonable.
- In the case at bar, it is clear that PNB unilaterally altered the - Following the decision laid down in Banco Filipino Savings
terms of its contract by increasing the interest rate without v. Navarro, there must be a de-escalation clause to mitigate
the prior assent of the spouses. Besides, Art. 1956 explicitly the one-sidedness of the escalation clause.
provides that interest shall only be due if it is stipulated in - Furthermore, any increase in the rate of interest made
writing. What has been stipulated in writing from a pursuant to an escalation clause must be the result of an
perusal of interest rate provision of the credit agreement agreement between the parties.
signed between the parties is that petitioners were bound

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- In the case at bar, there was no attempt made by the PNB - First, the payments were applied to debts that were already
to secure the conformity of the spouses to the successive due. Thus, when the first payment was made and applied on
increases made. Their assent cannot be implied from their January 5, 1990, all Promissory Notes were already due.
lack of response to the letters PNB sent, informing them of - Second, payments of the principal were not made until the
the increases. No one receiving a proposal to change a interests had been covered. For instance, the first payment
contract is obliged to answer the proposal. on January 15, 1990 had initially been applied to all interests
due on the notes, before deductions were made from their
DISPOSITIVE: CA affirmed respective principal amounts. The resulting decrease in
! interest balances served as the bases for subsequent pro-
New Sampaguita Builders v PNB (2004) Panganiban., J. ratings.
Petitioner: New Sampaguita Builders Inc. - Third, payments were proportionately applied to all
Respondents: Philippine National Bank interests that were due and of the same nature and burden.
Concept: Conventional Interest - Fourth, since there was no stipulation on capitalization, no
interests due and unpaid were added to the principal;
Doctrine: hence, such interests did not earn any additional interest.
One-sided impositions do not have the force of law between the The simple not compounded method of interest
parties, because such impositions are not based on the parties calculation was used on all Notes until the date of public
essential equality. Although escalation clauses are valid in auction.
maintaining fiscal stability and retaining the value of money on - In fine, under solutio indebiti or payment by mistake, there
long-term contracts, giving respondent an unbridled right to is no deficiency receivable in favor of PNB, but rather an
adjust the interest independently and upwardly would excess claim or surplus payable by respondent; this excess
completely take away from petitioners the right to assent to an should immediately be returned to petitioner-spouses or
important modification in their agreement and would also their assigns not to mention the buildings and
negate the element of mutuality in their contracts. The clause improvements on and the fruits of the property to the
cited earlier made the fulfillment of the contracts dependent end that no one may be unjustly enriched or benefited at
exclusively upon the uncontrolled will of respondent and was the expense of another.
therefore void. - Such surplus is in the amount of P3,686,101.52

Brief Facts: Sampaguita loaned money from PNB. PNB 2. Sampaguitas accessory duty to pay interest did not
unilaterally increased rates of interest in the loan w/o informing give PNB unrestrained freedom to charge any rate
Sampaguita. PNB claimed they were authorized to do it as there other than that, which was agreed upon.
was a clause in the agreement that they may do so. Besides, - No interest shall be due, unless expressly stipulated in
Usury law was no longer in force. writing. It would be the zenith of farcicality to specify and
agree upon rates that could be subsequently upgraded at
ISSUES: whim by only one party to the agreement. The unilateral
1. WON the loan accounts are bloated (YES) determination and imposition of increased rates is
2. WON PNB could unilaterally increase interest rates (NO) violative of the principle of mutuality of contracts ordained
in Article 1308 of the Civil Code.
RATIO: - One-sided impositions do not have the force of law
1. There is no deficiency; there is actually an between the parties, because such impositions are not
overpayment of more than 3M based on the based on the parties essential equality. Although escalation
computation of the SC. clauses are valid in maintaining fiscal stability and retaining
- The excessive interest rates in the Statements of Account the value of money on long-term contracts, giving
sent to petitioners are reduced to 19.5 percent and 21.5 respondent an unbridled right to adjust the interest
percent, as stipulated in the Promissory Notes; independently and upwardly would completely take away
- upon loan conversion, these rates are further reduced to the from petitioners the right to assent to an important
legal rate of 12 percent. Payments made by petitioners are modification in their agreement and would also negate the
pro-rated, the charges on penalty and insurance eliminated, element of mutuality in their contracts. The clause cited
and the resulting total unpaid principal and interest of earlier made the fulfillment of the contracts dependent
P6,582,077.70 as of the date of public auction is then exclusively upon the uncontrolled will of respondent and
subjected to 1 percent attorney's fees. was therefore void.
- The total outstanding obligation is compared to the bid - Besides, the pro forma promissory notes have the character
price. On the basis of these rates and the comparison made, of a contract of adhesion, where the parties do not bargain
the deficiency claim receivable amounting to P2,172,476.43 on equal footing, the weaker partys [the debtors]
in fact vanishes. participation being reduced to the alternative to take it or
- Instead, there is an overpayment by more than P3 million leave it.

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- Circular that lifted the ceiling of interest rates of usury law PNB v. Spouses Rocamora (2009) Brion, J.
did not authorize either party to unilaterally raise the Petitioner: Phil. National Bank (PNB)
interest rate without the others consent. The interest Respondent: Spouses Agustin and Pilar Rocamora
ranging from 26 percent to 35 percent in the statements of Concept: Simple Loan; Interest; Conventional Interest
account -- must be equitably reduced for being iniquitous,
unconscionable and exorbitant. Doctrine:
- Rates found to be iniquitous or unconscionable are void, as While an escalation clause may be valid, it does not sanction a
if it there were no express contract thereon. Above all, it is unilateral increase of the interest rates. Parties must still come to
undoubtedly against public policy to charge excessively for an agreement to such an increase. Otherwise, such increase will
the use of money. not have a binding effect.
- It cannot be argued that assent to the increases can be
implied either from the June 18, 1991 request of petitioners Brief Facts:
for loan restructuring or from their lack of response to the Spouses Rocamora contracted a P100k loan from PNB. They
statements of account sent by respondent. Such request executed two mortgages as security for the loan. These
does not indicate any agreement to an interest increase; mortgages contained an escalation clause and a de-escalation
there can be no implied waiver of a right when there is no clause as well. When the spouses became unable to pay, PNB
clear, unequivocal and decisive act showing such purpose. foreclosed the mortgages and filed a suit for the deficiency
Besides, the statements were not letters of information sent judgment.
to secure their conformity; and even if we were to presume
these as an offer, there was no acceptance. ISSUE:
- No one receiving a proposal to modify a loan contract, WON the principle of mutuality of contracts was violated by PNB
especially interest -- a vital component -- is obliged to (YES)
answer the proposal. Besides, PNB did not comply with its
own stipulation that should the loan not be paid 2 years RATIO: YES, PNB violated the principle of mutuality of
after release of money then it shall be converted to a contracts in its unilateral increase of the interest rates.
medium term loan. - PNB: The escalation clauses were valid; they met the
- Court applied 12% interest rate instead for being a standards set in Banco Filipino Savings and Mortgage Bank
forbearance of money (there were some pieces of evidence v. Navarro, as the clauses also contained a de-escalation
presented by PNB in court that Sampaguita objected to. clause
Lower courts overruled the objections but SC said the - SC: Presence of valid escalation clauses still do NOT
objections were correct and the evidence should not have authorize unilateral increase of interest rates, in observance
been admitted. i.e. contract wasnt signed by the parties, a of the mutuality principle of contracts.
part of the contract wasnt properly annexed/no reference o Any increase in the interest rate pursuant to an
was made in the main contract.) escalation clause MUST be the result of parties
- In addition to the preceding discussion, it is then useless to agreement thereto.
labor the point that the increase in rates violates the o Otherwise, it carries no binding effect.
impairment clause of the Constitution, because the sole o The presence of de-escalation clauses is not
purpose of this provision is to safeguard the integrity of determinative of the increases validity; it is the consent
valid contractual agreements against unwarranted of both parties thereto that gives it effectivity.
interference by the State in the form of laws. Private o Failure of the spouses Rocamora to contest the
individuals intrusions on interest rates is governed by increases that PNB made cannot is NOT consent
statutory enactments like the Civil Code. thereto. No one receiving a proposal to change a
contract is obliged to answer the proposal.
DISPOSITIVE: Petition set aside. - PNB: The amount being claimed was a result of the original
! 12% rate agreed upon.
! o SC: Our computation + examination of PNBs ledgers
! point that this statement is incorrect; PNB clearly
!
imposed more than 12% to get to this amount.
!
!
! DISPOSITIVE: Decision AFFIRMED with MODIFICATION.
! Complaint dismissed.
!
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Concepcion v. CA (1997) Vitug, J. parties to be valid. The minds of all parties must meet as to
Petitioner: Sps. Concepcion the proposed modification especially when it affects an
Respondents: Court of Appeals; Home Savings Bank and Trust important aspect of the agreement. In case of loan
Company (now Insular Life); and Asaje Realty Corporation contracts, the rate of interests is always a vital component.
Concept: Conventional Interest Thus, any change must be mutually agreed upon to create a
binding effect.
Doctrine: - A contract containing a condition which makes its fulfillment
Escalation clauses are valid provided that changes made shall dependent exclusively upon the uncontrolled will of one of
be mutually agreed upon by both parties to not violate the the contracting parties is void for being violative of the
principle of mutuality essential to contracts. principle of mutuality essential in contracts.
- Even arguendo, that the spouses are bound with the
Brief Facts: aforementioned provision in the promissory note in allowing
Sps. Concepcion loaned P1.4M from HSTBC. In the promissory increase in the interest rate without advance notice, the
note executed to secure the loan, the spouses authorized the escalation should still be subject, as also provided, to a
bank to increase the interest rate without advance notice if the corresponding increase by the Central Bank of its rediscount
Central Bank increases the interest rate. The bank increased the rate, or of the interest rate on savings and time deposit, or
interest rate thrice, spouses eventually defaulted, and the real of interest rate on such loans.
estate mortgage they executed was foreclosed and sold to - A perusal of the notices sent by the bank would reveal that
another corporation. it provides no sufficient justification for the unilateral
increases since it shows no corresponding increase made by
ISSUES: the Central Bank during each time. In fact, the notice only
1. WON HSTBC complied with the requirements of an provides vague excuses for the increase such as prevailing
extrajudicial foreclosure (NO) business and economic condition.
2. WON HSTBC may unilaterally increase the interest rates
pursuant to the provision in the loan agreement (NO) DISPOSITIVE: CFI affirmed with modification that HSBTC shall
pay spouses the excess, if any, of the bid price it received from
RATIO: Asaje Realty for the foreclosed property over and above the
1. NO; the bank did not comply with notice unpaid balance of the loan computed at the original interest
requirement provided in their mortgage contract. rate. REMANDED to TC for determinations
- General Rule: Extrajudicial foreclosure, as provided for in
Sec. 3, Act. No. 3135, only requires that (1there be posting Concepcion v. CA
of notices of sale in 3 public places, and (2) publication of Amortization came from the word mort, meaning death !
the same in a newspaper of general circulation. However, to deaden the loan (killing the loan slowly)
parties are not precluded from providing additional
requirements. Frias v. San Diego-Sison (2007) Austria-Martinez, J.
- In the case at bar, it is explicitly provided that all Petitioner: Bobie Rose Frias, represented by her Attorney-in-
correspondence relative to the mortgage shall be sent to fact, Marie Fujita
the mortgagor. However, no such notice was sent by the Defendant: Flora San Diego-Sison
bank to the spouses. Concept: Conventional Interest
- In spite of said breach, however, the spouses may not
recover the property sold since the Asaje Realty appears to Doctrine:
be an innocent purchaser in good faith. It purchases the The agreement between the parties is the law between them
property when the title was already in the name of the bank and must be respected. If the terms are clear, their literal
and was under no obligation to look beyond what appears meaning must be given. Also, the provisions of an agreement
therein. must be taken in the context of the entire agreement. An
agreement to pay interest continues for so long as the debtor
2. NO; it violates the mutuality of contracts provided continues in possession of the principal; otherwise, it would
for in Art. 1308, NCC constitute unjust enrichment.
- The validity of escalation or escalator clauses in
contracts was already upheld in the case of Banco Filipino Brief Facts:
Savings and Mortgage Bank v. Navarro. In that case, SC Frias and San Diego-Sison (SDS) entered into a MOA over a
ruled that such clauses is not substantively unconscionable house and lot for a consideration of P3-M. The MOA involved
and are widely used in commercial contracts in an effort to two 6-month periods: first, for SDS to decide WON to buy the
maintain fiscal stability and to retain real dollar value to property; second, for Frias to pay back the money if SDS decides
the price terms of long term contracts. not to buy the property. If SDS decides not to buy the house and
- However, the SC elaborated in PNB v. CA that contract lot, Frias must pay back the P3-M with interest only for the
changes must be made with the consent of the contracting second 6-month period.

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ISSUE: expectation that such amount would be paid within the date
WON the compounded bank interest should be limited to 6 stipulated. Since Frias failed to pay the amount, the
months as contained in the MOA (NO) monetary interest for the last 6 months continued to accrue
until actual payment of the loaned amount
RATIO: The compounded bank interest should not be o Payment of regular interest constitutes the price or cost
limited to just 6 months, but should be imposed until of the use of money and until the principal sum due is
fully paid. returned to the creditor, regular interest continues to
- Frias contends: accrue since the debtor continues to use such principal
o That the interest, whether at 32% or 25% per annum amount
which should run from June 7, 1991 until fully paid is o For the debtor to continue in possession without
contrary to the MOA payment of the monetary interest would constitute
o That the MOA provides that if San Diego-Sison would unjust enrichment
decide not to purchase the property, Frias has the - The parties stipulated that the loaned amount shall earn
period of another 6 months to pay the loan with the compounded bank interests; per certification by Prudential
compounded bank interest for the last 6 Bank, the interest rate for loans in 1991 ranged from 25% to
months only 32% per annum, which was no longer assailed by Frias !
o That the CAs ruling that a loan always bears interest The interest at 25% per annum for a P2-M loan is fair and
otherwise it is not a loan is contrary to Art. 1956 of the reasonable
NCC, which provides that no interest shall be due
unless it has been expressly stipulated in writing DISPOSITIVE: CA affirmed with modification. Attorneys fees
- SC: We are not persuaded: deleted.
o The CAs conclusion that a loan always bears interest
otherwise it is not a loan, is flawed since a simple loan Frias v. San Diego-Sison
may be gratuitous or with a stipulation to pay interest The MOA contains several different contracts, one of which is an
o NO ERROR in awarding 25% interest per annum on the OPTION CONTRACT, which has a separate consideration from
P2-M loan even beyond the second 6 months stipulated the purchase price.
period
- The MOA is the law between the parties, and in resolving an 2. Interest on Interest
issue based upon a contract, the contract must first be
examined, especially the provisions which are relevant to Art. 1959 Without prejudice to the provisions of Article 2212,
the controversy interest due and unpaid shall not earn interest. However, the
o GR: If the terms are clear and leave no doubt as to the contracting parties may by stipulation capitalize the interest
intention of the contracting parties, the literal meaning due and unpaid, which as added principal, shall earn new
of its stipulations shall prevail AND the various interest.
stipulations of the contract shall be interpreted
together, attributing to the doubtful ones that sense
Art. 2212 Interest due shall earn legal interest from the time it
which may result from all of them taken jointly
is judicially demanded, although the obligation may be silent
- The phrase for the last six months only should be taken in
upon this point.
context of the entire agreement; SC agrees with CA that:
o The agreement speaks of 2 periods of 6 months each
It is a subset of conventional interest
o First 6-month period: for San Diego-Sison to make up
her mind WON to purchase the property
GR: Interest will NOT earn interest
o Second 6-month period: for Frias to pay the P2-M loan
XPNs:
in the event San Diego-Sison decides not to buy the
1. Parties stipulate (compounded interest)
property, in which case the interest will be charged for
- Principal: P5,000
the last six months only, referring to the second 6-
- Conventional: 2% per annum
month period
- Interest on interest: (add unpaid 2% to 1st principal) =
o No interest for the first 6-month period, while San
new principal
Diego-Sison makes up her mind; interest would only be
- Amounts to compounding of interest
charged for the second period of 6 months after she
2. Judicial demand (filing of a complaint)
decides not to buy the property
- Principal: P5,000
o Nothing in the agreement suggests that interest will be
- Conventional: 2% per annum
charged for 6 months only even if it takes Frias an
- Interest on interest: legal interest (now 6% multiplied by
eternity to pay the loan
2%)
- The agreement does not mean that interest will no longer
Note: For this to apply, there must first be CONVENTIONAL
be charged after the second 6-month period since the
INTEREST
stipulation was made on the logical and reasonable

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GR: Conventional interest is paid on the principal only (simple Art. 2209 If the obligation consists in the payment of a sum of
interest) money, and the debtor incurs in delay, the indemnity for
XPN: Interest on interest damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence
Interest on interest of stipulation, the legal interest, which is six per cent per
- Compensation for interest that is due and unpaid annum.
- GR: not demandable
- XPN: demandable if: Art. 2213 Interest cannot be recovered upon unliquidated
o There is conventional interest (express stipulation in
claims or damages, except when the demand can be
writing to pay interest), AND
established with reasonably certainty.
o Any or both of the following instances:
" When by stipulation of the parties, compounding
Art. 2226 Liquidated damages are those agreed upon by the
or capitalizing of interest is agreed upon
parties to a contract, to be paid in case of breach thereof.
(compound interest)
" When interest that is due and unpaid is judicially
demanded, whether or not there is an agreement Art. 2227 Liquidated damages, whether intended as an
or stipulation to this effect (judicial demand is indemnity or a penalty, shall be equitably reduced if they are
reckoned from date of filing of a complaint, and iniquitous or unconscionable.
the rate shall be 12%)
Compensatory interest
3. Compensatory, Penalty, or Indemnity Interest - Also called penalty interest or indemnity interest
- It is the indemnity for damages arising from delay on the
Art. 1169 Those obliged to deliver or to do something incur part of the debtor of an obligation consisting in the
in delay from the time the obligee judicially or extrajudicially payment of a sum of money
demands from them the fulfillment of their obligation. - Interest allowed by law in the absence of a promise to pay,
as compensation for delay in paying a fixed sum
However, the demand by the creditor shall not be necessary in - Does not need to be expressly stipulated in writing, but
order that delay may exist: parties may stipulate on compensatory interest through a
penalty or penal clause
(1) When the obligation or the law expressly so declare; or - It may be equitably reduced by the court if it is iniquitous or
unconscionable
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when the Penal clause
thing is to be delivered or the service is to be rendered was a - It is an accessory obligation of the debtor to assume greater
controlling motive for the establishment of the contract; or liability in case of breach
- It strengthens the coercive nature of the principal
(3) When demand would be useless, as when the obligor has obligation; it provides, in effect, liquidated damages
rendered it beyond his power to perform. resulting from breach
- Debtor is bound to pay without the necessity of proof
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper LEGAL INTEREST
manner with what is incumbent upon him. From the moment Delegated interest to the Central Bank from Congress
one of the parties fulfills his obligation, delay by the other
begins. There must be EXPRESS stipulation for interest but actual rate is
not provided.
Art. 1226 In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.

The penalty may be enforced only when it is demandable in

accordance with the provisions of this Code.

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Eastern Shipping Lines v. CA Vitug, J. When such certainty cannot be so reasonably
Petitioner: Eastern Shipping Lines (ESL) established at the time the demand is made,
Respondents: CA and Mercantile Insurance Company (MIC) the interest shall begin to run only from the
Concept: Simple Loan: Interest; Compensatory, Penalty or date the judgment of the court is made
Indemnity Interest - When the judgment of the court awarding a sum of money
becomes final and executory
Doctrine: o o rate of legal interest shall be 12% per annum
When an obligation, not constituting a loan or forbearance of from such finality until its satisfaction because interim
money, is breached, the interest on the amount of damages period is deemed to be by then an equivalent to a
awarded may be imposed at the discretion of the court at the forbearance of credit
rate of 6% per annum. When such certainty cannot be so
reasonably established at the time the demand is made, the Siga-an v. Villanueva (2009) Chico-Nazario, J.
interest shall begin to run only from the date the judgment of Petitioner: Sebastian Siga-an
the court. It becomes 12 % when the judgment of the court Respondent: Alicia Villanueva
awarding a sum of money becomes final and executory. Concept: Compensatory, Penalty or Indemnity Interest

Brief Facts: Doctrine:

Insurer-subrogee Mercantile sued carrier Eastern Shipping In the absence of stipulation regarding interest to be paid,
because one drum from the shipment was damaged. Eastern interest may still be charged pursuant to Art. 2209 and Art. 2212,
questions the grant of interest on Mercantiles claim which was which covers situations when interest is imposed as penalty or
12% from the date of filing of the complaint because damages for breach of contractual obligations and NOT as
Mercantiles claim was unliquidated. compensation for use or forbearance of money.

ISSUE: Brief Facts:

What are the applicable rules on interest? Villanueva borrowed money from Siga-an, but their agreement
was not reduced in writing and there was no stipulation for the
RATIO: Eastern Shipping Rule on Interest: payment of interest. She repaid him with interest, but he was
- Obligation (regardless of its source) is breached and unsatisfied, and coerced her to pay more. She eventually
contravenor is held liable demanded a refund of the excess payment since she was not
o Provisions under Title 18 on "Damages" of the CC obligated to pay the same.
govern in determining the measure of recoverable
damages ISSUES:
- On rate of interest and accrual in the concept of actual and 1. WON interest is due to Siga-an (NO)
compensatory damages 2. WON the principle of solutio indebiti applies (YES)
o When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance RATIO:
of money 1. NO, Villanueva is not obligated to pay interest to
" the interest due should be that which may have Siga-an.
been stipulated in writing - Interest is a compensation fixed by the parties for the use
" earn legal interest from the time it is judicially or forbearance of money, referred to as monetary
demanded interest
" absence of stipulation-> 12% per annum to be o Interest imposed by law or by courts as penalty or
computed from from judicial or extrajudicial indemnity for damages is called compensatory
demand subject to the Article 1169 CC interest
o When an obligation, not constituting a loan or o The right to interest arises only by virtue of a contract or
forbearance of money, is breached by virtue of damages for delay or failure to pay the
" interest on the amount of damages awarded may principal loan on which interest is demanded
be imposed at the discretion of the court at the - Art. 1956, NCC, refers to monetary interest, and specifically
rate of 6% per annum mandates that no interest shall be due unless it has been
" General rule-> No interest adjudged on expressly stipulated in writing
unliquidated claims or damages o Payment of monetary interest is allowed only with the
" Exception-> When or until the demand can be concurrence of the two conditions:
established with reasonable certainty 1. There was an express stipulation for the
Where the demand is established with payment of interest; and
reasonable certainty, interest shall begin to 2. The agreement for the payment of interest was
run from the time the claim is made judicially reduced in writing
or extrajudicially

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 o The collection of interest without any stipulation in return of payment made by mistake, and the
writing is prohibited by law person who has no right to receive such payment
- Siga-an and Villanueva did not agree on the payment of becomes obligated to return the same
interest, neither was there convincing proof of written " It harks back to the ancient principle that no one
agreement between the two; there was no verbal or written shall enrich himself unjustly at the expense of
agreement for her to pay interest on the loan; monetary another
interest is due only if there was an express stipulation in " It applies where: 1) a payment is made when there
writing for the payment of interest exists no binding relation between the payor, who
o Villanuevas explanation that the promissory note was has no duty to pay, and the person who received
borne out of Siga-ans threats and his making her copy the payment; and 2) the payment is made through
the promissory note in her own handwriting was not mistake, and not through liberality or some other
rebutted by Siga-an ! this cannot pertain to an express cause
stipulation of interest or written agreement of interest - Villanueva paid interest to Siga-an, but she was under no
o The agreed 7% interest admitted by Villanueva in her duty to make such payment because there was no express
testimony in the BP 22 cases was not ruled upon by the stipulation in writing to that effect
RTC; what the RTC found was that the parties never o There was no binding relation between the two parties
intended the payment of interest and what Villanueva as regards the payment of interest and the payment
testified to was that after paying the total amount of the was clearly a mistake
loan, Siga-an ordered her to pay the interest ! this was o Since Siga-an received something when there was no
not a categorical declaration that she and Siga-an right to demand it, he has an obligation to return it
made an express stipulation in writing as regards - The reimbursable amount is P335,000 (the excess P160,000
payment of interest from the amount paid by checks, and P175,000 paid in cash
- (relevant to syllabus topic) Instances when interest may as admitted by Siga-an in his Reply Affidavit)
be imposed even in the absence of stipulation: - Although Villanueva was convicted for violating BP 22, it
o Art. 2209, NCC, which states that if the obligation doesnt affect the ruling because the two checks amounting
consists in the payment of a sum of money, and the to P700,000 (to cover the P540,000 loan) were not among
debtor incurs in delay, a legal interest of 12% per the checks found to be dishonored or bounced
annum may be imposed as indemnity for damages
if no stipulation on the payment of interest was agreed (Other amounts to be received by Villanueva)
upon - Damages awarded: moral (150,000), exemplary (P50,000),
o Art. 2212, NCC provides that interest due shall earn attorneys fees (25% of amount paid as interest)
legal interest from the time it is judicially demanded, - The RTC and CA imposed a 12% rate of legal interest on the
although the obligation may be silent on this point. amount refundable computed from Mar. 3, 1998 until full
o The interest under these two instances may be imposed payment ! this is erroneous
only as a penalty or damages for breach of o In Eastern Shipping Lines v. CA, it was held that when
contractual obligations; it cannot be charged as an obligation, not constituting a loan or forbearance of
compensation for the use or forbearance of money, i.e., money is breached, an interest on the amount of
these apply only to compensatory interest and not to damages awarded may be imposed at the rate of 6%
monetary interest (case at bar involves monetary per annum; when the judgment of the court awarding a
interest) sum of money becomes final and executory, the rate of
o Compensatory interest is not chargeable here because legal interest, whether for loan/forbearance of money
it was not duly proven that Villanueva defaulted in or not, shall be 12% per annum from such finality until
paying the loan PLUS no interest was due on the loan its satisfaction (interim period equivalent to forbearance
because there was no written agreement as regards of credit)
payment of interest o Siga-ans obligation arose from a quasi-contract of
solutio indebiti, not a loan or forbearance: 6% per
2. YES, the principle of solutio indebiti applies. annum imposed on amount to be refunded as well as
- Under Art. 1960, NCC, if the borrower of loan pays interest on the damages from extrajudicial demand on Mar. 3,
when there has been no stipulation therefor, the provisions 1998 up to finality of this decision ! interest shall
of the CC concerning solutio indebiti shall be applied become 12% per annum from finality of the Decision up
o Art. 2154, NCC, explains the principle, which provides to its satisfaction
that if something is received when there is no right to
demand it, and it was unduly delivered through DISPOSITIVE: Decision of the CA AFFIRMED with
mistake, the obligation to return it arises MODIFICATIONS.
" A creditor-debtor relationship is created under a
quasi-contract, whereby the payor becomes the Siga-an v. Villanueva
creditor who then has the right to demand the Compensatory interest based on solutio indebiti

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Ligutan v. CA (2002) Vitug, J. the application of which is addressed largely to the sound
Petitioner-Defendant: Tolomeo Ligutan & Leonidas dela discretion of the court.
Llana - CA decision affirmed, in reducing the penalty rate form
Respondents-Plaintiffs: Court of Appeals; Security Bank and 5% to 3% given the circumstances and the repeated acts of
Trust Company breach by Ligutan and dela Llana of their contractual
Concept: Compensatory, Penalty or Indemnity Interest obligation

Doctrine: 2. YES. Said interest rate does not appear as being

Penalty clauses may be validly agreed to by parties provided excessive.
they do not contravene law, morals, good customs, public order, - A penalty stipulation is not necessarily preclusive of interest,
or public policy. However, the courts may equitably reduce such the two being distinct concepts which may be separately
penalty if it is iniquitous or unconscionable or if the principal demanded. The essence or rationale for the payment of
obligation has been partly or irregularly complied with. interest is not exactly the same as that of a penalty.

Brief Facts: DISPOSITIVE: CA affirmed

Ligutan et al., loaned P120, 000 from Security Bank, covered by
promissory note binding themselves to pay 15% interest per Ligutan v. CA
annum upon maturity and to pay a penalty of 5% per month in Penalty clause is coercive ! do not have to prove damages
case of default. They also agreed to pay 10% of the total amount anymore
due as attorneys fees in case a suit for collection would be filed.
Ligutan et. al defaulted. Estores v. Spouses Supangan (2012) Del Castillo, J.
Petitioner: Hermojina Estores
ISSUES: Respondents: Spouses Arturo and Laura Supangan
1. WON penalty clause agreed upon by parties is valid (YES) Concept: Compensatory, Penalty or Indemnity Interest
2. WON the 15% interest rate is reasonable (YES)
Doctrine:
RATIO: Interest may be imposed even in the absence of stipulation in
1. YES. A penalty clause is expressly recognized by the contract. In obligations arising out of a loan or forbearance
law, and may be validly agreed upon by parties, of money, goods or credits, the applicable rate of interest is 12%
but may still be equitably reduced by the courts as per annum from the date of demand. Such interest is deemed a
the case may be. compensatory interest which serves as an indemnification for
- SBTC: The penalty sought to be deleted was even Estores continued use of their money, despite demand for its
insufficient to fully cover and compensate for the cost of return.
money brought about by the radical devaluation and
decrease in the purchasing power of the peso, vis--vis the Brief Facts:
US dollar, considering the time frame of its occurrence. Estores and Spouses Supangan entered into a Conditional Deed
Furthermore, there was no partial compliance since only P5, of Sale. Estores, as vendor, failed to fulfill the conditions in the
584 had been paid out of the entire loan of P120, 000. contract and was thereby adjudged to be in breach thereof.
- SC: A penalty clause, as expressly recognized by law in Art. Estores was ordered to pay the spouses the principal amount of
1226, is an accessory undertaking to assume greater liability P3.5M with an interest of 6% compounded annually starting
on the part of an obligor in case of breach. It functions to Sept. 27, 2000 (date of formal demand) until its full payment.
strengthen the coercive force of the obligation and to Estores now contests the propriety of the imposition of interest
provide a stipulated indemnity as liquidated damages as the same was not expressly stipulated in their contract.
resulting from such breach.
- While parties may validly agree to such terms and ISSUES:
conditions, a stipulated penalty may nevertheless be 1. WON the imposition of interest was proper even in the
equitably reduced by the courts if it is iniquitous or absence of stipulation in the contract (YES)
unconscionable or if the principal obligation has been partly 2. What interest rate should be applied (12%)
or irregularly complied with, in relation to Art. 2227 and Art.
1229.
- The determination of WON a penalty is reasonable or
iniquitous can be partly subjective and partly objective, and
dependent on such factors such as the type, extent, and
purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, etc.,

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RATIO: o Forbearance of money, goods, or credits refer to
1. Yes; interest may be imposed even in the absence arrangements other than loan agreements, where a
of stipulation in the contract person acquiesces to the temporary use of his money,
- Art. 2210 CC: Interest may, in the discretion of the court, goods or credits pending happening of certain events
be allowed upon damages awarded for breach of contract. or fulfillment of certain conditions.
- There is no question that Estores is legally obligated to - The instant case involves a forbearance of money
return the P3.5M because of her failure to fulfill her o In the instant case, Sps. Supangan parted with
obligations under the contract, despite demand their money even before the conditions were
- Estores is already in default of her obligation to return said fulfilled
amount from the date of demand which was made on Sept. o They have therefore allowed or granted
27, 2000. forbearance to Estores to use their money
- The interest must then be computed from said date pending fulfillment of the conditions. They were
deprived of the use of their money for the period
2. The interest at the rate of 12% is applicable since pending fulfillment of the conditions and when
the obligation arises out of a loan or a those conditions were breached, they are entitled
forbearance of money, goods or credits. not only to the return of the principal amount
- General rule: the applicable interest shall be computed in paid, but also to compensation for the use of their
accordance with the stipulation of the parties. Absent any money. And the compensation for the use of their
stipulation, the applicable interest shall be 12% per annum money, absent any stipulation, should be the
or 6% per annum, as the case may be same rate of legal interest applicable to a loan
o Art. 2209: If the obligation consists in the payment of since the use or deprivation of funds is similar to a
a sum of money, and the debtor incurs in delay, the loan.
indemnity for damages, there being no stipulation to o Estores unwarranted withholding of the money
the contrary, shall be the payment of interest agreed which rightfully pertains to the spouses amounts
upon, and in the absence of stipulation, the legal to forbearance of money which can be considered
interest, which is 6% per annum. as an involuntary loan.
o Central Bank Circular No. 416, series of 1974: - The accrual of interest shall be reckoned from the date of
When the obligation arises out of a loan or extrajudicial demand which was on Sept. 27, 2000; the said
forbearance of money, goods or credits, the date was satisfactorily established. (If it werent, accrual of
applicable rate of interest shall be 12% per annum interest is reckoned from the date of judicial demand)
- In the instant case, 12% is applicable since the - Eastern Shippine Lines, Inc. v. CA: With regard particularly
obligation herein involved arises out of a loan or to an award of interest in the concept of actual and
forbearance of money, goods or credits. 6% is compensatory damages, the rate of interest, as well as the
applicable in all other cases. accrual thereof, is imposes, as follows:
o The contract involved in this case is admittedly not a o When the obligation is breached, and it consists in the
loan but a Conditional Deed of Sale. However, the payment of a sum of money, i.e., a loan or forbearance
contract provides that the vendor must return the of money, the interest due should be that which may
payment made by the vendee if the conditions are not have been stipulated in writing.
fulfilled. o Furthermore, the interest due shall itself earn legal
o Estores failed to return the money and is considered in interest from the time it is judicially demanded.
default from the time demand was made on Sept. 27, o In the absence of stipulation, the rate of interest shall
2000. be 12% per annum to be computed from default, i.e.,
o Crismina Garments, Inc. v. CA: forbearance was form judicial or extrajudicial demand under and
defined as a contractual obligation of lender or subject to the provisions of Art. 1169 CC
creditor to refrain during a given period of time, from o When the judgment of the court awarding the sum of
requiring the borrower or debtor to repay a loan or money becomes final and executory, the rate of legal
debt then due and payable interest, whether the case involves a loan or
" This definition described a loan where a debtor is forbearance of money, goods or credits, or any other
given a period within which to pay a loan or debt. case, shall be 12% per annum from such finality until
In such a case, forbearance of money, goods or satisfaction, this interim period being deemed to be
credits will have no distinct definition from a by then an equivalent to a forbearance or credit.
loan.
" The court believes however, that the same is DISPOSITIVE: Petition for Review DENIED. CA Decision
meant to have a separate meaning from a loan, AFFIRMED with MODIFICATIONS.
otherwise there would have been no need to add
that phrase as a loan is already sufficiently defined
in the CC.

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Estores v. Sps. Supangan money, the interest due should be that which may have
This is a PROBLEMATIC DECISION AGAIN. been stipulated in writing. Furthermore, the interest due
- Forbearance of money shall itself earn legal interest from the time it is judicially
- Money owed must earn 12% demanded. In the absence of stipulation, the rate of interest
- There was already a definition of forbearance in Crismina shall be 12% per annum to be computed from default, i.e.,
Garments, but this case changed the meaning of from judicial or extrajudicial demand under and subject to
forbearance the provisions of Article 1169 of the Civil Code.
o Crismina Garments 2. When an obligation, not constituting a loan or
" Loan is a type of forbearance forbearance of money, is breached, an interest on the
" Creditor refrains from collecting on debt amount of damages awarded may be imposed at the
o Estores discretion of the court at the rate of 6% per annum. No
" Loan is different from a forbearance interest, however, shall be adjudged on unliquidated claims
" Creditor acquiesces (temporary) use or damages except when or until the demand can be
- It is required that the obligations are due, but here, in this established with reasonable certainty. Accordingly, where
case, NOT YET DUE the demand is established with reasonable certainty, the
- The 120 days = acquiescence to the use interest shall begin to run from the time the claim is made
- J. del Castillo called this forbearance an involuntary loan judicially or extrajudicially (Art. 1169, Civil Code) but when
BUT, by definition, this is NOT a loan because there is NO such certainty cannot be so reasonably established at the
INVOLUNTARY LOAN for want of consent time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at
Nacar v Gallery Frames (2013) Peralta., J. which time the quantification of damages may be deemed
Petitioner: Dario Nacar to have been reasonably ascertained). The actual base for
Respondents: Gallery Frames and/or Felipe Bordey Jr. the computation of legal interest shall, in any case, be on
Concept: Conventional Interest the amount finally adjudged.
3. When the judgment of the court awarding a sum of
Doctrine: money becomes final and executory, the rate of legal
When the judgment of the court awarding a sum of money interest, whether the case falls under paragraph 1 or
becomes final and executory, the rate of legal interest shall be paragraph 2, above, shall be 12% per annum from such
6% per annum from such finality until its satisfaction, this interim finality until its satisfaction, this interim period being
period being deemed to be by then an equivalent to a deemed to be by then an equivalent to a forbearance of
forbearance of credit. credit.
- Recently, however, the Bangko Sentral ng Pilipinas
Brief Facts: Monetary Board (BSP-MB), in its Resolution No. 796 dated
Dario Nacar filed a labor case against Gallery Frames and its May 16, 2013, approved the amendment of Section 234 of
owner Felipe Bordey, Jr. Nacar alleged that he was dismissed Circular No. 905, Series of 1982 and, accordingly, issued
without cause by Gallery Frames on January 24, 1997. On Circular No. 799,35 Series of 2013, effective July 1, 2013.
October 15, 1998, the Labor Arbiter (LA) found Gallery Frames Specifically, the rules on interest are now as follows:
guilty of illegal dismissal hence the Arbiter awarded Nacar
P158,919.92 in damages consisting of backwages and separation 1. Monetary Obligations ex. Loans:
pay. Nacar filed a motion with the LA to recomputed his a. If stipulated in writing:
backwages a.1. shall run from date of judicial demand (filing of the
case)
ISSUE: a.2. rate of interest shall be that amount stipulated
WON the Labor Arbiter was correct in the computation of b. If not stipulated in writing
interest in the form of actual or compensatory damages (NO). b.1. shall run from date of default (either failure to pay
upon extra-judicial demand or upon judicial demand
RATIO: When the judgment of the court awarding a whichever is appropriate and subject to the provisions
sum of money becomes final and executory, the rate of of Article 1169 of the Civil Code)
legal interestshall be 6% per annum from such finality b.2. rate of interest shall be 6% per annum
until its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of credit.
- With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of

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 2. Non-Monetary Obligations (such as the case Exercise
at bar) Here are the values:
a. If already liquidated, rate of interest shall be 6% per Conventional: 16%
annum, demandable from date of judicial or extra-judicial Penalty: 6%
demand (Art. 1169, Civil Code) Principal: P
b. If unliquidated, no interest Situation: Neither principal, penalty, interest paid. Calculate the
Except: When later on established with certainty. Interest total amount due.
shall still be 6% per annum demandable from the date of
judgment because such on such date, it is already deemed 1. How to calculate conventional interest (conv)
that the amount of damages is already ascertained. 16P x period
Period: time of maturity (from date it is due until final
3. Compounded Interest judgment)
- This is applicable to both monetary and non-monetary 2. How to calculate penalty
obligations .06P x period
- 6% per annum computed against award of damages Period: from demand (time it is due and not paid) until
(interest) granted by the court. To be computed from the finality of judgment
date when the courts decision becomes final and executory 3. How to calculate interest on interest (IOI)
until the award is fully satisfied by the losing party. Unpaid interest: either stipulation or legal interest (6%)
Period: from filing until finality of judgment
4. The 6% per annum rate of legal interest shall be 4. How to calculate total
applied prospectively: [P + conv + penalty + IOI] x LI
- Final and executory judgments awarding damages prior to Period: From finality of judgment until paid
July 1, 2013 shall apply the 12% rate;
- Final and executory judgments awarding damages on or Note: See RCBC v. Alpha Ready to Wear
after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with
respect to said judgments on or after July 1, 2013 shall still
incur the 6% rate.

DISPOSITIVE: Order of CA reversed and set aside.

Nacar v. Gallery Frames

- This is a restatement of Eastern Shipping Lines
- Formulation of rules for computation of interest
- Rules on compensatory interest:
1. Any obligation, when breached, gives rise to damages
2. Interest as compensatory
a. Sum of money (loan/forbearance)
- If there is a stipulation on penalty
o With rate: apply the rate
o No rate: apply legal interest
- If there is no stipulation on penalty
o Conventional ! legal interest
- WON there is a stipulation, it will earn legal
interest upon demand
b. Damages
- If demand is certain
o From moment of demand
- If demand is uncertain
o Ascertain first: from moment ascertained
- WON certain, it will earn legal interest

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4. Finance Charges A Finance Charge not only refers to conventional interest, but
also includes fees, service charges, discounts, and such other
RA 3765 charges incident to the extension of credit as the Monetary
Sec. 4 Any creditor shall furnish to each person to whom Board of the Central Bank of the Philippines may by regulation
credit is extended, prior to the consummation of the prescribe.
transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations UCPB v. Sps. Samuel and Odette Beluso (2007) Chico-Nazario
prescribed by the Board, the following information: Petitioner: United Coconut Planters Bank (UCPB)
Respondents: Samuel and Odette Beluso (Spouses Beluso)
(1) the cash price or delivered price of the property or service Concept: Interest; Finance Charges
to be acquired;
(2) the amounts, if any, to be credited as down payment and/or Doctrine:
trade-in; Determining interest in reference to the DBD retail rate or by the
(3) the difference between the amounts set forth under clauses branch head violates the mutuality of contracts. Interest
(1) and (2); determined by such practice is void. When interest provision is
(4) the charges, individually itemized, which are paid or to be void, the legal rate applies.
paid by such person in connection with the transaction but
which are not incident to the extension of credit; Brief Facts:
(5) the total amount to be financed; Spouses Beluso had a loan with UCPB, secured by a parcel of
(6) the finance charge expressed in terms of pesos and land, wherein the latter would determine interest in reference to
centavos; and the DBD retail rate or by the branch head. The spouses availed
(7) the percentage that the finance bears to the total amount to of the credit line and entered into loans evidenced b promissory
be financed expressed as a simple annual rate on the notes. Eventually, the spouses defaulted and were unable to
outstanding unpaid balance of the obligation. make payments, so the bank foreclosed on the property. The
spouses filed a petition for annulment against UCPB.
Sec. 6 (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in ISSUES:
violation of this Act or any regulation issued thereunder shall 1. WON the interest rates used were valid (NO)
be liable to such person in the amount of P100 or in an amount 2. WON there was an error in the re-computation of the debt
equal to twice the finance charged required by such creditor in (YES)
connection with such transaction, whichever is the greater, 3. WON the compounding of interest is valid. (YES)
except that such liability shall not exceed P2,000 on any credit 4. WON the liability for violation in Truth in Lending Act was
transaction. Action to recover such penalty may be brought by validly imposed. (YES)
such person within one year from the date of the occurrence of
the violation, in any court of competent jurisdiction. In any RATIO:
action under this subsection in which any person is entitled to a 1. No, the stipulated interest rates were void.
recovery, the creditor shall be liable for reasonable attorney's - RTC and CA: held that the interest rates used were invalid
fees and court costs as determined by the court. for not being numerically quantified on the face of the
(b) Except as specified in subsection (a) of this section, nothing promissory notes.
contained in this Act or any regulation contained in this Act or - UCPB: argued that this was not so because the interest was
any regulation thereunder shall affect the validity or determined in reference to the DBD retail rate. The
enforceability of any contract or transactions. provision providing for such reference must also be read
(c) Any person who willfully violates any provision of this Act or with the stipulation on interest rate review.
any regulation issued thereunder shall be fined by not less than o claimed that the reference was valid and was akin to
P1,00 or more than P5,000 or imprisonment for not less than 6 prevailing rates and prime rates allowed in the case of
months, nor more than one year or both. Polotan vs. Court of Appeals.
(d) No punishment or penalty provided by this Act shall apply o argued that even if the provision that the head of the
to the Philippine Government or any agency or any political branch may determine the rate is void, the separability
subdivision thereof. clause of the contract would save the other provisions
(e) A final judgment hereafter rendered in any criminal from being affected.
proceeding under this Act to the effect that a defendant has
willfully violated this Act shall be prima facie evidence against
such defendant in an action or proceeding brought by any
other party against such defendant under this Act as to all
matters respecting which said judgment would be an estoppel
as between the parties thereto.

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- SC: no merit in these contentions for the following reasons: on the exactness of the computations, which are too
o The provision on interest rates violated the mutuality of often contested.
contracts as provided under Article 1308 of the Civil o since there was a valid demand, the interests and
Code. penalties began to run at the point where UCPB first
" cited the case of Philippine National Bank vs. Court made demand.
of Appeals where there was a similar factual milieu, o the RTC actually recognized that the legal interest
i.e., the bank having the power to review and raise should be imposed.
the interest rate without and the debtor having on o spouses Beluso even originally asked the RTC to
say or whatsoever. In that case, the provision on impose the legal rate in their original pleading.
interest rate was declared void. o although the Court recognized that there was an error
" in this case, the provision on interest rate was in the re-computation, the rate of penalty to be
dependent solely on UCPB for if either the two imposed when the original contract was to be followed
choices in the interest rate provision presented an was considered iniquitous for it was already over and
opportunity for UCPB to fix the rate at will, the above the compounded interest imposed in the
bank can easily choose such an option, hence it contract.
violated the mutuality of contracts. o iniquitous or unconscionable rates of penalty may also
" the provision that the rate may be determined by be reduced by the courts.
the branch head gave the bank an unfettered
discretion on what rate to use, and the 3. Yes, compounding of interest is valid.
determination referencing the DBD retail rate was - the provision was neither nullified by the RTC or the Court
not akin to the prevailing rates or prime rates of Appeals, nor assailed by the spouses Beluso in their
allowed in the Polotan case, for in the latter case, original petition.
there was a fixed margin over the reference rate, - compounding of interest had also been declared legal by
which was absent in this case, hence, again, it gave the Court in Tan vs. Court of Appeals.
the bank unfettered discretion.
" the clause on interest rate review violated the 4. Yes, the liability under the Truth in Lending Act
mutuality of contracts, for the bank could give as was validly imposed.
much weight as it desired to the enumeration - Section 6 (a) of the Truth in Lending Act provides that action
considerations. to recover penalty under said section may be brought by
o The provision on interest rates violated the Truth in person injured within one year from the date of the
Lending Act. For not having numerically quantified the occurrence of the violation in any court of competent
interest and other charges, the provision failed to jurisdiction.
disclose the true finance charges in connection with the o UCPB: argued that since the spouses Beluso did not
extensions of credit, which is a form of deception specifically allege violation of the act, then the penalty
prohibited under the said act and the Court could not could not be imposed.
countenance. o SC: said that it is not the title of the pleadings or
- The interest rate stipulated being void, the legal rate of 12% allegations which are controlling, but the contents of
would apply. the allegations themselves.
- when the spouses Beluso alleged that contract did not
2. Yes, there was error in the re-computation of the provide for the quantity of interest, it was implied that they
debt. were alleging a violation of the act.
- UCPB: claimed that the interest charges, penalty charges, o UCPB: argued that since violations of the Truth in
and attorneys fees had been erroneously excluded by the Lending Act are criminal offenses, allegations cannot
RTC and the Court of Appeals. be implied.
- Spouses Beluso: argued that since the demand for o SC: said that UCPB failed to distinguish between
collection made by UCPB was for a considerably bigger Section 6 (a) and Section 6 (c). The first imposes a civil
amount that the proper amount, the demand was void, penalty and the latter, a criminal penalty. The spouses
hence, there would have been no default, and so interests Beluso may choose which remedy to pursue.
and penalties would not commence to run. - UCPB: argued that its right to due process was violated for
- SC: agreed with UCPB. the action was filed in the wrong venue.
o default commences upon judicial or extrajudicial - SC: said that the joinder of causes of action under the act,
demand. The Amount demanded in excess of the as provided under Section 5 thereof, was to be made in the
proper amount does not nullify a demand, which RTC. This was so in this case.
remains valid with respect to the proper amount. A
contrary ruling would put commercial transactions in DISPOSITIVE: The petition was partly granted. The stipulated
disarray, as validity of demands would be dependent interest rate was void, but there was error in the re-computation
of the debt.

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5. Usury 3. The rate of increase in the price levels; and

a. General Concepts 4. Such other relevant criteria as the Monetary Board may
adopt.
Art. 1175 Usurious transactions shall be governed by special
laws. Sec. 5 In computing the interest on any obligation, promissory
note or other instrument or contract, compound interest shall
Art. 1957 Contracts and stipulations, under any cloak or not be reckoned, except by agreement: Provided, That
device whatever, intended to circumvent the laws against usury whenever compound interest is agreed upon, the effective rate
shall be void. The borrower may recover in accordance with the of interest charged by the creditor shall not exceed the
laws on usury. equivalent of the maximum rate prescribed by the Monetary
Board, or, in default thereof, whenever the debt is judicially
claimed, in which last case it shall draw six per centum per
Art. 1961 Usurious contracts shall be governed by the Usury
annum interest or such rate as may be prescribed by the
Law and other special laws, so far as they are not inconsistent
Monetary Board. No person or corporation shall require
with this Code.
interest to be paid in advance for a period of more than one
year: Provided, however, That whenever interest is paid in
Act 2655 advance, the effective rate of interest charged by the creditor
Sec. 1 The rate of interest for the loan or forbearance of any shall not exceed the equivalent of the maximum rate
money goods, or credits and the rate allowed in judgments, in prescribed by the Monetary Board.
the absence of express contract as to such rate of interest, shall
be six per centum per annum or such rate as may be Sec. 9-a The Monetary Board shall promulgate such rules and
prescribed by the Monetary Board of the Central Bank of the regulations as may be necessary to implement effectively the
Philippines for that purpose in accordance with the authority provisions of this Act.
hereby granted.

Central Bank Circular No. 905-82, Sec. 1 The rate of

Sec. 1-a The Monetary Board is hereby authorized to
interest, including commissions, premiums, fees and other
prescribe the maximum rate or rates of interest for the loan or
charges, on a loan or forbearance of any money, goods, or
renewal thereof or the forbearance of any money, goods or
credits, regardless of maturity and whether secured or
credits, and to change such rate or rates whenever warranted
unsecured, that may be charged or collected by any person,
by prevailing economic and social conditions.
whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
In the exercise of the authority herein granted, the Monetary
Board may prescribe higher maximum rates for loans of low
- Historically, the lending of money at an interest was frowned
priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops finance companies and other upon. An example of this was the view of Christian law that
usury is a sin and a ground for excommunication.
similar credit institutions although the rates prescribed for
- Under Roman law, a ceiling was imposed for interest rate that
these institutions need not necessarily be uniform. The
may be charged. It was very close to the modern-day legal
Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings, interest rate of 12%
- In our jurisdiction, the Civil Code and Act. 2655 (or the
including deposits and deposit substitutes, or loans of financial
Usury Law) declares usury, or the lending of money at
intermediaries.
interest in excess of the maximum rates allowed by
law, as an illegal act.
Sec. 4-a The Monetary Board may eliminate, exempt from, or
suspend the effectivity of, interest rate ceilings on certain types - However, Central Bank Circular No. 905 has effectively lifted
the ceilings on interest rates; usury, in effect, is legally non-
of loans or renewals thereof or forbearances of money, goods,
existent.
or credit, whenever warranted by prevailing economic and
- The circular, however, did not repeal the Civil Code
social conditions.
provisions on usury nor did it repeal the Usury Law; it merely
suspended the operation of both.
Sec. 4-b In the exercise of its authority to fix the maximum
rate or rates of interest under this Act, the Monetary Board
shall be guided by the following:

1. The existing economic conditions in the country and the

general requirements of the national economy;

2. The supply of and demand for credit;

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Advocates for Truth in Lending, Inc. and Olaguer v. Bangko o implied repeal is not taken lightly by the court. In the
Sentral Monetary Board (2013) Reyes absence of an express repeal, a subsequent law cannot
Petitioner: Advocates for Truth in Lending, Inc. and Eduardo B. be construed as repealing a prior law unless an
Olaguer (ATL) irreconcilable inconsistency and repugnancy exists. The
Respondents: Bangko Sentral Monetary Board Court found no such thing between the Usury Law and
Concept: Usury; General Concepts RA 7653.

Doctrine: DISPOSITIVE: Deny petition.

See notes below on the application of interest rate as provided
in the Eastern Shipping Lines Case. Notes on application of interest (from Eastern
Shipping Lines vs. Court of Appeals):
Brief Facts:
The Monetary Board issued CB Circular No. 905, which provided 1) For breach of obligations consisting of payment of a sum of
that the rate of interest shall not be subject to any ceiling money.
prescribed under or pursuant to the Usury Law. Pres. Ramos a) Apply rate as stipulated.
signed RA 7653, which replaced the CB with the Bangko Sentral. b) If rate is not stipulated, but interest is intended, apply
ATL filed a petition for certiorari to prohibit the Monetary Board legal rate of 12% per annum.
of the Bangko Sentral from implementing CB Circular No. 905. c) Interest due shall earn legal interest from judicial
demand.
ISSUES: 2) For breach of obligations other than sum of money.
1. WON the Monetary Board of the Central Bank was within a) 6% per annum at the discretion of the court.
the bounds of law when it issued CB Circular 905. (YES) b) Interest applied from demand when liquidated,
2. WON the Monetary Board of the Bangko Sentral may otherwise, from promulgation of judgment.
continue to implement CB Circular 905. (YES) 3) When judgment becomes final, 12%.

RATIO: b. Usurious Acts

1. Yes, the Monetary Board of the Central Bank was
within the bounds of law. Act 2655
- ATL: argued that the Monetary Board of the Central Bank Sec. 2 No person or corporation shall directly or indirectly
committed an act without the bounds of law for it was only take or receive in money or other property, real or personal, or
authorized to prescribe or set the maximum rates of interest choses in action, a higher rate of interest or greater sum or
and nothing in PD 1684 authorized it to lift or suspend the value, including commissions, premiums, fines and penalties,
limits of interest on all credit transactions. The CB was also for the loan or renewal thereof or forbearance of money,
promulgated without the benefit of a public hearing. goods, or credits, where such loan or renewal or forbearance is
- SC: admitted that the CB suspended the Usury Law. secured in whole or in part by a mortgage upon real estate the
However, the Court did not find anything illegal or title to which is duly registered, or by any document conveying
unconstitutional in this suspension. such real estate or an interest therein, than twelve per centum
o a law cannot be repealed by a circular issued by an per annum or the maximum rate prescribed by the Monetary
executive agency, for only a law can repeal a law. This Board and in force at the time the loan or renewal thereof or
principle was not violated by the CB, for it merely forbearance is granted: Provided, That the rate of interest
suspended the usury law. under this section or the maximum rate of interest that may be
o implementation of the CB does not mean that banks or prescribed by the Monetary Board under this section may
financial institutions may demand any rate of interest. likewise apply to loans secured by other types of security as
Iniquitous rates may be declared void. may be specified by the Monetary Board.

2. Yes, the Monetary Board of the Bangko Sentral Sec. 3 No person or corporation shall directly or indirectly
may continue implement CB Circular 905. demand, take, receive or agree to charge in money or other
- ATL: argued that even if the Monetary Board of the Central property, real or personal, a higher rate or greater sum or value
Bank had the power to suspend the Usury Law, this power for the loan or forbearance of money, goods, or credits where
was not vested in the Monetary Board of the Bangko such loan or forbearance is not secured as provided in Section
Sentral, for RA 7653 expressly repealed RA 265 and did not two hereof, than fourteen per centum per annum or the
reenact Section 109 thereof. maximum rate or rates prescribed by the Monetary Board and
- SC: said that Section 109 covered only loans extended by in force at the time the loan or forbearance is granted.
banks, whereas Section 1-a of the Usury Law applies to all
loans or renewals thereof.
o had RA 7653 intended to repeal Section 1-a of Act 2655
(Usury Law), it would have been so stated.

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Sec. 4 No pawnbroker or pawnbroker's agent shall directly or the rates fixed in this Act.
indirectly stipulate, charge, demand, take or receive any higher
rate or greater sum or value for any loan or forbearance than Sec. 7 All covenants and stipulations contained in
two and one-half per centum per month when the sum lent is conveyances, mortgages, bonds, bills, notes, and other
less than one hundred pesos; two per centum per month when contracts or evidences of debts, and all deposits of goods or
the sum lent is one hundred pesos or more, but not exceeding other things, whereupon or whereby there shall be stipulated,
five hundred pesos; and fourteen per centum per annum when charged, demanded, reserved, secured, taken, or received,
it is more than the amount last mentioned; or the maximum directly or indirectly, a higher rate or greater sum or value for
rate or rates prescribed by the Monetary Board and in force at the loan or renewal or forbearance of money, goods, or credits
the time the loan or forbearance is granted. A pawnbroker or than is hereinbefore allowed, shall be void: Provided, however,
pawnbroker's agent shall be considered such, for the benefits That no merely clerical error in the computation of interest,
of this Act, only if he be duly licensed and has an establishment made without intent to evade any of the provisions of this Act,
open to the public. shall render a contract void: Provided, further, That parties to a
loan agreement, the proceeds of which may be availed of
It shall be unlawful for a pawnbroker or pawnbroker's agent to partially or fully at some future time, may stipulate that the rate
divide the pawn offered by a person into two or more fractions of interest agreed upon at the time the loan agreement is
in order to collect greater interest than the permitted by this entered into, which rate shall not exceed the maximum
section. allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the
It shall also be unlawful for a pawnbroker or pawnbroker's Monetary Board: And Provided, finally, That nothing herein
agent to require the pawner to pay an additional charge as contained shall be construed to prevent the purchase by an
insurance premium for the safekeeping and conservation of innocent purchaser of a negotiable mercantile paper, usurious
the article pawned. or otherwise, for valuable consideration before maturity, when
there has been no intention on the part of said purchaser to
- The Usury Law is only applicable in a case of loan or evade the provisions of this Act and said purchase was not a
forbearance of money, goods, or credit. part of the original usurious transaction. In any case, however,
- It does NOT apply to other contracts, such as conditional the maker of said note shall have the right to recover from said
sales based on installment plans. original holder the whole interest paid by him thereon and, in
o The increase in the price is not considered a mere pretext case of litigation, also the costs and such attorney's fees as
to cover a usurious loan. may be allowed by the court.
o Such increase when the sale is on credit, is called a time
price differential and is not the interest within the Sec. 8 All loans under which payment is to be made in
meaning of the Usury Law agricultural products or seed or in any other kind of
o It serves to cover expenses in such sales on credit and commodities shall also be null and void unless they provide
also encourages cash sales. that such products or seed or other commodities shall 6e
appraised at the time when the obligation falls due at the
c. Remedies current local market price: Provided, That unless otherwise
stated in a document written in a language or dialect
Art. 1413 Interest paid in excess of the interest allowed by the intelligible to the debtor and subscribed in the presence of not
usury laws may be recovered by the debtor, with interest less than two witnesses, any contract advancing money to be
thereon from the date of the payment. repaid later in agricultural products or seed or any other kind
of commodities shall be understood to be a loan, and any
person or corporation having paid otherwise shall be entitled
Act 2655
in case action is brought within two years after such payment
Sec. 6 Any person or corporation who, for any such loan or
or delivery to recover all the products or seed delivered as
renewal thereof or forbearance, shall have paid or delivered a
interest, or the value thereof, together with the costs and
higher rate or greater sum or value than is hereinbefore
attorney's fees in such sum as may be allowed by the court.
allowed to be taken or received, may recover the whole
Nothing contained in this section shall be construed to prevent
interest, commissions, premiums penalties and surcharges paid
the lender from taking interest for the money lent, provided
or delivered with costs and attorneys' fees in such sum as may
such interest be not in excess of the rates herein fixed.
be allowed by the court in an action against the person or
corporation who took or received them if such action is
brought within two years after such payment or delivery:
Provided, however, That the creditor shall not be obliged to
return the interest, commissions and premiums for a period of
not more than one year collected by him in advance when the
debtor shall have paid the obligation before it is due, provided
such interest, and commissions and premiums do not exceed
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Sec. 9 The person or corporation sued shall file its answer in 2) Remedy of Creditor
writing under oath to any complaint brought or filed against
said person or corporation before a competent court to - The nullity of the usurious interest stipulated does not bar
recover the money or other personal or real property, seeds or the creditor from collecting the principal amount of the loan
agricultural products, charged or received in violation of the from the debtor.
provisions of this Act. The lack of taking an oath to an answer - The principal amount, therefore, may still be recovered
to a complaint will mean the admission of the facts contained through judicial action. And in case of such demand, and the
in the latter. debtor incurs in delay, then the principal amount shall earn
interest from date of the demand.
Sec. 9-a The Monetary Board shall promulgate such rules and
regulations as may be necessary to implement effectively the DEPOSIT
provisions of this Act.
I. THE CONCEPT OF DEPOSIT
Sec. 10 Without prejudice to the proper civil action violation
of this Act and the implementing rules and regulations Art. 1962 A deposit is constituted from the moment a person
promulgated by the Monetary Board shall be subject to receives a thing belonging to another, with the obligation of
criminal prosecution and the guilty person shall, upon safely keeping it and of returning the same. If the safekeeping
conviction, be sentenced to a fine of not less than fifty pesos of the thing delivered is not the principal purpose of the
nor more than five hundred pesos, or to imprisonment for not contract, there is no deposit but some other contract.
less than thirty days nor more than one year, or both, in the
discretion of the court, and to return the entire sum received as Art. 1964 A deposit may be constituted judicially or
interest from the party aggrieved, and in the case of non- extrajudicially.
payment, to suffer subsidiary imprisonment at the rate of one
day for every two pesos: Provided, That in case of
Art. 1967 An extrajudicial deposit is either voluntary or
corporations, associations, societies, or companies the
necessary.
manager, administrator or gerent or the person who has
charge of the management or administration of the business
- A deposit is an obligation constituted from the moment of
shall be criminally responsible for any violation of this Act.
delivery of the property belonging to another for the
purpose of safekeeping and eventual return.
- The Usury Law is only applicable in a case of loan or
- It may be judicial, extrajudicial, voluntary and necessary.
forbearance of money, goods, or credit.
- The principal obligation in any kind of deposit is the
- It does NOT apply to other contracts, such as conditional
safekeeping of the thing and its eventual return.
sales based on installment plans.
o The increase in the price is not considered a mere pretext
Sources of deposit: not just by contract
to cover a usurious loan.
o Such increase when the sale is on credit, is called a time
Object:
price differential and is not the interest within the
GR: movable
meaning of the Usury Law
XPN: judicial deposit can involve even immovable
o It serves to cover expenses in such sales on credit and
also encourages cash sales.
Obligation:
1. Depositary: safekeeping then return
1) Remedy of Debtor
2. Depositor: transfer object

- Should the debtor pay under the usurious agreement, his

Deposit: If there is a stipulation on penalty
remedy is to recover the amount he paid as interest under
- Roman law concept of depositum, a contract of
such usurious agreement.
neighborliness, which is the gratuitous deposit of goods for
- There is no conflict between Sec. 6 of the Usury Law and Art.
the benefit of the depositor
1413 of the Civil Code; both allow for the recovery of the
- It is an obligation constituted from the moment of delivery
whole interest paid under the usurious interest.
of property belonging to another for the purpose of
o Art. 1413 only adds that the whole interest to be
safekeeping and eventual return
recovered shall be recovered with interest, accruing from
- Principal obligation and distinguishing characteristic is the
the date of payment.
safekeeping and its eventual return
- Sec. 9 of the Usury does not apply when the defendant is the
one alleging usury.

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Types of Deposit: - An extrajudicial deposit that arises out of a contract
1. Judicial the obligation arises as a consequence of law, o Thus, meeting if the minds is required between the
allowing the issuance of a judicial order constituting a depositor and the chosen depositary.-
deposit o A deposit is a real contract, requiring delivery for its
2. Extrajudicial perfection
a. Voluntary obligation arises as a consequence of a o May be oral or written, may be gratuitous or onerous
contract o A contract to deposit, or an agreement to constitute a
b. Necessary obligation arises as a consequence of law deposit, is a valid consensual contract.
or quasi-contract
BPI v. IAC (1988) Cortes, J.
Deposit Mutuum Petitioner: Bank of the Philippine Islands
For safekeeping or custody For consumption Respondent: Intermediate Appellate Court and Rizaldy
Depositor can demand return Period to return must be Zshornack
at any time respected by lender Concept: Voluntary Deposit
Compensation is essentially Compensation may be
gratuitous (except by mutual gratuitous, or with a Doctrine:
agreement) stipulation to pay interest In a deposit, the safekeeping of the object is the principal
Any property Fungible thing purpose. This is constituted from the moment a person receives
Depositor and depositary Lender and borrower a thing belonging to another, with the obligation of safely
relationship relationship keeping it and of returning the same. The intention and the
subsequent acts of the parties determine the nature of the
arrangement between the parties.
II. VOLUNTARY DEPOSIT
Brief Facts:
Zshornack entrusted $3,000 to COMTRUST for safekeeping.
A. General Concepts
When the amount was requested to be returned, the bank
refused, alleging that the amount was already credited to
Art. 1963 An agreement to constitute a deposit is binding,
Zshornacks account. Zshornack filed a complaint against
but the deposit itself is not perfected until the delivery of the
COMTRUST for the recovery of the $3,000.
thing.

ISSUES:
Art. 1968 A voluntary deposit is that wherein the delivery is 1. W the delivery of the cash was to sell it at prevailing
made by the will of the depositor. A deposit may also be made currency rates or for safekeeping (SAFEKEEPING)
by two or more persons each of whom believes himself entitled 2. WON the bank is liable (NO)
to the thing deposited with a third person, who shall deliver it
in a proper case to the one to whom it belongs. RATIO:
1. The delivery was for safekeeping.
Art. 1969 A contract of deposit may be entered into orally or - Document states that the US$3,000.00 was received by the
in writing. bank for safekeeping
o Subsequent acts also show that the intent of the parties
Art. 1965 A deposit is a gratuitous contract, except when was really for the bank to safely keep the dollars and to
there is an agreement to the contrary, or unless the depositary return it to Zshornack at a later time ! he did demand
is engaged in the business of storing goods. the return on May 10, 1976 (over 5 months later)
o This arrangement is that contract defined under Art.
1962: A deposit is constituted from the moment a
Art. 1966 Only movable things may be the object of a
person receives a thing belonging to another, with the
deposit.
obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not
Art. 1995 A deposit its extinguished: the principal purposes of the contract, there is no
deposit but some other contract.
(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.

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- Object of the contract between Zshornack and BPI v. IAC
COMTRUST was foreign exchange SGS: Remember this case contract of deposit
o Transaction governed by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Triple-V Food Services Inc. v. Filipino Merchants Insurance Co.
Transactions, which provide the following (2005) Nachura, J.
" Transactions shall NOT be effected when they are Petitioner: Triple-V Food Services Inc.
owned by and in the name of banks: money Respondent: Filipino Merchants Insurance Company (FMIC)
expressed in foreign currencies Concept: Deposit; Voluntary Deposit; General Concepts
" All receipts of foreign exchange shall be sold daily
to the Central Bank within one business day Doctrine:
following the receipt of such foreign exchange In a contract of deposit, the depositary receives an object
o Document and subsequent acts show that they belonging to the depositor, and has the obligation of safely
intended to safekeep the foreign exchange, and return keeping the object and returning the same to the latter. The
it later to Zshornack contract of deposit may be constituted without consideration. It
is a real contract, perfected upon the delivery of the object by
o Parties did not intend to sell the US dollars to the the depositor to the depositary.
Central Bank within one business day from receipt; Brief Facts:
otherwise, contract of depositum would never have De Asis, an employee of Crispa Textile Inc., dined at Triple-Vs
been entered into at all Kamayan Restaurant. She availed of the valet parking service of
- The mere safekeeping of the greenbacks, without selling the restaurant for the company car assigned to her. However,
them to the Central Bank within one business day from the after dining, the car was discovered to be lost and could not be
receipt, is a transaction which is not authorized by CB recovered. Covered under a policy, Crispa Textile was
Circular No. 20 and makes it fall under the general class of indemnified by FMIC; in turn, FMIC was subrogated into Crispas
prohibited transactions rights and filed suit against Triple-V for the loss of the car.
o Art. 5 of the NCC provides that it is void, having been
executed against the provisions of a ISSUES:
mandatory/prohibitory law 1. WON Triple-V was liable (YES)
o It affords neither of the parties a cause of action ! pari 2. WON the provision in the parking ticket served as a valid
delicto waiver (NO)

2. No, the bank is NOT liable. Since the nullity arises RATIO:
from an illegal act, the parties will be left as they 1. YES. Triple-V is liable under the contract of
are, as a result of being in pari delicto. deposit.
- BPI: It is not liable because it is Garcia who is personally - When De Asis availed of the valet service of Triple-V in its
liable, having exceeded his powers when he entered into restaurant, De Asis expected the safe return of the vehicle at
the transaction the end of her meal. Triple-V, therefore, was constituted as a
- SC: Bank did not question the document, which is an depositary of the said car.
actionable document, thereby admitting Garcias authority, o In a contract of deposit, the depositary receives
and the banks power, to enter into the contract an object belonging to another (depositor), with the
o Stranger deals with the corporation on the faith of the obligation of safely keeping and returning the
ostensible authority exercised by some of the corporate said object.
officers; reasonable that the corporation should be o A deposit may be constituted even without any
required, if it denies its authority, to state such defense consideration; the depositary need not be paid a fee
in his answer before the obligation attaches.
o To absolve a corporation every time an officer enters - Triple-V clearly failed in complying with its obligation as the
into a contract beyond corporate powers, is to cast depositary of the car. Hence, its liability.
corporations in so perfect a mold that transgressions
and wrongs by such artificial beings become impossible
- When the nullity proceeds from the illegality of the cause
or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no
cause of action against each other. (Art. 1411)
- Only remedy is for the State to prosecute the parties

DISPOSITIVE: AFFIRMED with MODIFICATIONS.

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2. NO. There was no waiver. Art. 1977 The depositary cannot make use of the thing
- SC: The ticket was a contract of adhesion since Triple-V deposited without the express permission of the depositor.
alone prepared it. While they are valid by nature, the Court
will not hesitate to rule out blind adherence thereto if they Otherwise, he shall be liable for damages.
prove to be one-sided under the attendant fact and
circumstances. However, when the preservation of the thing deposited
- De Asis deposited the car partly of Triple-Vs enticement for requires its use, it must be used but only for that purpose.
customers: providing a safe parking space within which to
leave their vehicles while they dine.
Art. 1978 When the depositary has permission to use the
- De Asis having fully entrusted the vehicle, she fully expects
thing deposited, the contract loses the concept of a deposit
the safe return of the vehicle after her visit in Kamayan was
and becomes a loan or commodatum, except where
over.
safekeeping is still the principal purpose of the contract.
- Hence, Triple-V cannot be allowed to use the ticket as a
shield from any esponsibility for any loss or damage to
The permission shall not be presumed, and its existence must
vehicles or to the valuables contained therein.
be proved.

DISPOSITIVE: RTC and CA affirmed.

Art. 1981 When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition,
Triple-V v. Filipino Merchants
and he shall be liable for damages should the seal or lock be
Are all contracts for parking contracts of deposit? Or are there
broken through his fault.
critical factors in the case that, if not present in another situation,
would lead to a different conclusion?
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
If not valet parking, it is a contract of lease (use of space)
because no transfer of object and expectation is different just
As regards the value of the thing deposited, the statement of
to use the space
the depositor shall be accepted, when the forcible opening is
imputable to the depositary, should there be no proof to the
A valet is a contract of deposit.
contrary. However, the courts may pass upon the credibility of
the depositor with respect to the value claimed by him.
B. Obligation to Safekeep

When the seal or lock is broken, with or without the

1. Way of the Deposit
depositary's fault, he shall keep the secret of the deposit.

Art. 1974 The depositary may change the way of the deposit
if under the circumstances he may reasonably presume that the Art. 1982 When it becomes necessary to open a locked box
depositor would consent to the change if he knew of the facts or receptacle, the depositary is presumed authorized to do so,
of the situation. However, before the depositary may make if the key has been delivered to him; or when the instructions
such change, he shall notify the depositor thereof and wait for of the depositor as regards the deposit cannot be executed
his decision, unless delay would cause danger. without opening the box or receptacle.

Way of the Deposit

Art. 1975 The depositary holding certificates, bonds,
- Delivery in a specific manner to the depositary by the
securities or instruments which earn interest shall be bound to
depositor of the object of the deposit for safekeeping
collect the latter when it becomes due, and to take such steps
as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to
law.

The above provision shall not apply to contracts for the rent of
safety deposit boxes.

Art. 1976 Unless there is a stipulation to the contrary, the

depositary may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall own
or have a proportionate interest in the mass.

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Rules to be Followed by the Depositary Brief Facts:
a) The depositary may not change the way of the deposit Agro-Industrial and Sps. Pugao rented a safety deposit box from
unless: Security Bank which was kept in the latters possession.
1. There is a presumption of consent based on the Certificates of title of 2 lots sold by Pugaos to Agro-Industrial
circumstances, and were kept in the box until Agro-Industrial has fully paid the
2. The depositary notifies the depositor and waits for the purchase price of the sale. In order for the box to be opened, a
decision. The obligation to notify does not apply if key in the possession of the renters and the guard key in the
delay would cause danger to the object of the deposit possession of the bank were needed. Joint signatures of the
b) The depositary must: renters were likewise required. When Agro-Industrial and the
1. Collect the interest of certificates, bonds, securities or Pugaos went to the bank to have the safety deposit box opened,
instruments when they become due, and it was found that its contents were missing. Agro-Industrial
2. Must take necessary measures to preserve their value missed out on an offer to purchase said lots due to the delay in
and corresponding rights. This obligation does not the reconstitution of titles. As a result, it sued the bank for
apply if the certificates, bonds, securities or instruments damages. The bank invokes the conditions in their lease
are kept pursuant to a contract for the rent of safety agreement of the safety deposit box, wherein the bank explicitly
deposit boxes. declared that it is not a depositary of the contents and assumes
c) The depositary may commingle grain or other articles of the no liability in connection therewith.
same kind and quality unless there is a stipulation to the
contrary ISSUES:
d) The depositary cannot use the thing deposited unless: 1. WON the contract for rent od a safety deposit box is a
1. There is express and proven permission of the contract of lease (NO)
depositor, in which case the deposit is considered an 2. WON the stipulation that the bank should not be held liable
irregular deposit. In this first exception, the principal for any loss is valid (NO)
purpose of the irregular deposit is still safekeeping. If
safekeeping is not the principal purpose, then the RATIO:
contract is not a deposit and may be a loan. 1. No. The contract is a special kind of deposit.
2. The preservation of the object of the deposit requires - The questioned contract is not an ordinary contract of lease
its use. In this second exception, use of the object by o It cannot be characterized as an ordinary lease contract
the depositary is for the limited purpose of because the full and absolute possession and control of
preservation. the safety deposit box was not given to the renters.
e) The depositary must return a closed and sealed object in o The guard key of the box remained with the bank and
the same condition and must keep the secret of the deposit without this key, neither of the renters could open the
if the seal or lock is broken box
f) The depositary may open a locked box or receptacle only if: o The bank could not likewise open the box without the
1. There is express authority, since the parties are free to renters key
stipulate on this. - Neither could Art. 1975 (cited by the CA in its decision) be
2. There is presumed authority, such as when the key to invoked as an argument against the deposit theory because
the lock has been delivered, or the instructions of the clearly, the first paragraph of such provision cannot apply to
depositor as regards the deposit cannot be executed a depositary of certificates, bonds, securities, or instruments
without opening the box or receptacle. which earn interest if such documents are kept in a rented
safety deposit box which the depositary cannot open
CA Agro-Industrial Development Corporation v. CA (1993) without the renter being present.
Davide, Jr., J - It cannot be considered as an ordinary contract of deposit
Petitioner: CA Agro-Industrial Development Corp. as the absolute control and possession over the thing
Respondents: CA and Security Bank and Trust Company deposited is not given to the depositary
Concept: Voluntary deposit; Obligation to safekeep - However, we adopt the prevailing rule in the US that banks
who rent out safety deposit boxes are depositaries
Doctrine: o Sec. 72 of the General Banking Act 23 provides
Banking institutions who receive in custody funds, documents, that banking institutions who receive in custody funds,
and valuable objects, and rent safety deposit boxes for documents, and valuable objects, and rent safety
safeguarding of such effects are depositaries. The primary deposit boxes for safeguarding of such effects are
function is still found within the parameters of a contract of depositaries
deposit. The renting out of the safety deposit boxes is not o The primary function is still found within the parameters
independent from, but related to this principal function. of a contract of deposit
Stipulations exempting a depositary from liability in case of loss o The renting out of the safety deposit boxes is not
are contrary to law and public policy. independent from, but related to this principal function

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2. No. Such is contrary to law and public policy ISSUE:
- A contract of deposit may be entered into orally or in writing WON estate of Fr. Agustin is obliged to pay back the P6, 641
and parties thereto may establish such stipulations they may (trust-money) which was part of the money confiscated by the
deem convenient provided they are not contrary to law, government (NO)
morals, good customs, public order or public policy
- The responsibility of the depositary is governed by Title I, RATIO:
Book IV CC (Obligations and Contracts) NO; the confiscation of the U.S. government is a
o Accordingly, the depositary would be liable if, in fortuitous event which has the effect of excusing the
performing its obligation, it is found guilty of fraud, debtor (Fr. Agustin) to comply with his obligation
negligence, delay or contravention of the tenor of the - The Roman maxim of major casus est, cui humana infirmitas
agreement resistere non pottest is effected by the Civil Code in Art.
o In the absence of any stipulation prescribing the degree 1105 (now Art. 1174, NCC) which governs the rule on
of diligence required, that of a good father of a family is fortuitous events.
to be observed - By placing the money in the bank and mixing it with his
o Hence, any stipulation exempting the depositary from personal funds, De la Pena did not assume an obligation
any liability arising from the loss of the thing deposited different from that under which he would have lain if such
on account of fraud, negligence or delay would be void deposit had not been made, nor did he make himself liable
for being contrary to law and public policy to repay at all hazards.
- It is not correct to assert that the bank has neither the - In the case at bar, that the money had been confiscated by
possession nor control of the contents of the box since the the government is considered a fortuitous event for it is an
said box itself is located in its premises and under its event which could not be foreseen, or which having been
absolute control. Moreover, the guard key is in the foreseen were inevitable.
possession of the bank and the renters cannot open the box - The fact that he placed the trust fund in the bank in his
without the same. personal account does not add to his responsibility, and
such deposit did not make him a debtor who must respond
DISPOSITIVE: Petition for review partially granted by deleting at all hazards.
award of attorneys fees - There is no need to consider the question of WON he was
negligent in depositing them instead of leaving them at his
CA Agro-Industrial v. CA house, or WON he was negligent in depositing them in his
The object of the deposit: titles personal account instead of a separate account as trustee,
since there was no law prohibiting him from
The SDB = the way of the deposit depositing it as he did and there was no law which
- There is no effect on the contract of deposit because what is changed his responsibility by reason of the
affected is only the way of the deposit deposit.

Roman Catholic Bishop of Jaro v. De la Pena(1913) Powell, J. DISPOSITIVE: CFI reversed. The money was forcibly taken
Petitioner: Bishop of Jaro from the bank by the U.S armed forces; thus, Fr. Agustin was not
Respondents: Gregorio de la Pena, as administrator of the responsible for its loss.
estate of Father Agustin dela Pena !
Concept: Obligation to Safekeep DISSENT: J. Trent
- The sum of P6, 641, being part of a trust fund, was then
Doctrine: clothed with all the immunities and protection the law seeks
Fortuitous events constitute a defense, with the effect of to invest trust funds. However, when he mixed them with his
relieving the debtor of his obligation to the creditor. personal account, he unclothed it of all the protection it
had.
Brief Facts: - If the money was deposited in a separate account as trustee
Fr. De la Pena was a made a trustee by the Bishop of Jaro to or agent, it may be presumed that the military would not
collect and safekeep funds to be used for the construction of a have confiscated for the reason that they were looking for
leper hospital. He then deposited the collected money in his insurgent funds only.
personal account. When war and the revolution broke out, he - Citing US v Thomas, trustees may be held liable even for
was arrested as a political prisoner and his funds in the account fortuitous events in cases where they mix the trust-money
were confiscated by the government, as it was allegedly being with their own, whereby it loses its identity, and they
used for revolutionary purposes. Bishop wants the estate of the become mere debtors.
trustee to repay the trust-money which was also confiscated by - While the majority is correct in saying that there is no law
the US armed forces. prohibiting the act of mixing trust-money with personal
account, the very nature of the trust itself prohibits such act,
since the position of trustee is one of trust.

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- While there is no showing that Fr. De la Pena used the trust- Art. 1981 When the thing deposited is delivered closed and
money for personal purposes, considering the considerable sealed, the depositary must return it in the same condition,
length of time intervened from time of deposit until and he shall be liable for damages should the seal or lock be
confiscation, as well as the records stating that several broken through his fault.
withdrawals and deposits have been made, the facts
strongly indicate that he had as a matter of fat been using Fault on the part of the depositary is presumed, unless there is
the money in violation of the trust imposed in him. proof to the contrary.

Roman Catholic Bishop of Jaro v. De La Pena As regards the value of the thing deposited, the statement of
The Judge would hold the Father liable because he lost the the depositor shall be accepted, when the forcible opening is
thing and violated the deposit imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of
The counsel should advise him to open another account, saying the depositor with respect to the value claimed by him.
it is owned by the Bishop, with the Father acting as agent
When the seal or lock is broken, with or without the
2.Liability for Loss and Damage depositary's fault, he shall keep the secret of the deposit.

Art. 1972 The depositary is obliged to keep the thing safely Art. 1979 The depositary is liable for the loss of the thing
and to return it, when required, to the depositor, or to his heirs through a fortuitous event:
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to (1) If it is so stipulated;
the safekeeping and the loss of the thing, shall be governed by
the provisions of Title I of this Book. (2) If he uses the thing without the depositor's permission;
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must (3) If he delays its return;
observe.
(4) If he allows others to use it, even though he himself may
Art. 1973 Unless there is a stipulation to the contrary, the have been authorized to use the same.
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositary is liable Art. 1990 If the depositary by force majeure or government
for the loss if he deposited the thing with a person who is order loses the thing and receives money or another thing in
manifestly careless or unfit. The depositary is responsible for its place, he shall deliver the sum or other thing to the
the negligence of his employees. depositor

Art. 1977 The depositary cannot make use of the thing Art. 1993 The depositor shall reimburse the depositary for
deposited without the express permission of the depositor. any loss arising from the character of the thing deposited,
unless at the time of the constitution of the deposit the former
Otherwise, he shall be liable for damages. was not aware of, or was not expected to know the dangerous
character of the thing, or unless he notified the depositary of
However, when the preservation of the thing deposited the same, or the latter was aware of it without advice from the
requires its use, it must be used but only for that purpose. depositor.

- Purpose of safekeeping is the distinguishing characteristic

of a contract of deposit
- Responsibility for loss and damage are subject to specific
rules under the Civil Code

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a. Liability of Depositary C. Obligation to Return

Responsibility for loss and damage will attach to the 1. By Whom and To Whom
DEPOSITARY if:
1. The depositary deposits the object with a third person, Art. 1972 The depositary is obliged to keep the thing safely
unless there is a stipulation allowing it. and to return it, when required, to the depositor, or to his heirs
2. If deposit with a third person is allowed, the depositary and successors, or to the person who may have been
deposits the thing with a person who is manifestly careless designated in the contract. His responsibility, with regard to
or unfit. the safekeeping and the loss of the thing, shall be governed by
3. The employees of the depositary are negligent. the provisions of Title I of this Book.
4. The depositary uses the object of the deposit, unless
there was express permission of the depositor, or the use If the deposit is gratuitous, this fact shall be taken into account
was necessary for the limited purpose of preservation. in determining the degree of care that the depositary must
5. The seal or lock of a thing delivered closed and sealed is observe.
broken through the fault of the depositary. Fault is
presumed, unless there is proof to the contrary. If the
Art. 1970 If a person having capacity to contract accepts a
forcible opening of a thing delivered closed and sealed is deposit made by one who is incapacitated, the former shall be
imputable to the depositary, the value of the thing
subject to all the obligations of a depositary, and may be
deposited shall be based on the statement of the depositor,
compelled to return the thing by the guardian, or
unless:
administrator, of the person who made the deposit, or by the
a. There is contrary proof, and
latter himself if he should acquire capacity.
b. The courts determine otherwise based on the credibility
of the depositor.
Art. 1971 If the deposit has been made by a capacitated
6. Even in case of a fortuitous event, depositary is liable if:
person with another who is not, the depositor shall only have
a. It has been stipulated,
an action to recover the thing deposited while it is still in the
b. The depositary uses the thing without the depositors
possession of the depositary, or to compel the latter to pay
permission,
him the amount by which he may have enriched or benefited
c. The depositary delays the return of the object of the
himself with the thing or its price. However, if a third person
deposit, or
who acquired the thing acted in bad faith, the depositor may
d. The depositary allows others to use it, even though the
bring an action against him for its recovery.
depositary may have been authorized to use the same.
7. Even if the depositary is not liable, if the depositary
loses the thing by force majeure or government order, but Art. 1984 The depositary cannot demand that the depositor
receives money or a replacement, the depositary shall prove his ownership of the thing deposited.
deliver the money or replacement to the depositor.
Nevertheless, should he discover that the thing has been
b. Liability of Depositor (only instance of liability) stolen and who its true owner is, he must advise the latter of
- Responsibility for loss or damage will attach to the the deposit.
depositor ONLY IF the depositor delivers a thing the
character of which causes any loss to the depositary, unless: If the owner, in spite of such information, does not claim it
1. At the time of the constitution of the deposit the within the period of one month, the depositary shall be
depositor was not aware of, or was not expected to relieved of all responsibility by returning the thing deposited to
know the dangerous character of the thing, or the depositor.
2. The depositor notified the depositary of the
dangerous character, or the depositary was in any case If the depositary has reasonable grounds to believe that the
aware of the character. thing has not been lawfully acquired by the depositor, the
former may return the same.
c. Liability for Expenses
Art. 1985 When there are two or more depositors, if they are
Art. 1992 If the deposit is gratuitous, the depositor is obliged not solidary, and the thing admits of division, each one cannot
to reimburse the depositary for the expenses he may have demand more than his share.
incurred for the preservation of the thing deposited.
When there is solidarity or the thing does not admit of division,
- If the deposit is gratuitous, the depositor bears the the provisions of Articles 1212 and 1214 shall govern. However,
expenses for the preservation of the thing deposited if there is a stipulation that the thing should be returned to one
- If the deposit is onerous, the depositary bears the of the depositors, the depositary shall return it only to the
expenses of preservation person designated

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 2. What to Return
Art. 1212 Each one of the solidary creditors may do whatever
may be useful to the others, but not anything which may be Art. 1983 The thing deposited shall be returned with all its
prejudicial to the latter. products, accessories and accessions.

Art. 1214 The debtor may pay any one of the solidary Should the deposit consist of money, the provisions relative to
creditors; but if any demand, judicial or extrajudicial, has been agents in article 1896 shall be applied to the depositary.
made by one of them, payment should be made to him.
Art. 1986 If the depositor should lose his capacity to contract
Art. 1986 If the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned
after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his
except to the persons who may have the administration of his property and rights.
property and rights.
- Thing itself
- Plus all its products, accessories and accessions
Art. 1991 The depositor's heir who in good faith may have
- Interest on sums applied to depositarys own use from day
sold the thing which he did not know was deposited, shall only
be bound to return the price he may have received or to assign on which he did so and on those which he still owes after
extinguishment of agency
his right of action against the buyer in case the price has not
been paid him.
3. Where to Return

SGS: Art. 1991 should read The depositarys heir

Art. 1987 If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take
To whom:
the thing deposited to such place; but the expenses for
1. Depositor; or
transportation shall be borne by the depositor.
2. Heirs and successors; or
3. Person designated in the contract
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the
On issues of capacity to contract:
same place where the deposit was made, provided that there
1. If depositor is incapacitated, depository must return to (Art.
was no malice on the part of the depositary.
1970):
a. Guardian or administrator of the depositor
b. Depositor if he should acquire capacity - Place designated; expenses to be borne by depositor
2. If depositor loses capacity to contract after depositing, - No designated place: where thing deposited may be, even
depositor must return to persons who may have if not where deposit was made
administration of depositors property and rights

When there are two or more solidary depositors OR

when the thing is not divisible:
1. If there is a stipulation to return to one of the depositors,
depository shall return it only to the person designated
2. If there is no stipulation:
a. But there is a demand, judicial or extrajudicial, payment
should be made to him
b. If there is no demand, depositary may pay any one of
the depositors

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4. When to Return III. NECESSARY DEPOSIT

Art. 1988 The thing deposited must be returned to the A. General Concepts
depositor upon demand, even though a specified period or
time for such return may have been fixed. Art. 1964 A deposit may be constituted judicially or
extrajudicially.
This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he Art. 1967 An extrajudicial deposit is either voluntary or
have been notified of the opposition of a third person to the necessary.
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the
Art. 1996 A deposit is necessary:
attachment or opposition.

(1) When it is made in compliance with a legal obligation;

Art. 1989 Unless the deposit is for a valuable consideration,
the depositary who may have justifiable reasons for not (2) When it takes place on the occasion of any calamity, such as
keeping the thing deposited may, even before the time fire, storm, flood, pillage, shipwreck, or other similar events.
designated, return it to the depositor; and if the latter should
refuse to receive it, the depositary may secure its consignation
Art. 1966 Only movable things may be the object of a
from the court.
deposit.

- Principal purpose of delivering object to depository:

A deposit may be constituted:
safekeeping
- Judicially
- One of the primary obligations: return object upon demand
- Extrajudicially
- GR: Return upon demand, even though a specified period
o Voluntary
or time has been fixed
o Necessary
- XPN:
" In compliance with a legal obligation
o Thing deposited is judicially attached while in the
" Takes place on the occasion of any calamity
depositarys possession; or
o Depository was notified of the opposition of a third
NECESSARY DEPOSIT
person to the return or the removal of the thing
- Extrajudicial deposit constituted over movable property as a
deposited
consequence of law or quasi-contract, so that no unjust
- For the above exceptions, depository must immediately
enrichment will result from the juridical relation
inform the depositor of the attachment or the opposition,
but it does not imply that obligation to return ceases
B. Examples of Necessary Deposit
o They are exceptions to return upon demand
o Depository may take measures to protect itself, such as
1. Compliance with a Legal Obligation
seeking appropriate protective measures from a court

Art. 1996 A deposit is necessary:

5. Right to Retention

(1) When it is made in compliance with a legal obligation;

Art. 1994 The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of the
(2) When it takes place on the occasion of any calamity, such as
deposit.
fire, storm, flood, pillage, shipwreck, or other similar events.

- Depository has a right of retention as a means or device

Art. 1997 The deposit referred to in No. 1 of the preceding
for the depository to be able to obtain payment of what
article shall be governed by the provisions of the law
may be due
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.

The deposit mentioned in No. 2 of the preceding article shall

be regulated by the provisions concerning voluntary deposit
and by Article 2168

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2. On the Occasion of a Calamity 4. Hotels or Inns

Art. 1996 A deposit is necessary: Art. 1998 The deposit of effects made by the travellers in
hotels or inns shall also be regarded as necessary. The keepers
(1) When it is made in compliance with a legal obligation; of hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees,
(2) When it takes place on the occasion of any calamity, such as of the effects brought by the guests and that, on the part of
fire, storm, flood, pillage, shipwreck, or other similar events. the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of
Art. 1997 The deposit referred to in No. 1 of the preceding their effects.
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on Art. 1999 The hotel-keeper is liable for the vehicles, animals
voluntary deposit. and articles which have been introduced or placed in the
annexes of the hotel.
The deposit mentioned in No. 2 of the preceding article shall
be regulated by the provisions concerning voluntary deposit Art. 2000 The responsibility referred to in the two preceding
and by Article 2168. articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
Art. 2168 When during a fire, flood, storm, or other calamity, the keepers of hotels or inns as well as strangers; but not that
property is saved from destruction by another person without which may proceed from any force majeure. The fact that
the knowledge of the owner, the latter is bound to pay the travellers are constrained to rely on the vigilance of the keeper
former just compensation. of the hotels or inns shall be considered in determining the
degree of care required of him.
- If it is saved from destruction during a calamity without the
knowledge of the owner, the owner is bound to pay the one Art. 2001 The act of a thief or robber, who has entered the
who saved just compensation hotel is not deemed force majeure, unless it is done with the
- Person who saves movable property from destruction is use of arms or through an irresistible force.
considered by law as the depositary
- Owner of the property is bound to pay just compensation
Art. 2002 The hotel-keeper is not liable for compensation if
and is considered by law as the depositor
the loss is due to the acts of the guest, his family, servants or
visitors, or if the loss arises from the character of the things
3. Passenger Baggage with Common Carriers
brought into the hotel.

Art. 1754 The provisions of Articles 1733 to 1753 shall apply

Art. 2003 The hotel-keeper cannot free himself from
to the passenger's baggage which is not in his personal
responsibility by posting notices to the effect that he is not
custody or in that of his employee. As to other baggage, the
liable for the articles brought by the guest. Any stipulation
rules in Articles 1998 and 2000 to 2003 concerning the
between the hotel-keeper and the guest whereby the
responsibility of hotel-keepers shall be applicable.
responsibility of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void.
- Common carriers: persons, corporations, firms or
associations engaged in the business of carrying or
Art. 2004 The hotel-keeper has a right to retain the things
transporting passengers or goods or both, by land, water, or
brought into the hotel by the guest, as a security for credits on
air, for compensation, offering their services to the public
account of lodging, and supplies usually furnished to hotel
- Law on common carriers governs baggage not in the
guests.
custody of the passenger or the passengers employees !
requires extraordinary diligence in the vigilance over goods
- Passenger baggage deposited with the common carrier is
considered a necessary deposit, subjecting the common
carrier, considered by law as the depository, to the same
rules on necessary deposit as hotels or inns

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YHT Realty Corporation vs. Court of Appeals Tinga, J. consummation, unless the reason for the loss is force
Petitioners: YHT Realty Corporation (YHT), Erlinda Lainez majeure, which in case something is stolen, force
(Lainez) and Anicia Payam (Payam) majeure only occurs when the stealing is done with the
Respondents: Court of Appeals (CA) and Maurice McLoughlin use of arms or through an irresistible force.
(McLoughlin) o The management also failed to notify McLoughlin of
Concept: Deposits with Hotels or Inns the incident and waited for him to discover the taking
before it disclosed the matter to him.
Doctrine: o That Tan was close to McLoughlin was not a defense.
Disclaimer of liability by a hotel or inn or items deposited with it Mere close companionship and intimacy are not
contravenes Article 2003 of the Civil Code. The hotel or inn can enough to warrant the conclusion that Tan was his wife
only be exculpated from liability when loss occurs through force or that she was authorized to have access to the safety
majeure, which in case of stolen items, when the stealing is done deposit box.
with the use of arms or through an irresistible force, or when the o That Tan was a visitor of McLoughlin was also not a
loss is due to acts of the guest, his family or visitors, but in the defense. While Article 2002 of the Civil Code provides
latter case, only when there is no concurrent negligence on part that the hotel-keeper is not liable for compensation if
of the hotel or inn. the loss is due to the acts of the guest, his family,
servants or visitors, this is only the case when there is no
Brief Facts: concurrent negligence on part of the hotel. Tropicana
Tropicana, owned by YHT, rents safety deposit boxes to its was negligent.
guests, disclaiming, through the rental agreement, liability for
lost items. On two occasions, McLoughlin lost money placed 2. No, YHT, Lainez, and Payam cannot disclaim
within the safety deposit box rented by him from the hotel. liability under paragraph 2 of the terms on the
rental of the safety deposit box.
ISSUES: - SC: The paragraph contravenes Article 2003 of the Civil
1. Whether or not the conclusion anent the loss and the Code, which provides that the hotel-keeper cannot free
finding of negligence on part of YHT was supported by himself from responsibility by posting notices to the effect
evidence. Yes. that he is not liable for the articles brought by the guest and
2. Whether or not YHT, Lainez, and Payam can disclaim liability that any stipulation between the hotel-keeper and the guest
under paragraph 2 of the terms on the rental of the safety whereby the responsibility of the former as set forth in
deposit box. No. Articles 1998 to 2001 is suppressed or diminished shall be
void.
RATIO: o The provision is an expression of public policy. The
1. Yes, the conclusion anent the loss and the finding hotel business like the common carriers business is
of negligence were supported by evidence. imbued with public interest. Hotelkeepers are bound to
- RTC (affirmed by CA): these were sufficiently shown by provide not only lodging for hotel guests but also
McLoughlins direct and straightforward manner of testifying security to their persons and belongings. These twin
in court. If he had not lost his dollars, he would not have duties are the essence of the business and cannot be
gone through the trouble and personal inconvenience of negated or diluted by any contrary stipulation.
seeking aid and assistance from the Office of the President, o To hold hotelkeepers or innkeepers liable for the
DOJ, police authorities, and the City Fiscals Office. effects of their guests, it is not necessary that they be
o As to the loss prior the one where a confrontation took actually delivered to the innkeepers or their employees.
place, considering the admission of Lainez, and Payam It is enough that such effects are within the hotel or inn.
that they allowed Tan to open the box, it was logical Thus, a fortiori, liability should be enforced when the
and reasonable to presume that his personal assets missing items are taken without the guests knowledge
were taken by Tan through the cooperation of Payam and consent from a safety deposit box provided by the
and Lainez. hotel itself.
- SC: the petition was a review through Rule 45, and the
thrust of said rule is the resolution only of questions of law DISPOSITIVE: Affirm CA decision.
and any peripheral factual question addressed to the Court
is beyond the bounds of this mode of review. YHT Realty Corp. v. CA
o As to the finding of negligence, since the safety deposit Is this a VOLUNTARY or a NECESSARY deposit?
box cannot be opened through the personal request of
a registered guest and with assistance from the
management, with more reason that access to safety
deposit box should be denied if the one requesting is a
stranger. Thus, in case of loss, the inevitable conclusion
is that the management had at least a hand in its

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IV. JUDICIAL DEPOSIT V. WAREHOUSE RECEIPTS

Art. 1964 A deposit may be constituted judicially or A. General Concepts

extrajudicially.
Act 2137, Sec. 1 Persons who may issue receipts
Art. 2005 A judicial deposit or sequestration takes place when Warehouse receipts may be issued by any warehouseman.
an attachment or seizure of property in litigation is ordered.
Act 2137, Sec. 2 Form of receipts; essential terms
Art. 2006 Movable as well as immovable property may be the Warehouse receipts need not be in any particular form but
object of sequestration. every such receipt must embody within its written or printed
terms:
(a) The location of the warehouse where the goods are stored,
Art. 2007 The depositary of property or objects sequestrated
cannot be relieved of his responsibility until the controversy
(b) The date of the issue of the receipt,
which gave rise thereto has come to an end, unless the court
so orders.
(c) The consecutive number of the receipt,

Art. 2008 The depositary of property sequestrated is bound (d) A statement whether the goods received will be delivered
to comply, with respect to the same, with all the obligations of to the bearer, to a specified person or to a specified person or
a good father of a family. his order,

Art. 2009 As to matters not provided for in this Code, judicial (e) The rate of storage charges,
sequestration shall be governed by the Rules of Court
(f) A description of the goods or of the packages containing
- A judicial deposit or sequestration is a deposit them,
constituted by judicial order, as a consequence of litigation.
- It is suppletorily governed by the provisions of the Rules of (g) The signature of the warehouseman which may be made by
Court on attachment and seizure of the property. his authorized agent,
- Unlike the general rule on deposit, judicial deposit is the
only type of deposit that may have for its object an (h) If the receipt is issued for goods of which the
immovable property. warehouseman is owner, either solely or jointly or in common
with others, the fact of such ownership, and

(i) A statement of the amount of advances made and of

liabilities incurred for which the warehouseman claims a lien. If
the precise amount of such advances made or of such liabilities
incurred is, at the time of the issue of, unknown to the
warehouseman or to his agent who issues it, a statement of the
fact that advances have been made or liabilities incurred and
the purpose thereof is sufficient.

A warehouseman shall be liable to any person injured thereby

for all damages caused by the omission from a negotiable
receipt of any of the terms herein required.

Act 2137, Sec. 3 Form of receipts. What terms may be

inserted A warehouseman may insert in a receipt issued by
him any other terms and conditions provided that such terms
and conditions shall not:

(a) Be contrary to the provisions of this Act.

(b) In any wise impair his obligation to exercise that degree of

care in the safe-keeping of the goods entrusted to him which is
reasonably careful man would exercise in regard to similar
goods of his own.

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Act 2137, Sec. 4 Definition of non-negotiable receipt A (c) A readiness and willingness to sign, when the goods are
receipt in which it is stated that the goods received will be delivered, an acknowledgment that they have been delivered,
delivered to the depositor or to any other specified person, is a if such signature is requested by the warehouseman.
non-negotiable receipt.
In case the warehouseman refuses or fails to deliver the goods
Act 2137, Sec. 5 Definition of negotiable receipt A in compliance with a demand by the holder or depositor so
receipt in which it is stated that the goods received will be accompanied, the burden shall be upon the warehouseman to
delivered to the bearer or to the order of any person named in establish the existence of a lawful excuse for such refusal.
such receipt is a negotiable receipt.
Act 2137, Sec. 9 Justification of warehouseman in delivering
No provision shall be inserted in a negotiable receipt that it is A warehouseman is justified in delivering the goods, subject
non-negotiable. Such provision, if inserted shall be void. to the provisions of the three following sections, to one who is:

Act 2137, Sec. 6 Duplicate receipts must be so marked (a) The person lawfully entitled to the possession of the goods,
When more than one negotiable receipt is issued for the same or his agent;
goods, the word "duplicate" shall be plainly placed upon the
face of every such receipt, except the first one issued. A (b) A person who is either himself entitled to delivery by the
warehouseman shall be liable for all damages caused by his terms of a non-negotiable receipt issued for the goods, or who
failure so to do to any one who purchased the subsequent has written authority from the person so entitled either
receipt for value supposing it to be an original, even though indorsed upon the receipt or written upon another paper; or
the purchase be after the delivery of the goods by the
warehouseman to the holder of the original receipt. (c) A person in possession of a negotiable receipt by the terms
of which the goods are deliverable to him or order, or to
bearer, or which has been indorsed to him or in blank by the
Act 2137, Sec. 7 Failure to mark "non-negotiable" A non-
person to whom delivery was promised by the terms of the
negotiable receipt shall have plainly placed upon its face by
receipt or by his mediate or immediate indorser.
the warehouseman issuing it "non-negotiable," or "not
negotiable." In case of the warehouseman's failure so to do, a
holder of the receipt who purchased it for value supposing it to Act 2137, Sec. 10 Warehouseman's liability for misdelivery
be negotiable, may, at his option, treat such receipt as Where a warehouseman delivers the goods to one who is
imposing upon the warehouseman the same liabilities he not in fact lawfully entitled to the possession of them, the
would have incurred had the receipt been negotiable. warehouseman shall be liable as for conversion to all having a
right of property or possession in the goods if he delivered
This section shall not apply, however, to letters, memoranda, the goods otherwise than as authorized by subdivisions (b) and
or written acknowledgment of an informal character. (c) of the preceding section, and though he delivered the
goods as authorized by said subdivisions, he shall be so liable,
if prior to such delivery he had either:
- It is a formal contract because although the law states
that a warehouse receipt need not be in a particular form,
the Warehouse Receipts Law requires that it must be (a) Been requested, by or on behalf of the person lawfully
entitled to a right of property or possession in the goods, not
written and must contain specific terms.
to make such deliver; or
B. Obligations and Rights of a Warehouseman
(b) Had information that the delivery about to be made was to
1. Obligation to Deliver one not lawfully entitled to the possession of the goods.

Act 2137, Sec. 8 Obligation of warehousemen to deliver Act 2137, Sec. 11 Negotiable receipt must be cancelled
A warehouseman, in the absence of some lawful excuse when goods delivered Except as provided in section thirty-
provided by this Act, is bound to deliver the goods upon a six, where a warehouseman delivers goods for which he had
demand made either by the holder of a receipt for the goods issued a negotiable receipt, the negotiation of which would
or by the depositor; if such demand is accompanied with: transfer the right to the possession of the goods, and fails to
take up and cancel the receipt, he shall be liable to any one
(a) An offer to satisfy the warehouseman's lien; who purchases for value in good faith such receipt, for failure
to deliver the goods to him, whether such purchaser acquired
(b) An offer to surrender the receipt, if negotiable, with such title to the receipt before or after the delivery of the goods by
indorsements as would be necessary for the negotiation of the the warehouseman.
receipt; and

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Act 2137, Sec. 12 Negotiable receipts must be cancelled or Act 2137, Sec. 15 Effect of duplicate receipts A receipt
marked when part of goods delivered Except as provided in upon the face of which the word "duplicate" is plainly placed is
section thirty-six, where a warehouseman delivers part of the a representation and warranty by the warehouseman that such
goods for which he had issued a negotiable receipt and fails receipt is an accurate copy of an original receipt properly
either to take up and cancel such receipt or to place plainly issued and uncanceled at the date of the issue of the
upon it a statement of what goods or packages have been duplicate, but shall impose upon him no other liability.
delivered, he shall be liable to any one who purchases for value
in good faith such receipt, for failure to deliver all the goods Act 2137, Sec. 16 Warehouseman cannot set up title in
specified in the receipt, whether such purchaser acquired title himself No title or right to the possession of the goods, on
to the receipt before or after the delivery of any portion of the the part of the warehouseman, unless such title or right is
goods by the warehouseman. derived directly or indirectly from a transfer made by the
depositor at the time of or subsequent to the deposit for
Act 2137, Sec. 13 Altered receipts The alteration of a storage, or from the warehouseman's lien, shall excuse the
receipt shall not excuse the warehouseman who issued it from warehouseman from liability for refusing to deliver the goods
any liability if such alteration was: according to the terms of the receipt.

(a) Immaterial, Act 2137, Sec. 17 Interpleader of adverse claimants If

more than one person claims the title or possession of the
(b) Authorized, or goods, the warehouseman may, either as a defense to an
action brought against him for non-delivery of the goods or as
(c) Made without fraudulent intent. an original suit, whichever is appropriate, require all known
claimants to interplead.
If the alteration was authorized, the warehouseman shall be
liable according to the terms of the receipt as altered. If the
Act 2137, Sec. 18 Warehouseman has reasonable time to
alteration was unauthorized but made without fraudulent
determine validity of claims If someone other than the
intent, the warehouseman shall be liable according to the
depositor or person claiming under him has a claim to the title
terms of the receipt as they were before alteration.
or possession of goods, and the warehouseman has
information of such claim, the warehouseman shall be excused
Material and fraudulent alteration of a receipt shall not excuse
from liability for refusing to deliver the goods, either to the
the warehouseman who issued it from liability to deliver
depositor or person claiming under him or to the adverse
according to the terms of the receipt as originally issued, the
claimant until the warehouseman has had a reasonable time to
goods for which it was issued but shall excuse him from any
ascertain the validity of the adverse claim or to bring legal
other liability to the person who made the alteration and to any
proceedings to compel claimants to interplead.
person who took with notice of the alteration. Any purchaser
of the receipt for value without notice of the alteration shall
acquire the same rights against the warehouseman which such Act 2137, Sec. 19 Adverse title is no defense except as
purchaser would have acquired if the receipt had not been above provided Except as provided in the two preceding
altered at the time of purchase. sections and in sections nine and thirty-six, no right or title of a
third person shall be a defense to an action brought by the
depositor or person claiming under him against the
Act 2137, Sec. 14 Lost or destroyed receipts Where a
warehouseman for failure to deliver the goods according to
negotiable receipt has been lost or destroyed, a court of
the terms of the receipt.
competent jurisdiction may order the delivery of the goods
upon satisfactory proof of such loss or destruction and upon
the giving of a bond with sufficient sureties to be approved by Act 2137, Sec. 36 Effect of sale After goods have been
the court to protect the warehouseman from any liability or lawfully sold to satisfy a warehouseman's lien, or have been
expense, which he or any person injured by such delivery may lawfully sold or disposed of because of their perishable or
incur by reason of the original receipt remaining outstanding. hazardous nature, the warehouseman shall not thereafter be
The court may also in its discretion order the payment of the liable for failure to deliver the goods to the depositor or owner
warehouseman's reasonable costs and counsel fees. of the goods or to a holder of the receipt given for the goods
when they were deposited, even if such receipt be negotiable.
The delivery of the goods under an order of the court as
provided in this section, shall not relieve the warehouseman
from liability to a person to whom the negotiable receipt has
been or shall be negotiated for value without notice of the
proceedings or of the delivery of the goods.

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Act 2137, Sec.58 Definitions (a) In this Act, unless the 2. Liability for Goods
content or subject matter otherwise requires:
Act 2137, Sec. 20 Liability for non-existence or
"Action" includes counterclaim, set-off, and suits in equity as misdescription of goods A warehouseman shall be liable to
provided by law in these islands. the holder of a receipt for damages caused by the non-
existence of the goods or by the failure of the goods to
"Delivery" means voluntary transfer of possession from one correspond with the description thereof in the receipt at the
person to another. time of its issue. If, however, the goods are described in a
receipt merely by a statement of marks or labels upon them or
"Fungible goods" means goods of which any unit is, from its upon packages containing them or by a statement that the
nature by mercantile custom, treated as the equivalent of any goods are said to be goods of a certain kind or that the
other unit. packages containing the goods are said to contain goods of a
certain kind or by words of like purport, such statements, if
"Goods" means chattels or merchandise in storage or which true, shall not make liable the warehouseman issuing the
has been or is about to be stored. receipt, although the goods are not of the kind which the
marks or labels upon them indicate or of the kind they were
"Holder" of a receipt means a person who has both actual said to be by the depositor.
possession of such receipt and a right of property therein.
Act 2137, Sec. 21 Liability for care of goods A
"Order" means an order by indorsement on the receipt. warehouseman shall be liable for any loss or injury to the
goods caused by his failure to exercise such care in regard to
"Owner" does not include mortgagee. them as reasonably careful owner of similar goods would
exercise, but he shall not be liable, in the absence of an
"Person" includes a corporation or partnership or two or more agreement to the contrary, for any loss or injury to the goods
persons having a joint or common interest. which could not have been avoided by the exercise of such
care.
To "purchase" includes to take as mortgagee or as pledgee.

Act 2137, Sec. 22 Goods must be kept separate Except

"Receipt" means a warehouse receipt.
as provided in the following section, a warehouseman shall
keep the goods so far separate from goods of other depositors
"Value" is any consideration sufficient to support a simple
and from other goods of the same depositor for which a
contract. An antecedent or pre-existing obligation, whether
separate receipt has been issued, as to permit at all times the
for money or not, constitutes value where a receipt is taken
identification and redelivery of the goods deposited.
either in satisfaction thereof or as security therefor.

"Warehouseman" means a person lawfully engaged in the Act 2137, Sec. 23 Fungible goods may be commingled if
business of storing goods for profit. warehouseman authorized If authorized by agreement or by
custom, a warehouseman may mingle fungible goods with
(b) A thing is done "in good faith" within the meaning of this other goods of the same kind and grade. In such case, the
Act when it is in fact done honestly, whether it be done various depositors of the mingled goods shall own the entire
negligently or not. mass in common and each depositor shall be entitled to such
portion thereof as the amount deposited by him bears to the
whole.
- The obligation of the warehouseman to deliver is not the
delivery required for the perfection of real contracts, but is
similar to the obligation of the depositary to return. Act 2137, Sec. 24 Liability of warehouseman to depositors of
- Because of the commercial nature of the transactions of a commingled goods The warehouseman shall be severally
warehouseman, this obligation is subjected to stricter rules. liable to each depositor for the care and redelivery of his share
of such mass to the same extent and under the same
circumstances as if the goods had been kept separate.

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Act 2137, Sec. 25 Attachment or levy upon goods for which (c) A demand that the amount of the claim as stated in the
a negotiable receipt has been issued If goods are delivered notice of such further claim as shall accrue, shall be paid on or
to a warehouseman by the owner or by a person whose act in before a day mentioned, not less than ten days from the
conveying the title to them to a purchaser in good faith for delivery of the notice if it is personally delivered, or from the
value would bind the owner, and a negotiable receipt is issued time when the notice shall reach its destination, according to
for them, they can not thereafter, while in the possession of the the due course of post, if the notice is sent by mail,
warehouseman, be attached by garnishment or otherwise, or
be levied upon under an execution unless the receipt be first (d) A statement that unless the claim is paid within the time
surrendered to the warehouseman or its negotiation enjoined. specified, the goods will be advertised for sale and sold by
The warehouseman shall in no case be compelled to deliver up auction at a specified time and place.
the actual possession of the goods until the receipt is
surrendered to him or impounded by the court. In accordance with the terms of a notice so given, a sale of the
goods by auction may be had to satisfy any valid claim of the
Act 2137, Sec. 26 Creditor's remedies to reach negotiable warehouseman for which he has a lien on the goods. The sale
receipts A creditor whose debtor is the owner of a shall be had in the place where the lien was acquired, or, if
negotiable receipt shall be entitled to such aid from courts of such place is manifestly unsuitable for the purpose of the claim
appropriate jurisdiction, by injunction and otherwise, in specified in the notice to the depositor has elapsed, and
attaching such receipt or in satisfying the claim by means advertisement of the sale, describing the goods to be sold,
thereof as is allowed at law or in equity in these islands in and stating the name of the owner or person on whose
regard to property which can not readily be attached or levied account the goods are held, and the time and place of the
upon by ordinary legal process. sale, shall be published once a week for two consecutive weeks
in a newspaper published in the place where such sale is to be
held. The sale shall not be held less than fifteen days from the
- The liability of a warehouseman for the goods stored is
time of the first publication. If there is no newspaper published
similar to the liability of the depositary for the safekeeping
of the property deposited. in such place, the advertisement shall be posted at least ten
days before such sale in not less than six conspicuous places
- The rules on warehousemans liability for goods take into
therein.
consideration the commercial nature of the credit
transaction.
From the proceeds of such sale, the warehouseman shall
satisfy his lien including the reasonable charges of notice,
3. Warehousemans Lien
advertisement and sale. The balance, if any, of such proceeds
shall be held by the warehouseman and delivered on demand
Act 2137, Sec. 31 Warehouseman need not deliver until lien
to the person to whom he would have been bound to deliver
is satisfied A warehouseman having a lien valid against the
or justified in delivering goods.
person demanding the goods may refuse to deliver the goods
to him until the lien is satisfied.
At any time before the goods are so sold, any person claiming
a right of property or possession therein may pay the
Act 2137, Sec. 32 Warehouseman's lien does not preclude warehouseman the amount necessary to satisfy his lien and to
other remedies Whether a warehouseman has or has not a pay the reasonable expenses and liabilities incurred in serving
lien upon the goods, he is entitled to all remedies allowed by notices and advertising and preparing for the sale up to the
law to a creditor against a debtor for the collection from the time of such payment. The warehouseman shall deliver the
depositor of all charges and advances which the depositor has goods to the person making payment if he is a person entitled,
expressly or impliedly contracted with the warehouseman to under the provision of this Act, to the possession of the goods
pay. on payment of charges thereon. Otherwise, the
warehouseman shall retain the possession of the goods
Act 2137, Sec. 33 Satisfaction of lien by sale A according to the terms of the original contract of deposit.
warehouseman's lien for a claim which has become due may
be satisfied as follows:

(a) An itemized statement of the warehouseman's claim,

showing the sum due at the time of the notice and the date or
dates when it becomes due,

(b) A brief description of the goods against which the lien

exists,

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Act 2137, Sec. 34 Perishable and hazardous goods If Act 2137, Sec. 38 Negotiation of negotiable receipt by
goods are of a perishable nature, or by keeping will deteriorate indorsement A negotiable receipt may be negotiated by the
greatly in value, or, by their order, leakage, inflammability, or indorsement of the person to whose order the goods are, by
explosive nature, will be liable to injure other property , the the terms of the receipt, deliverable. Such indorsement may
warehouseman may give such notice to the owner or to the be in blank, to bearer or to a specified person. If indorsed to a
person in whose names the goods are stored, as is reasonable specified person, it may be again negotiated by the
and possible under the circumstances, to satisfy the lien upon indorsement of such person in blank, to bearer or to another
such goods and to remove them from the warehouse and in specified person. Subsequent negotiation may be made in like
the event of the failure of such person to satisfy the lien and to manner.
receive the goods within the time so specified, the
warehouseman may sell the goods at public or private sale Act 2137, Sec. 39 Transfer of receipt A receipt which is
without advertising. If the warehouseman, after a reasonable not in such form that it can be negotiated by delivery may be
effort, is unable to sell such goods, he may dispose of them in transferred by the holder by delivery to a purchaser or donee.
any lawful manner and shall incur no liability by reason thereof.
A non-negotiable receipt can not be negotiated, and the
Act 2137, Sec. 35 Other methods of enforcing lien The indorsement of such a receipt gives the transferee no
remedy for enforcing a lien herein provided does not preclude additional right.
any other remedies allowed by law for the enforcement of a
lien against personal property nor bar the right to recover so Act 2137, Sec. 40 Who may negotiate a receipt A
much of the warehouseman's claim as shall not be paid by the negotiable receipt may be negotiated:
proceeds of the sale of the property.
(a) By the owner thereof, or
Act 2137, Sec. 36 Effect of sale After goods have been
lawfully sold to satisfy a warehouseman's lien, or have been (b) By any person to whom the possession or custody of the
lawfully sold or disposed of because of their perishable or receipt has been entrusted by the owner, if, by the terms of the
hazardous nature, the warehouseman shall not thereafter be receipt, the warehouseman undertakes to deliver the goods to
liable for failure to deliver the goods to the depositor or owner the order of the person to whom the possession or custody of
of the goods or to a holder of the receipt given for the goods the receipt has been entrusted, or if, at the time of such
when they were deposited, even if such receipt be negotiable. entrusting, the receipt is in such form that it may be negotiated
by delivery.
The warehousemans lien is the warehousemans legal right
or interest in the depositors property. It is similar to the Act 2137, Sec. 41 Rights of person to whom a receipt has
depositorys right of retention under the NCC, which is a means been negotiated A person to whom a negotiable receipt
or device by which the depositary is able to obtain payment of has been duly negotiated acquires thereby:
what may be due because of the deposit.
(a) Such title to the goods as the person negotiating the
C. Negotiation and Transfer receipt to him had or had ability to convey to a purchaser in
good faith for value, and also such title to the goods as the
Act 2137, Sec. 37 Negotiation of negotiable receipt of depositor or person to whose order the goods were to be
delivery A negotiable receipt may be negotiated by delivered by the terms of the receipt had or had ability to
delivery: convey to a purchaser in good faith for value, and

(a) Where, by terms of the receipt, the warehouseman (b) The direct obligation of the warehouseman to hold
undertakes to deliver the goods to the bearer, or possession of the goods for him according to the terms of the
receipt as fully as if the warehouseman and contracted directly
(b) Where, by the terms of the receipt, the warehouseman with him.
undertakes to deliver the goods to the order of a specified
person, and such person or a subsequent indorsee of the
receipt has indorsed it in blank or to bearer.

Where, by the terms of a negotiable receipt, the goods are

deliverable to bearer or where a negotiable receipt has been
indorsed in blank or to bearer, any holder may indorse the
same to himself or to any other specified person, and, in such
case, the receipt shall thereafter be negotiated only by the
indorsement of such indorsee.

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Act 2137, Sec. 42 Rights of person to whom receipt has Act 2137, Sec. 46 No warranty implied from accepting
been transferred A person to whom a receipt has been payment of a debt A mortgagee, pledgee, or holder for
transferred but not negotiated acquires thereby, as against the security of a receipt who, in good faith, demands or receives
transferor, the title of the goods subject to the terms of any payment of the debt for which such receipt is security, whether
agreement with the transferor. from a party to a draft drawn for such debt or from any other
person, shall not, by so doing, be deemed to represent or to
If the receipt is non-negotiable, such person also acquires the warrant the genuineness of such receipt or the quantity or
right to notify the warehouseman of the transfer to him of such quality of the goods therein described.
receipt and thereby to acquire the direct obligation of the
warehouseman to hold possession of the goods for him Act 2137, Sec. 47 When negotiation not impaired by fraud,
according to the terms of the receipt. mistake or duress The validity of the negotiation of a receipt
is not impaired by the fact that such negotiation was a breach
Prior to the notification of the warehouseman by the transferor of duty on the part of the person making the negotiation or by
or transferee of a non-negotiable receipt, the title of the the fact that the owner of the receipt was induced by fraud,
transferee to the goods and the right to acquire the obligation mistake or duress or to entrust the possession or custody of
of the warehouseman may be defeated by the levy of an the receipt to such person, if the person to whom the receipt
attachment or execution upon the goods by a creditor of the was negotiated or a person to whom the receipt was
transferor or by a notification to the warehouseman by the subsequently negotiated paid value therefor, without notice of
transferor or a subsequent purchaser from the transferor of a the breach of duty, or fraud, mistake or duress.
subsequent sale of the goods by the transferor.

Act 2137, Sec. 48 Subsequent negotiation Where a

Act 2137, Sec. 43 Transfer of negotiable receipt without person having sold, mortgaged, or pledged goods which are
indorsement Where a negotiable receipt is transferred for in warehouse and for which a negotiable receipt has been
value by delivery and the indorsement of the transferor is issued, or having sold, mortgaged, or pledged the negotiable
essential for negotiation, the transferee acquires a right against receipt representing such goods, continues in possession of
the transferor to compel him to indorse the receipt unless a the negotiable receipt, the subsequent negotiation thereof by
contrary intention appears. The negotiation shall take effect as the person under any sale or other disposition thereof to any
of the time when the indorsement is actually made. person receiving the same in good faith, for value and without
notice of the previous sale, mortgage or pledge, shall have the
Act 2137, Sec. 44 Warranties of a sale of receipt A person same effect as if the first purchaser of the goods or receipt had
who, for value, negotiates or transfers a receipt by indorsement expressly authorized the subsequent negotiation.
or delivery, including one who assigns for value a claim secured
by a receipt, unless a contrary intention appears, warrants: Act 2137, Sec. 49 Negotiation defeats vendor's lien
Where a negotiable receipt has been issued for goods, no
(a) That the receipt is genuine, seller's lien or right of stoppage in transitu shall defeat the
rights of any purchaser for value in good faith to whom such
(b) That he has a legal right to negotiate or transfer it, receipt has been negotiated, whether such negotiation be
prior or subsequent to the notification to the warehouseman
(c) That he has knowledge of no fact which would impair the who issued such receipt of the seller's claim to a lien or right of
validity or worth of the receipt, and stoppage in transitu. Nor shall the warehouseman be obliged
to deliver or justified in delivering the goods to an unpaid
(d) That he has a right to transfer the title to the goods and that seller unless the receipt is first surrendered for cancellation.
the goods are merchantable or fit for a particular purpose
whenever such warranties would have been implied, if the
contract of the parties had been to transfer without a receipt of
the goods represented thereby.

Act 2137, Sec. 45 Indorser not a guarantor The

indorsement of a receipt shall not make the indorser liable for
any failure on the part of the warehouseman or previous
indorsers of the receipt to fulfill their respective obligations.

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D. Criminal Liability Act 2137, Sec. 54 Delivery of goods without obtaining
negotiable receipt A warehouseman, or any officer, agent,
Act 2137, Sec. 50 Issue of receipt for goods not received or servant of a warehouseman, who delivers goods out of the
A warehouseman, or an officer, agent, or servant of a possession of such warehouseman, knowing that a negotiable
warehouseman who issues or aids in issuing a receipt knowing receipt the negotiation of which would transfer the right to the
that the goods for which such receipt is issued have not been possession of such goods is outstanding and uncanceled,
actually received by such warehouseman, or are not under his without obtaining the possession of such receipt at or before
actual control at the time of issuing such receipt, shall be guilty the time of such delivery, shall, except in the cases provided
of a crime, and, upon conviction, shall be punished for each for in sections fourteen and thirty-six, be found guilty of a
offense by imprisonment not exceeding five years, or by a fine crime, and, upon conviction, shall be punished for each offense
not exceeding ten thousand pesos, or both. by imprisonment not exceeding one year, or by a fine not
exceeding two thousand pesos, or by both.
Act 2137, Sec. 51 Issue of receipt containing false statement
A warehouseman, or any officer, agent or servant of a Act 2137, Sec. 55 Negotiation of receipt for mortgaged
warehouseman who fraudulently issues or aids in fraudulently goods. Any person who deposits goods to which he has no
issuing a receipt for goods knowing that it contains any false title, or upon which there is a lien or mortgage, and who takes
statement, shall be guilty of a crime, and upon conviction, shall for such goods a negotiable receipt which he afterwards
be punished for each offense by imprisonment not exceeding negotiates for value with intent to deceive and without
one year, or by a fine not exceeding two thousand pesos, or by disclosing his want of title or the existence of the lien or
both. mortgage, shall be guilty of a crime, and, upon conviction, shall
be punished for each offense by imprisonment not exceeding
Act 2137, Sec. 52 Issue of duplicate receipt not so marked one year, or by a fine not exceeding two thousand pesos, or by
A warehouse, or any officer, agent, or servant of a both.
warehouseman who issues or aids in issuing a duplicate or
additional negotiable receipt for goods knowing that a former A fundamental distinction between special commercial laws on
negotiable receipt for the same goods or any part of them is credit transactions and their Civil Code counterparts, such as the
outstanding and uncanceled, without plainly placing upon the Warehouse Receipts Law in relation to deposits, is the inclusion
face thereof the word "duplicate" except in the case of a lost of provisions criminalizing certain acts and omissions relating to
or destroyed receipt after proceedings are provided for in the credit transaction.
section fourteen, shall be guilty of a crime, and, upon
conviction, shall be punished for each offense by imprisonment E. General Bonded Warehouses
not exceeding five years, or by a fine not exceeding ten
thousand pesos, or by both. Act 3893
Sec. 1 This Act shall be known by the short title of "BONDED
Act 2137, Sec. 53 Issue for warehouseman's goods or WAREHOUSE ACT."
receipts which do not state that fact Where they are
deposited with or held by a warehouseman goods of which he Sec. 2 As used in this Act, the term "warehouse" shall be
is owner, either solely or jointly or in common with others, such deemed to mean every building, structure, or other protected
warehouseman, or any of his officers, agents, or servants who, inclosure in which rice is kept for storage. The term "rice" shall
knowing this ownership, issues or aids in issuing a negotiable be deemed to mean either palay in bundles, or in grains, or
receipt for such goods which does not state such ownership, clean rice, or both. "Person" including corporation or
shall be guilty of a crime, and, upon conviction, shall be partnership or two or more persons having joint or common
punished for each offense by imprisonment not exceeding one interest; "warehouseman" means a person engaged in the
year, or by a fine not exceeding two thousand pesos, or by business receiving rice for storage; and "receipt" means any
both. receipt issued by a warehouseman for rice delivered to him.
For the purpose of this Act, the business of receiving rice for
storage shall include (1) any contract or transaction wherein the
warehouseman is obligated to return the very same rice
delivered to him or pay its value;(2) any contract or transaction
wherein the rice delivered is to be milled for and on account of
the owner thereof; (3) any contract or transaction wherein the
rice delivered is commingled with the rice delivered by or
belonging to other persons and the warehouseman is
obligated to return the rice of the same kind or pay its value.

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Sec. 3 No person shall engage in the business of receiving Sec. 9 Every warehouseman licensed under this Act shall keep
rice for storage without first securing a license therefore from a complete record of the rice received by him, of the receipts
the Director of the Bureau of Commerce and Industry. Said issued therefor of the withdrawals, of the liquidations and of all
license shall be annual and shall expire on the thirty-first day of receipts returned to and cancelled by him. He shall make
December. reports to the Director of Bureau of Commerce and Industry
concerning his warehouse and the conditions, contents,
Sec. 4 Any person applying for a license to engage in the operations, and business thereof in such form and at such time
business of receiving rice for storage shall set forth in the as the said Director may require, and shall conduct said
application the place or places where the business and warehouse in all other respects in compliance with this Act and
warehouse are to be established or located and the maximum the rules and regulations made in accordance therewith.
quantity of rice to be received. The application shall be
accompanied by a cash bond or a bond secured by real estate Sec. 10 The Director of Bureau of Commerce and Industry
or signed by a duly authorized bonding company, the amount shall from time to time make such rules and regulations as he
of which shall be fixed by the Director of the Bureau of may deem necessary for the efficient execution of the
Commerce and Industry at not less than thirty-three and one provisions of this Act.
third percent of the market value of the maximum quantity or
rice to be received. Said bond shall be so conditioned as to Sec. 11 Any person engaging in the business of receiving rice
respond for the market value of the rice actually delivered and for storage in violation of Section three of this Act shall be
received at any time the warehouseman is unable to return the deemed guilty of misdemeanor, and upon conviction thereof
rice or to pay its value. The bond shall be approved by the shall be punished by imprisonment of not less than one month
Director of the Bureau of Commerce and Industry before or by a fine of not more than five thousand pesos, or both, in
issuing a license under this Act, to satisfy himself concerning the discretion of the court.
the sufficiency of such bond, and to determine whether the
warehouse for which such license is applied for is suitable for Sec. 12 Any warehouseman licensed under this Act receiving
the proper storage of rice. a quantity of rice greater than that specified in his application
and license, shall, upon conviction, be fined double the market
Sec. 5 Whenever the Director of the Bureau of Commerce value of the rice so received in excess of the quantity of rice he
and Industry shall determine that a bond approved by him, is is authorized to receive.
or any cause, has become insufficient, he may require an
additional bond or bonds to be given by the warehouseman Sec. 13 Any person entering into connivance or combination
concerned, conforming with the requirements of the preceding with any warehouseman that is not licensed under this Act, with
section, and unless the same be given within the time fixed by the purpose of evading the provisions of section three of this
a written demand therefor the license of such warehouse may Act, shall be deemed guilty of misdemeanor, and upon
be suspended or revoked. conviction thereof, shall be fined not more than two hundred
pesos or imprisonment for not more than one months, or both,
Sec. 6 Every person licensed under this Act to engage in the in the discretion of the court.
business of receiving rice for storage shall insure the rice so
received and stored against fire. Sec. 14 The Director of the Bureau of Commerce and Industry
may, after opportunity for hearing has been afforded to the
Sec. 7 Any person injured by the breach of any obligation to license concerned, suspend or revoke any license issued to any
secure which a bond is given, under the provisions of this Act, warehouseman, conducting a warehouse under this Act, for
shall be entitled to sue on the bond in his own name in any any violation or failure to comply with any provision of this Act
court of competent jurisdiction to recover the damages he may or of the rules and regulations made by virtue thereof.
have sustained by such breach. Nothing contained herein shall
except any property of assets of any warehouseman from Sec. 15 This Act shall not be applicable to cooperative
being sued on in case the bond given is not sufficient to marketing associations of rice producers organized under Act
respond for the full market value of the rice received by such Numbered Three Thousand Four Hundred and Twenty-five
warehouseman. known as the "Cooperative Marketing Law," provided such
associations shall not receive, for storage, rice from non-
Sec. 8 Every warehouseman licensed under this Act shall members which is greater in quantity than one-half of the total
receive for storage, so far as his license and the capacity of his quantity of rice received from members, at any time.
warehouse permit, any rice, of the kind customarily stored
therein by him, which may be tendered to him in a suitable
condition for warehousing, in the usual manner and in the
ordinary and usual course of business, without making any
discrimination between persons desiring to avail themselves of
warehouse facilities.

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Sec. 16 If any clause, sentence, or paragraph, or part of this Brief Facts:
Act shall, for any reason, be adjusted by any court of In accordance with Act No. 2137, the Warehouse Receipts Law,
competent jurisdiction to be invalid, such judgment shall not Noahs Ark Sugar Refinery issued on several dates, 5 Warehouse
affect, impair, or invalidate the remainder thereof, but shall be Receipts (Quedans). These were endorsed and negotiated to
confined in his operation to the clause, sentence, paragraph or Ramos and Zoleta. They failed to pay their loans upon maturity
part thereof directly involved in the controversy in which such so PNB wrote to Noahs Ark Sugar Refinery demanding delivery
judgment shall have been rendered. of the sugar stocks covered by the quedans endorsed to it by
Zoleta and Ramos. Noahs Ark Sugar Refinery refused. PNB filed
Sec. 17 This Act shall take effect on January First, nineteen a complaint for Specific Performance with Damages and
hundred and thirty-two. Application for Writ of Attachment.

Purpose: to regulate the business of receiving commodities for ISSUE:

storage in order to protect persons who may want to avail WON PNB is liable for warehousemans lien (YES)
themselves of warehouse facilities and to encourage the
establishment of more warehouses. RATIO: YES; prior judgment holding that a party is a
warehouseman obligated to deliver sugar stocks
The business: includes entering into any contract or covered by thewarehouse receipts does not
transaction wherein: necessarily carry with it a denial of its lien over the
a. The warehouseman is obligated to return the very same same sugar stocks.
commodity to the person depositing or pay its value; - Under the subject Warehouse Receipts provision, storage
b. The commodity delivered is to be milled for the owner fees are chargeable. PNB is legally bound to stand by the
thereof; express terms and conditions on the face of the Warehouse
c. The commodity delivered is commingled with the Receipts as to the payment of storage fees. Even in the
commodity belonging to other persons, and the absence of such a provision, law and equity dictate the
warehouseman is obligated to return the commodity of the payment of the warehousemans lien pursuant to Sections
same kind or to pay its value. 27 and 31 of the Warehouse Receipts Law (R.A. 2137)
- to wit: SECTION 27. What claims are included in the
Duties of the bonded warehouseman: warehousemans lien. Subject to the provisions of section
a. To insure the commodity received for storage against fire; thirty, a warehouseman shall have lien on goods deposited
b. To receive for storage any commodity of the kind or on the proceeds thereof in his hands, for all lawful
customarily stored by him in the warehouse so far as his charges for storage and preservation of the goods; also for
license and the capacity of his warehouse will permit, all lawful claims for money advanced, interest, insurance,
without making any discrimination between the persons transportation, labor, weighing coopering and other
desiring to avail themselves of warehouse facilities; charges and expenses in relation to such goods; also for all
c. To keep a complete record of all commodities received by reasonable charges and expenses for notice, and
him, of the receipts issued therefor, of the withdrawals, of advertisement of sale, and for sale of the goods where
the liquidation, and of all the receipts returned to and default has been made in satisfying the warehousemans
cancelled by him. lien.
- SECTION 31. Warehouseman need not deliver until lien is
Philippine National Bank v. Se (1996) Hermosisima, Jr., J. satisfied. A warehouseman having a lien valid against the
Petitioner: Philippine National Bank person demanding the goods may refuse to deliver the
Respondents: Hon. Benito C. Se Jr. & Noahs Ark Sugar goods to him until the lien is satisfied.
Refinery - After being declared as the warehouseman, Noahs Ark
Concept: General Bonded Warehouses Act cannot legally be deprived of their right to enforce their
claim for warehousemans lien, for reasonable storage fees
Doctrine: and preservation expenses. Pursuant to Section 31 the
Where the judgment creditor makes an unconditional goods under storage may not be delivered until said lien is
presentment of warehouse receipts for delivery of sugar stocks satisfied.
against the warehouseman, it thereby admits the existence and
validity of the terms, conditions and stipulations written on the
face of the warehouse receipts, including the unqualified
recognition of the payment of warehousemans lien for storage
fees and preservation expenses.

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- Considering that PNB does not deny the existence, validity 1. Distinguished from Securities
and genuineness of the Warehouse Receipts on which it
anchors its claim for payment against Noahs Ark, it cannot RA 8799, Sec. 3 Definition of Terms - 3.1. "Securities" are
disclaim liability for the payment of the storage fees shares, participation or interests in a corporation or in a
stipulated therein. PNB is in estoppel in disclaiming liability commercial enterprise or profit-making venture and evidenced
for the payment of storage fees due the PRs as by a certificate, contract, instruments, whether written or
warehouseman while claiming to be entitled to the sugar electronic in character. It includes:
stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery of (a) Shares of stocks, bonds, debentures, notes evidences of
the sugar stocks. The unconditional presentment of the indebtedness, asset-backed securities;
receipts by PNB for payment against PRs on the strength of
the provisions of the Warehouse Receipts Law (R.A. 2137) (b) Investment contracts, certificates of interest or participation
carried with it the admission of the existence and validity of in a profit sharing agreement, certifies of deposit for a future
the terms, conditions and stipulations written on the face of subscription;
the Warehouse Receipts, including the unqualified
recognition of the payment of warehousemans lien for (c) Fractional undivided interests in oil, gas or other mineral
storage fees and preservation expenses. rights;
- PNB may not now retrieve the sugar stocks without paying
the lien due Noahs Ark as ware houseman. (d) Derivatives like option and warrants;
- RULE: While the PNB is entitled to the stocks of sugar as the
endorsee of the quedans, delivery to it shall be effected (e) Certificates of assignments, certificates of participation,
only upon payment of the storage fees. Imperative is the trust certificates, voting trust certificates or similar instruments
right of the warehouseman to demand payment of his lien
at this juncture, because, in accordance with Section 29 of (f) Proprietary or nonproprietary membership certificates in
the Warehouse Receipts Law, the warehouseman loses his corporations; and
lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman (g) Other instruments as may in the future be determined by
surrenders the possession of the goods without requiring the Commission.
payment of his lien, because a warehousemans lien is
possessory in nature. SECURITIES
- From the Securities Regulation Code (SRC) (RA 8799)
DISPOSITIVE. Petition dismissed for lack of merit - Sec. 3.1 Securities are shares, participation or interests
in a corporation or in a commercial enterprise or profit-
SECURITY TRANSACTIONS making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character
I. THE CONCEPT OF SECURITY o It includes bonds, debentures, notes, evidences of
indebtedness, asset-backed securities
A. General Concepts - Bonds, notes, and debentures are evidences of
indebtedness and are the common commercial forms that
CONTRACT OF SECURITY (Security Transaction) contracts of loan take BUT in the SRC, these contracts of
- The means by which the parties to a principal obligation simple loan or mutuum are securities, whether secured or
ensure its enforcement, protect an interest in property, or unsecured
ensure that the person to be made secure (secured
creditor) can be compensated for loss SECURITY SECURITIES
- It is an accessory obligation that mitigates the risk that Civil Code Securities Regulation Code
the debtor will default on a principal obligation Accessory obligation Principal obligation
- If the principal obligation is ensured by a contract of security Decrease/mitigate loss
= secured obligation
- If the principal obligation is NOT ensured by a contract of
security = unsecured obligation

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2. Distinguished From Securitization
- In credit transactions, it is customary for parties to define
SECURITIZATION other events of default (for the principal obligation) such
- Process by which loans and other debts with an expected as, but not limited to, failure to submit required reports,
cash payment stream (interest on simple loans) are sold on a maintain and file appropriate tax returns, and maintain and
without recourse basis by a seller to a special purpose entity preserve the security
(the issuer) which in turn issues securities (bond or other - In the event of a default that occurs and is continuing, then
instrument) that depend, for their repayment, on the the creditor is given the right to declare, or accelerate, all
expected cash payment stream outstanding obligations as immediately due and payable
- To securitize is to convert assets into securities for resale o Acceleration clause is valid and binding on the
in the financial market parties and the creditor is justified in invoking it to
- It is a process of distributing the risk of default or non- declare the entire principal obligation immediately due
payment of loans and other debts by aggregating these and payable, and to enforce the security
debts and then issuing new securities backed by the
aggregated debt C. Kinds of Security Transactions
- Securities issued by the special purpose entity (issuer) are
called asset-backed securities 1. Personal Security Transactions
- Contracts of loan and expected principal and interest
payments, sold by the original creditors to a special purpose PERSONAL SECURITY TRANSACTION
entity, are aggregated into tranches based on risk and - Contractual obligation for the repayment of a debt binding
packaged as new securities a person, as distinguished from property
o Securities with higher risks provide higher yields - It is an obligation of a person, natural or juridical, other than
- Unlike a security transaction that mitigates risk, the principal debtor to ensure the fulfillment of a principal
securitization distributes the risk of default or non- obligation
payment to those willing to assume it - Example: guaranty, where the faithful performance of the
obligation by the principal debtor is secured by the
SECURITIZATION SECURITY TRANSACTION personal commitment of another
Distributes the risk of default Mitigates risk
or non-payment to those 2. Real Security Transactions
willing to assume it
REAL SECURITY TRANSACTION
B. Events of Default - Encumbrance of property (collateral) given to guarantee
- Essential condition of a security transaction: if the the fulfillment of an obligation, especially the assurance that
principal obligation is duly complied with, then, proceeding a creditor will be repaid with money or credit extended to a
from its accessory character, the security is automatically debtor, usually with interest
extinguished - Example: mortgage (Latin: dead security), where the
o Once the principal obligation is complied with, the creditor acquires a security interest in the collateral for
security transaction becomes, ipso facto, null and void purposes of securing the fulfillment of the principal
o If the principal obligation becomes due and the debtor obligation
defaults, the creditor may elect: o Security interest is a property interest created by
" To bring an ordinary action for specific agreement or by operation of law to secure the
performance of the principal obligation; or performance of an obligation
" As a secured creditor, elect to enforce the " According to PD 115, Sec. 3(h): it is a property
security interest in goods, documents or instruments to
- Enforcement of the security is proper in case of mora secure performance of an obligation and includes
solvendi (debtors default) or in case of delay in the title, whether or not expressed to be absolute,
fulfillment of the principal obligation by a cause imputable whenever such title is in substance taken or
to the debtor retained for security only

REQUISITES FOR DEFAULT:

1. Principal obligation is demandable and liquidated
" Demandable enforceable in Court
" Liquidated existence and amount are determined or
determinable
2. Debtor delays performance
3. Creditor judicially or extrajudicially requires the debtors
performance

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3. In the Context of Insolvency II. LETTERS OF CREDIT

RA 10142, Sec. 4 Definition of Terms - As used in this Act, A. General Concepts

the term:
CoC, Art. 567 Letters of credit are those issued by one
(p) Insolvent shall refer to the financial condition of a debtor merchant to another, or for purpose of attending to a
that is generally unable to pay its or his liabilities as they fall commercial transaction.
due in the ordinary course of business or has liabilities that are
greater than its or his assets. CoC, Art. 568 The essential conditions of letters of credit
shall be:
(jj) Secured claim shall refer to a claim that is secured by a lien.
1. To be issued in favor of a determined person and not to
(kk) Secured creditor shall refer to a creditor with a secured order.
claim.
2. To be limited to a fixed and specified amount, or to one or
(ll) Secured party shall refer to a secured creditor or the agent more indeterminate amounts, but all included in a maximum
or representative of such secured creditor. sum the limit of which must be exactly stated.

(pp) Unsecured claim shall refer to a claim that is not secured Letters of credit which do not have one of these conditions
by a lien. shall be considered simply as letters of recommendation.

(qq) Unsecured creditor shall refer to a creditor with an CoC, Art. 2 Commercial transactions, be they performed by
unsecured claim. merchants or not, whether they are specified in this Code or
not, shall be governed by the provisions contained in the
(t) Lien shall refer to a statutory or contractual claim or judicial same; in the absence of such provisions, by the commercial
charge on real or personal property that legality entities a customs generally observed in each place; and in the absence
creditor to resort to said property for payment of the claim or of both, by those of the common law. LET05cd
debt secured by such lien.
Commercial transactions shall be considered those
Financial Rehabilitation and Insolvency Act of 2010 enumerated in this Code and any others of a similar character.
- Sec. 4(p): Condition of being INSOLVENT is the financial
condition of a debtor that is generally unable to pay its or - A letter of credit is an instrument that involves three parties:
his liabilities as they fall due in the ordinary course of the issuer (usually a bank), the applicant, and the
business or has liabilities that are greater than its or his beneficiary
assets o Under this instrument, the issuer, at the applicants
o Liabilities refers to monetary claims against the request, agrees to honor a draft or other
debtor demand for payment made by the beneficiary,
- Sec. 4(ll) classifies creditors: provided that the draft or demand by the beneficiary
o Secured party: secured creditor or agent or complies with the specified conditions under the letter.
representative of such secured creditor o The issuer shall honor the draft or demand regardless of
o Secured creditor: creditor with a secured claim whether any underlying obligation between the applicant
o Secured claim: claim that is secured by a lien and beneficiary is satisfied.
o Unsecured creditor: creditor with an unsecured - Our Code of Commerce, under Art. 567, further defines it as
claim an instrument issued by one merchant to another, or
o Unsecured claim: claim that is not secured by a lien for attending to a commercial transaction.
o Lien: statutory or contractual claim or judicial charge - Its effect, as a security transaction, is to substitute the
on real or personal property that legally entitles a financial strength of the issuer (usually a bank) for that of
creditor to resort to said property for payment of the the applicant, in order to convince the beneficiary to
claim or debt secured transact with the latter.
- In the context of insolvency: o Having such letter of credit, the beneficiary is assured
o A secured creditor is a creditor that has in its favor a that he/she may call upon such instrument as
real security transaction, that is, a claim secured by a security, in case the applicant fails to perform his
statutory, contractual or judicial charge on real or obligation.
personal property (collateral) that legally entitles a
creditor to resort to the property for payment of its claim
o An unsecured creditor is a creditor who only has in its
favor a personal security transaction

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Transfield Phils. v. Luzon Hydro Corp., et al (2004) Tinga, J. standardize practices in the area of letters of credit. As a
Petitioner: Transfield Philippines, Inc. (TPI) result, most letters of credit incorporate the UCP provisions.
Respondent: Luzon Hydro Corp (LHC), Australia and New - In the past cases of BPI v. De Reny Fabric and Bank of
Zealand Banking Grp. Limited (ANZ), and Security Bank Corp. America v. CA, the SC has ruled that there being no specific
(SBC) provisions in the Code of Commerce and other statutes, the
Concept: Security Transactions; Letters of Credit; General UCP is applicable under the principle that usages and
Concepts customs generally observed shall be followed.
- Now, Art. 3 of the UCP, provides that credits, by their
Doctrine: nature, are separate transactions from the sales contract or
The independence principle of letters of credit means that (1) any other type of contracts that they may be based on;
assures the beneficiary of prompt payment, notwithstanding any hence, banks are in no way concerned or bound by such
breach of the main contract and (2) precludes the bank from contracts.
determining whether the main contract (sales or non-sale) is o Consequently, the undertaking of the bank (as the
actually accomplished or not. Both the bank and beneficiary may addressee) to pay, accept and pay drafts, or negotiate
invoke this principle to their benefit. and/or fulfill any other obligation under the letter of
credit is not subject to claims or defenses by the
Brief Facts: applicant, resulting from his relationships with the
TPI and LHC entered into a turnkey contract wherein TPI is issuing bank or the beneficiary.
obligated to build a power plant. To secure the obligation, TPI o In the same token, a beneficiary can in no case avail
executed two letters of credit in favor of LHC, which the former himself of the contractual relationships existing
opened in two banks (one letter each). When TPI failed to between the banks or between the applicant and the
complete the project on the target date, LHC attempted to draw issuing bank.
upon the funds under the letter of credit. There still being o Thus the engagement of the issuing bank is to pay the
ongoing proceedings on the issue of whether TPI was in delay, beneficiary of the credit once the draft and the required
TPI sought to retrain LHC from drawing upon the letters of documents are presented to it. The so-called
credit. independence principle (1) assures the beneficiary of
prompt payment, notwithstanding any breach of the
ISSUES: main contract and (2) precludes the bank from
1. WON LHC can withdraw the funds under the letters of determining whether the main contract (sales or non-
credit, by invoking independence principle of letters of sale) is actually accomplished or not.
credit (YES) o Under this independence principle, the banks assume
2. WON LHC can withdraw the funds even before the no liability or responsibility for the form, sufficiency,
arbitration proceedings are resolved (YES) accuracy, genuineness, falsification or legal effect of any
3. WON the banks are justified in releasing the amounts documents or superimposed theron, nor do they
despite TPIs notice to them (YES) assume any liability responsibility for the description,
quantity, weight, quality, condition, packing, delivery,
On Letters of Credit value, or existence of the goods.
- A letter of credit is a written instrument whereby the - The independence of the letter of credit may be: (1)
writer requests or authorizes the addressee to pay independence in toto where the credit is independent from
money or deliver goods to a third person and the justification aspect and is a separate obligation from the
assumes responsibility for payment of debt therefor to the underlying agreement, or (2) independence only with respet
addressee. as to the justification aspect, which is identical with the same
- It is a financial device developed by merchants as a obligations in the underlying agreement.
convenient and relatively safe mode of dealing o In both cases, payment may be enjoined if in the light
with sales of goods in a manner that satisfies the of the purpose of credit, its payment would constitute
seemingly irreconcilable interests of a seller, who fraudulent abuse of the credit.
refuses to part with his goods before he is paid,
and a buyer, who wants to have control of the RATIO:
goods before paying. 1. YES. LHC can invoke the independence principle
- It serves to reduce the risk of nonpayment of the purchase and withdraw the funds.
price. - TPI: The independence principle is a defense that only the
- However, they may also be used in non-sale settings issuing bank may interpose.
(such as in this instant case). These credits used in non-sale - LHC: It is against common sense to deny the benefit of an
transactions are called standby credits. independent contract for whom the benefit is intended,
- Gaining acceptability in international trade transactions, the which is the beneficiary.
ICC has periodically published updates on the Uniform - SC: Given the irrevocable nature of the letter of credit, the
Customs and Practices (UCP) for Documentary credits to banks undertaking to pay the beneficiary once documents

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 are presented is definite and binding. This obligation is - Furthermore, LHC was entitled to call upon the letters of
independent of the related and originating contract (the credit to begin with, under the provisions of the turnkey
turnkey contract). contract.
o Bearing this in mind, TPIs argument is untenable, as it o 8.7.2 The Employer may, without prejudice to any
would render nugatory the purpose for which letters of other method of recovery, deduct the amount of such
credit are used in commercial transactions. The damages from any monies due, or to become due to
independence principle works to the benefit of both the Contractor and/or by drawing on the Security.
the issuing bank and the beneficiary. o Following the rule that the terms of a perfected
o Letters of credit, from the point of view of the writer, contract constitute law between the parties, the
serves as a security, which he may confidently present provision should be upheld as it reveals the intention of
to convince the beneficiary to enter into the the parties to make the letters of credit answerable for
transaction. On the other hand, from the point of the of the liquidated damages brought own by the delay in
the beneficiary, the letter of credit assures the latter the performance.
that he may call on it when the commercial transaction o Hence, even without the independence principle, LHC
fails or when the writer fails to perform his part of the is entitled to the amounts under the letter of credit.
obligation.
DISPOSITIVE: RTC and CA affirmed. Petition dismissed.
2. YES. There was NO need to wait for the
proceedings before the CIAC and ICC to be B. Kinds of Letters of Credit
resolved.
- SC: To wait for the proceedings to be resolved before LHC 1. Commercial Letters of Credit
could call upon the letters of credit is to convert the letters
of credit into a mere guaranty. - This kind of letter of credit, also known as a commercial
o Jurisprudence has already clearly distinguished the two, letter of credit or, simply, commercial credit, is
in that a settlement of a dispute is not a pre-requisite utilized in a contract of sale of goods between the
for the release of funds under a letter of credit. applicant (buyer) and the beneficiary (seller).
- The Court, citing Prof. John F. Dolan: - The Court, in Transfield Phils v. Luzon Hydro, explained that
o The surety and the letter of credit share the same this kind of letter of credit was developed by merchants as a
purpose: ensure against the obligors non-performance. convenient and relatively safe mode of dealing with the sale
o In a traditional surety, however, there is a need to of goods to satisfy the seemingly irreconcilable
determine first if the obligor really defaulted (usually interests of a seller-beneficiary who refuses to part
resulting in litigation) and after that, a need to with its goods before it is paid, and that of a buyer-
determine the cost of performance which the surety will applicant who wants to have control of the goods
undertake to pay. before paying.
o The letter of credit, meanwhile, entitles the beneficiary - Commercial credits, being involved in a contract of sale of
to promptly receive payment in the event of non- goods, becomes payable only upon the presentation
performance and that he shall receive such payment by the seller-beneficiary of documents that show it
before any litigation with the obligor. has taken affirmative steps to comply with the
o In a surety, the financial burden during litigation is with contract of sale.
the beneficiary. The surety holds the money and the
beneficiary bears most of the cost of the delay in the 2. Standby Letters of Credit
performance.
o A letter of credit reverses the financial burden; the - This kind of letter of credit, also known as a standby letter
beneficiary may receive payment even before litigation, of credit, or, simply, standby credit, is used as a
as soon as he presents the required document. He is guarantee or security for either a monetary or non-
entitled to receive those payments even if it is later on monetary obligation.
determined after litigation that the obligor did in fact - In a standby credit arrangement, the issuer agrees to
performed the obligation. In such case, the obligor pay the creditor-beneficiary if the debtor-applicant
becomes entitled to sue the beneficiary in tort, in defaults or fails to perform the obligation.
contract or in breach of warranty. - The standby credit becomes payable upon certification
of the debtor-applicants default or failure to
3. YES. The banks performed their obligation, perform the obligation.
pursuant to the letter of credit.
- SC: Given the nature and purpose of the letter of credit, the
banks were left with little to no alternative but to honor
LHCs call upon the letter of credit.

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C. Rule of Strict Compliance o For the food faith, or acts, or omission, solvency,
performance, or standing of the consignor, the carriers, or
- Under this rule, the documents tendered by the the insurers of the goods, or any other persons.
beneficiary must strictly conform to the terms of - EX: Fraud Exception Rule; an injunction against the payment
the letter of credit. will be granted upon the showing of all of the following
o The tender of documents must include all the requisites:
documents required by the letter. o Clear proof of fraud
- Should the honoring entity accept the tender by the o Such fraud constitutes a fraudulent abuse of the
beneficiary, but such tender does not comply with what is independent purpose of the letter of credit, and not only
required (i.e., a faulty tender), then the issuer acts on its own fraud under the principal obligation
risk and may not thereafter recover from the applicant or the o A showing that irreparable injury might follow if injunction
issuer, as the case may be, the money it paid to the is not granted, or that recovery of damages would be
beneficiary. seriously affected.
- An honoring entity deals only with the documents; it is not in
a position to determine whether the documents required by III. TRUST RECEIPTS
the letter of credit is important or superfluous to the
applicant. A. General Concepts
o As a rule, the honoring entity should assume that the
document is of vital importance to the applicant by the PD 115, Sec. 3 Definition of terms As used in this Decree,
mere fact that it was specified as a required document unless the context otherwise requires, the term
under the letter of credit.
(a) "Document" shall mean written or printed evidence of title
D. Independence Principle to goods.

- The independence principle is a rule on letters of credit (b) "Entrustee" shall refer to the person having or taking
that: possession of goods, documents or instruments under a trust
o Assures the beneficiary of prompt payment, independent receipt transaction, and any successor in interest of such
of any breach of the principal obligation, the reason by person for the purpose or purposes specified in the trust
which the letter of credit was procured receipt agreement.
o Precludes the issuer from making a determination
whether the principal obligation is actually accomplished (c) "Entruster" shall refer to the person holding title over the
or not. goods, documents, or instruments subject of a trust receipt
- Under this principle, the letter of credit is a separate and transaction, and any successor in interest of such person.
distinct obligation with respect to the principal obligation
for which the letter of credit was constituted. (d) "Goods" shall include chattels and personal property other
o The settlement of a dispute between the parties is not a than: money, things in action, or things so affixed to land as to
pre-requisite for the release of funds under a letter of become a part thereof.
credit.
- The independence principle only admits of one exception: (e) "Instrument" means any negotiable instrument as defined
the fraud exception rule. in the Negotiable Instrument Law; any certificate of stock, or
o Under this exception, the falsity of a certificate bond or debenture for the payment of money issued by a
accompanying the demand for payment under a letter of public or private corporation, or any certificate of deposit,
credit may qualify as fraud, sufficient to support an participation certificate or receipt, any credit or investment
injunction against the payment, upon showing of instrument of a sort marketed in the ordinary course of
three requisites. business or finance, whereby the entrustee, after the issuance
of the trust receipt, appears by virtue of possession and the
- GR: The issuer of the letter of credit shall make payment face of the instrument to be the owner. "Instrument" shall not
upon the tender of documents required by the beneficiary, include a document as defined in this Decree.
and it shall assume NO liability or responsibility:
o For the form, sufficiency, accuracy, genuineness, (f) "Purchase" means taking by sale, conditional sale, lease,
falsification, or legal effect of any documents, or for the mortgage, or pledge, legal or equitable.
general or particular conditions stipulated in the
documents or superimposed thereon (g) "Purchaser" means any person taking by purchase.
o For the description, quantity, weight, quality, condition,
packing, delivery, value, or existence of the goods
represented by any documents

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(h) "Security Interest" means a property interest in goods, 2. In the case of instruments,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the a) to sell or procure their sale or exchange; or
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained b) to deliver them to a principal; or
for security only.
c) to effect the consummation of some transactions involving
(i) "Person" means, as the case may be, an individual, trustee, delivery to a depository or register; or
receiver, or other fiduciary, partnership, corporation, business
trust or other association, and two more persons having a joint d) to effect their presentation, collection or renewal
or common interest.
The sale of goods, documents or instruments by a person in
(j) "Trust Receipt" shall refer to the written or printed the business of selling goods, documents or instruments for
document signed by the entrustee in favor of the entruster profit who, at the outset of the transaction, has, as against the
containing terms and conditions substantially complying with buyer, general property rights in such goods, documents or
the provisions of this Decree. No further formality of execution instruments, or who sells the same to the buyer on credit,
or authentication shall be necessary to the validity of a trust retaining title or other interest as security for the payment of
receipt. the purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of this
(k) "Value" means any consideration sufficient to support a Decree.
simple contract.
Trust Receipt
PD 115, Sec. 4 What constitutes a trust receipt transaction - Convenient business device that assists importers and
A trust receipt transaction, within the meaning of this Decree, merchants
is any transaction by and between a person referred to in this
Decree as the entruster, and another person referred to in this Trust Receipt Transaction
Decree as entrustee, whereby the entruster, who owns or holds - A real security transaction
absolute title or security interests over certain specified goods, - A person who owns or holds absolute title or security
documents or instruments, releases the same to the interests over certain specified goods, documents or
possession of the entrustee upon the latter's execution and instruments (entruster) releases the same to the possession
delivery to the entruster of a signed document called a "trust of another person (entrustee)
receipt" wherein the entrustee binds himself to hold the - The entrustee binds himself to hold the goods, documents
designated goods, documents or instruments in trust for the or instruments in trust for the entruster and to sell or
entruster and to sell or otherwise dispose of the goods, otherwise dispose of the goods, documents or instruments,
documents or instruments with the obligation to turn over to with the obligation to turn over to the entruster the
the entruster the proceeds thereof to the extent of the amount proceeds thereof, or the goods, documents or instruments
owing to the entruster or as appears in the trust receipt or the themselves, if they are unsold or otherwise not disposed of,
goods, documents or instruments themselves if they are unsold in accordance with the terms and conditions in the trust
or not otherwise disposed of, in accordance with the terms and receipt
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following: B. Form of Trust Receipts

1. In the case of goods or documents, (a) to sell the goods or PD 115, Sec. 5 Form of trust receipts; contents A trust
procure their sale; or (b) to manufacture or process the goods receipt need not be in any particular form, but every such
with the purpose of ultimate sale: Provided, That, in the case of receipt must substantially contain (a) a description of the
goods delivered under trust receipt for the purpose of goods, documents or instruments subject of the trust receipt;
manufacturing or processing before its ultimate sale, the (2) the total invoice value of the goods and the amount of the
entruster shall retain its title over the goods whether in its draft to be paid by the entrustee; (3) an undertaking or a
original or processed form until the entrustee has complied commitment of the entrustee (a) to hold in trust for the
fully with his obligation under the trust receipt; or (c) to load, entruster the goods, documents or instruments therein
unload, ship or tranship or otherwise deal with them in a described; (b) to dispose of them in the manner provided for in
manner preliminary or necessary to their sale; or the trust receipt; and (c) to turn over the proceeds of the sale
of the goods, documents or instruments to the entruster to the
extent of the amount owing to the entruster or as appears in
the trust receipt or to return the goods, documents or
instruments in the event of their non-sale within the period
specified therein.

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 deemed sufficiently given if in writing, and either personally
The trust receipt may contain other terms and conditions served on the entrustee or sent by post-paid ordinary mail to
agreed upon by the parties in addition to those hereinabove the entrustee's last known business address.
enumerated provided that such terms and conditions shall not
be contrary to the provisions of this Decree, any existing laws, PD 115, Sec. 8 Entruster not responsible on sale by
public policy or morals, public order or good customs. entrustee. The entruster holding a security interest shall not,
merely by virtue of such interest or having given the entrustee
PD 115, Sec. 6 Currency in which a trust receipt may be liberty of sale or other disposition of the goods, documents or
denominated A trust receipt may be denominated in the instruments under the terms of the trust receipt transaction be
Philippine currency or any foreign currency acceptable and responsible as principal or as vendor under any sale or contract
eligible as part of international reserves of the Philippines, the to sell made by the entrustee.
provisions of existing law, executive orders, rules and
regulations to the contrary notwithstanding: Provided, D. Obligations of Entrustee
however, That in the case of trust receipts denominated in
foreign currency, payment shall be made in its equivalent in PD 115, Sec. 9 Obligations of the entrustee The entrustee
Philippine currency computed at the prevailing exchange rate shall (1) hold the goods, documents or instruments in trust for
on the date the proceeds of sale of the goods, documents or the entruster and shall dispose of them strictly in accordance
instruments held in trust by the entrustee are turned over to with the terms and conditions of the trust receipt; (2) receive
the entruster or on such other date as may be stipulated in the the proceeds in trust for the entruster and turn over the same
trust receipt or other agreements executed between the to the entruster to the extent of the amount owing to the
entruster and the entrustee. entruster or as appears on the trust receipt; (3) insure the
goods for their total value against loss from fire, theft, pilferage
- A trust receipt is a formal contract or other casualties; (4) keep said goods or proceeds thereof
- Although the law states that it need not be in any particular whether in money or whatever form, separate and capable of
form, the Trust Receipts Law requires that it must be written identification as property of the entruster; (5) return the goods,
or printed and must contain specific terms documents or instruments in the event of non-sale or upon
demand of the entruster; and (6) observe all other terms and
C. Rights of Entruster conditions of the trust receipt not contrary to the provisions of
this Decree.
PD 115, Sec. 7 Rights of the entruster The entruster shall
be entitled to the proceeds from the sale of the goods, PD 115, Sec. 10 Liability of entrustee for loss The risk of
documents or instruments released under a trust receipt to the loss shall be borne by the entrustee. Loss of goods, documents
entrustee to the extent of the amount owing to the entruster or or instruments which are the subject of a trust receipt, pending
as appears in the trust receipt, or to the return of the goods, their disposition, irrespective of whether or not it was due to
documents or instruments in case of non-sale, and to the the fault or negligence of the entrustee, shall not extinguish his
enforcement of all other rights conferred on him in the trust obligation to the entruster for the value thereof.
receipt provided such are not contrary to the provisions of this
Decree.
PD 115, Sec. 11 Rights of purchaser for value and in good
faith Any purchaser of goods from an entrustee with right to
The entruster may cancel the trust and take possession of the
sell, or of documents or instruments through their customary
goods, documents or instruments subject of the trust or of the
form of transfer, who buys the goods, documents, or
proceeds realized therefrom at any time upon default or failure
instruments for value and in good faith from the entrustee,
of the entrustee to comply with any of the terms and
acquires said goods, documents or instruments free from the
conditions of the trust receipt or any other agreement between
entruster's security interest.
the entruster and the entrustee, and the entruster in
possession of the goods, documents or instruments may, on or
after default, give notice to the entrustee of the intention to PD 115, Sec. 12 Validity of entruster's security interest as
sell, and may, not less than five days after serving or sending of against creditors The entruster's security interest in goods,
such notice, sell the goods, documents or instruments at public documents, or instruments pursuant to the written terms of a
or private sale, and the entruster may, at a public sale, become trust receipt shall be valid as against all creditors of the
a purchaser. The proceeds of any such sale, whether public or entrustee for the duration of the trust receipt agreement.
private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustee's indebtedness to the
entruster. The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency. Notice of sale shall be
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PD 115, Sec. 13 Penalty clause The failure of an entrustee
to turn over the proceeds of the sale of the goods, documents ISSUE:
or instruments covered by a trust receipt to the extent of the W the transaction was a trust receipt transaction or a simple loan
amount owing to the entruster or as appears in the trust (SIMPLE LOAN)
receipt or to return said goods, documents or instruments if
they were not sold or disposed of in accordance with the terms RATIO: The transaction was a simple loan, not a trust
of the trust receipt shall constitute the crime of estafa, receipt agreement.
punishable under the provisions of Article Three hundred and - Sec. 4, PD No. 115 defines a trust receipt transaction
fifteen, paragraph one (b) of Act Numbered Three thousand as any transaction by and between a person referred to as
eight hundred and fifteen, as amended, otherwise known as the entruster, and another person referred to as the
the Revised Penal Code. If the violation or offense is entrustee, whereby the entruster who owns or holds
committed by a corporation, partnership, association or other absolute title or security interest over certain specified
juridical entities, the penalty provided for in this Decree shall goods, documents or instruments, releases the same to the
be imposed upon the directors, officers, employees or other possession of the entrustee upon the latters execution and
officials or persons therein responsible for the offense, without delivery to the entruster of a signed document called a
prejudice to the civil liabilities arising from the criminal offense. trust receipt wherein the entrustee binds himself to
hold the designated goods, documents or instruments with
E. Rights of Purchaser the obligation to turn over to the entruster the proceeds
thereof to the extent of the amount owing to the entruster
or as appears in the trust receipt or the goods, documents
PD 115, Sec. 11 Rights of purchaser for value and in good
or instruments themselves if they are unsold or not
faith Any purchaser of goods from an entrustee with right to
sell, or of documents or instruments through their customary otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt
form of transfer, who buys the goods, documents, or
- Two possible situations in a trust receipt transaction:
instruments for value and in good faith from the entrustee,
o Money received under the obligation involving the duty
acquires said goods, documents or instruments free from the
entruster's security interest. to deliver it (entregaria) to the owner of the
merchandise sold
o Merchandise received under the obligation to return
Colinares v. CA (2000) Davide, Jr., J.
it (devolvera) to the owner
Petitioner: Melvin Colinares and Lordino Veloso
- Failure of the entrustee to turn over the proceeds of the
Respondent: CA and People of the Philippines
sale, covered by the trust receipt to the entruster OR to
Concept: Trust Receipts; Rights of the Purchaser
return the goods if they were not disposed of in accordance
with the terms of the trust receipt shall be punishable as
Doctrine:
estafa under Art. 315 (1) of the RPC without need of
The ownership of merchandise in a trust receipts transaction
proving intent to defraud
remains vested in the person who had advanced payment until
- SC: Transaction was NOT a trust receipt
he has been paid in full. He acquires a security interest in the
o Colinares and Veloso received the merchandise from
goods as holder of a security title for the advances made to the
CM Builders on Oct. 30, 1979 (ownership was already
entrustee. He takes full title to the goods at the very beginning
transferred to be used for the construction project)
and continues to hold that title as his indispensable security
o ONE DAY LATER, they applied to the bank for a loan to
until the goods are sold and the vendee is called upon to pay for
pay for the merchandise
them.
o This belies what normally happens in a pure trust
(Note: This is under Sec. 11, which provides that a purchaser for
receipt transaction where goods are owned by the bank
value and in good faith is free from the entrusters security
and only released to the importer in trust subsequent to
interest. However, this wasnt discussed in the ratio, so maybe
the grant of the loan
its about security, in general, under PD No. 115)
" Bank acquires a security interest in the goods as
holder of a security title for the advances it made
Brief Facts:
to the entrustee
Colinares and Veloso contracted with the Carmelite Sisters to
" Ownership remains with the person who had
renovate their convent. The contractors obtained several
advanced the payment until he has been paid in
materials from CM Builders, and, the day after, applied for a
full or if the merchandise has been sold, the
commercial letter of credit with the PBC to cover the invoice of
proceeds should be turned over to him
the goods. They were made to sign a pro-forma trust receipt as
" To secure that the bank shall be paid, it takes full
security. Despite demands, they failed to pay, so PBC charged
title to the goods at the very beginning and
them with the violation of PD No. 115 (Trust Receipts Law).
continues to hold that title as his
Lower court and CA convicted the two. SC reversed, held that
indispensable security until the goods are sold and
the transaction was NOT a trust receipt transaction, but a simple
the vendee is called to pay for them
loan.
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 " Importer has never owned the goods and is not IV. GUARANTY
able to deliver possession
" Trust receipts partake of the nature of a conditional A. General Concepts
sale where the importer becomes absolute owner
as soon as he pays the price Art. 2047 By guaranty a person, called the guarantor, binds
o Trust receipts were intended to aid in financing himself to the creditor to fulfill the obligation of the principal
importers and retail dealers who do not have sufficient debtor in case the latter should fail to do so.
funds or resources to finance the importation or
purchase of merchandise and who may not be able to If a person binds himself solidarily with the principal debtor,
acquire credit except through utilization, as collateral, the provisions of Section 4, Chapter 3, Title I of this Book shall
of the merchandise imported or purchased be observed. In such case the contract is called a suretyship.
o Antecedent acts in a trust receipt transaction:
application and approval of the letter of credit, making Art. 2048 A guaranty is gratuitous, unless there is a stipulation
of the marginal deposit, and the effective importation
to the contrary.
of the goods
o Trust Receipts Law does not seek to enforce payment
Art. 2051 A guaranty may be conventional, legal or judicial,
but punishes the dishonesty and abuse of confidence in
gratuitous, or by onerous title.
the handling of money or goods
o Here, NO dishonesty nor abuse of confidence because
It may also be constituted, not only in favor of the principal
they continually endeavored to meet their obligations
debtor, but also in favor of the other guarantor, with the
(several receipts issued by PBC acknowledging
latter's consent, or without his knowledge, or even over his
payment)
objection.
" They did not employ an artifice in dealing with PBC
and they never evaded payment nor attempted to
abscond Guaranty
" They are not importers acquiring the goods for re- - a promise to answer for the payment of some debt or the
sale performance of some duty, in case of the failure of another
" They are contractors who obtained fungible goods who is liable in the first instance.
for their construction project; title over the - A personal security transaction that involves the conditional
construction materials never passed to the bank obligation of a person (guarantor) to fulfill a principal
(directly to Colinares and Veloso) obligation in favor of a creditor, in case the debtor fails to
- Practice of banks making borrowers sign trust receipts to do so.
facilitate the collection of loans and placing them under - Obligation of the guarantor always a rise as a consequence
threats of criminal prosecution should they be unable to pay of a contract
may be unjust and inequitable, if not reprehensible - It may be conventional, legal, or judicial.
o These are contracts of adhesion
o This leaves poor and hapless borrowers at the mercy of B. Form of Guaranty
banks and is prone to misinterpretation (as what
happened in this case) Art. 2055 A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
DISPOSITIVE: Decision REVERSED and SET ASIDE.
If it be simple or indefinite, it shall compromise not only the
Colinares v. CA principal obligation, but also all its accessories, including the
What would the remedy have been? judicial costs, provided with respect to the latter, that the
guarantor shall only be liable for those costs incurred after he
Letters of Credit distinguished from Trust Receipt has been judicially required to pay.
LETTERS OF CREDIT TRUST RECEIPT
Code of Commerce PD 115 Art. 1403 The following contracts are unenforceable, unless
Benefits the Benefits the bank/protects they are ratified:
supplier/protects the seller the bank
No assurance that bank will So bank can be assured to be (1) Those entered into in the name of another person by one
be paid paid who has been given no authority or legal representation, or
No criminal penalties Has a criminal penalty (estafa) who has acted beyond his powers;
Only a credit extension Bank owns the goods

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(2) Those that do not comply with the Statute of Frauds as set C. Obligations Secured
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the Art. 2052.A guaranty cannot exist without a valid obligation.
same, or some note or memorandum, thereof, be in writing,
and subscribed by the party charged, or by his agent; Nevertheless, a guaranty may be constituted to guarantee the
evidence, therefore, of the agreement cannot be received performance of a voidable or an unenforceable contract. It may
without the writing, or a secondary evidence of its contents: also guarantee a natural obligation.

(a) An agreement that by its terms is not to be performed Art. 2053 A guaranty may also be given as security for future
within a year from the making thereof; debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated. A
(b) A special promise to answer for the debt, default, or conditional obligation may also be secured.
miscarriage of another;

Art. 2054 A guarantor may bind himself for less, but not for
(c) An agreement made in consideration of marriage, other
more than the principal debtor, both as regards the amount
than a mutual promise to marry;
and the onerous nature of the conditions.

(d) An agreement for the sale of goods, chattels or things in

Should he have bound himself for more, his obligations shall
action, at a price not less than five hundred pesos, unless the
be reduced to the limits of that of the debtor.
buyer accept and receive part of such goods and chattels, or
the evidences, or some of them, of such things in action or pay
- Guaranty cannot exist if the principal obligation is void, but
at the time some part of the purchase money; but when a sale
it can exist even if the contract is voidable or unenforceable.
is made by auction and entry is made by the auctioneer in his
- It can also secure future debt, even if the amount due is not
sales book, at the time of the sale, of the amount and kind of
yet known. In this case, the guarantor will not be liable until
property sold, terms of sale, price, names of the purchasers
the amount is known. It can also secure a future obligation.
and person on whose account the sale is made, it is a sufficient
- Article 2053 is the basis for continuing guaranty, i.e., one
memorandum;
which governs a course of dealing for an indefinite time or
by a succession of credits. It is not limited to a single
(e) An agreement of the leasing for a longer period than one
transaction but contemplates a prospective or future course
year, or for the sale of real property or of an interest therein;
of dealing, covering a series of transactions, which are within
the stipulations of the contract of guaranty, until the
(f) A representation as to the credit of a third person.
expiration or termination thereof.
- The object of a continuing guaranty is to grant to the
(3) Those where both parties are incapable of giving consent to
principal debtor a standing credit to be used from time to
a contract.
time either indefinitely or until a certain period.
- Terms used for continuing guaranty: any debt, any
indebtedness, any sum, any transaction, money to be
- Guaranty: a special promise to answer for debt, default, or
furnished the principal debtor from time to time, at any
miscarriage of another.
time, on such time
- It is covered by the Statute of Frauds.
- It is an accessory contract.
D. Parties to a Guaranty
- The obligation of the guarantor must be express and not
presumed and it cannot extend to more than what is
Art. 2056 One who is obliged to furnish a guarantor shall
stipulated.
present a person who possesses integrity, capacity to bind
- Simple or indefinite guaranty: that which extends to
himself, and sufficient property to answer for the obligation
the principal obligation as well as accessories and judicial
which he guarantees. The guarantor shall be subject to the
costs.
jurisdiction of the court of the place where this obligation is to
- Definite guaranty: that which extends only to a specified
be complied with.
amount.
- If the guaranty specifies a fixed amount but nevertheless
also provides for liability for interest and expenses, the Art. 2057 If the guarantor should be convicted in first instance
guarantor will be liable for the latter amounts even if these of a crime involving dishonesty or should become insolvent,
exceed the specified fixed amount. the creditor may demand another who has all the qualifications
required in the preceding article. The case is excepted where
the creditor has required and stipulated that a specified person
should be the guarantor.

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Art. 2049 A married woman may guarantee an obligation Art. 2061 The guarantor having fulfilled all the conditions
without the husband's consent, but shall not thereby bind the required in the preceding article, the creditor who is negligent
conjugal partnership, except in cases provided by law. in exhausting the property pointed out shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
Art. 2064 The guarantor of a guarantor shall enjoy the benefit resulting from such negligence.
of excussion, both with respect to the guarantor and to the
principal debtor. Art. 2062 In every action by the creditor, which must be
against the principal debtor alone, except in the cases
Art. 2065 Should there be several guarantors of only one mentioned in Article 2059, the former shall ask the court to
debtor and for the same debt, the obligation to answer for the notify the guarantor of the action. The guarantor may appear
same is divided among all. The creditor cannot claim from the so that he may, if he so desire, set up such defenses as are
guarantors except the shares which they are respectively granted him by law. The benefit of excussion mentioned in
bound to pay, unless solidarity has been expressly stipulated. Article 2058 shall always be unimpaired, even if judgment
should be rendered against the principal debtor and the
The benefit of division against the co-guarantors ceases in the guarantor in case of appearance by the latter.
same cases and for the same reasons as the benefit of
excussion against the principal debtor. Art. 2063 A compromise between the creditor and the
principal debtor benefits the guarantor but does not prejudice
- There are at least three parties to a guaranty him. That which is entered into between the guarantor and the
o The creditor creditor benefits but does not prejudice the principal debtor.
o The debtor of the principal obligation
o The guarantor Art. 2064 The guarantor of a guarantor shall enjoy the benefit
- A sub-guarantor is a guarantor of a guarantor of excussion, both with respect to the guarantor and to the
- A co-guarantor is one of several guarantors of only one principal debtor.
debtor for the same debt
- Qualifications of a guarantor - The benefit of excussion (or exhaustion or exclusion) is the
1. A guarantor must possess integrity, capacity to contract right of the guarantor to demand that the creditor first:
and sufficient property for the guaranteed obligation. 1. Exhaust all of the properties of the principal debtor,
Loss of these qualifications gives the creditor the right AND
to demand a new guarantor unless the creditor had 2. Resort to all legal remedies against the principal
stipulated a specified person to act as guarantor. debtorbefore the guarantor is liable to fulfill the
A married woman requires the consent of her husband to bind obligation of the principal debtor. It is the
conjugal property. distinguishing mark of guaranty.
- For the creditor to enforce the guaranty:
E. Benefit of Excussion 1. The creditor must bring an action against the principal
debtor alone, except in the cases mentioned in Art.
Art. 2058 The guarantor cannot be compelled to pay the 2059.
creditor unless the latter has exhausted all the property of the 2. The creditor shall ask the court to notify the guarantor
debtor, and has resorted to all the legal remedies against the of the action.
debtor. 3. The guarantor may appear so that it may, if it so
desires, set up such defenses as are granted by law.
Art. 2059 The excussion shall not take place: The benefit of excussion shall always be unimpaired,
(1) If the guarantor has expressly renounced it; even if judgment should be rendered against the
(2) If he has bound himself solidarily with the debtor; principal debtor and the guarantor in case of
(3) In case of insolvency of the debtor; appearance by the latter.
(4) When he has absconded, or cannot be sued within the 4. In order that the guarantor may make use of the benefit
Philippines unless he has left a manager or representative; of excussion, it must:
(5) If it may be presumed that an execution on the property of - Set it up against the creditor upon demand for
the principal debtor would not result in the satisfaction of the payment, AND
obligation. - Point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover
the amount of the debt.
Art. 2060 In order that the guarantor may make use of the
benefit of exclusion, he must set it up against the creditor
upon the latter's demand for payment from him, and point out
to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the debt.

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Tupaz IV & Tupaz v. CA and BPI (2005) o By signing in such capacity, they did not bind
Petitioners: Jose C. Tupaz IV and Petronila C. Tupax themselves personally liable for El Oro Corporations
Respondents: CA and Bank of the Philippine Islands obligation
Concept: Security Transactions; Guaranty o A corporate representative who signs a solidary
guaranty clause in a trust receipt does not undertake to
Doctrine: guarantee personally the payment of the corporations
A corporate officer who signs a trust receipt containing a solidary debts (Ong. V. CA)
guaranty clause merely binds himself as a guarantor and not a
surety. The solidary liability is not with the principal debtor, but 2. Jose bound himself as a guarantor of El Oro
with other guarantors who sign the trust receipt. Nonetheless, Corporations debt. He is not a surety who is
when the trust receipt contains a waiver of excussion, the solidarily liable.
guarantor can no longer demand for the assets of the principal - Trust receipt dated Sept. 30, 1981 reads as follows:
debtor to be exhausted before payment by the former can be o To the Bank of the Philippine Islands
had. In consideration of your releasing to _____________
under the terms of this Trust Receipt the goods
Brief Facts: described herein, I/We, jointly and severally, agree
Jose and Petronila, corporate officers of El Oro Corporation, and promise to pay to you, on demand, whatever
obtained letters of credit from BPI to finance the purchase of raw sum or sums of money which you may call upon me/us
materials for the manufacture of survival bolos. To secure the to pay to you, arising out of, pertaining to, and/or in any
debt, two trust receipts were signed. The first was signed by way connected with, this Trust Receipt, in the event of
Jose alone, in his personal capacity. The second was signed by default and/or non-fulfillment in any respect of this
Jose and Petronila, in their capacity as corporate officers. In the undertaking on the part of the said __________________
trust receipts, the signatories bound themselves jointly and I/we further agree that my/our liability in this
severally to pay the debt of El Oro Corporation. El Oro guarantee shall be DIRECT AND IMMEDIATE,
defaulted in its obligation, prompting BPI to file a case for estafa without any need whatsoever on your part to
against Jose and Petronila. The two were acquitted of the take any steps or exhaust any legal remedies
criminal charge but were ordered to pay the corresponding that you may have against the said __________________
amounts due under their obligation as sureties of El Oro. before making demand upon me/us.
- Lower Courts interpreted this to mean that Jose bound
himself solidarily liable with El Oro CorporationTHIS IS
ISSUES: ERROR!
1. Whether Jose and Petronila bound themselves personally - Prudential Bank v. IAC the court interpreted a substantially
liable for El Oro Corporations debts under the trust identical clause and ruled that a corporate officer signing
receipts (ONLY JOSE IS PERSONALLY LIABLE IN THE FIRST the same is merely liable as a guarantor
TRUST RECEIPT) o The phrase without any need whatsoever on
2. What is the nature of Joses liability (THAT OF A your part to take any steps or exhaust any
GUARANTOR) legal remedies found at the end of the trust
3. WON BPIs suit against Jose stands despite the Courts receipt speaks of a waiver of exhaustion
finding that he is liable as a guarantor only (YES) " The defense of exhaustion (excussion) may be
raised by a guarantor before he may be held
RATIO: liable for the obligation
1. Jose is personally liable for El Oro Corporations " The inclusion of said waiver of exhaustion
debt under trust receipt dated Sept. 30, 1981 could only mean that the Jose is signing is a
- Trust receipt #1 dated Sept. 30, 1981 guarantor
o Jose signed alone, in his personal capacity o I/We, jointly and severally, agree and
o He did not indicate that he was signing as El Oro promise to pay to you is actually a solidary
Corporations Vice-President for Operations guaranty clause
o Hence, he bound himself personally liable for the " Signatories are not binding themselves
corporations debt solidarily with the principal debtor, but with
o Petronila is not liable under this trust receipt other guarantors who sign the same
- Trust receipt #2 dated Oct. 9, 1981
o Jose and Petronila signed as officers of El Oro
Corporation
o Under their signatures appeared their respective
corporate positions (Vice President Operations; Vice
President Treasurer)

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3. Although Jose is a mere guarantor, he is still liable F. Right to Protection
to pay without the necessity of exhausting the
assets of El Oro Corporation Art. 2071 The guarantor, even before having paid, may
- Excussion is not a pre-requisite to secure judgment against proceed against the principal debtor:
a guarantor
o The guarantor can still demand deferment of the (1) When he is sued for the payment;
execution of judgment against him until after the assets
of the principal debtor shall have been exhausted (2) In case of insolvency of the principal debtor;
- The benefit of excussion may be waived
o Jose waived the benefit of excussion when he (3) When the debtor has bound himself to relieve him from the
agreed his liability in the gauranty shall be DIRECT guaranty within a specified period, and this period has expired;
AND IMMEDIATE without any need whatsoever on the
part of BPI to take any steps to exhaust any legal (4) When the debt has become demandable, by reason of the
remedies expiration of the period for payment;
- As guarantor, he is liable to pay the principal debt as well as
other accessory liabilities (5) After the lapse of ten years, when the principal obligation
o The trust receipt provided for payment of: has no fixed period for its maturity, unless it be of such nature
" Attorneys fees (10% of total amount due) that it cannot be extinguished except within a period longer
" Interest (7% per annum) than ten years;
o The letters of credit are subject to interest (18% per
annum) (6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
DISPOSITIVE: GRANT the petition in part. AFFIRM the CA
Decision and Resolution with MODIFICATIONS. (7) If the principal debtor is in imminent danger of becoming
insolvent.
Tupaz v. CA
There is solidarity with each other (co-guarantors) BUT not with In all these cases, the action of the guarantor is to obtain
the creditor. release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
There is a guarantee but there is a WAIVER of the benefit of danger of insolvency of the debtor.
excussion. Since it is waived, there is no longer a need to
proceed against the debtor before proceeding against the - Right to Protection: right of the guarantor as against
guarantor. the principal debtor to:
1. Obtain release from guaranty, or
Reasons why Tupaz was made liable to the bank even before 2. Demand security
excussion is resorted to: - Purpose: for guarantor to protect itself from
1. Excussion is not a pre-requisite to secure judgment against 1. Any proceeding by the creditor
a guarantor. 2. The danger of insolvency of the debtor
2. The benefit of excussion may be waived (which was present
in this case) This right is exercised by the guarantor as against the principal
debtor.
There is still a remedy for the guarantor, which is to demand
deferment of the execution of the judgment against it until after Since a guarantor binds himself to the creditor, it is also only the
the assets of the principal debtor is exhausted. creditor that can release the guarantor from its guaranty.

This case is basis for saying that a creditor may secure judgment
against a guarantor even before excussion is resorted to.

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G. Right to Indemnification - In guaranty, there is also a legal tie created between the
guarantor and principal debtor to which the principal
Art. 2066 The guarantor who pays for a debtor must be creditor is not privy
indemnified by the latter. - Right to indemnification is the substantive right of action of
The indemnity comprises: the guarantor, after it has paid the principal debt, as against
the principal debtor, to recover:
(1) The total amount of the debt; 1. the totality of the debt
2. the legal interests thereon from the time the payment
(2) The legal interests thereon from the time the payment was was made known to the debtor, even though it did not
made known to the debtor, even though it did not earn earn interest from the creditor
interest for the creditor; 3. the expenses incurred by the guarantor after having
notified the debtor that payment had been demanded
(3) The expenses incurred by the guarantor after having of it, and
notified the debtor that payment had been demanded of him; 4. damages, if they are due
- the right to indemnification is more than a real right to
(4) Damages, if they are due. reimbursement of what was paid
- but for the right to exist in favor of the guarantor, contract of
guaranty must have been entered into with the knowledge
Art. 2050 If a guaranty is entered into without the knowledge
and consent of the principal debtor
or consent, or against the will of the principal debtor, the
provisions of Articles 1236 and 1237 shall apply.
It is not just reimbursement, but involves indemnification.

Art. 1236 The creditor is not bound to accept payment or

H. Right to Subrogation
performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the
Guarantor steps into the shoes of the creditor. However, this
contrary.
right only arises when the guarantor has already paid the
principal debt and the contract of guaranty was enetered with
Whoever pays for another may demand from the debtor what
the knowledge and consent of the principal debtor.
he has paid, except that if he paid without the knowledge or
against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor. Art. 2067 The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the
debtor.
Art. 2069 If the debt was for a period and the guarantor paid
it before it became due, he cannot demand reimbursement of
If the guarantor has compromised with the creditor, he cannot
the debtor until the expiration of the period unless the
demand of the debtor more than what he has really paid.
payment has been ratified by the debtor.

Art. 2050 If a guaranty is entered into without the knowledge

Art. 2070 If the guarantor has paid without notifying the
or consent, or against the will of the principal debtor, the
debtor, and the latter not being aware of the payment, repeats
provisions of Articles 1236 and 1237 shall apply.
the payment, the former has no remedy whatever against the
debtor, but only against the creditor. Nevertheless, in case of a
gratuitous guaranty, if the guarantor was prevented by a Art. 1237 Whoever pays on behalf of the debtor without the
fortuitous event from advising the debtor of the payment, and knowledge or against the will of the latter, cannot compel the
the creditor becomes insolvent, the debtor shall reimburse the creditor to subrogate him in his rights, such as those arising
guarantor for the amount paid. from a mortgage, guaranty, or penalty.

Art. 2072 If one, at the request of another, becomes a Art. 2068 If the guarantor should pay without notifying the
guarantor for the debt of a third person who is not present, the debtor, the latter may enforce against him all the defenses
guarantor who satisfies the debt may sue either the person so which he could have set up against the creditor at the time the
requesting or the debtor for reimbursement. payment was made.

Art. 2080 The guarantors, even though they be solidary, are

released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
and preference of the latter.

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- Right of subrogation is the right of the guarantor who pays, 2. Right to Reimbursement
as against the principal debtor, to be substituted to all the
rights and remedies and securities that the creditor had Art. 2073 When there are two or more guarantors of the same
against the principal debtor debtor and for the same debt, the one among them who has
- Contract of guaranty must have been entered into with the paid may demand of each of the others the share which is
knowledge and consent of the principal debtor proportionally owing from him.
- The benefit of division against the co-guarantors ceases in If any of the guarantors should be insolvent, his share shall be
the same cases and for the same reasons as the benefit of borne by the others, including the payer, in the same
excussion against the principal debtor. proportion.

I. Rights of Co-Guarantors The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or
1. Benefit of Division unless the principal debtor is insolvent.

Art. 2065 Should there be several guarantors of only one Art. 2074 In the case of the preceding article, the co-
debtor and for the same debt, the obligation to answer for the guarantors may set up against the one who paid, the same
same is divided among all. The creditor cannot claim from the defenses which would have pertained to the principal debtor
guarantors except the shares which they are respectively against the creditor, and which are not purely personal to the
bound to pay, unless solidarity has been expressly stipulated. debtor.

The benefit of division against the co-guarantors ceases in the

Art. 2075 A sub-guarantor, in case of the insolvency of the
same cases and for the same reasons as the benefit of
guarantor for whom he bound himself, is responsible to the co-
excussion against the principal debtor.
guarantors in the same terms as the guarantor.

Art. 2078 A release made by the creditor in favor of one of

- The right to reimbursement is the right of the co-guarantor
the guarantors, without the consent of the others, benefits all
who pays as against the other co-guarantors to recover the
to the extent of the share of the guarantor to whom it has been shares due from the co-guarantors, but only if the following
granted.
conditions concur:
a. There are 2 or more guarantors of the same debtor and
- There is co-guaranty when two or more persons answer for fro the same debt
the same debt of the same debtor b. One of the co-guarantors has paid
- Among co-guarantors, the benefit of division is the right of a c. Payment is made by virtue of a judicial demand or the
co-guarantor, as against a creditor, to pay only the divided principal debtor is insolvent
share that it is bound to pay - If any of the co-guarantors is insolvent, the share of the
- The benefit of division will cease and the creditor may claim insolvent co-guarantor shall be born by the other co-
the entire amount from the co-guarantor if: guarantors, including the co-guarantor paying, in the same
a. The co-guarantor against whom the creditor is making proportion as that established in the co-guaranty
the claim has expressly renounced the benefit of
division Allegedly 2 ways of looking at Art .2078:
b. The co-guarantor has bound itself solidarily with the co- 1. The amount of the benefit of release will be divided among
guarantor all debtors; or
c. In case of insolvency of the co-guarantor 2. The other co-guarantors may seek reimbursement from the
d. When a co-guarantor has absconded, or cannot be co-guarantor that was released.
sued within the Philippines unless it has left a manager
or representative Insolvency of debtor & one of co-guarantors paid creditor ! the
e. If it may be presumed that an execution on the remedy of co-guarantor is to go against principal debtor
property of the co-guarantor would not result in the
satisfaction of the obligation RIGHT OF GUARANTOR
Against Creditor: Benefit of excussion
Against Debtor: Protection, indemnification, subrogation

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J. Extinguishment and Right of Release Art. 2082 The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications
Art. 2076 The obligation of the guarantor is extinguished at prescribed in article 2056 and in special laws. (1854a)
the same time as that of the debtor, and for the same causes
as all other obligations. Art. 2056 One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind
Art. 2077 If the creditor voluntarily accepts immovable or himself, and sufficient property to answer for the obligation
other property in payment of the debt, even if he should which he guarantees. The guarantor shall be subject to the
afterwards lose the same through eviction, the guarantor is jurisdiction of the court of the place where this obligation is to
released. be complied with. (1828a)

Art. 2079 An extension granted to the debtor by the creditor Art. 2083 If the person bound to give a bond in the cases of the
without the consent of the guarantor extinguishes the preceding article, should not be able to do so, a pledge or
guaranty. The mere failure on the part of the creditor to mortgage considered sufficient to cover his obligation shall be
demand payment after the debt has become due does not of admitted in lieu thereof. (1855)
itself constitute any extention of time referred to herein.
Art. 2084 A judicial bondsman cannot demand the exhaustion
Art. 2080 The guarantors, even though they be solidary, are of the property of the principal debtor.
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, A sub-surety in the same case, cannot demand the exhaustion of
and preference of the latter. the property of the debtor or of the surety.

Extinguishment by payment or performance of principal SURETYSHIP

obligation. - Legal relation that arises when one party assumes liability
for a debt, default or other failing of a second party
The guaranty is also consequently extinguished once the - A contractual relation
principal obligation is extinguished. - Results from an agreement whereby one person (surety)
engages to be answerable for the debt, default or
V. SURETY miscarriage of another (principal or principal debtor)
- A personal security transaction that involves the
A. General Concepts obligation of the surety to fulfill a principal obligation in
case the principal debtor, to whom the surety is solidarily
Art. 2047 By guaranty a person, called the guarantor, binds bound, does not do so
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. Suretyship as an accessory, ancillary or collateral
obligation
If a person binds himself solidarily with the principal debtor, the - Obligation is not an original and direct one, but merely
provisions of Section 4, Chapter 3, Title I of this Book shall be accessory or collateral to the obligation contracted by the
observed. In such case the contract is called a suretyship. (1822a) principal debtor
- Surety is solidarily bound, but the liability is
consequent upon the liability of the principal debtor and is
Art. 1211 Solidarity may exist although the creditors and the
so dependent on that of the principal debtor (considered in
debtors may not be bound in the same manner and by the same
law as the same party)
periods and conditions. (1140)
- If principal debtor is liable, liability of the surety would be
solidary
Art. 1216 Novation, compensation, confusion or remission of - Nature of suretys undertaking: no liability unless the
the debt, made by any of the solidary creditors or with any of the principal debtor is liable
solidary debtors, shall extinguish the obligation, without
prejudice to the provisions of article 1219. Suretys Liability
- To the creditor is direct, primary and absolute
The creditor who may have executed any of these acts, as well as - Surety is directly and equally bound with the principal
he who collects the debt, shall be liable to the others for the - Surety becomes LIABLE for the debt or duty of another
share in the obligation corresponding to them. (1143) although it possesses no direct or personal interest
over the obligations nor does it receive benefit therefrom

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Obligations of Surety SURETY
- The obligations always arise as a consequence of a - Constitutes a special promise to answer for the debt,
contract, whether it is legal or judicial default, or miscarriage of another
o Legal: offered in virtue of a provision of law - Under the Statute of Frauds, the agreement, note, or
o Judicial: offered in virtue of a judicial order memorandum must be:
- In a legal and judicial suretyship, the surety (bondsman) o In writing; and
must possess the qualifications required of a guarantor: o Subscribed by the party charged or by his agent
o Integrity - If it does not comply with the above requisites, it shall be
o Capacity to bind itself unenforceable
o Sufficient property to answer for the obligation which it
guarantees C. Obligations Secured

B. Form of Surety Art. 2053 A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no
Art. 1403 The following contracts are unenforceable, unless claim against the guarantor until the debt is liquidated. A
they are ratified: conditional obligation may also be secured. (1825a)

(1) Those entered into in the name of another person by one On the Consideration in a Contract of Suretyship
who has been given no authority or legal representation, or who - Peculiar nature of a suretyship: it is valid despite the
has acted beyond his powers; absence of any direct consideration received by the surety
either from the principal debtor or the creditor
(2) Those that do not comply with the Statute of Frauds as set - Generally, it must be supported by a sufficient consideration
forth in this number. In the following cases an agreement o Consideration need not pass directly to the surety
hereafter made shall be unenforceable by action, unless the o If it goes to the principal debtor alone, this will suffice
same, or some note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, On the Extend of the Obligation of the Surety
therefore, of the agreement cannot be received without the - Obligation of the surety cannot be extended by implication
writing, or a secondary evidence of its contents: beyond its specified limits (terms of the contract)
- To the extent, and in the manner, and under the
(a) An agreement that by its terms is not to be performed within circumstances pointed out in the obligation, the surety is
a year from the making thereof; bound, and no farther
- GR: Contracts are strictissimi juris (Law Dictionary: of the
(b) A special promise to answer for the debt, default, strictest right or law)
or miscarriage of another; o XPN: Compensated sureties
o Why the XPN? Formerly, parties became sureties, not
(c) An agreement made in consideration of marriage, other than for hire but as a matter of accommodation
a mutual promise to marry; o Strictissimi juris has no application to sureties organized
for the purpose of conducting an indemnity business at
(d) An agreement for the sale of goods, chattels or things in established rates of compensation
action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the - Aside from the contract of suretyship being the law between
evidences, or some of them, of such things in action or pay at the parties and confining the obligations of the surety to
the time some part of the purchase money; but when a sale is what is stipulated, Art. 2053 applies to suretyships as well
made by auction and entry is made by the auctioneer in his sales - Applies to a continuing surety
book, at the time of the sale, of the amount and kind of property o CONTINUING SURETY: not limited to a single
sold, terms of sale, price, names of the purchasers and person transaction but contemplates a prospective or future
on whose account the sale is made, it is a sufficient course of dealing, covering a series of transactions,
memorandum; which are within the stipulations of the contract of
surety, until the expiration or termination thereof
(e) An agreement for the leasing for a longer period than one " Applies to a succession of liabilities for which the
year, or for the sale of real property or of an interest therein; surety becomes liable as they accrue

( f ) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a

contract.

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Security Bank and Trust Company, Inc. vs. Cuenca (2000) surety should be extinguished pursuant to Art. 2079, as he
Panganiban, J. did not sign or consent to the restructuring agreement.
Petitioner: SBTC
Respondents: Rodolfo M. Cuenca DISPOSITIVE: CA affirmed
Concept: Surety Obligations Secured
SBTC v. Cuenca
Doctrine: This is a consensual CONTRACT TO LOAN
Suretyship Agreements, being accessory obligations, shall also
be extinguished when the principal obligation is also Make sure solidary liability is with the co-principal debtor, not
extinguished. with the co-guarantors

Brief Facts: There is a surety, which is valid. No benefit of excussion.

SBTC granted a credit line to SIMC for P8M, secured by an
Indemnity Agreement wherein Cuenca, as President, held No more principal obligation for which to be liable.
himself solidarily liable. After Cuenca sold his shares, SIMC and
SBTC agreed to restructure its obligations, to allow the former to D. Distinguished from Standby Letter of Credit
make several more loans. When SIMC defaulted, SBTC filed suit
against both SIMC and Cuenca pursuant to the Indemnity Suretyship Standby Letter of
Agreement. Credit
Purpose Both ensure against the debtors
ISSUE: nonperformance
WON the 1989 Loan agreement novated the 1981 CAM and Obligation Obligation is to Obligation is to pay
Cuencas liability under the Indemnity Agreement (YES) complete debtors in the event of
performance nonperformance
RATIO: YES. The purpose of the restructured loan Requisites for Fact of debtors Submission of the
agreement was to extinguish the original credit obligation to non-performance required
accommodation. arise must first be documents as stated
- Requisites of Novation: established, in the letter of credit
o There is a previous valid obligation usually through
o The parties concerned agree to a new contract litigation
o The old contract is extinguished Benefit to Benefit to creditor is Benefit to the creditor
o There is a valid new contract. Creditor that surety will is that he will
- That the 1989 Loan Agreement extinguishes the original perform if the receive payment in
credit accommodation is evident from its express provision debtor does not the event of non-
to liquidate the principal and the interest of the earlier performance, ahead
indebtedness. of any litigation
- The former manager of the Loans and Discounts Who bears Financial burden is Financial burden is
Department of SBTC also testified that the proceeds of the financial on the creditor reversed since the
1989 Loan Agreement was used to pay-off the original burden while there is creditor is assured of
indebtedness. litigation to payment ahead of any
- Incompatibilities between the 1989 Loan Agreement and determine if the litigation.
1980 Credit Accommodation: debtor really is in
o Limit of CAM P8M; while amount of Loan was P12.2 M default and if so, the
o Periods of payment also different. costs of
o Loan agreement also contained conditions not found in performance
the earlier obligation, such as delivering additional
documents and writings as may be necessary and that
SURETYSHIP
SIMC shall not create any mortgage or encumbrance - Legal relation that arises when one party assumes liability
on any asset that it owned, nor would it participate in
for a debt, default or other failing of a second party
any merger or consolidation.
- A contractual relation
- As the 1989 Loan Agreement extinguished the credit
- Results from an agreement whereby one person (surety)
accommodation, the Indemnity Agreement, an accessory
engages to be answerable for the debt, default or
obligation, was also necessarily extinguished pursuant to miscarriage of another (principal or principal debtor)
Art. 1296.
- A personal security transaction that involves the
- Even arguendo that the Loan agreement merely extends the
obligation of the surety to fulfill a principal obligation in
original credit accommodation, Cuencas obligation as a
case the principal debtor, to whom the surety is solidarily
bound, does not do so

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STANDBY LETTER OF CREDIT (an instrument) When obligation Obligation to pay Obligation to pay
- This kind of letter of credit, also known as a standby letter arises arises when the arises once
of credit, or, simply, standby credit, is used as a principal debtor creditor has
guarantee or security for either a monetary or non- defaults in his exhausted all of
monetary obligation. performance principal
- In a standby credit arrangement, the issuer agrees to debtors
pay the creditor-beneficiary if the debtor-applicant property and
defaults or fails to perform the obligation. after all
- The standby credit becomes payable upon certification remedies
of the debtor-applicants default or failure to against the
perform the obligation. latter has been
resorted to.
E. Distinguished from Guaranty
Estrella Palmares vs. Court of Appeals and M.B. Lending
Art. 2047 By guaranty a person, called the guarantor, binds CorporationRegalado, J.
himself to the creditor to fulfill the obligation of the principal Petitioner: Estrella Palmares
debtor in case the latter should fail to do so. Respondent: Court of Appeals (CA) and M.B. Lending
Corporation (MB)
If a person binds himself solidarily with the principal debtor, the Concept: Surety Distinguished from Guaranty
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. (1822a) Doctrine:
In a guaranty, a person called the guarantor binds himself to the
Suretyship Guaranty creditor to fulfill the obligation of the principal debtor in case the
Purpose Insure the Insure the latter should fail to do so. If a person binds himself solidarily with
payment of the solvency of the the principal debtor, the contract is called a suretyship. See also
debt/performance principal debtor the text in italics below.
of the obligation of
the principal debtor Brief Facts:
Obligation Surety will pay if the Guarantor will pay Palmares signed as co-maker of a promissory note with Osmea
debtor does not if debtor is and Azarraga. She bound herself to pay the obligation jointly
pay unable to pay and severally. She also bound herself to pay in case Osmea and
Nature of Liability Direct, primary, Enjoys the Azarraga defaulted.
and absolute benefit of
liability to the excussion; ISSUES:
creditor creditor must first 1. W Palmares signed as a surety or as a guarantor. (She
exhaust all signed as a surety.)
properties of the 2. WON Palmares was liable. (YES)
principal debtor
and resort to all RATIO:
remedies 1. Palmares signed as a surety.
against the - Palmares: contended that while paragraph 2 provides that
principal debtor she was jointly and severally liable with the principal makers,
before going after under paragraph 3, her liability was actually that of a
the guarantor. guarantor because she bound herself to fulfill the obligation
only in case the principal debtor should fail to do so, which
is the essence of the contract of guaranty.
Debtors Solvency Obligated to pay Debtor must be
regardless of insolvent before o Averred that the words jointly and severally were
solvency or guarantor can be technical and legal terms not fully appreciated by an
ordinary layman such as she, a 65 year-old housewife,
insolvency of the obligated to pay
who entered into the transaction without fully realizing
debtor;. The only
the nature and extent of her liability. The words used in
determining factor
is debtors paragraph 3 are easier to comprehend.
o The law looks upon the contract of suretyship with a
nonperformance
jealous eye and the rule is that the obligation of the
surety cannot be extended by implication beyond
specified limits, taking into consideration the peculiar
nature of a surety agreement.

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 o The promissory note was a contract of adhesion be used as an aid in determining whether a partys
prepared by MB and any apparent ambiguity should be undertaking is that of a surety or a guarantor.
strictly construed against MB. o Several acts by the petitioner also showed that the
- SC: Article 2047 of the Civil Code provides that by contract was that of suretyship. When petitioner was
guarantee, a person called the guarantor binds himself to informed about the failure of the principal debtor to
the creditor to fulfill the obligation of the principal debtor in pay, she immediately offered to settle the account.
case the latter should fail to do so. If a person binds himself Petitioner also presented receipts of payments already
solidarily with the principal debtor, the contract is called a made, which were all issued in her name and of the
suretyship. Azarraga spouses. The concomitant and simultaneous
o The contract must be interpreted literally since it was compliance of Palmares obligation with that of her
clear and left no doubt as to the intention of the principals only goes to show that, from the very start,
parties. Palmares expressly bound herself to be jointly petitioner considered herself equally bound by the
and severally or solidarily liable with the principal maker contract.
of the note. Her liability is that of a surety. o A surety usually enters into the same obligation as that
o Her pretensions that the terms jointly and severally or of his principal, and the signatures of both usually
solidarily liable could not be easily understood was appear upon the same instrument, and the same
diametrically opposed to her manifestation in the consideration usually supports the obligation for both
contract that she fully understood the contents and was the principal and the surety. This was so in this case.
fully aware of her solidary liability. She admitted to
signing voluntarily, hence she could not be heard to 2. Yes, Palmares was liable.
claim otherwise. - Palmares: There was fraud on part of MB and there was
o A surety is an insurer of the debt, whereas a guarantor misapprehension of her part.
is an insurer of the debt, whereas a guarantor is an - SC: Claim of fraud was unavailing since Palmares only
insurer of the solvency of the debtor. A suretyship is an presented her own uncorroborated and, expectedly, self-
undertaking that the debt shall be paid; a guaranty, an serving allegations. Having entered into a contract
undertaking that the debtor shall pay. Stated voluntarily, Palmares was stopped to assert that she did so
differently, a surety promises to pay the principals debt under misapprehension or ignorance of the legal effect of
if the principal will not pay, while a guarantor agrees the contract. Mistake of a surety as to the legal effect of her
that the creditor, after proceeding against the principal, obligation is ordinarily no reason for relieving her of liability.
may proceed against the guarantor if the principal is o In the absence of a statutory or contractual
unable to pay. A surety binds himself to perform if the requirement, it is not necessary that payment or
principal does not, without regard to his ability to do performance of the obligation be first demanded of the
so. A guarantor, on the other hand, does not contract principal. It is not a requisite, before proceeding
that the principal will pay, but simply that he is able to against the sureties, that the principal be called on to
do so. In other words, a surety undertakes directly for account.
the payment and is so responsible at once if the o A surety is liable as much as his principal is liable and
principal debtor makes default, while guarantor absolutely liable as soon as default is made, without any
contracts to pay if, by the use of due diligence, the demand upon the principal whatsoever (Is the Court
debt cannot be made out of the principal debtor. saying that default in a contract of surety means
Quintessentially, the undertaking to pay upon default of ordinary delay and not the default as contemplated by
the principal debtor does not automatically remove it the Civil Code?) or any notice of default.
from the ambit of a contract of suretyship. - Palmares: There was neither demand upon her nor notice
o It has not been shown, either in the contract or the of the principals default.
pleadings, that MB agreed to proceed against Palmares - SC: Demand on the sureties is not necessary before brining
only if and when the default principal has become a suit against them, since the commencement of the suit is a
insolvent. A contract of suretyship is that wherein one sufficient demand.
lends his credit by joining in the principal debtors o A surety is not even entitled, as a matter of right, to be
obligation, so as to render himself directly and primarily given notice of the principals default. The creditor
responsible with him, and without reference to the owes no duty of active diligence to take care of the
solvency of the principal. interest of the surety. The creditors mere failure to give
o The rule of strictissimi juristhat the liability of the information to the surety of the default of the principal
surety, under his contract, as thus interpreted and cannot have the effect of discharging the surety. The
construed, is not to be extended beyond its strict surety is bound to take notice of the principals default
meaningdid not apply because it only does after it and to perform the obligation. The surety cannot
has been definitely ascertained that the contract is one complaint that the creditor has not notified him in the
of suretyship and not a contract of guaranty. It cannot absence of a special agreement to that effect in the
contract of suretyship.

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- Palmares: Questioned the propriety of filing a complaint RATIO:
solely against her to the exclusion of the principal debtors 1. YES; The use of the term "guarantee" does not
who allegedly were the only ones who benefitted from the ipso facto mean that the contract is one of
proceeds of the loan. guaranty.
- SC: Palmares, as surety, was solidarily liable. The creditor - Under A contract of surety is an accessory promise by which
can sue any of the solidarily liable, each or several, for the a person binds himself for another already bound, and
entire obligation. agrees with the creditor to satisfy the obligation if the
- Palmares: Failure to sue her immediately exonerated her. debtor does not. A contract of guaranty, on the other hand,
- SC: Mere failure to immediately sue Palmares did not is a collateral undertaking to pay the debt of another in case
release her from liability. Mere want of diligence or the latter does not pay the debt.
forbearance does not affect the creditors rights vis--vis the - Strictly speaking, guaranty and surety are nearly related, and
surety, unless the surety requires him by appropriate notice many of the principles are common to both. However, under
to sue on the obligation. Even neglect of the creditor to sue our civil law, they may be distinguished thus: A surety is
the principal does not absolve surety. usually bound with his principal by the same instrument,
o In order to constitute an extension discharging the executed at the same time, and on the same consideration.
surety it should appear that: 1) the extension was for a He is an original promissor and debtor from the beginning,
definite period, pursuant to an enforceable agreement and is held, ordinarily, to know every default of his principal.
between principal and creditor; and 2) it was made Usually, he will not be discharged, either by the mere
without the consent of the surety or with a reservation indulgence of the creditor to the principal, or by want of
of rights with respect to him. These requirements were notice of the default of the principal, no matter how much
not shown to exist. In fact, if the facts are reviewed, it he may be injured thereby.
was Palmaress acts that caused the collection period to - On the other hand, the contract of guaranty is the
be prolonged. guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of
DISPOSITIVE: CA decision affirmed with modification. the principal, and is often supported on a separate
consideration from that supporting the contract of the
Palmares v. CA principal. He is often discharged by the mere indulgence of
Creditor can go after the surety or the debtor or both. the creditor to the principal, and is usually not liable unless
notified of the default of the principals.
E. Zobel v CA (1998) Martinez, J. - Based on the aforementioned definitions, it appears that
Petitioner: E. Zobel the contract executed by petitioner in favor of SOLIDBANK,
Respondents: SOLIDBANK albeit denominated as a "Continuing Guaranty," is a
Concept: Surety Distinguished from Guaranty contract of surety. The terms of the contract categorically
obligates petitioner as "surety" to induce SOLIDBANK to
Doctrine: extend credit to respondent spouses. This can be seen in
The use of the term "guarantee" does not ipso facto mean that the following stipulations.to wit: ...undersigned is now
the contract is one of guaranty. obligated to you as surety and in order to induce you..; ...!
the undersigned agrees to guarantee, and does hereby
Brief Facts: guarantee, the punctual payment, at maturity or upon
Respondent spouses applied for a loan with respondent demand, to you of any and all such instruments, loans,
SOLIDBANK. The loan was granted subject to the condition that advances, credits and/or other obligations herein before
spouses execute a chattel mortgage over the 3 vessels to be referred to, and also any and all other indebtedness of every
acquired by them, and that a continuing guarantee be executed kind which is now or may hereafter become due or owing to
by petitioner EZ, Inc. in favor of Solid Bank. The spouses you by the Borrower..
defaulted in payment of the entire obligation upon maturity. - The contract clearly discloses that petitioner assumed
SolidBank filed a complaint for the sum of money against EZ liability to SOLIDBANK, as a regular party to the
Zobel. Zobel moved to dismiss the complaint on the ground that undertaking and obligated itself as an original promissor. It
its liability as guarantor of the loan was extinguished pursuant to bound itself jointly and severally to the obligation with the
Article 2080. respondent spouses. In fact, SOLIDBANK need not resort to
all other legal remedies or exhaust respondent spouses'
ISSUE: properties before it can hold petitioner liable for the
WON Zobel, under the Continuing Guaranty, obligated obligation.
himself as a surety (YES).
DISPOSITIVE. Petition dismissed for lack of merit

E. Zobel v. CA
Art. 2080 does not apply to a surety

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International Finance Corporation v. Imperial Textile Mills, Inc. - The obligations of the guarantors are meticulously
(2005) Panganiban expressed:
Petitioner: International Finance Corporation (IFC) o Section 2.01. The Guarantors jointly and severally,
Respondent: Imperial Textile Mills, Inc. (ITM) irrevocably, absolutely and unconditionally
Concept: Surety: Distinguished from Guaranty guarantee, as primary obligors and not as
sureties merely, the due and punctual payment of
Doctrine: the principal of, and interest and commitment charge
Although denominated as a Guarantee Agreement, ITM has on, the Loan, and the principal of, and interest on, the
bound itself solidarily with PPIC. Under Art. 2047, when the Notes, whether at stated maturity or upon prematuring,
guarantor binds itself solidarily, it becomes a suretyship and the all as set forth in the Loan Agreement and in the
provisions on Joint and Solidary Obligations will apply. The Notes.
creditor may then proceed against any of the solidary debtors or - SC: The Agreement uses guarantee and guarantors but
some or all of them simultaneously for so long as the debt has the Court is not convinced that the use of the two words
not been fulfilled. A suretyship, as compared to a guaranty limits the Contract to a mere guaranty because the
involves a situation where the guarantor is solidarily liable to the stipulations show otherwise
creditor. o The Agreement stated that the corporation was
jointly and severally liable
Brief Facts: o To emphasize the nature of that liability, Contract
IFC granted a loan to PPIC in the amount of US$7-M. IFC stated that ITM was a primary obligor, not a mere
contracted with ITM and Grandtex to secure the loan granted to surety
PPIC, denominating it as a Guarantee Agreement and using the o At bottom, and to all legal intents and purposes, it was
words guarantor and guarantee. When PPIC defaulted and a surety
an extrajudicial foreclosure of the mortgage was unable to satisfy o ITM bound itself to be solidarily liable with PPIC for the
the outstanding obligation, IFC filed a complaint against PPIC latters obligations under the Loan Agreement with IFC;
and ITM for the balance. it brought itself to the level of PPIC and could not be
deemed merely secondarily liable
ISSUE: o Initially, it was a stranger to the Loan Agreement, but its
WON ITM is a surety, and thus solidarily liable with PPIC for loan liability commenced when it guaranteed PPICs
payment (YES) obligation
o Became a surety when it bound itself solidarily with
RATIO: YES, ITM is a surety. It is solidarily liable with the principal obligor
PPIC for the payment of its loan. " Art. 2047 By guaranty, a person, called the
- 2 Contracts involved: 1) Loan Agreement (IFC and PPIC); 2) guarantor binds himself to the creditor to fulfill the
Guarantee Agreement (ITM & Grandtex and IFC) obligation of the principal in case the latter should
- IFC: Under the Guarantee Agreement, ITM bound itself as fail to do so.
surety to PPICs obligations proceeding from the Loan If a person binds himself solidarily with the
Agreement principal debtor, the provisions of Sec. 4, Chap. 3,
- ITM: By the terms of the Guarantee Agreement, it was Title I of this Book shall be observed. In such case
merely a guarantor, not a surety the contract shall be called suretyship.
- The premise of the Guarantee Agreement: " The cited provisions refer to Arts. 1207 to 1222,
o (A) By an Agreement of even date herewith between NCC on Joint and Solidary Obligations, and what is
IFC and PHILIPPINE POLYAMIDE INDUSTRIAL relevant is Art. 1216
CORPORATION (herein called the Company), which " Art. 1216 The creditor may proceed against any
agreement is herein called the Loan Agreement, IFC one of the solidary debtors or some or all of them
agrees to extend to the Company a loan (herein called simultaneously. The demand made against one of
the Loan) of seven million dollars ($7,000,000) on the them shall not be an obstacle to those which may
terms therein set forth, including a provision that all or subsequently be directed against the others, so
part of the Loan may be disbursed in a currency other long as the debt has not been fully collected.
than dollars, but only on condition that the o Pursuant to Art. 1216, IFC was justified in taking action
Guarantors agree to guarantee the obligations directly against ITM
of the Company in respect of the Loan as - SC: There is no ambiguity in the provisions of the
hereinafter provided. Guarantee Agreement
o (B) The Guarantors, in order to induce IFC to enter o When qualified by the term jointly and severally, the
into the Loan Agreement, and in consideration of IFC use of the word guarantor to refer to a surety does
entering into said Agreement, have agreed so to not violate the law
guarantee such obligations of the Company.

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 o Art. 2047 (see above) provides that a suretyship is
created when a guarantor binds itself solidarily with the
principal obligor
o The phrase as primary obligor and not merely as ISSUES:
surety stresses that ITM is being placed on the same 1. WON Ching could be held liable for the obligations that
level as PPIC ! the words emphasize the nature of the were constituted after the execution of the deed of
liability, which the law characterizes as suretyship suretyship (YES)
o Use of the word guarantee does not ipso facto make 2. WON Ching may still be held liable for his undertaking under
the contract one of guaranty; very terms of a contract the trust receipts when TRB prevented their fulfillment (YES)
govern the obligations of the parties 3. WON TRB may collect a larger amount from Ching as surety
- Execution of the Agreement was a condition precedent for of PBM than the amount in the SEC-approved rehabilitation
the approval of the loan; IFC required a higher degree of plan (YES)
liability from ITM in case PPIC committed a breach; ITM
agreed with the Sec. 2.01 stipulation and is now estopped RATIO:
from feigning ignorance 1. YES. Ching is still liable for these obligations
- CA: denied solidary liability on the theory that the parties - SC: This appeal is, in effect, a disguised motion for
would not have executed a Guarantee Agreement if they reconsideration of the earlier ruling in Traders Royal Bank v.
intended to name ITM as a primary obligor; that ITMs CA.
undertaking was collateral to and distinct from the Loan - The SC has already ruled that Chings liability as surety is
Agreement separate from that of the liability of PBM which has already
o SC: A suretyship is merely an accessory or a collateral to been under the rehabilitation proceedings under the SEC.
a principal obligation; however, the liability of the - Under Art. 1216 of the Civil Code, Ching can be sued
surety is direct, primary and absolute, or equivalent to separately to enforce his liability as surety.
that of a regular party to the undertaking - As for the obligations being constituted after the execution
" Surety becomes liable to the debt and duty of the of the deed, the SC held that under Art. 2053 of the Civil
principal even without possessing a direct or Code, there can be a surety for future debts
personal interest in the obligations - Dio v. CA: A continuing suretyship is one which covers all
transactions, including those arising in the future, which are
DISPOSITIVE: Petition GRANTED and the assailed decision is within the description or contemplation of the contract of
MODIFIED. ITM is declared a surety to PPIC and is ordered to guaranty, until the expiration or termination thereof.
pay IFC the same amounts. - The very instrument of the deed of suretyship states that
Ching shall answer for amounts that PBM may now be
IFC v. ITM indebted or may hereafter become indebted to TRB.
This case serves only to emphasize liability
2. YES. Ching is still liable under the trust receipts
Phil. Blooming Mills & Ching v. CA (2003) Carpio, J. - Ching is still liable for the amounts under these
Petitioners: Phil. Blooming Mills (PBM) and Alfredo Ching corresponding trust receipts and letters of credit since he
Respondents: Court of Appeals and Traders Royal Bank (TRB) has not shown proof of payment or settlement with TRB.
Concept: Surety; Distinguished from Guaranty - TRB was empowered by express provisions in the trust
receipts and also by the provisions of PD 115 (Trust Receipts
Doctrine: Law) to take possession of the merchandise covered by the
A continuing suretyship is one which covers all transactions, trust receipts.
including those arising in the future, which are within the - Under. Sec. 7 of PD 115, once the entruster (in this case,
description or contemplation of the contract of guaranty, until TRB) has taken possession, it may sell the merchandise and
the expiration or termination thereof. the proceeds of such sale shall be applied to the expenses
that the entruster made for retaking and keeping the
Brief Facts: merchandise, as well as the indebtedness of the entrustee.
Ching, Senior VP of PBM, bound himself, in his personal Should there be any surplus, the entrustee shall be entitled
capacity, to be the surety of PBM in its transactions with TRB. to them. But if there is any deficiency between the
PBM defaulted and was placed under receivership by the SEC. indebtedness and the proceeds, the entrustee shall be
TRB now proceeds against Ching as the surety of PBM in a liable to pay the same.
separate suit while Ching contends that since PBM was placed - Thus, even if TRB took the merchandise covered by the trust
under receivership, the regular courts have no jurisdiction over receipts, Ching remains liable.
his case.

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3. YES. TRB may collect a larger amount and is not Art. 2067 The guarantor who pays is subrogated by virtue
bound by the amount set in the rehabilitation plan. thereof to all the rights which the creditor had against the
- Ching: Under Art. 1222 of the Civil Code, wherein the surety debtor.
is allowed to raise the defenses personal to the debtor, he
argues that he is entitled to a reduction of his liability in view If the guarantor has compromised with the creditor, he cannot
of the reduced amount that TRB is set to receive under the demand of the debtor more than what he has really paid. (1839)
rehabilitation plan.
- SC: Chings theory is incorrect. Under Art. 1216 of the Civil Art. 1217 Payment made by one of the solidary debtors
Code, TRB is entitled to pursue against Ching the full
extinguishes the obligation. If two or more solidary debtors offer
amount of PBMs loan.
to pay, the creditor may choose which offer to accept.
- SC: TRB proceeded in the transaction with PBM in light of
the fact that Ching undertook to pay the amount as surety,
He who made the payment may claim from his co-debtors only
should PBM fail to pay what it owed TRB. This is Chings the share which corresponds to each, with the interest for the
very purpose as surety. Hence, it cannot use PBMs failure to
payment already made. If the payment is made before the debt
pay to justify a reduced liability.
is due, no interest for the intervening period may be demanded.

DISPOSITIVE: CA affirmed. When one of the solidary debtors cannot, because of his
insolvency, reimburse his share to the debtor paying the
PBM v. CA obligation, such share shall be borne by all his co-debtors, in
1st debt: 10M proportion to the debt of each. (1145a)
Final debt: 19M
Debt after receivership: 1.3M
Surety Joint and Solidary
Debtor
Ching has to pay 20M to bank (creditor)
Has a right to indemnification Has a right to reimbursement
and subrogation as against the as against his co-debtors
Ching can only go after PBM for 2M (principal debtor) because it
principal debtor
is under receivership
Entitled to the total amount of Entitled to be reimbursed for
the debt he has paid and to be the share that corresponds to
Ching, as asurety, assumes the risk it is a RISK THAT YOU
subrogated to all the rights that each co-debtor
HAVE TO BEAR (as counsel, advise your client surety of that fact)
the creditor had against the
principal debtor
F. Distinguished from Joint and Solidary Obligations
Suretyship is an accessory,
ancillary or collateral obligation
Art. 2047 By guaranty a person, called the guarantor, binds
Since this is an Person is still bound as part of
himself to the creditor to fulfill the obligation of the principal
ancillary/accessory obligation, the principal obligation
debtor in case the latter should fail to do so.
not part of principal obligation
Requires a PRINCIPAL There is already a PRINCIPAL
If a person binds himself solidarily with the principal debtor, the
obligation obligation
provisions of Section 4, Chapter 3, Title I of this Book shall be
Right of indemnification Right of reimbursement
observed. In such case the contract is called a suretyship. (1822a)

Art. 2066 The guarantor who pays for a debtor must be

indemnified by the latter.

The indemnity comprises:

(1) The total amount of the debt;

(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;

(3) The expenses incurred by the guarantor after having notified

the debtor that payment had been demanded of him;

(4) Damages, if they are due. (1838a)

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Escano & Silos v. Ortigas Jr. (2007) Tinga, J. - The mere fact that Escao et al. identified themselves as
Petitioners: Salvador P. Escao and Mario M. Silos Sureties in the Undertaking does not render them
Respondent: Rafael Ortigas solidarily liable
Concept: Surety; distinguished from joint and solidary - In order for the conclusion of Ortigas to hold (that the
obligations designation surety conclusively entails a suretyship
agreement), the Court would have to be satisfied that
Doctrine: among Escao, Silos, and Matti, there is one who stand as
- In cases where there are several obligors, in the absence of the principal debtor to Ortigas and another as surety who
an express stipulation that liability is solidary, it is presumed has the right to full reimbursement from the principal debtor
the liability is merely joint, unless the nature of the or debtorsHOWEVER, such is not the case
obligation requires solidarity. - The Court is likewise not convinced that the nature of the
- Art. 1217 makes plain that the solidary debtor who obligation requires solidarity
effected the payment to the creditor may claim from his co- o Even if the liability of Escao et al. were merely joint,
debtors only the share which corresponds to each the full relief and reimbursement of Ortigas arising from
with the interest for the payment already made. Such his payment to PDCP would still be accomplished
solidary debtor will not be able to recover from the co- through complete execution of such judgment
debtors the full amount already paid to the creditor,
because the right to recovery extends only to the Discussion on suretyship vis--vis solidary obligation
proportional share of the other co-debtors, and not as to - Art. 2047 provides for the definition of surety
the particular proportional share of the solidary debtor who o By guaranty a person, called the guarantor, binds
already paid. In contrast, even as the surety is solidarily himself to the creditor to fulfill the obligation of the
bound with the principal debtor to the creditor, the surety principal debtor in case the latter should fail to do so. If
who does pay the creditor has the right to recover the full a person binds himself solidarily with the principal
amount paid, and not just any proportional share, from the debtor, the provisions of Section 4, Chapter 3, Title I of
principal debtor. Such right to full reimbursement falls within