MANRESA 2015

Atty. Jazzie Sarona Lozare

PART I: take into consideration the essential elements of a valid

CONCEPT OF CREDIT TRANSACTIONS contract. Now, who are the parties in a bailment? We have:
1. The Bailor;1 and
Credit Transactions. These are transactions for purchaser of 2. The Bailee2
goods or loan of goods, including services or money, which
(relates to) a purchase or loan at the present time with promise Kinds of Bailment:
to pay or deliver in the future. With these credit transactions, 1. For the sole benefit of the bailor
it is now possible for more exchanges to take place. Because Gratuitous Deposit and
essentially, you get to enjoy the money that you borrow now Mandatum;
but you will pay later. Or you get to enjoy the use of a property 2. For the sole benefit of the bailee.
now and just return it later. So, credit transactions that are Commodatum
involved, we have BUGMAC Gratuitous Simple Loan or Mutuum; and
1. Bailment Contracts; 3. For the benefit of both parties 3
2. Usury Law, but the Usury Law has already been Contract of Deposit for compensation,
suspended; Involuntary Deposit,
3. Contracts of Guarantees and Suretyship; Pledge.
4. Mortgages;
5. Antichresis; and When we say the bailment is gratuitous, there is no
6. Concurrence and Preference of Credits. consideration involved but nevertheless, obligations are
imposed on the respective parties.
Now, in relation to Credit Transactions, we will also discuss the
two (2) types of security. Security, meaning yung collaterals. It Now, we also have Bailments for Hire:
can be: Hire of Things, we have contracts of lease;
1. Real Security/Secured Transactions; collateral or an Hire of Service, like that of a contract for piece of
encumbrance upon a property. CARP work under Article 1467;
Contracts of Pledge; Hire for Carriage of Goods, like common carrier;
Chattel Mortgage; and
Real Estate Mortgage; as well as Hire for Custody for Safekeeping, like that which
Antichresis. is covered under the Warehouse Receipts Law.

2. Personal Security/Unsecured Transactions wherein the

obligation or the collateral is essentially supported PART II:
only by a promise to pay or a personal commitment LOAN (ARTICLES 1933 - 1961)
of a person such as a guarantor or a surety.
I. Concept
So with contracts of security, essentially, something is given,
deposited or served as a means to ensure the fulfilment or Article 1933. by the contract of loan
enforcement of an obligation or of protecting some interest in COMMODATUM LOAN
the property. One of the parties Money or other
deliver to another consumable thing,
Bailment either something NOT upon the condition that
So, we have here contracts of bailment. Bailment, meaning, it consumable so that the the same amount of the
involves contracts to deliver. Delivery of property of one latter may use them for same kind and quality
person to another in trust for a specific purpose with a a certain time and shall be paid
contract, whether express or implied, that the trust shall be return it
faithfully executed and the property returned or duly Essentially gratuitous May be gratuitous or
accounted for when the special purpose is accomplished or with a stipulation to pay
kept until the bailor retains it. So, we have here contractual
interest
relations. Since it involves contractual relations, then we also

1 Bailor, also referred to as the Commodatario, is the giver. The one who delivers
possession or custody of the thing bailed. As you will see when we discuss the different
contracts involving bailment, it is NOT required that the bailor be the owner of the
property that is delivered. What is important is that the bailor must have a POSSESSORY
INTEREST like that of a lessee, wherein he is not prohibited to let other persons lease or
use the property, as well as a usufructuary, wherein the person is given the right to enjoy
the property without transfer of ownership. Again, these persons (i.e. Lessee and
Usufructuary) can be considered as bailors.
2And then we have bailees. Bailee is the recipient. It refers to the person who receives the
possession or custody of the thing that is delivered. He is also known as the
Commodante. Now, the bailees obligation is to restore the subject of the bailment in
the same or in an altered form xxx (NOTE: a few words are inaudible), therefore.
3When we say Mutual Benefit Bailments, the third kind that Ive mentioned, essentially
what we have here are business transactions with consideration.
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 MANRESA 2015
Atty. Jazzie Sarona Lozare

Bailor retains Ownership passes to same kind and quality,

ownership of the thing the borrower with or without interest.
loaned
Loan vs. Discounting:
Alright, when we think of loan, the first thing that comes into When we talk about loan, it is different from DISCOUNTING.
our mind is money, pera or utang. Pag sinabing loan, Now, what happens in discounting? It is a mode of loaning
naghiram ka ng pera. But if you take into consideration the money. Anybody who is familiar with discounting? A check is
definition as provided under our laws, loan is not just money. issued in your name pero post-dated pa. Wala ka naming bank
Loan as provided under Article 1933, we have two (2) kinds: account or kelangan mo pa puntahan sa banko para magpa-
1. Commodatum; and encash. So, magpa discount ka. When we say magpa-
2. Mutuum. discount, bawasan yung amount, diba? sa check? Which
should be considered as interest on the part of the person na
nagpa-discount. So, essentially, it is really not a loan. In a
Now, first thing that you should consider is that discount, interest is deducted in advance unlike that of a loan in
a Contract of Loan is a REAL CONTRACT, perfected by mere its general term. So you could have a single paper discounting,
delivery. only the signature of the maker appears, in loan. But if it is
And essentially, it is considered as a UNILATERAL discounting, that is considered as double paper in the sense
CONTRACT because obligations are more on the part of that you would have two (2) signatures appearing with both
the borrower. But we will see later on that there are also parties liable for the payment.
obligations on the part of the bailee pero very minor
nalang siya with regard to this loan. LOAN DISCOUNTING
Interest usually not Interest is deducted in
Q: what is the cause or consideration in this Contract of Loan? deducted in advance. advance.
Borrower acquisition of the thing; One could have a single Considered as double
Lender the right to demand the return or the equivalent paper discounting (only paper discounting in the
thereof. the signature of the sense that you would
maker appears). have two (2) signatures
Now, when we talk of loan in the common acceptance of the appearing with both
term, that is what we call MUTUUM wherein there is delivery parties liable for the
by one party and the receipt of the other party who becomes payment.
the OWNER of that sum that was given or other consumable
thing upon agreement, whether express or implied, with the Alright, so what are the two (2) kinds of loan?
obligation to repay the same amount of the same kind and 1. Commodatum; and
quality, with or without interest. 2. Mutuum (also known as Simple Loan).
What are the distinctions between these two?
COMMODATUM MUTUUM
Loan vs. Credit: As to Ordinarily involves Subject matter is
When we say loan in its general sense, it is different from object something not money or other
CREDIT. Because when we talk about credit, it is the ability to consumable consumable or
borrow money or things by virtue of the confidence or trust fungible thing (e.g.
reposed by a lender that he will pay what he has promised money, rice)
within the period specified by the parties. So it is a sum As to Ownership is Ownership is
credited on the books of a company who gives credit to a ownership retained by the transferred to the
person who appears entitled to it. bailor person who
LOAN (in its general obtained the loan
CREDIT
sense) As to ESSENTIALLY May be gratuitous or
Delivery by one party and The ability to borrow cause Gratuitous (not just onerous
the receipt of the other money or things by virtue gratuitous)
party who becomes the of the confidence or trust As to Involves real or Only involves
owner of that sum that reposed by a lender that property personal properties personal properties
was given or other he will pay what he has (e.g. money or
consumable thing upon promised within the consumable thing)
agreement, whether period specified by the As to For temporary use For consumption
express or implied, with parties purpose or possession only
the obligation to repay As to Bailor may demand The lender/bailor
the same amount of the demand the return of the may not demand its
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 MANRESA 2015
Atty. Jazzie Sarona Lozare

thing loaned before return before the In usufruct, enjoyment of the fruits is the main cause.
the expiration of lapse of the term LOAN USUFRUCT
the term in case of agreed upon Temporary possession Enjoyment of the fruits is
urgent need as and use (Commodatum) the main cause.
provided for under and Consumption
Article 1946 (Mutuum) can be the
As to To return the thing To pay the same purposes.
obligation loaned amount of the same
kind and quality that Loan vs. Barter:
was loaned to you A barter is onerous. You exchange something for some
As to loss Applying the The borrower quantity, quality or kind.
principle of Res suffers the loss LOAN BARTER
Perit Domino, the Commodatum is Onerous
owner/bailor essentially gratuitous,
As to Purely personal Not purely personal while Mutuum may be
nature in nature onerous or gratuitous

So, those are the distinctions between Commodatum and

Mutuum. II. Commodatum
Kinds of Commodatum:
1. Ordinary Commodatum; and Article 1935. The bailee in commodatum acquires the use
2. Precarium. of the thing loaned but not its fruits; if any compensation is
to be paid by him who acquires the use, the contract
Aside from distinguishing loan from credit, from discounting, ceases to be a commodatum.
we also take into consideration that a loan is different from a
lease. Now, lets go to the specific provisions for a Commodatum.
Okay, So, this emphasizes the purpose of a commodatum, noh
Loan vs. Lease: USE OF THE THING LOANED. Now, relate it to Article 1933,
In lease, one of the parties binds himself to give to another the that the bailee is allowed to make use of the thing loaned and
enjoyment or use of a property for a price certain. that commodatum is essentially gratuitous. In other words,
LOAN (Mutuum) LEASE walay compensation, as to be distinguished from a Contract of
Delivery by one party and One of the parties binds Lease. What happened in the case of Pajuyo vs. Court of
the receipt of the other himself to give to another Appeals?
party who becomes the the enjoyment or use of a
owner of that sum that property for a price PAJUYO VS CA
was given or other certain. Pajuyo was able to acquire rights over a 250 sq. m. lot in
consumable thing upon Payatas, Quezon City from one Pedro Perez. Pajuyo made a
agreement, which is house made of light materials in such lot. He and his family
either express or implied, lived there from 1979 to December 7, 1985. On December 8,
with the obligation to 1985, Pajuyo entered into a Kasunduan with respondent.
repay the same amount Pajuyo, as the owner of the house, allowed Guevarra to live
of the same kind and in the house for free provided that the latter will maintain
quality, with or without the cleanliness and orderliness of the house. Guevarra
interest. promised that upon Pajuyos demand, the former will vacate
the premises.However, when the time came that Pajuyo
Loan vs. Deposit: demanded him to vacate, Guevarra refused. This prompted
In deposit, you deliver a subject matter but you do not Pajuyo to file an ejectment case against Guevarra. MTC
authorize the depositary to use the said property. In deposit, rendered a decision in favour of Pajuyo. RTC affirmed the
the purpose is safekeeping. same.
LOAN DEPOSIT
You allow the borrower You do not authorize the Issue: W/N the Kasunduan entered into by Guevarra and
to use. depositary to use the said Pajuyo can be considered a Commodatum
property. The purpose is
safekeeping. Ruling:
The contract cannot be considered a Commodatum because
Loan vs. Usufruct: it is NOT essentially gratuitous. The stipulation regarding
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Atty. Jazzie Sarona Lozare
maintaining the cleanliness and orderliness of the house was
considered by the Court as a cause or consideration.
Q1: Why is there a need to determine whether it was a
commodatum or not?
A1: It is important to determine whether it was a commodatum
or not because there is a responsibility on the part of the lender
or the bailee to return the property upon the demand of the
property.
Q2: So if it is not a commodatum, (Pajuyo) cannot demand the
return of the property?
A2: Ay, rather Maam, it is important to determine whether it
was a commodatum or not because, if it is a commodatum,
then the....
Q3: What was the case filed here?
A3: Ejectment. Unlawful Detainer, Maam.
Q4: Okay. So, the issue is with regard to entitlement of
possession. So was there a commodatum?
A4: According to the Supreme Court Maam, there was NO
commodatum.
Q5: Why not? Isnt it that he was allowed to use the property?
A5: Yes Maam but the Court considered the stipulation to
maintain the cleanliness and the orderliness (of the house) as
the compensation, Maam.
Q6: So, if their Kasunduan was not a commodatum, what kind
of contract would that be? It is not commodatum because
there is an obligation imposed on the part of the bailee which
will not make the Kasunduan essentially gratuitous. So if it is
not commodatum, then what kind of contract?
A6: Contract of Lease, Maam??
Q7: So was there a stipulation to pay for a price certain?
A7: It would be similar to a contract of lease but we could not
really say that it would exactly be a contract of lease because
there was no payment of a price.
Q8: So with that, since the law does not provide a name for such
contract, what do you think that contract would be? Is the
Kasunduan a valid contract?
A8: No Maam??
Q9: Oh, so there was no valid contract? There was no meeting
of the minds between the parties??
A9: It is a valid contract Maam.
Q10: What kind of contract would that be?? It is not
commodatum because it is not essentially gratuitous. It is not
exactly a lease. Ang nakalagay dyan, akin to a landlord-tenant
relationship. It is similar to a lease but not exactly a lease. So
san sya mahulog na classification? If the law does not designate
a name for a contract, what would that be?
MANRESA 2015
A10: (NOTE: Class answers) Innominate Contract
Q11: Oh, What kind of innominate contract?
A11: Do ut facias.
Q12: Do ut facias which means?
A12: I give so that you may do.
Okay, thank you. So, what do we have here? In this
case, the Supreme Court emphasized the fact that a
Commodatum MUST be ESSENTIALLY GRATUITOUS. While it is
true that the bailor here was given the right to use the subject
matter, it is not essentially gratuitous because while the
Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. So that
obligation makes it a contract different from commodatum.
Now, the effects of the Kasunduan are also different because
here, a case of ejectment is similar to a lease (NOTE: Ha?? Di
ko po to gets? ) However, even if we assume that we do not
have a commodatum, Guevarra would still have the duty to
return, or rather turn-over, the possession to Pajuyo, the
bailor.
Now, take note here that one of the defenses of Guevarra was
that Pajuyo does not have a valid title over the property. Now,
take note that the defense could not be used in a contract of
commodatum because ownership is NOT required on the part
of the bailor for the perfection of a commodatum.
So, we could say that commodatum is somehow similar to a
donation because a benefit is given to the recipient to make
use of the property without any compensation. Now, the
presumption here is that when the bailor in commodatum has
loaned the thing to a bailee, he has no need for the said
property. But, the difference between donation and
commodatum is obviously, in donation, there is TRANSFER OF
OWNERSHIP which is absent in Commodatum.
Now, as mentioned earlier in Article 1935, the purpose (of
commodatum) is to make use of the thing itself. So the use is
limited to the thing, the fruits are EXCLUDED unless otherwise
stipulated by the parties. Why are the fruits excluded in the
use? Because fruits is (sic) essentially a right to be enjoyed by
the OWNER. It could be the bailor if he is the owner, it could
be the bailor if he is given the right by the owner to make use
thereof. But just because the bailee is given the right to use of
the thing, it does not necessarily mean na kasama ang fruits
unless otherwise stipulated.
Also in Article 1935, it emphasizes the purpose of a
commodatum USE. However, if there is compensation, it will
not be considered as a commodatum anymore as it will be
considered as a LEASE. So the purpose of commodatum is the
temporary use of the thing loaned for a certain time.
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Atty. Jazzie Sarona Lozare
If you deliver a thing to another person, but the bailee is not
allowed the use thereof, take into consideration the purpose
which may be safekeeping wherein it will be considered as a
DEPOSIT.
Q1: So, what is a valid subject matter in a commodatum? What
would be a subject matter in commodatum? It was already
mentioned earlier during the distinctions.
A1: Ummm, it ordinarily involves something not consumable.
Q2: What do you mean by consumable things?
A2: It will be consumed Maam, in time it will be lesser in value.
Q3: You mentioned that the subject matter in a commodatum
is a non-consumable thing. Is it possible for a commodatum that
the subject matter is a consumable thing?
A3: Yes Maam. When the use of the consumable thing Maam
would be for exhibition. Example? Rice, for exhibition.
What happened in the case of Producers Bank vs.
Court of Appeals?
Producers Bank vs. Court of Appeals
Facts:
Franklin Velez was asked by a friend to assist Doronilla in
incorporating his business, Sterella. Velez asked that
P200,000 be deposited in the bank for such purpose and he
promised that the same shall be returned and that the same
can be withdrawn in a months time. The said amount was
indeed deposited under the name of Sterella. Later on, it was
discovered that the office of Sterella is not anymore in the
original location. Also, upon checking with the bank, only
P90,000 of the P200,000 was left.
Issue: W/N this is a case of commodatum
Ruling: YES. As provided under Article 1936, consumable
goods may be the subject of commodatum if the purpose of
the contract is not the consumption of the object as it is
merely for its exhibition.
The rule here is to determine the intention of the parties. The
intention of the parties in entering the contract shall be
accorded primordial consideration in determining the actual
character of a contract. In case of doubt, contemporaneous
and subsequent acts of the parties shall be considered in
such determination.
Here, evidence shows that private respondent agreed to
deposit his money in the savings account of Sterella for the
purpose of making it appear that the said firm has sufficient
capitalization for incorporation with the promise that the
amount shall be returned within thirty (30) days.
Okay. So, we have in this case a contract of commodatum and
not a mutuum even if the subject matter is money. Now, as
MANRESA 2015
provided under Article 1936, consumable goods may be the
subject of commodatum if the purpose of the contract is not
the consumption of the object as it is merely for its exhibition.
So, a commodatum may have for its subject matter a
consumable thing.
Article 1936. Consumable goods may be the subject of a
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for
exhibition.
The rule here is to determine the intention of the parties. The
intention of the parties, as we all know, in determining the
contract, shall be accorded primordial consideration in
determining the actual character of a contract. In case of
doubt, as we have learned in the interpretation of contracts,
contemporaneous and subsequent acts of the parties shall be
considered in such determination. Here, evidence shows that
private respondent agreed to deposit his money in the savings
account of Sterella for the purpose of making it appear that the
said firm has sufficient capitalization for incorporation with the
promise that the amount shall be returned within thirty (30)
days. Private respondent clearly accommodated Doronilla by
lending his money without consideration as a favour to his
friend.
Doronillas attempt to return to private respondent the
amount of P200,000 which the latter deposited in Sterellas
account together with P12,000, (which) allegedly represented
interest in a contract of mutuum, however did not convert the
transaction from a commodatum to mutuum because again,
there was no intention on the part of the parties. The P12,000
could be considered not as an interest in a mutuum or simple
loan but rather the fruits to which the bailor should be entitled.
So it was only proper for Doronilla to remit to private
respondent the P200,000 plus the interest accruing to the
money deposited with petitioner.
Now, notice in this case that what we have is somehow unique.
Why? Because it was held to be commodatum but the subject
is money. And what is expected to be returned, while the same
amount of P200,000, is NOT the exact denomination, the exact
serial number, of the money that is deposited in that account
equivalent lang. Because if we take into consideration a
commodatum noh, you return the EXACT SAME THING. Dito,
what was demanded was the equivalent value.
Although the purpose is similar to that of commodatum,
merely to show that there was sufficient capitalization in the
bank account of the corporation, there was no transfer of
ownership, similar to a MUTUUM, again this is unique in the
sense na what is expected to be returned is not the exact
denomination of money that was put into that account, but the
exact value. Okay? Because when we talk of commodatum,
kung ano yung hiniram mo, yun EXACTLY ang ibalik mo.
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Atty. Jazzie Sarona Lozare
So, subject matter, as a general rule, in commodatum is a non-
consumable good. So again, when we talk about
consumable, it cannot be returned anymore once you use it.
Because how do you use it? You consume it. So the purpose
here (in commodatum) if the subject matter is consumable
should NOT be consumption. As mentioned, it is merely for
exhibition with the intent to return the same thing to the
bailor.
Example is yung wine, mag exhibit ka ng mga wines. That could
be considered as a commodatum with the intention that you
would return the exact same thing to the bailor. Now, Article
1937:
Article 1937. Movable or immovable property may be the
object of commodatum.
Now, we have this case of Mina vs. Pascual:
Mina vs. Pascual
Facts:
The property involved here is a lot in the center of Laoag,
Ilocos Norte which was awarded to Francisco Fontanilla, the
brother of Andres Fontanilla. Later, Andres Fontanilla, with
the consent of his brother Francisco, erected a warehouse on
a part of the said lot. After Franciscos death, he was
succeeded by Mina. Andres also died and was succeeded by
his wife, Roberta Pascual and their children. The controversy
arose when Roberta attempted to sell a portion of the lot
allegedly corresponding to Andres. This was opposed by
Mina. One of the contentions that were raised is that the sale
of the portion of the lot is not valid because she was not the
owner of the same.
Issue: W/N there was a contract of commodatum between
Francisco Fontanilla and Andres Fontanilla
Ruling:
Two features of a commodatum:
1. Subject matter is non-consumable;
2. It must be for a certain period of time.
In this case, Francisco, when he allowed Andres to build a
warehouse on a portion of the land, did not stipulate a
period of time when he will demand the return of the subject
matter. Hence, there can be no valid commodatum.
NOT COMMODATUM, BUT LEASE. Okay, because it
presupposes that the use of the property was for a valid
consideration. So, what we have here is a property that was
passed from generations. So as we already emphasized, a real
property can be the subject matter of a commodatum. In this
case, a portion of a property was at issue.
Now, an essential feature of a commodatum is that the use of
the thing belonging to another shall be for a certain period. But
MANRESA 2015
under the facts of this case, Francisco did not fix any period
during which Andres could use the lot. That is what happened
for the past thirty (30) years, noh. Napasa na nga sa kanilang
mga heirs.
So here, it could not be considered a commodatum as it never
entered Franciscos mind to limit the period during which his
brother was to have the use of the lot because he expected
that the warehouse will eventually fall into the hands of his son,
Fructuoso. However, this did not happen because Fructuoso
died before Andres.
Now, with that, it appears that the intention of the parties was
for Francisco to allow his brother Andres a surface right with
the payment of an annual rent and with the use of the lot. So,
we could say that their intention could have been a contract of
lease.
So therefore, along with the issue as to the sale, it was
necessary to annul the sale of the lot that was made to the
third person made by Roberta in representation of her minor
children.
Now, Article 1938:
Article 1938. The bailor in commodatum need not be the
owner of the thing loaned.
Because again, there is no transfer of ownership in a
commodatum. In fact, if you are a lessee, you are allowed to
loan the same subject matter that was leased to you if there is
no express prohibition. If you are a usufructuary, wherein you
are entitled to the use and fruits of the property, you can also
allow another person to make use thereof, unless otherwise
stipulated. However, as we will see in Article 1939, the bailee
may not himself lease to a third person. Please read Article
1939:
Article 1939. Commodatum is purely personal in character.
Consequently:
(1) The death of either the bailor or the bailee
extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the
contract to a third person. However, the members of
the bailees household may make use of the thing
loaned, unless there is a stipulation to the contrary, or
unless the nature of the thing forbids such use.
Okay, so under Article 1939, it emphasizes the character of
commodatum being personal in nature.
Q1: Jose, let us say, you have a car. You do not want to use it
because you like to commute going to school. Do you trust
Raphael, noh, that you will loan your car (to him) without any
compensation?
A1: *Shakes his head* (Agay, Friendship Over..haha)
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Atty. Jazzie Sarona Lozare
Q2: What do you take into consideration? Magpahiram ka sa tao
ng walang bayad. you take into consideration the character as
well as the credit of a person. That makes is purely personal in
nature, noh. CHARACTER, CREDIT and CONDUCT are taken into
consideration.
Now, the general rule here since it is purely personal in nature,
the death of either party will terminate the contract of
commodatum. Why? Because the trust that you may repose
on the bailor or the bailee is not the same trust that you can
have with regards to his heirs, noh. Saligan nimo sya because
he takes care of things, he will take care of the thing that you
loaned to him, pero if the bailee dies, it does not mean that the
same care may be extended by his heirs. So, the general rule is
that the contract will be terminated. So, it is an
INTRANSMISSIBLE RIGHT. The only exception is, of course, by
stipulation of the parties that in case any one of them dies, the
commodatum will not be extinguished.
Now, if there are two (2) or more bailees, the death of one,
however, will NOT extinguish the contract unless there is a
stipulation to the contrary. So, in relation to this, we recall your
Article 1178 in Obligations and Contracts:
Article 1178. Subject to the laws, all rights acquired in virtue
of an obligation are transmissible, if there has been no
stipulation to the contrary.
So eto (NOTE: Maam referring to the intransmissible nature of
commodatum), exception sya.
Now, with regard to use, general rule, the BAILEE cannot lend
or lease the object to a third person. While it is true that the
BAILOR is NOT required to be the owner of the subject
property as long as he has possessory interest and not
prohibited by the owner thereof, he can loan the subject
matter to another person and enter into a contract of
commodatum, the BAILEE himself, as a general rule, cannot
lend or lease the object to a third person with exceptions under
paragraph 2 of Article 1939:
a. Stipulation of the parties; or
b. Members of the bailees household may make use of the
thing loaned.
So, pwede, kung same household. So pinahiram mo ang
cellphone, laptop. Pwede yung members (ng same household)
ang mag gamit unless otherwise stipulated by the parties. Or,
unless the nature of the thing forbids such use.
For instance, kahit magkasama kayo sa bahay, pero ang
pinahiram sayo ay damit. Okay? By the nature of the thing
itself, hindi sya yung ipahiram mo nalang basta kanino sa
bahay ninyo. Kase bakit? Baka kasya sayo tapos ipagpilitan ng
kapatid mo na kasya rin sa kanya. So baka masira lang. Okay?
So here, when it comes to the members of the same
household, as a general rule, pwede nila gamitin EVEN
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WITHOUT THE CONSENT OF THE BAILOR, unless otherwise
stipulated or when the nature of the thing forbids such use.
Now, Article 1940:
Article 1940. A stipulation that the bailee may make use of
the fruits of the thing loaned is valid.
So, eto yung exception sa Article 1935 because the right to USE
the subject matter is distinct from the right to USE ITS FRUITS.
If the parties stipulated that the bailee can use the fruits, then
that is VALID, but in the absence of a stipulation, only as to the
use of the thing.
Now, when we talk of fruits here, the use of the fruits must
only be incidental to the use of the thing. Because otherwise,
if the stipulation provides that the bailee can use the fruits as
the MAIN cause of the contract, it is not commodatum
anymore but usufruct.
Now, we have here the case of Delos Santos vs. Jarra:
Delos Santos vs. Agustina Jarra
Facts:
This case involves lending of carabaos. On September 1,
1906, Felix Delos Santos brought a suit against Agustina
Jarra as the administratrix of the estate of Jimenea. Delos
Santos averred that Jimenea borrowed from him ten (10)
first class carabaos. However, Jimenea never returned the
same.
Because of Jimeneas death, the estate of Jimenea was
already administered by Agustina Jarra.
Issue: What is the contract entered into by Jimenea and
Delos Santos?
Ruling:
COMMODATUM. From the foregoing, it may be logically
inferred that the carabaos were loaned through a
commodatum to the now deceased Magdaleno Jimenea.
However, for some reasons, there are now only six (6)
surviving carabaos.
Agustina Jarra, being the administratrix of Jimeneas estate,
has now the responsibility to return the said carabaos
because the contract between Jimenea and Delos Santos
was in the form of a commodatum.
Q: At the time of the demand for the return of the carabaos,
were all of them still alive? Yes, but not at the time of the finality
of the case.
Q: Okay, so in view of the return of the carabaos, what was the
liability here on the part of the heirs of the bailee? As there was
DELAY in the return of the said carabaos, the heirs would still
be liable for the death of the other carabaos (or the dead
carabaos) because they, Jimenea or his heirs, were not able to
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Atty. Jazzie Sarona Lozare
return the carabaos on time. So, because of the delay, they are
liable for damages, plus the value of the carabaos.
Now, the case of Delos Santos emphasizes the first obligation
of the bailee to return the thing that was loaned, to return
the thing subject of the commodatum. Since it is a
commodatum, there was no transfer of ownership so you, as
the bailee, has the obligation to return the EXACT same thing
that you have borrowed. The carabaos given for use, not being
returned by the defendant upon demand, there is no doubt
that there is an obligation to indemnify the owner thereof by
paying him the value of the said carabaos. It is the imperative
duty of the bailee, to return the thing itself to its owner, or to
pay him damages if through the fault of the bailee, the thing
should have been lost or injured. So, that was the ruling in this
case.
Obligations of the Bailee:
1. To return the thing that was borrowed;
2. To pay for the ordinary expenses for the use and preservation
of the thing loaned;
Article 1941. The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.
Why is it that the bailee shoulders the ordinary expenses?
Because these are ordinary expenses in relation to USE, which
he gets to enjoy. Now, in relation to Article 1941, dont forget
the obligation imposed in Article 1163. The obligation to take
good care of the thing with the diligence of a good father of a
family:
Article 1163. Every person obliged to give something is also
obliged to take care of it with the proper diligence of a good
father of a family, unless the law or the stipulation of the
parties requires another standard of care.
So, based on that, you take care of the ordinary expenses. If
what was loaned is car, then you should be liable for the gas,
or the change oil, among others
To pay for the loss of the thing even if it is for a fortuitous event
under certain circumstances;
Article 1942. The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event:
(1) If he devotes the thing to any purpose different
from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or
after the accomplishment of the use for which the
commodatum has been constituted;
(3) If the thing loaned has been delivered with
appraisal value, unless there is a stipulation
exempting the bailee from responsibility in case of
a fortuitous event;
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(4) If he lends or leases the thing to a third person,
who is not a member of his household;
(5) If, being able to save either the thing borrowed or
his own thing, he chose to save the latter.
Okay. While the general rule is that the bailee is not liable for
the loss or damage (of the thing loaned) due to a fortuitous
event, again applying the principle of Res Perit Domino, you
have the exceptions under Article 1942.
In relation to that, we have the case of Republic vs.
Bagtas:
Republic vs. Bagtas
Facts:
Bagtas borrowed from the Bureau of Animal Industry three
(3) bulls for breeding purposes subject to the government
charge/breeding fee of 10%. At the expiration of the period,
Bagtas requested for an extension of one (1) year. The
Secretary of Agriculture acquiesced but only as to one (1)
bull. So, Bagtas offered to pay for the value of the three (3)
bulls with the deduction of the yearly depreciation as
approved by the Auditor General. However, the Secretary of
Agriculture said that the value of the three (3) bulls cannot
be reduced and that they should be paid their book value or
should be returned not later than October 1, 1950.
Issue: W/N the contract between the Republic and Bagtas is
a commodatum
Ruling: NO. A contract of commodatum is essentially
gratuitous. The Supreme Court held that the 10% breeding
fee is considered compensation. As such, it would be
considered a contract of lease wherein the lessee would be
subject to the responsibilities of a possessor in bad faith.
Even assuming that the contract was commodatum, the
spouse would still be liable under Article 1942 making the
bailee liable even if the loss is through a fortuitous event if
he keeps the thing longer than the period stipulated.
Q: Was there commodatum here? What was the contention of
the government? As to compensation? Was there
compensation here? breeding fee?10% of the value of the bulls
Q: If that is compensation, can it be considered commodatum?
No. because commodatum is essentially gratuitous.
Q: Now, considering that the contract could not be considered
a commodatum, can we say that the spouse of Bagtas can still
be liable for the value of the third bull? She would still be liable
due to the delay in returning.
So here, again, a contract of commodatum is ESSENTIALLY
GRATUITOUS. In the agreement between the parties, the State
and Bagtas, there was a breeding fee to be considered as a
compensation. As such, it would be considered a contract of
lease wherein the lessee would be subject to the
pg. 8

Atty. Jazzie Sarona Lozare
responsibilities of a possessor in bad faith. Why? Because
Bagtas, as well as his surviving spouse, continued possession of
the bull after the expiry of the contract. So with that, he could
be held liable.
Even assuming that it was commodatum, the spouse would still
be liable under Article 1942. Why? Because of paragraph 2, If
he keeps it longer than the period stipulated...
So, regardless of whether it was a lease or a commodatum, the
fact remains that the bull that was subject of the lease or the
loan, whichever is applicable, (was lost) and the surviving
spouse or the estate would be held liable for the bull or the
value thereof which has not been returned because it was
killed while it was under the custody of the estate regardless of
who is at fault. Regardless kung sino or paano namatay yung
bull because there is already DELAY.
Take a look at the exceptions under Article 1942. Essentially,
these refer to improper acts on the part of the bailee:
(1) Devotes the thing to any purpose different from that for
which it has been loaned;
This shows bad faith on the part of the bailee. Kotse, syempre,
sa road lang (dapat), tapos gisadya talaga, gi drive mo nung
nagbaha, noh. So, obviously, that is a purpose different from
that for which it has been loaned.
(2) Keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has
been constituted;
That would mean DELAY. So we all know under Article 1169,
noh, ay, 1169 ba yun? Delay? Or 1164? I forgot (NOTE: Article
1170 po ata Maam ) Yun, the effect of delay. When there is
delay, there is already liability on the part of the debtor, in this
case, the bailee.
Article 1169. Those obliged to deliver or to do
something incur delay from the time the oblige
judicially or extrajudicially demands from them the
fulfilment of their obligation xxx.
Article 1170. Those who in the performance of
their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
(3) The thing loaned has been delivered with appraisal value,
unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
There is the intention here for the borrower to be made liable.
Why? because the bailor puts value on the thing subject of
commodatum. However, this is unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous
event.
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(4) Lends or leases the thing to a third person, who is not a
member of his household;
Again, lets go back to the nature of a commodatum being
purely personal in nature.
(5) If, being able to save either the thing borrowed or his own
thing, he chose to save the latter.
Lastly - Ingratitude. While naturally, we tend to save our
personal things, it would still be considered ingratitude if we
chose to save our own thing over the thing that was loaned to
you. Why? because remember, it was loaned to you
essentially gratuitous.
To emphasize, the primary obligation on the part of the bailee,
to return the thing that was loaned, to return the thing that
was subject of the commodatum. Since it was a commodatum,
there was no transfer of ownership. So you as the bailee has
the obligation to return the exact same thing that was
borrowed. The carabaos being used, not having been returned
by the defendant upon demand, there is no doubt that she is
under obligation to indemnify the owner thereof, by paying
him the value of the said carabao.
It is the imperative duty of the bailee to return the thing itself to
the owner or to pay him damages if through the fault of the
bailee, the thing should have been lost of injured.
Obligations of the bailee, again to return the thing that was
borrowed.
Article 1941: The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.
Why is it that the bailee shoulders these ordinary expenses?
It is because, these are ordinary expenses in relation to use
which he gets to enjoy. Now in relation to Article 1941, dont
forget the obligation imposed in Article 1163, the obligation to
take good care of the thing, with the diligence of a good father
of the family.
Article 1163: Every person obliged to give something is also
obliged to take care of it with the proper diligence of a good
father of a family, unless the law or the stipulation of the
parties requires another standard of care.
So in relation to that, you take care of the ordinary expenses.
If what you loaned is a car, you should be liable for the gas, for
the change oil, among others.
We have Article 1942.
Article 1942: The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event.
(1) If he devotes the thing to any purpose different from
that for which it has been loaned.
pg. 9
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Atty. Jazzie Sarona Lozare

(2) If he keeps it longer than the period stipulated or after
the accomplishment of the use for which the
commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of
its value, unless there is a stipulation exempting the
bailee from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is
not a member of his household;
(5) If, being able to save either the thing borrowed or his
own thing, he chose to have the latter.
loan, if applicable, would still mean that the surviving spouse
would be held liable, or rather, the estate of the deceased will
be liable for the value thereof, which has not been returned
because it is still in the custody of the estate, regardless of who
is at fault, regardless kung sino or kung paano namatay yung
bull because there was already delay.
Take a look at the exceptions in 1942 wherein, essentially,
these refer to improper acts on the part of the bailee.

Improper Act Rationale

While the general rule is that the bailee is not liable for the 1. If he devotes the
loss or damage due to a fortuitous event, again applying the thing to any purpose
principle of res perit domino, you have the exceptions under different from that for
Article 1942. In relation to that, you have the case of the which it has been
Republic of the Philippines vs Bagtas. loaned.
RP vs Bagtas
Facts: Bagtas borrowed from RP 3 bulls for a period of 1 year,
subject to breeding fee of 10% of the book value. One of the 2. If he keeps it longer
bulls died due to stray bullets during a Huk raid and the said bull than the period
was in the possession of Bagtas even after the expiration of the stipulated or after the
period of the contract. accomplishment of the
use for which the
Issue: WON Bagtas was exempt from liability: NO commodatum has been
constituted
Ruling: In Art. 1942, bailee is liable for loss through FE if he 3. If the thing loaned has
keeps it longer than stipulated and the thing loaned has been been delivered with
delivered with appraisal of its value, unless there is a stipulation appraisal of its value,
exempting liability in case of FE. unless there is a
stipulation exempting
the bailee from
Again, a contract of commodatum is essentially gratuitous. In responsibility in case of
the agreement here between the State and Bagtas, there was a fortuitous event;
a breeding fee to be considered as a compensation. As such, it
would be considered as a contract of lease, wherein the lessee 4. If he lends or leases
would be subject to the responsibilities of a possessor in bad the thing to a third
faith. Why? Because Bagtas, as well as his surviving spouse, person, who is not a
continued possession of the bull after the expiry of the member of his
contract. With that, he could be held liable. household
5. If, being able to save
Even assuming that it was a contract of commodatum, the either the thing
spouse (Bagtas died) would still be liable under Article 1942. borrowed or his own
The bailee is liable for the loss of the thing, even if it should be thing, he chose to have
through a fortuitous event:xxx the latter
(2) If he keeps it longer than the period stipulated or after the
accomplishment of the use for which the commodatum Article 1943: The bailee does not answer for the
has been constituted; deterioration of the thing loaned due only to the use thereof
(3) If the thing loaned has been delivered with appraisal of its and without his fault.
value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event.xxx
So, ordinary wear and tear, depreciation, shall be born by
So regardless of whether it was a lease or commodatum, the bailor. But bailee can be held liable if:
fact remains that the bulls that were subject of the lease or (1) he is at fault, or
It shows bad faith on the
part of bailee. Kotse,
syempre i-drive sa road
lang otherwise,
obviously that is a
purpose different from
what it has been loaned
for.
That is delay. under
1169. When there is
delay, there is liability
on the part of the
debtor, in that case, the
bailee.
There is an intention for
the borrower to be held
liable. Why? Because
you put value of the
thing that is subject of
commodatum. Take
note, if there is a
stipulation exempting
from liability.
Go back to the ratio of
commodatum, personal
in nature.
It is considered
ingratitude because
remember it was loaned
to you, essentially,
gratuitously.
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Atty. Jazzie Sarona Lozare
(2) negligent; or
(3) uses it for any purpose different.
Article 1944: The bailee cannot retain the thing loaned on
the ground that the bailor owes him something, even
though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in
Article 1951.
General rule sa commodatum, the bailee has no right to retain
the thing loaned as security for things he has against the bailor.
Si bailee pinahiram ng sasakyan pero si bailee nagpahiram din
ng pera kay bailor. Si bailor hindi binayaran yung utang kahit
due na. The bailee cannot say na I will not return the car to you
unless you have paid your monetary obligation to me. So yan
ang ibig sabihin sa 1944. The bailee cannot use that as a
defense. He, the bailor can demand the return of the thing.
But of course, his obligation to pay his monetary obligation will
remain the same. The only exception we have is when we reach
Article 1951, involving hidden defects.
Catholic Vicar vs CA
Facts: Respondents were possessors, with claim of ownership in
good faith, of the lots in question from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951
when it repudiated the trust and declared the properties in its
name for taxation purposes. In 1962, Petitioner applied for
registration of the said lots claiming that its adverse claim
ripened into title by way of ordinary prescription.
Issue: WON Petitioner is entitled to register the land in question
by ordinary prescription: NO
Ruling: When Respondents allowed Petitioners free use of the
properties in question, they became bailors in commodatum
and the petitioner the bailee. The failure to return the subject
matter of the commodatum did not mean adverse possession
but that bailee only held in trust the property. Adverse
possession came only in 1951 when it declared the lots for
taxation purposes. There could be no title by way of ordinary
acquisitive prescription because of the absence of just title.
Extraordinary prescription requires 30 years. In this case,
adverse possession was only for 11 years.
Q1: Under the facts of this case, when did the adverse
possession on the part of the Petitioner begin?
A1: In 1951, when properties were declared by petitioners for
taxation purposes
Q2: What do you mean by adverse possession?
A2: Claim of ownership in the concept of an owner
Q3: Why is adverse possession relevant in this case?
A3: It is relevant for the determination of acquisitive
prescription. If the possession is in bad faith, the period of
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possession required is 30 years, but if in good faith, only for 10
years.
Q4: In this case, what is the prescriptive period that should have
been applied?
A4: Since there was no just title, what should have been
applied is the 30-year requirement for extraordinary
prescription.
Q5: When did the adverse possession begin? What is the
relevance of knowing the prescriptive period required when you
do not know when it began?
A5: The reckoning point is 1951. Until 1951, there was a
recognition of a commodatum. If there is a commodatum, you
acknowledge that you are merely a bailee. Thus, you are in
possession of the property, not in the concept of an owner. So
the prescriptive period, whether 10 or 30 years, will not run.
But because in 1951, petitioner declared the properties for
taxation purposes, adverse possession began and thus the
prescriptive period began to run.
In 1951, Petitioner repudiated the trust by declaring the
properties in his name for taxation purposes. So if you declare
it for taxation purposes, you are now claiming to be in
possession of the property in the concept of an owner. So
magiging relevant na yung 10 year or 30 year period. Here,
obviously he is in bad failth because prior to 1951, there was
an acknowledgement of the existence of a commodatum
possession only in the concept of a bailee, acknowledgment
that there is another person who owns the property.
Now when Petitioner applied for registration in 1962, he had
been in possession only for 11 years. You do not apply the 10
year prescriptive period requirement, because the possession
from 1951 was not in good faith. It was in bad faith so dapat 30
years ang mag-apply. Ordinary acquisitive prescription or
prescription in good faith requires possession for 10 years but
needs just title. Extraordinary prescription requires 30 years.
Now here, while it is true that private respondent never asked
for the return of the house, they became bailors in
commodatum and the petitioner the bailee. The petitioners
failure to return the subject matter of commodatum to the
bailor did not mean adverse possession on the part of the
borrower until 1951. The bailee held in trust the property
subject of the commodatum. The adverse claim of petitioner
came only in 1951 when it declared the lots for taxation
purposes. So, the action of petitioner by such adverse claim
could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.
So here, take note, mere failure to return does not constitute
adverse possession. It does not mean that you are already
possessing the property in the concept of an owner. There must
be another act, noh, like in this case, declaring the property in
his name for taxation purposes, to show that you have started
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Atty. Jazzie Sarona Lozare
possessing the property in the concept of an owner. But just
because you did not return it, does not mean that the acquisitive
prescription period will now run. So thats 1944.
Article 1945: When there are two or more bailees to whom
a thing is loaned in the same contract, they are liable
solidarily.
If one of them dies, the contract would still continue. But with
regard to the nature of their liability, they shall be held solidarily
liable. This is to safeguard effectively the rights of the lender. It
takes into account the personal integrity and responsibility of
all bailees. Article1945 is an exception of 1207 and 1208.
1207---there is a solidary liability only when the
obligation expressly so states, or when the law or the
nature of the obligation requires solidarity;
1208--- presumption that an obligation is joint unless
otherwise stipulated by the parties.
Here, Article 1945 expressly so states that two or more bailees
shall be held solidarily liable.
SUMMARY: WHAT ARE THE OBLIGATIONS OF THE BAILEE?
RED1942NOS
1.) To return the thing to the bailor
2.) To pay for ordinary expenses
3.) To take good care of the thing with the diligence of a
good father of a family
4.) With regard to expenses, for ostentatious decorations,
bailor shall be held liable
5.) For extraordinary expenses (we get to discuss that in
1949)
6.) With regard to loss due to a fortuitous event, bailee
shall not be held liable unless it falls within the
exceptions under 1942
7.) For deterioration, ordinary wear and tear, bailee will
not be liable unless he is negligent or use property for
other purpose, or if stipulated by the parties
8.) No right to retain by bailee (exception, when we get to
1951)
9.) Solidary liability under 1945
How about on the part of the Bailor?
Article 1946:
The bailor cannot demand the return of the thing loaned till
after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has
been constituted. However, if in the meantime, he should
have urgent need of the thing, he may demand its return or
temporary use. In case of temporary use by the bailor, the
4 What is a precarium? It is a kind of commodatum where bailor may demand the
thing at will or at any time
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contract of commodatum is suspended while the thing is in
the possession of the bailor.
So here, the obligation of the bailor, to allow the use of the
thing loaned:
1.) till after the expiration of the period stipulated; or
2.) till after the accomplishment of the purpose
As we have pointed our earlier, when we talk about
commodatum, use for a certain period of time. Now, 1946
provides that if the bailor has an urgent need for the subject of
the commodatum, he can seek for the return thereof, but the
return is only temporary. So the effect of such return or
temporary use, is that the commodatum will be suspended
while in the possession of the bailor.
Now, earlier, we mentioned that there are 2 kinds of
commodatum:
1.) ordinary commodatum
2.) precarium 4
Quintos vs Beck
Facts: Defendant was a tenant of Plaintiff. Upon the novation
of the contract of lease, plaintiff gratuitously granted to the
defendant the use of the furniture subject to the condition that
defendant would return them upon the plaintiffs demand.
Plaintiff sold the property to Lopez. Plaintiff required defendant
to return ALL the furniture but the latter informed the former
that it could not give up the 3 gas heaters and 4 electric lamps
because he would use them until the expiration of the lease.
Plaintiff refused to get the furniture in view of the fact that
defendant declined to deliver ALL of them. Upon the expiration
of the lease, defendant deposited all the furniture in a
warehouse in the custody of the sheriff.
Issue: (1) WON Defendant complied with his obligation to
return the furniture upon Plaintiffs demand: NO
(2) WON Plaintiff should bear the expenses of the deposit: NO
Ruling: The contract entered into is a commodatum because
plaintiff gratuitously granted the use of the furniture to the
defendant reserving for himself the ownership thereof.
Defendant bound himself to return the furniture upon demand
but he did not comply with it when he retained the gas heaters
and lamps. The court could not compel plaintiff to bear the
expenses occasioned by the deposit because the defendant as
bailee, was not entitled to place the furniture on deposit nor was
plaintiff under a duty to accept only part of the all the furniture
which the defendant was under obligation to return upon
demand.
pg. 12

Atty. Jazzie Sarona Lozare
Summary of Q&A:
Do we have a commodatum here? Yes, a precarium because of
the agreement to return the thing upon the demand of the
plaintiff. Since there was a precarium, defendant must return
the furniture upon demand. Here, What he did was to merely
place them in the custody of the sheriff. Such deposit of the
furniture is not proper. Now, the one who must bear the cost
of the deposit should be the defendant because he is the one
who has the obligation to return the thing and he did not
properly do so.
So what we have here is a precarium. Obviously, it is a
precarium, even if not expressly stated by the Supreme Court
because of the agreement here: gratuitously granted to the
latter the use of the furniture subject to the condition that the
defendant would return them to the plaintiff upon the latters
demand.
Precarium- a kind of commodatum where the bailor may
demand the thing at will-a contract by which the owner of a
thing, at the request of another person, gives the latter, the
thing for use as long as the owner shall please
So in this case, as long as the bailor shall please. Now, when
demand was already made, defendant failed to return the
furniture to the plaintiff. So, as the defendant had voluntarily
undertaken to return all the furniture to the plaintiff upon the
latters demand, but failed to do so, the court could not legally
compel her to bear the expenses occasioned by the deposit of
the furniture at the defendants behest. The bailee was not
entitled to place the furniture on deposit, nor was the plaintiff
under a duty to accept the offer to return the furniture,
because the defendant wanted to retain the 3 gas heaters and
the 4 electric lamps. Siya pa ang nagimpose ng condition,
dapat LAHAT kasi yun ang agreement.
The costs in both instances would be borne by the defendant
because the plaintiff is the prevailing party. Remember, under
Obligations and Contracts, the creditor cannot be compelled to
accept partial payment of partial performance. So in this case,
the bailor could not be compelled to accept only a few of the
furniture (wherein the defendant retains the heaters and
lamps.)
The defendant was the one who breached the contract of
commodatum, and without any reason he refused to return
and deliver all the furniture upon the demand of the bailor. In
these circumstances, it is just and equitable that he pays the
legal expenses and other judicial costs which the plaintiff
would not have otherwise defrayed. So that is Article 1947.
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Article 1947: The bailor may demand the thing at will, and
the contractual relation is called a precarium, in the
following cases:
(1) If neither the duration of the contract nor the use to
which the thing loaned should be devoted has been
stipulated; or
(2) If the use of the thing is merely tolerated by the owner.
COMPARE this to ordinary commodatum where possession of
the bailee is more secured for he has the right to retain the
thing loaned:
1.) until the expiration of the period stipulated; or
2.) upon the accomplishment of the use for which the
commodatum has been constituted
Article 1948: The bailor may demand immediate return of
the thing if the bailee commits any acts of ingratitude
specified in Article 765.
So here, sa donation ito. Remember, awhile ago, there are
similarities between commodatum and donation because they
are gratuitous in nature. So the bailee, in the case of
commodatum would be unworthy of the trust reposed upon
him with his acts of ingratitude.
So even if it is ordinary commodatum, pwede mag-demand ng
return of the thing if any of the acts under 765 is committed.
Under Article 765 in relation to commodatum:
1.) if the bailee should COMMIT some offense against the
person, the honor or the property of the bailor, or of his
wife or children under his parental authority;
2.) if the bailee IMPUTES to the bailor any criminal offense, or
any act involving moral turpitude, even though he should
prove it, unless the crime or the act has been committed
against the bailee himself, his wife or children under his
authority;
3.) if bailee unduly REFUSES bailor SUPPORT when the bailee
is legally or morally bound to give support to the bailor.
Article 1949:
The bailor shall refund the extraordinary expenses during
the contract for the preservation of the thing loaned,
provided the bailee brings the same to the knowledge of the
bailor before incurring them, except when they are so
urgent that the reply to the notification cannot be awaited
without danger.
If the extraordinary expenses arise on the occasion of the
actual use of the thing by the bailee, even though he acted
without fault, they shall be borne equally by both the bailor
and the bailee, unless there is a stipulation to the contrary.
who shall bear the EXTRAORDINARY EXPENSES? Consider
whether it is:
pg. 13

Atty. Jazzie Sarona Lozare
1.) for the PRESERVATION of the thing loaned; or 5
2.) arises on the occasion of the ACTUAL USE of the thing
loaned. 6
Article 1950: If, for the purpose of making use of the thing,
the bailee incurs expenses other than those referred to in
Articles 1941 and 1949, he is not entitled to reimbursement.
1941---ordinary expenses
1949extraordinary expenses
So ano yung covered ng Article 1950? Ito yung ostentatious
expenses or expenses for decoration. So here, it shall be
shouldered by the bailor (?)
So Article 1951, this is the exception that we mentioned earlier.
Article 1951: The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be
liable to the latter for the damages which he may suffer by
reason thereof.
REQUISITES for applying 1951:
FLAND
1.) There must be a flaw or defect on the thing loaned;
2.) The defect must be hidden or latent;
3.) The bailor must be aware of such defect;
1.) 4.)The bailor does not advise the bailee of the flaw or
defect;
4.) The bailee suffers damages by reason of the flaw or
defect.
If all of these requisites are present, then (the implication is):
a.) bailor shall be liable to the bailee for the damages
suffered; and
b.) the bailee is entitled to retain the thing, to hold the thing
subject of commodatum until he will be reimbursed for
the damages he has suffered.
So again this is the exception we mentioned earlier under
Article 1944.
General rule: Bailee has NO RIGHT TO RETAIN.
Exception: If it falls under Article 1951(see requisites).
So, considering that the bailor is in bad faith under the
circumstances in Article 1951, the bailee is given the right to
retain until the damages are paid. Only the right to hold the
property, he cannot sell the property.
5 If the extraordinary expenses were incurred for the PRESERVATION of the thing loaned,
it shall be borne by the bailor. For example when the property was damaged by the
interuptee. Why? There is no transfer of ownership. So the bailor, when he incurs his
extraordinary expenses for the preservation of the thing loaned, he profits by the said
expenses. If the bailee was the one who initially incurred these expenses, the bailor
has the obligation to refund the bailee. However, as a general rule, for the bailee to be
entitled to reimbursement, he must inform the bailor first before incurring these
extraordinary expenses. This requirement of notification can be disregarded if it is
urgent.
MANRESA 2015
Like for example, subject of commodatum is a car and
apparently, there is a hidden defect with regard to the brakes,
the bailor knows it, he did not notify or inform the bailee, then
the bailee was involved in an accident and suffered injuries. So
1951 will be applicable.
Take note: However if the bailee could have known after
inspection, the bailor is not liable. If he could have known after
inspection, then, obviously, hindi siya mahuhulog under Article
1951, why, because the defect is not hidden.
If it is not known to the bailor, the bailor may not be held liable,
why, because commodatum is essentially gratuitous. Ito ang
difference niya sa sale.
COMMODATUM SALE
(with regard to hidden defects)
If bailor was not aware There could be breach of
thereof, he could not be warranty against hidden
held liable because defects even if seller is in
commodatum is good faith and with no
essentially gratuitous, knowledge of the hidden
wala na man siyang defect
makukuha diyan, unlike
than in a contract of sale
or even in a contract of
lease where there is a
valuable consideration
Article 1952: The bailor cannot exempt himself from the
payment of expenses or damages by abandoning the thing
to the bailee.
So let us say there were expenses incurred for example arising
from the extraordinary expenses for the preservation of the
thing loaned. Na-inform na man si bailor pero hindi niya i-
reimburse, sabi niya hindi ko na lang i-reimburse, sayo na lang
yung property.
Can he do so? No, Article 1952 provides that he cannot do so.
Why? Because the expenses for damages may even exceed the
value of the thing loaned which would not be fair to the bailee.
It would be unfair to allow the bailor to just abandon the thing
instead of paying for said expenses for damages.
SUMMARY: WHAT ARE THE OBLIGATIONS OF THE BAILOR?
1.) The right to demand the return of the thing
6Now, if it is an extraordinary expense arising from ACTUAL USE of the thing loaned, like
for example, the repair of the car which is damaged due to a collision. The rule is 50:50,
half sa bailee, half sa bailor. Why? Because here, it was derived from the use of the bailee
and you will also return it to the bailor so it is just fair that they share it equally UNLESS
they have stipulated for a different sharing.
pg. 14

Atty. Jazzie Sarona Lozare
General rule: The bailor cannot demand until expiration
or accomplishment of the purpose agreed upon by the
parties (of course that refers to ordinary commodatum)
Exception: Upon urgent need (it is different if
precarium because it can demand the return of the
thing at any time)
2.) Right to immediate return if the bailee has committed
acts of ingratitude
General Rule: Liable for extraordinary expenses for
preservation of the thing, FULL amount, provided he
has been informed before the bailee incurs the
expenses
Exception to the requisite notification: Urgent need
3.) Extraordinary expenses arising from the use of the
thing, 50:50
4.) Liability for damages under Article 1951 for hidden
defects
5.) No right to abandon for expenses and damages.
So, that is commodatum, finish.
We are done with commodatum. The other type of loan is
III. SIMPLE LOAN OR MUTUUM.
Its a contract whereby one of the parties delivers to
another money or other consumable thing with the
understanding that the same amount, the same kind and
quality shall be paid.
Article 1953. A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and
is bound to pay to the creditor an equal amount of the
same kind and quality. (1753a)
Notice here, in Art. 1953, it is bound to pay not bound to
return. Why? Because what is involved here is return of the
equivalent only and not the identical thing. So, you do not
really return what you have borrowed. What you return is
something of the same amount, of the same kind and quality
that you have already borrowed. The return of the equivalent
only and not the identical thing because the borrower acquires
ownership thereof. Recall, this is one of the main distinctions
between Commodatum and Mutuum. In Commodatum, there
is no transfer of ownership unlike that in Mutuum.
Yong Chan Kim vs People
Yong Chan Kim was employed as a Researcher at SEAFDEC. Kim
was issued Travel Order No. 2222 which covered his travels to
different places in Luzon from 16 June to 21 July 1982. Under
this travel order, he received P6,438.00 as cash advance to
defray his travel expenses. Kim was issued another travel order,
T.O. 2268, requiring him to travel from the Head Station at
Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982, which
he received a cash advance of P495
MANRESA 2015
Later, petitioner presented both travel orders for liquidation.
When the Travel Expense Reports were audited, it was
discovered that there was an overlap of four (4) days (30 June
to 3 July 1982) in the two (2) travel orders for which petitioner
collected per diems twice. The dispute arose when Kim allegedly
failed to return P1,230.00 out of the cash advance which he
received under T.O. 2222. For the alleged failure of petitioner
to return such amount, he was charged with the crime of Estafa
under Article 315, par. 1(b) of the Revised Penal Code in which
he was found guilty by the trial court.
ISSUE: WON Kim was guilty of estafa; WON Kim was under
obligation to return the same money (cash advance) which he
had received
HELD NOT guilty of estafa and he has NO obligation to return
the money.
In order that a person can be convicted under Estafa, it must be
proven that he had the obligation to deliver or return the same
money, good or personal property that he had received.
Liquidation simply means the settling of an indebtedness. An
employee, such as herein petitioner, who liquidates a cash
advance is in fact paying back his debt in the form of a loan of
money advanced to him by his employer, as per diems and
allowances.
Similarly, as stated in the assailed decision of the lower court,
"if the amount of the cash advance he received is less than the
amount he spent for actual travel, he has the right to demand
reimbursement from his employer the amount he spent coming
from his personal funds.
In other words, the money advanced by either party is actually
a loan to the other. Hence, petitioner was under no legal
obligation to return the same cash or money, i.e., the bills or
coins, which he received from the private respondent.
Ownership of the money was transferred to the petitioner. It is
a case of a simple loan or mutuum.
Since ownership was transferred to him, no fiduciary
relationship was created. Absent this fiduciary relationship
between petitioner and private respondent, which is an
essential element of the crime of estafa by misappropriation or
conversion, petitioner could not have committed estafa.
Additionally, it has been the policy of private respondent that
all cash advances not liquidated are to be deducted
correspondingly from the salary of the employee concerned.
For a person to be convicted under Article 315, par. 1(b) of the
Revised Penal Code, he must have the obligation to return or
deliver the same money, goods or personal property that he
had received. In this case, he was asked to liquidate which
pg. 15

Atty. Jazzie Sarona Lozare
simply means settling of an indebtedness. The employee, such
as herein Kim, who liquidates a cash advance is in fact paying
back his debt in the form of a loan of money advanced to him
by his employer. Here, what was the effect? Pag sobra yung
binigay sa kanya, he has to liquidate and pay back the
company. It could not be considered as an estafa because
when what he has received is less than what he should have
used as expenses for his travels, then he has the right to
demand from the employer. So here, if the amount of the cash
advance received is less than the amount he spent for actual
travel, he has the right to demand reimbursement from his
employer. Hence, petitioner was under no legal obligation to
return the same cash or money which he received from his
employer. Then, what we have here is a simple loan. There is a
transfer of ownership to the petitioner. Because of that, there
is no fiduciary relationship created which would hold Kim
criminally liable for estafa. Absent this fiduciary relationship,
which is an essential element of the crime of estafa by
misappropriation or conversion, petitioner could not have
committed estafa.
Here, as a case of mutuum, the borrower can dispose of the
thing borrowed and his act cannot be considered as a
misappropriation.
NOTE the distinction between a rent and a loan.
LOAN RENT
A loan signifies delivery of Rent on the other hand,
some other consumable signifies delivery to another
thing to another with the some non-consumable thing
promise to pay and in order that the latter may
equivalent amount of the use it during a certain period
same kind and quality and return it to the former
for a consideration.
Parties in the loan obligor in rent landlord and tenant
and obligee
creditor receives payment owner receives
compensation or price
either in money or
provisions.
Look again in Art. 1953 on the term fungible thing. These are
things dealt by number and measurement such as rice, grain,
oil, gasoline, so that any given unit or portion is treated as any
other unit or portion. These are those belonging to the same
genus or several species of the same kind.
Recall the distinction last time as to the subject matter. We talk
about commodatum, it generally involves non-consumable
thing. As an exemption, consumable but with purpose of
exhibition. On the other hand, we have mutuum money or
other consumable thing. Is there a difference between
consumable and fungible as used in Art. 1953? None. When it
comes to mutuum, those two are used interchangeably. In the
concept that the thing cannot be used without being
consumed under the old Civil Code is precisely that of the
MANRESA 2015
consumable things that are also considered in the contract of
loan.
BPI VS CA
Sometime in 1980, Frank Roa sold a house and lot to private
respondents ALS and Antonio Litonjua for P850,000. They
paid P350k in cash and assumed the P500k balance of Roas
indebtedness with petitioner BPI Investment Corp.
(BPIIC). Said loan was mortgaged with the said house and
lot. BPIIC, however, was not willing to extend the old interest
rate (from Roas loan) to private respondents and proposed
to grant them a new loan of P500,000 to be applied to Roas
debt and secured by the same property with new interest
rate.
Consequently, private respondents executed a mortgage
deed containing the above stipulations with the provision
that payment of the monthly amortization shall commence
on May 1, 1981.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of
their loan after full payment of Roas loan.
Later, BPIIC instituted foreclosure proceedings against
private respondents on the ground that they failed to pay the
mortgage indebtedness from May 1, 1981 to June 30, 1984.
Private respondents maintained that they should not be
made to pay amortization before the actual release of
the P500,000 loan in August and September 1982.
ISSUE: When should the payment of the monthly
amortization commence?
HELD: A month after the release of the loan on Sept. 13,
1982. In the present case, the loan contract between BPI and
ALS and Litonjua was perfected only on September 13, 1982,
the date of the second release of the loan.
Ratio: A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object
of the contract.
A contract of loan involves a reciprocal obligation, wherein
the obligation or promise of each party is the consideration
for that of the other. As averred by private respondents, the
promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly
amortization commencing on May 1, 1981, one month after
the supposed release of the loan.
It is a basic principle in reciprocal obligations that neither
party incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is incumbent
pg. 16

Atty. Jazzie Sarona Lozare
upon him. Only when a party has performed his part of the
contract can he demand that the other party also fulfills his
own obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for the payment
of the monthly amortization after September 13, 1982 for it
was only then when it complied with its obligation under the
loan contract.
Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage,
the starting date is October 13, 1982 and not May 1, 1981.
Q1: How is a contract of Mutuum perfected?
A1: By delivery
Q2:For example, there is a loan of money. If I issue a check in
your name and I delivered it to you, is the simple loan or
mutuum already perfected?
A2: Not yet. It would be perfected upon encashment.
Q3: When was the contract deemed perfected in this case?
A3: It was deemed perfected on Sept. 13, 1982
Q4: Why was there a need to determine the perfection of the
contract of loan?
A4: Because it would determine whether or not BPI may validly
foreclose the properties; and if there would already be an
obligation on the part of Litonjua to pay for the monthly
amortization; and when the payment of such should start. In
this case, the monthly amortization should start not on May 1,
1981 [as they have stipulated in the contract] but on Sept. 13,
1982.
Atty. Lozare: Here, it emphasizes simple loan is perfected upon
the delivery of the object of the contract and therefore it is a
real contract. The contract here was perfected only on Sept.
13, 1982 even if the loan contract was signed on March 31,
1981. It was only on Sept. 13 when the full loan was released
to private respondents. Take note, the court here emphasized
that in a loan agreement, you have reciprocal obligations from
each party where the obligation or promise of each party is the
consideration of the other party. The consideration for BPI in
entering into the loan contract is the promise of private
respondents to pay the monthly amortization. For the private
respondents, it is the promise of BPI to deliver the money.
In reciprocal obligations, neither of the parties incurs delay if
the other has not complied or is not ready to comply in the
proper manner with what is incumbent upon him. Therefore,
there was no delay when the private respondents did not pay
the monthly amortization on May 1, 1981 as it was only on
Sept. 13, 1982 when petitioner has fully complied with its
obligation under the loan contract.
Again, in mutuum, a loan contract is only perfected upon
delivery and that it involves reciprocal obligations.
MANRESA 2015
Sps. Tan vs. Villapaz
Villapaz issued a Philippine Bank of Communications
(PBCom) crossed check in the amount of P250,000.00,
payable to the order of petitioner Antonio Tan. Villapaz filed
a complaint for collection of sum of money against Sps. Tan
alleging that the check he issued was for a loan to be settled
in 6 months but the spouses failed to settle the same.
Sps. Tan denied. They contended that since the alleged loan
was one with a period payable in six months and where the
amount exceeds P 500, it should have been expressly
stipulated upon in writing (under Art. 1358) by the parties
but it was not. Hence, the essential requisite for the validity
and enforceability of a loan is wanting; and the check is
inadmissible to prove the existence of a loan
ISSUE: WON there was a contract of loan
HELD: Yes.
Sps. Tans reliance on Art. 1358 of the Civil Code is misplaced
for the requirement that contracts where the amount
involved exceeds P500.00 must appear in writing is only for
convenience. At all events, a check, the entries of which are
no doubt in writing, could prove a loan transaction.
No written proof of the grant of the loan was executed was
credibly explained by respondent when he declared that
petitioners son being his godson, he, out of trust and
respect, believed that the crossed check sufficed to prove
their transaction.
That petitioner Antonio Tan had, an outstanding balance of
more than P950,000.00 in his account at PBCom did not rule
out petitioners securing a loan. It is pure naivete to believe
that if a businessman has such an outstanding balance in his
bank account, he would have no need to borrow a lesser
amount.
Q1: How about the allegation here of Antonio Tan that there
could be no reason that he would borrow money because he
also has money in the bank?
A1: The same reason is untenable because anybody can loan
money. Corporations enter into contracts of loan even if they
have assets.
Atty. Lozare: What you have here is a contract of loan and it is
not required that there may be a separate contract, for
example a promissory note to show that the issuance of the
check was really considered as a simple loan or mutuum.
One of the functions of a negotiable instrument is that the
instrument is an evidence of indebtedness. So, there is no need
pg. 17
 MANRESA 2015
Atty. Jazzie Sarona Lozare

for a separate promissory note to show that the issuance of a If the subject of mutuum is money, apply the principles in Art.
check is because of a simple loan or mutuum. 1249 and Art. 1250.

A check, the entries of which are no doubt in writing could
prove a loan transaction. Furthermore, it is not required that
there must be a separate contract for a contract of loan to be
valid and enforceable. Art. 1358 is only for convenience. And if
you look at Statute of Frauds, Art. 1403 (2),
walanamangnakalagaydyan with regard to a contract of loan
to be in writing to be enforceable.
Shifting gears
Destruction of the thing loaned does not extinguish ones
obligation to pay. In mutuum, what is your obligation? Your
obligation is to pay the money. If the money was lost or you
became insolvent or you were robbed, will that extinguish the
obligation? No. Genus nunquamperit. Money is a generic thing.
Therefore, even if the money that you are supposed to pay the
loan for was destroyed, obligation is not extinguished in
mutuum.
Article 1249. The payment of debts in money shall be made
in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in
the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or
when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance. (1170)
Article 1250. In case an extraordinary inflation or deflation of
the currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement
to the contrary. (n)

Article 1954. A contract whereby one person transfers the If the subject matter is a consumable thing, the obligation is to
ownership of non-fungible things to another with the deliver the same kind, quality and quantity (KQQ) even if it
obligation on the part of the latter to give things of the same should change in value. If it is impossible, then the value of the
kind, quantity, and quality shall be considered a barter. (n) thing at the time the loan was perfected. Again, this applies
In here, there is a distinction between mutuum and barter. As only when it is IMPOSSIBLE to deliver the same KQQ.
defined in Art. 1638 on barter:
Now we look at:
Article 1638. By the contract of barter or exchange one of Article 1956. No interest shall be due unless it has been
the parties binds himself to give one thing in consideration expressly stipulated in writing. (1755a)
of the other's promise to give another thing. (1538a)
A bulk of our discussion here in mutuum revolves around
Commodatum Mutuum Barter interest. If you look at Art. 1956, you could say that we have
Subject ordinarily money or Non- therein the requisites for recovery of interest.
matter non- other fungible or a. It must be expressly stipulated and
consumable consumable non- b. second, it must be in writing.
thing consumable Art. 1956 is under this chapter on mutuum. In other words, the
thing requirement for interest to be expressly stipulated in writing is
Thing the identical Same kind, The only applicable for simple loan. For other instances, there may
to thing quality and equivalent be liability for interests, but it is not required to be expressly
return borrowed quantity thing stipulated in writing if its not a loan.
only
equivalent Also, another requisite that is mentioned there is that the
thereof interest must be lawful [*personal note: I dont know where is
Nature Essentially May be Always there that this requisite has been mentioned. Lo siento!]. But
gratuitous gratuitious onerous considering that the usury law has already been suspended,
then you do not simply follow it anymore.
Article 1955. The obligation of a person who borrows money
shall be governed by the provisions of articles 1249 and What is applied nowadays is that the interest rate must be
1250 of this Code. If what was loaned is a fungible thing conscionable. Otherwise, if it is unconscionable and iniquitous,
other than money, the debtor owes another thing of the the courts may reduce it. Also recall in ObliCon, contracting
same kind, quantity and quality, even if it should change in parties may stipulate freely on any adjustment on the interest
value. In case it is impossible to deliver the same kind, its rate as one of their stipulations on the loan or forbearance of
value at the time of the perfection of the loan shall be paid. money. But the law does not authorize increase of interest rate
(1754a) by one party without the other partys consent. Any change

pg. 18

Atty. Jazzie Sarona Lozare
must be mutually agreed by the parties as one of the principles
emphasized in ObliCon.
Now, we have the term forbearance.
CRISMINA GARMENTS 128721
PNB vs. Ibarrola
As payments for the purchase of medicines,
the Province of Isabela issued several checks drawn against
its accounts with petitioner Philippine National Bank (PNB) in
favor of the seller, private respondent Ibarrola. Ibarrola failed
to receive the full payment, thus she filed an action for a sum
of money and damages against the Province of Isabela and
PNB among others.
RTC ruled in her favor ordering that she be paid with interest
thereon at the legal rate from the date of the filing of the
complaint until the entire amount is fully paid. CA and SC
affirmed. However, the three courts did not specify whether
the legal rate of interest referred to in the judgment is 6% or
12%.
ISSUE: Whether in an action for damages, the legal rate of
interest is 6% as provided by Article 2209of the New Civil Code
or 12% as provided by CB Circular 416 series of 1974
HELD:
The case at bench does not involve a loan. When an obligation
arises from a contract of purchase and sale and not from a
contract of loan or mutuum, the applicable rate is 6% per
annum as provided in Article 2209 of the NCC and not the rate
of 12% per annum as provided in (CB) Cir. No. 416.
The rate of 12% interest referred to in Cir. 416 applies only to:
Loan or forbearance of money, or to cases where money is
transferred from one person to another and the obligation to
return the same or a portion thereof is adjudged. Any other
monetary judgment which does not involve or which has
nothing to do with loans or forbearance of any money, goods
or credit does not fall within its coverage for such imposition
is not within the ambit of the authority granted to the Central
Bank.
Therefore, the proper rate of interest referred to in the
judgment under execution is only 6%. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim and
until payment thereof, is deemed to be equivalent to a
forbearance of credit. Thus, the rate of 12% p.a. should be
imposed, and to be computed from the time the judgment
became final and executory until fully satisfied.
MANRESA 2015
Q1: How is the term forbearance defined in this case?
A1: FORBEARANCE in the context of the usury law is a
contractual obligation of lender or creditor to refrain, during a
given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable.
Q2: In this case, do we have a loan or forbearance of money?
A2: There was none. It was merely a contract of sale
Q3: So what is the interest rate that should be imposed?
A3: The proper rate of interest is only 6%. However, once the
judgment becomes final and executory, in the interim period
from the finality of judgment awarding a monetary claim and
until payment thereof, the rate of 12% p.a. should be imposed.
Q4: The 12% interest rate will commence at what period?
A4: From the time the judgment became final and executory
until fully satisfied.
Atty. Lozare: So in this case, SC mentioned that the 12%
interest rate referred to in BSP Cir. No. 416 applies only to a
loan or forbearance of money. In cases where money is
transferred from one person to another and the obligation to
return the same or the portion thereof is adjudged.
What do you have here? The liability arose from a contract of
sale. It did not involve a loan, forbearance of money or a
judgment involving a loan or forbearance of money. That is
why the applicable rate is 6% per annum. Again, the obligation
here did not constitute a breach of a loan. However, the interim
period from the finality of judgment awarding a monetary claim
and until payment thereof, is deemed to be equivalent to a
forbearance of credit wherein the 12% interest rate should be
imposed. So here, the rate shall be 6% per annum from the
time the complaint was filed until full payment before finality
of judgment. If the amount adjudged remains unpaid, interest
rate shall be 12% per annum computed from the time the
judgment became final and executory until fully satisfied.
Estores vs. Sps. Supangan
Estores averred that she is willing to return the principal
amount of P3.5 million but without any interest since the
Conditional Deed of Sale provided only for the return of the
downpayment in case of breach,hence she cannot be held
liable to pay legal interest as well
ISSUE: WON Sps. Supangan are entitled of interest
HELD: YesInterest may be imposed even in the absence of
stipulation in the contract
Article 2210 of the Civil Code expressly provides that
"[i]nterest may, in the discretion of the court, be allowed
upon damages awarded for breach of contract." In this case,
pg. 19

Atty. Jazzie Sarona Lozare
there is no question that petitioner is legally obligated to
return the P3.5 million because of her failure to fulfil the
obligation under the Conditional Deed of Sale, despite
demand. She has in fact admitted that the conditions were
not fulfilled and that she was willing to return the full
amount of P3.5 million but has not actually done so.
Petitioner enjoyed the use of the money from the time it was
given to her until this moment
The interest at the rate of 12% is applicable in the instant
case. The contract involved in this case is admittedly not a
loan but a Conditional Deed of Sale. However, the contract
provides that the seller must return the payment made by
the buyer if the conditions are not fulfilled, which happened
in this case. Petitioners unwarranted withholding of the
money which rightfully pertains to respondent-spouses
amounts to forbearance of money which can be considered
as an involuntary loan. Thus, the applicable rate of interest
is 12% per annum.
Q1: How is forbearance of money defined here?
*A1: Forbearance of money, goods or credits refers to
arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or credits
pending happening of certain events or fulfilment of certain
conditions.
Q2: Is interest imposable here?
A2: Yes, even if the contract in this case does not stipulate any
interest to be imposed.
Q3: In this case, there was no loan. What is then the basis of the
claim of interest? What article [in NCC] did the SC cite in its
decision? Did it cite Art. 1956?
A3: No, it cited: Article 2210. Interest may, in the discretion of
the court, be allowed upon damages awarded for breach of
contract.
[Therefore, the claim of interest is based on Art. 2210 on
damages awarded for breach of contract since in this case,
there was a breach.]
Q4: In this case, you have a conditional deed of sale. So what is
the rate of interest that should be imposed?
A4: The 12% rate per annum
Q5: Why not the 6% rate? Isnt it that this is also a deed of sale
and as decided in Ibarrola case, SC ruled that the rate should be
6%?
A5: Because the rate of 12% per annum is applied when the
contract is of loan or of forbearance of money. In this case,
there was a forbearance of money.
Q6: Why was it considered as a forbearance of money even if it
is based on a contract of sale?
MANRESA 2015
A6: Because of the lapse of time (7 years), it would fall under
forbearance of money. During those times, the seller already
made use of the buyers money.
Atty. Lozare: Here, it is proper to impose interest
notwithstanding the absence of stipulation in the contract. In
this case, there is no loan or mutuum, so there is no
requirement that it should be expressly stipulated in writing.
The basis of the interest is Art. 2210.
As a general rule, interest shall be computed in accordance
with the stipulation of the parties. Absent such stipulation, rate
of interest shall be
12% per annum when the obligation arises out of a
loan or forbearance of money, goods, or credits.
6%. In all other cases
While the SC recognizes the previous definition of forbearance
as "contractual obligation of lender or creditor to refrain during
a given period of time, from requiring the borrower or debtor
to repay a loan or debt then due and payable"; in this case and
other subsequent cases, the definition of
FORBEARANCE OF MONEY, goods, or credit was
expounded. It should now refer to arrangements
other than loan agreements.
Why? The phrase "forbearance of money, goods or credits" is
meant to have a separate meaning from a loan, otherwise
there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code.
Hence, definition of forbearance of money is [refer to *A1]
They have therefore allowed or granted forbearance to the
seller (petitioner) to use their money pending fulfillment of the
conditions. They were deprived of the use of their money for
the period pending fulfillment of the conditions and when
those conditions were breached, they are entitled not only to
the return of the principal amount paid, but also to
compensation for the use of their money [which is interest].
And the compensation for the use of their money, absent any
stipulation, should be the same rate of legal interest applicable
to a loan since the use or deprivation of funds is similar to a
loan.
Petitioners unwarranted withholding of the money which
rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an
involuntary loan. Thus, the applicable rate of interest is 12%
per annum.
*With regard to these cases we have already discussed, notice
the importance of the distinction when to apply 6% or 12%.
However, effective July 1, 2013, the legal interest rate is
already 6%. In other words, there is no need to distinguish
anymore. But we still need to discuss this because for
pg. 20

Atty. Jazzie Sarona Lozare
obligations with any interest that is due prior July 1, 2013, we
still have to make the distinction whether to apply 6% or 12%
on the interest rate.
In the case of Yong Chan Kim, in order for a person to be
convicted of estafa, it must be proven that there is an
obligation to deliver or return money, goods, or personal
property. In this case, he is just obligated to liquidate.
Liquidation here is the settling of indebtedness.
In the case of BPI, a loan, whether it is commodatum or
mutuum, is a real contract and not a consensual contract.
Therefore, it is perfected upon delivery. The consideration of
the BPI here is the promise of private respondent to pay the
monthly amortization. On the part of the private respondent,
the promise of BPI to deliver the money. As mentioned, in
reciprocal obligations, neither party incurs delay if the other
does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. Here private respondents
did not incur in delay when they did not commence payment
for the monthly amortization because it was only on 13
September 1982 when BPI fully complied with its obligation in
the contract.
We have also discussed those having interests particularly
those involving forbearance of money and goods. In the
subsequent cases just like in the case of Estores we mentioned
that forbearance has a separate meaning with loan.
Forbearance is defined as a contractual obligation of the
lender or creditor to refrain during a given period of time,
from requiring the borrower or debtor to repay a loan or
debt then due and payable.
Forbearance of money, goods or credits should therefore
refer to arrangements other than loan agreements, where
a person acquiesces to the temporary use of his money,
goods or credits pending the happening of certain events
or fulfillment of certain conditions.
As distinguished in the case of Ibarrola, this case does not
involve a loan, forbearance of money, or judgment involving a
loan or forbearance of money as it arose from a contract of sale
where Ibarrola did not receive the full payment for her
merchandise. When an obligation arises not from a contract of
loan or forbearance of money but from a contract of sale the
applicable rate of interest is 6% per annum as provided under
Article 2209 of the NCC.
As we all know, the law does not authorize the
increase of the interest rate without the consent of the other
contracting party. However, in the case of Pan Pacific
PAN PACIFIC vs EQUITABLE PCI BANK
MANRESA 2015
FACTS: Pan Pacific is engaged in contracting mechanical works
on airconditioning system. They entered into a contract of
mechanical works with respondent for the total consideration
for the whole project was P23,311,410.30. The Contract
stipulated that Pan Pacific shall be entitled to a price
adjustment in case of increase in labor costs and prices of
materials under paragraphs 70.1 and 70.2 of the General
Conditions for the Construction of PCIB Tower II Extension.
Pan Pacific commenced the mechanical works in the project
site. In 1990, labor costs and prices of materials escalated. On
5 April 1991, in accordance with the escalation clause, Pan
Pacific claimed a price adjustment of P5,165,945.52.
Respondents asked for a reduction in the price adjustment. To
show goodwill, Pan Pacific reduced the price adjustment
toP4,858,548.67.
Due to the extraordinary increases in the costs of labor and
materials, Pan Pacifics operational capital was becoming
inadequate for the project. However, respondent withheld the
payment of the price adjustment under the escalation clause
despite Pan Pacifics repeated demands.
Instead, respondent offered Pan Pacific a loan of P1.8 million.
Pan Pacific was constrained to execute a promissory note in the
amount of P1.8 million as a requirement for the loan. Pan
Pacific also posted a surety bond. The P1.8 million was released
directly to laborers and suppliers and not a single centavo was
given to Pan Pacific.
Pan Pacific made several demands for payment on the price
adjustment but respondent merely kept on promising to release
the same. Meanwhile, the P1.8 million loan matured and
respondent demanded payment plus interest and penalty. Pan
Pacific refused to pay the loan. Pan Pacific insisted that it would
not have incurred the loan if respondent released the price
adjustment on time. Pan Pacific alleged that the promissory
note did not express the true agreement of the parties. Pan
Pacific maintained that the P1.8 million was to be considered
as an advance payment on the price adjustment. Therefore,
there was really no consideration for the promissory note; hence,
it is null and void from the beginning.
Respondent stood firm that it would not release any amount of
the price adjustment to Pan Pacific but it would offset the price
adjustment with Pan Pacifics outstanding balance
of P3,226,186.01, representing the loan, interests, penalties
and collection charges.
Pan Pacific refused the offsetting but agreed to receive the
reduced amount of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial settlement,
less P1.8 million and P414,942 as advance payments.
ISSUE: Whether the CA, in awarding the unpaid balance of the
price adjustment, erred in fixing the interest rate at 12% instead
of the 18% bank lending rate. YES
pg. 21

Atty. Jazzie Sarona Lozare
HELD: The CA went beyond the intent of the parties by requiring
respondent to give its consent to the imposition of interest
before petitioners can hold respondent liable for interest at the
current bank lending rate. This is erroneous. A review of Section
2.6 of the Agreement and Section 60.10 of the General
Conditions shows that the consent of the respondent is not
needed for the imposition of interest at the current bank
lending rate, which occurs upon any delay in payment.
Article 1956 of the Civil Code, which refers to monetary interest,
specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. Therefore, payment of
monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest;
and
(2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for
the payment of monetary interest.
The consent of the respondent is not needed in order to impose
interest at the current bank lending rate.
Under Article 2209 of the Civil Code, the appropriate measure
for damages in case of delay in discharging an obligation
consisting of the payment of a sum of money is the payment of
penalty interest at the rate agreed upon in the contract of the
parties. In the absence of a stipulation of a particular rate of
penalty interest, payment of additional interest at a rate equal
to the regular monetary interest becomes due and payable.
Finally, if no regular interest had been agreed upon by the
contracting parties, then the damages payable will consist of
payment of legal interest which is 6%, or in the case of loans or
forbearances of money, 12% per annum. It is only when the
parties to a contract have failed to fix the rate of interest or
when such amount is unwarranted that the Court will apply the
12% interest per annum on a loan or forbearance of money.
The written agreement entered into between petitioners and
respondent provides for an interest at the current bank lending
rate in case of delay in payment and the promissory note
charged an interest of 18%.
To prove petitioners entitlement to the 18% bank lending rate
of interest, petitioners presented the promissory note prepared
by respondent bank itself. This promissory note, although
declared void by the lower courts because it did not express the
real intention of the parties, is substantial proof that the bank
lending rate at the time of default was 18% per annum. Absent
any evidence of fraud, undue influence or any vice of consent
exercised by petitioners against the respondent, the interest
rate agreed upon is binding on them.
Q1: What is the proper interest rate that should be
imposed?
A1: The interest rate that should be imposed is 18%.
Q2: Why?
A2: Settled is the rule that the agreement or the contract
between the parties is the formal expression of the parties
MANRESA 2015
rights, duties, and obligations. It is the best evidence of the
intention of the parties. Thus, when the terms of an agreement
have been reduced in writing it is considered as containing all
the terms agreed upon and there can be, between the parties
and their succesors-in-interest, no evidence of such terms
other than the contents of the written agreement.
Q3: Where was it stipulated?
A3: Under the General Conditions Section 60.10, which
provides that the CONTRACTOR may charge interest at the
current bank lending rates. The current bank lending rate is at
18% p.a.
Q4: But isnt it that the PN was considered void for lack of
consideration?
A4: The written agreement provides that the interest be
at the current bank lending rate in case there is delay in
payment. While it is true that the PN was declared void as it did
not express the real intention of the parties, it was
nevertheless considered as substantial proof that the bank
lending rate at that time of default is 18% p.a.
When the terms of the contract are clear and leave no doubt
as to the intention of the parties, the literal meaning of the
stipulation governs. Once, the parties agree on the price
adjustment after due consultation in compliance with the
provisions of the escalation clause, the agreement is in effect
an amendment to the original contract, and gives rise to the
liability of the respondent to pay the adjusted costs. Upon
respondents failure to pay within the time provided, then it
shall be liable to pay the stipulated interests. Therefore, the
basis is the delay of EPCI such that its consent is not anymore
needed before it can become liable for the adjusted price.
Article 1956, which refers to the monetary interest, specifically
mandates that no interest shall be due unless it has been
expressly stipulated in writing. Therefore, payment of the
monetary interest is allowed only if:
1. there was an express stipulation for the payment of
interest; and
2. the agreement for the payment of interest was
reduced in writing. The concurrence of the two
conditions is required for the payment of the
monetary interest.
Also, under Article 2209 of the NCC, the appropriate measure
for the damages in the case of delay in discharging an
obligation consisting of the payment of a sum of money is the
payment of the penalty interest at the rate agreed upon in the
contract of the parties. In the absence of a stipulation of a
particular rate of penalty interest, payment of additional
interest at a rate equal to the regular monetary interest
becomes due and payable. Finally, if no regular interest had
been agreed upon by the contracting parties, then the damages
payable will consist of payment of legal interest, which is 6%,
pg. 22

Atty. Jazzie Sarona Lozare
or in the case of loans or forbearance of money, 12% p.a. It is
only when the parties to a contract have failed to fix the rate of
interest or when such amount is unwarranted that the Court
will apply the 12% interest p.a. on a loan or forbearance of
money.
Another thing that you should consider is the difference
between monetary and compensatory interests.
1. Monetary Interest compensation for the use of money;
2. Compensatory Interest penalty or indemnity of payment
for damages.
Debtor in delay is liable to pay the legal interest as indemnity
from damages even in the absence of stipulation of payment
of interest. Those obliged to deliver or to do something incur
in delay from the time the oblige judicially or extrajudicially
demands from them the fulfillment of the obligation. This is in
relation to Article 1169.
We have the case of Prisma
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and
ROGELIO S. PANTALEON vs ARTHUR F. MENCHAVEZ
FACTS: December 8, 1993, Pantaleon, President and Chairman
of the Board of PRISMA, obtained a P1M loan from the
respondent, with monthly interest of P40,000.00 payable for 6
months, or a total obligation of P1,240,000.00 payable within
6 months.
To secure the payment of the loan, Pantaleon issued a PN
signed in his personal capacity and as duly authorized by the
Board of Directors of PRISMA. PRISMA failed to pay within the
stipulated period.
As of January 4, 1997, respondent found that the petitioners
still had an outstanding balance of P1,364,151.00, to which
respondent applied a 4% monthly interest.
On August 28, 1997, respondent filed a complaint for sum of
money to enforce the unpaid balance, plus 4% monthly interest.
The petitioners admitted the loan of P1,240,000.00, but denied
the stipulation on the 4% monthly interest, arguing that the
interest was not provided in the promissory note. Pantaleon
also denied that he made himself personally liable and that he
made representations that the loan would be repaid within six
(6) months. Petitioners appealed to CA insisting that there was
no express stipulation on the 4% monthly interest. CA favored
respondent but noted that the interest of 4% per month, or 48%
per annum, was unreasonable and should be reduced to 12%
per annum. MR denied hence this petition.
ISSUE: Whether the parties agreed to the 4% monthly interest
on the loan. If so, does the rate of interest apply to the 6-month
payment period only or until full payment of the loan?
MANRESA 2015
RULING: Interest due should be stipulated in writing; otherwise,
12% per annum APPLIES.
The collection of interest without any stipulation in writing is
prohibited by law.
The interest of P40,000.00 per month corresponds only to the
six-month period of the loan, or from January 8, 1994 to June
8, 1994, as agreed upon by the parties in the promissory note.
Thereafter, the interest on the loan should be at the legal
interest rate of 12% per annum.
When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of
the Civil Code.
The facts show that the parties agreed to the payment of a
specific sum of money of P40,000.00 per month for six months,
not to a 4% rate of interest payable within a 6-month period.
The payment of the specific sum of money of P40,000.00 per
month was voluntarily agreed upon by the petitioners and the
respondent. There is nothing from the records and, in fact,
there is no allegation showing that petitioners were victims of
fraud when they entered into the agreement with the
respondent.
Therefore, as agreed by the parties, the loan of P1M shall earn
P40,000.00 per month for a period of 6 months, for a total
principal and interest amount of P1,240,000.00. Thereafter,
interest at the rate of 12% per annum shall apply. The amounts
already paid by the petitioners during the pendency of the suit,
amounting toP1,228,772.00 as of February 12, 1999, should be
deducted from the total amount due, computed as indicated
above. We remand the case to the trial court for the actual
computation of the total amount due.
Q: What do you mean by interest? It is a form of compensation
for the use of another persons money.
Q: When is a person liable for interest? He is liable for interest,
generally, when he borrows money. He is liable for the use of
another persons money. It is a form of compensation.
Q: Was there an agreement for interest? No. The 1M loan shall
be payable within 6 months. During this period, the loan shall
earn an interest of 40k per month, for a total obligation of 1.24
M for the six-month period. Note that this agreed sum can be
computed at 4% interest per month, but no such rate of
interest was stipulated in the PN rather a fixed sum equivalent
to this rate was agreed upon.
pg. 23

Atty. Jazzie Sarona Lozare
Q: Why is there a need to determine the interest rate? There is
a need to determine the proper interest rate that must be
applied because there was non-payment of the obligation.
Going back to the definition of interest, it is a form of
compensation for the use of another persons money.
Q: Why 12%?
When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or a forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence
of stipulation, the rate of 12% p.a. to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the NCC.
Applying, Article 1956, which refers to the monetary interest,
specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. Therefore, payment of the
monetary interest is allowed only if:
1. there was an express stipulation for the payment of
interest; and
2. the agreement for the payment of interest was
reduced in writing. The concurrence of the two
conditions is required for the payment of the
monetary interest.
The Court finds that the interest rate of 40k per month
corresponds only to the 6-month period of the loan as agreed
upon by the parties in the PN. Thereafter, the interest on the
loan should be at 12% p.a.
WHAT ARE THE TYPES OF INTEREST UNDER THE PHILIPPINE
LAW?
1.) Simple Interest paid for the principal at a certain rate as
stipulated by the parties.
2.) Compound Interest Imposed upon interest due and
unpaid.
Accrued interest is the interest earned but not yet
received. That is the nature of a compound interest
added to the principal sum and the whole principal
and interest is treated as the new principal upon
which the interest for the next period is stipulated. As
a general rule, interest due and unpaid shall not earn
interest. So if the parties stipulated an interest, it is
considered simple. It becomes only compound when
there is a stipulation. In other words, a compound
interest cannot be demanded from the borrower
unless there is a stipulation.
3.) Legal Interest That which the law directly charged in the
absence of any agreement as to liability between the
parties.
7 Remember, that since the Usury Law has been suspended, there is no more maximum
interest FOR NOW.
MANRESA 2015
4.) Lawful Interest - Interest, which the law allows or does not
prohibit; that which is the maximum interest allowed by
law.
5.) Unlawful Interest or Usurious Interest rate stipulated that
is beyond the maximum rate allowed by law.7
WITH REGARD TO LAWFUL AND UNLAWFUL INTEREST RATES
In relation to that let us take into consideration the provisions:
Article 2209 to Article 2213. This is more in related to torts and
damages but these provisions of law nonetheless deal with
interest.
Article 2209.
If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation,
the legal interest, which is six per cent p.a.
In 1974 it was at 12& p.a. but starting July 2013 it was reduced
to 6% p.a.
Article 2210.
Interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.
Also, we have crimes and quasi delicts.
Article 2211.
In crimes and quasi-delicts, interest as part of the damages
may, in proper case, be adjudicated in the discretion of the
court.
Article 2212.
Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this
point.
Article 2213.
Interest cannot be recovered upon unliquidated claims or
damages, except when the demand can be established with
reasonable certainty.
Since we already have an idea that the usury law has been
suspended, so what happens of the interest rates are found to
be excessive?
We have the case of Chua vs. Timan
CHUA vs. TIMAN
FACTS: In February and March 1999, petitioners Salvador and
Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia
Timan the following loans: a) P100,000; b) P200,000;
c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These
pg. 24

Atty. Jazzie Sarona Lozare
loans were evidenced by PN with interest of 7% per month,
which was later reduced to 5% per month.
Respondents paid the loans initially at 7% interest rate per
month until September 1999 and then at 5% interest rate per
month from October to December 1999. Sometime in March
2000, respondents offered to pay the principal amount of the
loans through a PNB managers check worth P764,000, but
petitioners refused to accept the same insisting that the
principal amount of the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the
Clerk of Court of the RTC of Quezon City. Later, they filed a case
for consignation and damages which was released to the
petitioners.
The RTC ruled that the original stipulated interest rates of 7%
and 5% per month were excessive. It further ordered petitioners
to refund to respondents all interest payments in excess of the
legal rate of 1% per month or 12% per annum.
The Court of Appeals declared illegal the stipulated interest
rates of 7% and 5% per month for being excessive, iniquitous,
unconscionable and exorbitant.
Petitioners aver that the stipulated interest of 5% monthly and
higher cannot be considered unconscionable because these
rates are not usurious by virtue of Central Bank (C.B.) Circular
No. 905-82 which had expressly removed the interest ceilings
prescribed by the Usury Law. Petitioners add that respondents
were in pari delicto since they agreed on the stipulated interest
rates of 7% and 5% per month. They further aver they honestly
believed that the interest rates they imposed on respondents
loans were not usurious.
ISSUE: Whether or not the original stipulated interest rates of
7% and 5%, equivalent to 84% and 60% per annum, are
unconscionable
RULING: Yes. The stipulated interest rates of 7% and 5% per
month imposed on respondents loans must be equitably
reduced to 1% per month or 12% per annum. We need not
unsettle the principle we had affirmed in a plethora of cases
that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against
the law. While C.B. Circular No. 905-82, which took effect on
January 1, 1983, effectively removed the ceiling on interest rates
for both secured and unsecured loans, regardless of
maturity,nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest
rates to levels which would either enslave their borrowers or
lead to a hemorrhaging of their assets.
As well set forth in Medel:
MANRESA 2015
We agree that the stipulated rate of interest at 5.5% per
month on the P500,000.00 loan is excessive, iniquitous,
unconscionable and exorbitant. However, we can not consider
the rate "usurious" because this Court has consistently held
that Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law and that the Usury Law is now
"legally inexistent."
In Security Bank and Trust Company vs. Regional Trial Court of
Makati,
CB Circular No. 905 "did not repeal nor in any way amend the
Usury Law but simply suspended the latters effectivity." "Usury
has been legally non-existent in our jurisdiction. Interest can
now be charged as lender and borrower may agree upon."
Nevertheless, we find the interest at 5.5% per month, or 66%
per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and, hence, contrary to
morals ("contra bonos mores"), if not against the law. The
stipulation is void.
Q: What is the effect if the interest is excessive and iniquitous?
It will be reduced by the Courts.
Q: Since it was reduced, did the court considered it
unconscionable? What is the ruling as to the liability? Yes. The
Court ruled that their liability is only at 1% per month or 12%
p.a.
So even if there is a suspension of the usury law it does not
mean that the debtor shall not anymore be liable for any
interest if the stipulated rate was ruled as iniquitous. The
Courts will only reduce it. In the case of Pilipinas Bank
PILIPINAS BANK vs. COURT OF APPEALS
FACTS: PR Echaus filed a complaint against PB, for collection
of a sum of money alleging that Greatland assigned 2.3m
out of the total consideration of dacion en pago the latter
executed with PB.
TC ordered payment in her favor out of the P2,300,000.00
liability of PB to Greatland plus legal interest from the dates
of assignments until fully paid.
CA modified and ordered PB to pay 2,300,000,00 Pesos,
representing the total amount assigned by Greatland to her,
with interest at the legal rate starting July 24, 1981, date
when demand was first made.
On September 4, 1990, petitioner filed a motion in the trial
court praying that private respondent to refund to her the
excess payment of P1,898,623.67 with interests at 6%.
Private respondent opposed the motion of petitioner with
respect to the rate of interest to be charged on the amount
of P2,300,000.00. According to private respondent, the legal
pg. 25

Atty. Jazzie Sarona Lozare
interest on the principal amount of P2,300,000.00 due her
should be 12% per annum pursuant to CB Circular No. 416
and not 6% per annum as computed by petitioner.
The Court of Appeals was of the theory that the action in Civil
Case No. 239-A filed by private respondent against
petitioner "involves forbearance of money, as the principal
award to plaintiff-appellee (private respondent) in the
amount of P2,300.000.00 was the overdue debt of
defendant-appellant to her since July 1981. The case is, in
effect, a simple collection of the money due to plaintiff-
appellee, as the unpaid creditor from the defendant bank,
the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central
Bank Circular No. 416, the Court of Appeals held that the
applicable rate of interest is 12% per annum.
Petitioner argues that the applicable law is Article 2209 of
the Civil Code, not the Central Bank Circular No. 416.
ISSUE: Whether or not the legal rate of interest on the
amount of P2,300,000.00 adjudged to be paid by petitioner
to private respondent is 12% per annum.
RULING: Presidential Decree No. 116 authorized the
Monetary Board to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance
of any money, goods or credits and amended the Usury Law
(Act No. 2655) for that purpose.
As amended, the Usury Law now provides:
Sec. 1. The rate of interest for the loan or forbearance of any
money, goods, or credits and the rate allowed in judgments,
in the absence of express contract as to 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.
Sec. 1-a. The Monetary Board is hereby authorized to
prescribe the maximum rate or rates of interest for the loan
or renewal thereof or the forbearance of any money, goods
or credits, and to charge such rate or rates whenever
warranted by prevailing economic and social
conditions:Provided, That such changes shall not be made
oftener that once every twelve months.
In the exercise of the authority herein granted, the Monetary
Board may prescribe higher maximum rates for consumer
loans or renewals thereof as well as such loans made by
pawnshops, finance companies and other similar credit
institutions although the rates prescribed for these
institutions need not necessarily be uniform.
Acting on the authority vested on it by the Usury Law, as
amended by P.D. No. 116, the Monetary Board of Central
Bank issued Central Bank Circular No. 416, which provides:
MANRESA 2015
By virtue of the authority granted to it under Section 1 of Act
2655, as amended, otherwise known as the "Usury Law" the
Monetary Board in its Resolution No. 1622 dated July 29,
1974, has prescribed that the rate of interest for the loan, or
forbearance of any money, goods, or credits and the rate
allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) per cent per
annum. This Circular shall take effect immediately.
Note that Circular No. 416, fixing the rate of interest at 12%
per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and (3) judgments.
What then is the nature of the judgment ordering petitioner
to pay private respondent the amount of P2,300,000.00?
The said amount was a portion of the P7,776,335.69 which
petitioner was obligated to pay Greatland as consideration
for the sale of several parcels of land by Greatland to
petitioner. The amount of P2,300,000.00 was assigned by
Greatland in favor of private respondent. The said obligation
therefore arose from a contract of purchase and sale and not
from a contract of loan or mutuum. Hence, what is
applicable is the rate of 6% per annum as provided in Article
2209 of the Civil Code of the Philippines and not the rate of
12% per annum as provided in Circular No. 416.
Petitioner next contends that, consistent with its thesis that
Circular No. 416 applies only to judgments involving the
payment of loans or forbearance of money, goods and
credit, the Court of Appeals should have ordered private
respondent to pay interest at the rate of 12% on the
overpayment collected by her pursuant to the advance
execution of the judgment.
The Court agrees. Private respondent was paid in advance
the amount of P5,517,707.00 by petitioner to the order for
the execution pending appeal of the judgment of the trial
court. On appeal, the Court of Appeals reduced the total
damages to P3,619,083.33, leaving a balance of
P1,898,623.67 to be refunded by private respondent to
petitioner. In an execution pending appeal, funds are
advanced by the losing party to the prevailing party with the
implied obligation of the latter to repay former, in case the
appellate court cancels or reduces the monetary award.
In the case before us, the excess amount ordered to refunded
by private respondent falls within the ruling in Viloriaand
Buiser that Circular No. 416 applies to cases where money is
transferred from one person to another and the obligation
to return the same or a portion thereof is subsequently
adjudged.
Q1: What is dacion en pago?
pg. 26

Atty. Jazzie Sarona Lozare
A1: Article 1245 provides that dation in payment, whereby
property is alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law on sales.
Q2: Again, when do we apply the 12%?
A2: When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or a forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of 12% p.a. to be computed
from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the NCC.
Q: As to the 2.3 M what interest rate must be applied? As to the
excess?
The said amount was a portion of the 7.7 M petitioner was
obligated to pay to Greatland as consideration for the sale of
several parcels of land by Greatland to petitioner. The amount
of 2.3 M was assigned in favor of Lilia Echaus. The said
obligation therefore arose from a contract of purchase and sale
and not from a contract of loan or mutuum. Hence, what is
applicable is the rate of 6% p.a. a as provided in Article 2209 of
the NCC and not the rate of 12% p.a. as provided in Circular No.
416.
However, as to the excess, it shall earn interest of 12% p.a. The
reason is that the BSP Circular applies only to judgments
involving the payment of loans or forbearance of money, goods
and credit. Echaus must refund the excess amount to Pilipinas
Bank (parasiyang payment of loan/forbearance thats why i-
apply ang 12% sa excess; there is that obligation to
return/refund.)
We also have the case of Eastern Shipping. This case provided
us with a guideline.
EASTERN SHIPPING LINES, INC. vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE
COMPANY, INC
FACTS: This is an action against defendants shipping
company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the
consignee the value of such losses/damages.
The Court, among others, ordered defendants to pay
plaintiff, jointly and severally The amount of P19,032.95,
with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until
fully paid (the liability of defendant Eastern Shipping, Inc.
shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro
Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to
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exceed P5,000.00 each, pursuant to Section 6.01 of the
Management Contract)
ISSUE:
1. Whether the payment of legal interest on an award for
loss or damage is to be computed from the time the
complaint is filed or from the date the decision
appealed from is rendered.
2. Whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%). 6%
HELD:
1. It may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for
future guidance
When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.
With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, NOT constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until
the demand can be established with reasonable
certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code) but
when such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made (at which time the
pg. 27

Atty. Jazzie Sarona Lozare
quantification of damages may be deemed to have
been reasonably ascertained).
The actual base for the computation of legal
interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.
THEREFORE, the legal interest to be paid is SIX PERCENT (6%)
on the amount due computed from the decision, dated 03
February 1988, of the court a quo. A TWELVE PERCENT (12%)
interest, in lieu of SIX PERCENT (6%), shall be imposed on
such amount upon finality of this decision until the payment
thereof (pursuant to no.3 above.)
NOTE:
The Central Bank Circular imposing the 12% interest per
annum applies only to loans or forbearance of money,
goods or credits, as well as to judgments involving such
loan or forbearance of money, goods or credits, and
that the
6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in
the performance of obligations in general. Observe, too,
that in these cases, a common time frame in the
computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the
adjudged amount is fully paid.
Q1: Why do you think that is necessary for the SC to lay down
this guideline?
Based on the rulings in the previous cases there are variations
depending upon the circumstances of each case that is why it
is necessary for the SC to reconcile everything in one simple
guideline.
Q2: So what is the imposable rate of interest?
A2: 6% p.a. because the contract is sale and transportation of
goods.
Looking at this case it did not reverse the mode of imposition
of interest in the previous cases rather it just presented a
simpler guideline. You will find out later in one case that even
if the legal interest rate has already been amended you still
have to be familiar with these cases kasi you should know what
interest rate should be applied specially those prior to July 1,
2013. You have to make some distinctions.
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We have already emphasized that there is no more usurious
interest or unlawful interest due to the suspension of the Usury
Law. However, we have also discussed in the case of Chua that
despite the suspension of the Usury Law imposing maximum
interest rates or ceiling rate for interest, parties or creditors
cannot impose interest rates which are deemed exorbitant,
iniquitous or unconscionable. We have also discussed in the
case of Chua that the effect is that the stipulation will be
considered void and the interest will be reduced accordingly by
the Supreme Court.
What if it was the debtor who voluntarily agreed to such
interest rate? What happened in the case of Dio vs Japor?
Dio vs Spouses Japor
Facts: Spouses Virgilio Japor and Luz Roces Japor were the
owners of a residential lot including its improvements
situated in Lucena City.
On August 23, 1982, the respondents obtained a loan of
P90,000 from the Quezon Development Bank (QDB), and as
security therefor, they mortgaged the said lots, as evidenced
by a Deed of Real Estate Mortgage. Subsequently, the
parties amended the deed increasing respondents loan to
P128,000.
The respondents failed to pay their aforesaid loans.
However, before the bank could foreclose on the mortgage,
respondents offered to mortgage their properties to
petitioner Teresita Dio. Respondents mortgaged anew the
two properties already mortgaged with QDB to secure the
timely payment of a P350,000 loan that respondents had
from petitioner Dio. Under the terms of the deed,
respondents agreed to pay the petitioner interest at the rate
of five percent (5%) a month, within a period of two months
or until April 14, 1989. In the event of default, an additional
interest equivalent to five percent (5%) of the amount then
due, for every month of delay, would be charged on them.
However, the respondents failed to settle their obligation to
petitioner on April 14, 1989, the agreed deadline for
settlement. On August 27, 1991, petitioner made written
demands upon the respondents to pay their debt. Despite
repeated demands, respondents did not pay, hence
petitioner applied for extrajudicial foreclosure of the
mortgage.
Issue: Won the stipulation of 5% interest within the 2 month
period and 5% interest for every month of delay after that is
contrary to morals, if not, illegal.
Ruling: The stipulation as to the 5% interest for the two-
month period was sustained. However, the stipulation as to
the 5% interest for every month of delay after that
(compound interest) was deemed unconscionable.
The evidence shows that it was indeed the respondents who
proposed the 5% interest rate per month for two (2) months.
pg. 28

Atty. Jazzie Sarona Lozare
Having agreed to said rate, the parties are now estopped
from claiming otherwise. For the succeeding period after the
two months, however, the Court of Appeals correctly
reduced the interest rate to 12% per annum and the penalty
rate to 1% per month, in accordance with Article 2227of the
Civil Code.
The Usury Law is now legally inexistent. Interests may be set
at rates agreed upon. However, the interest rate albeit
technically cannot be considered as usurious, may be
equitably reduced should it be found by the courts as
iniquitous, unconscionable and hence, contrary to morals if
not against the law.
Q: Was the 5% per month deemed unconscionable?
Yes. In previous cases, even the interest rate of above 3% per
month is already unconscionable. What is deemed
conscionable is 12% per year or 1% per month.
Q: So what happened to the interest rate here agreed upon?
Was the 5% additional interest which was actually the penalty
for every month of delay sustained?
What is unconscionable is only the 2nd part of the interest
wherein there will be 5% interest within the succeeding period
after the 2 months. The 1st part was upheld by the court
because it was the debtor himself who made the proposal
regarding the interest rate of 5% per month within the first 2
months.
Q: Isnt it that it was also their agreement that in case of a
default there will also be an additional 5% interest per month?
Why cant we use the same reasoning (interest rate voluntarily
agreed upon) as to the penalty?
It is because the Supreme Court recognizes the reality that
whenever a person would need money, he would bite into any
offer or any kind of arrangement even though it is already
iniquitous such as the 5% per month interest which the
Supreme Court has already held in previous cases as iniquitous.
Q: How about the 5% interest for the two-month period? Why
was it upheld by the court? Because it was the debtor himself
who made such offer and probably maam because it was only
valid for the 2 month period and not absolute u til the entire
debt is paid.
Q: Let us change the facts a bit. What if it was voluntarily offered
by the debtor that he would be liable for interest of 5% per
month until fully paid? What do you think should be the
judgment in that scenario?
The SC would have to change the interest rate if it is iniquitous.
Q: What do we take into consideration to say that the interest is
iniquitous, unconscionable and exorbitant for the Supreme
Court to lower the interest rates?
1. Whether it is the debtor himself who made the offer
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2. Whether the interest rate is within the interest rate that
has been established by jurisprudence. It seems that the
mark established by jurisprudence is 3% per month at
most.
Q: But if we use that jurisprudence in the case of Prisma, why is
it that the 5% in the case of Dio was upheld? How do you
reconcile everything that we have discussed? What I am trying
to ask is what do we take into consideration to say that the
interest is unconscionable?
What is iniquitous, unconscionable and exorbitant would
depend upon the FACTUAL CIRCUMSTANCES. In this case, it
was Dio who made the offer that it was 5% for the first 2
months so it was upheld and the fact that it was the creditor
that offered the additional 5% penalty, it was considered
unconscionable.
First thing that you should consider in deeming the interest
rate as exorbitant, iniquitous and unconscionable are the
FACTUAL circumstances of each case. If you look at Dio, Civil
Code or Circulars or jurisprudence, there is no fixed rate. The
court never said that interest of 3% and above is automatically
considered iniquitous or unconscionable. Jurisprudence says
that it can serve as a guide but by itself, we cannot say that 3%
and above interest rate can be considered unconscionable.
What are the other factual circumstances that can be
considered by the court?
In the case of Dio vs Japor, the fact that it was the respondents
who proposed the interest for the two months was also
considered not only because they were the once who
proposed it but I think it was also taken into consideration the
period, the 2 month period.
So that is why I asked what if it is the debtor who voluntarily
proposed the 5% interest per month, can we say that it is
iniquitous and unconscionable even if it is the debtor who
voluntarily offered for such rate? I dont think so. I think the
Supreme Court would also deduce that. Have you remembered
discussing the case of Medel in your Obligations and Contracts?
Because in the case of Medel, the rate was already stipulated
but the Court otherwised held that it was iniquitous. I think it
was also 5%. In Medel vs CA, the stipulated rate of interest at
5.5% per month is considered excessive, iniquitous and
unconscionable, so the interest imposed was 12% per annum
and additional 1% per month penalty.
With that, you cannot say that you could use the principle of
estoppel for the interest rate not to be equitably reduced by
the court. Recall also the case of Prisma. What was the ground
why the SC did not rule anymore as to the interest rate being
unconscionable? Because it was never raised during appeal
and also taking into consideration that it was a short period of
time- 6 months. Again, there is no hand-and-fast rule as to
what is considered as iniquitous or unconscionable interests
for the courts to reducethe interest rate. No fixed rates
pg. 29

Atty. Jazzie Sarona Lozare
although nagserve as a guide yung above 3%. The principle of
estoppel or the fact that it was voluntarily made by the
respondent by itself cannot be used.
Short span of time for the payment and failure to pay can be
taken into consideration. But all in all again, it depends upon
the factual circumstances of the case.
In this case, the Supreme Court held that the 5% for the 2
months was unconscionable and was subsequently reduced to
12% per annum or 1 % per month. Also, with regard to the
surplus the SC held here that the surplus was the result of the
computation of the CA of the outstanding liability based on the
reduced rate of 12%. In the instant case, there is no surplus to
speak of because in adjusting the interest and penalty rates
from unconscionable levels, what the court did was to reflect
the true price of the land at the time of the foreclosure sale.
Please take note what are to be considered unconscionable.
By the way, the case of Medel is GR No. 131162, November 27,
1998.
Also, last time we already discussed the case of Eastern
Shipping. It provided the guideline on what is the interest rate
to be imposed and when should it start. As we also discussed
last time, the guidelines in Eastern Shipping has already been
amended due to the Circular which took effect on July 1, 2013.
So applying the amendments we have the case of Nacar.
Dario Nacar vs Gallery Frames
Facts: Nacar filed a labor case against Gallery Frames and its
owner Felipe Bordey, Jr. Nacar. On October 15, 1998, the
Labor Arbiter (LA) found Gallery Frames guilty of illegal
dismissal hence the Arbiter awarded Nacar P158,919.92 in
damages consisting of backwages and separation pay.
Gallery Frames appealed all the way to the (SC). The SC
affirmed the decision of the LA and the decision became final
on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion
before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal
dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the
motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision of the
LA (October 15, 1998). The LA reasoned that the said date
should be the reckoning point because Nacar did not appeal
hence as to him, that decision became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it comes
to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal). The
first part is the ruling that the employee was illegally
dismissed. This is immediately final even if the employer
appeals but will be reversed if employer wins on appeal.
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The second part is the ruling on the award of backwages
and/or separation pay. For backwages, it will be computed
from the date of illegal dismissal until the date of the
decision of the Labor Arbiter. But if the employer appeals,
then the end date shall be extended until the day when the
appellate courts decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on
appeal, will increase this is just but a risk that the employer
cannot avoid when it continued to seek recourses against the
Labor Arbiters decision. This is also in accordance with
Article 279 of the Labor Code.
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines are accordingly
modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
pg. 30

Atty. Jazzie Sarona Lozare
above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
Q1: When was the 12% interest rate imposed?
A1: The 12% interest was imposed on the award of backwages
from the finality of the decision on May 27, 2002.
Q2: Why 12%?
A2: It was 12 % first because they followed the ruling in Eastern
Shipping. The guideline in Eastern Shipping (3rd paragraph)
states that when the judgment of the court awarding a sum of
money becomes final and executory, the interest to be
imposed is 12%.
Q3: So what is May 27, 2002?
A3: The date when the resolution/decision of the court became
final and executory.
Q4: After that, what is the penalty to be imposed?
A5: The penalty to be imposed is 6% until full payment.
Alright, what do we have here? This is actually emanating from
a case of dismissal with the NLRC wherein there was a
judgment for liability for Php 158,000 as backwages and
separation pay. The judgment became final and executory on
May 27, 2002 and there was a recomputation from Php
158,000, it became Php 417,000 plus because of the interest
rates.
Backwages is computed from time of illegal dismissal until
FJ.
Separation pay is computed from the time of employment
until FJ.
Interest rate of 12% per annum of the total monetary award
from May 27, 2002 (resolution became final and executory).
Thereafter, 6% from July 1, 2013 until full satisfaction. Take
note that Circular No. 799 issued by the Bangko Sentral
Monetary Board saying that the legal interest is now 6% should
be applied prospectively, not retroactively. Consequently, the
12% interest shall run until June 30, 2013. (By the way, walay 31
and June) So from July 1, 2013, it is 6% per annum as the
prevailing rate of interest.
Again, that is the relevance of why we still discuss cases
applying the rule in Eastern Shipping. We have to make a
distinction for interest rates made applicable prior to July 1,
2013.
ECE Realty vs Hernandez
Facts: Haydn Hernandez filed a complaint for specific
performance with damages against EMIR and ECE Realty
due to the failure of the respondents to deliver a
condominium unit which he purchased from them. The
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respondents allegedly promised to turn over to him the unit
by December 31, 1999, but failed to do so. Worse, he learned
that the actual area was only 26 square meters, not 30
square meters as indicated in their contract to sell, and the
company refused to grant his corresponding reduction in the
purchase price; instead the companies told him to settle his
arrears in amortizations. He learned later that that company
sold Unit 808 to a third party.
The HLURB ruled in favour of the complainant and ordered
the company to reimburse the respondent the amount of
P452,551.65, plus legal interest, from the filing of the
complaint, and to pay the respondent P50,000.00 as moral
damages, P50,000.00 as attorneys fees, and P50,000.00 as
exemplary damages.
The CA affirmed the decision with modification and ruled on
the imposable interest:
We DIRECT petitioner ECE REALTY AND DEVELOPMENT INC.,
to pay respondent Haydyn Hernandez, the amount of
[?]452,551.65 (representing the total amount respondent
Hernandez paid petitioner ECE), plus 6% interest per annum
starting 07 September 2006, and 12% interest per annum
from the time the judgment becomes final and executor[y],
until fully paid.
Issue: What is the imposable interest rate on the damages
and refund awarded to Hernandez?
Ruling: SC affirmed the CA decision with modification, by
reducing the interest imposable after finality from twelve
percent (12%) to six percent (6%).
Eastern Shipping Lines, Inc. synthesized the rules on the
imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No. 416
shall apply only to loans or forbearance of money, goods, or
credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per
annum under Art. 2209 of the Civil Code applies when the
transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the
performance of obligations in general, with the application
of both rates reckoned from the time the complaint was
filed until the [adjudged] amount is fully paid
Thus, from the finality of the judgment awarding a sum of
money until it is satisfied, the award shall be considered a
forbearance of credit, regardless of whether the award in
fact pertained to one. Pursuant to Central Bank Circular No.
416 issued on July 29, 1974, in the absence of written
stipulation the interest rate to be imposed in judgments
involving a forbearance of credit was twelve percent (12%)
per annum, up from six percent (6%) under Article 2209 of
the Civil Code. This was reiterated in Central Bank Circular
No. 905, which suspended the effectivity of the Usury Law
beginning on January 1, 1983.
But since July 1, 2013, the rate of twelve percent (12%) per
annum from finality of the judgment until satisfaction has
been brought back to six percent (6%). Section 1 of
pg. 31

Atty. Jazzie Sarona Lozare
Resolution No. 796 of the Monetary Board of the Bangko
Sentral ng Pilipinas dated May 16, 2013 provides: The rate
of interest for the loan or forbearance of any money, goods
or credits and the rate allowed in judgments, in the absence
of an express contract as to such rate of interest, shall be six
percent (6%) per annum. Thus, the rate of interest to be
imposed from finality of judgments is now back at six percent
(6%), the rate provided in Article 2209 of the Civil Code.
Q1: Why is it here that the developer was liable to Hernandez?
Was their liability only for damages?
A1: No maam, it was also for the refund of the payments made
by Hernandez plus interest.
Q2: From what time is the 6% interest imposed?
A2: From the filing of the complaint until the finality of
judgment.
Q3: Why is it only 6% and not 12% prior to July 1, 2013?
A3: Because under the Eastern Shipping guideline, 6% interest
is imposable if what is involved is an obligation other than loan
or forbearance of money. What is involved in this case is the
refund of the payments made and also payment for damages.
Q4: Until finality of judgment until fully paid, what is the
interest rate?
A4: Also, 6% maam.
Alright, take note here the relevance of the rule in Eastern
Shipping. It is very easy to remember the effect of the
amendment by Bangko Sentral Circular 799 because it is 6%
whether or not it is a loan or forbearance of money, goods or
credit. Lahat yun sila 6%. Pero bakit natin sila pinag-aaralan?
Because here, a 2014 case, prior to July 1, 2013, we still take
into consideration whether it is a loan or forbearance of
money. Here, 6% interest is imposed because from the time of
filing until finality, by way of actual and compensatory
damages, the obligation is not arising from loan or forbearance
of money. From finality until full satisfaction, the total amount
due now compounded with interest due is 6%.
Also take note class that we have to make a distinction
between monetary and compensatory interest.
Article 1956.
MONETARY INTEREST COMPENSATORY
INTEREST
Article 1956 Article 2209, 2210 and
also those with regard to
actual and compensatory
damages
With this amendment of the legal interest rate to be imposed,
let us try to connect it with what we have discussed earlier. Kasi
it is pretty much clear that if the interest rate becomes
unconscionable, the court will reduce that. And it is fixed at
12% interest per annum. Of course, differentiated from
penalty. Kasi for penalty, it is like 1% interest per month pero
fixed yung 12% per annum or 1% per month.
MANRESA 2015
Take note, if you take a look at Article 2209, when the New Civil
Code took effect, the legal interest rate was still 6% per annum.
Here sa last phrase, and in the absence of stipulation, the
legal interest is 6% per annum. Kailan siya nagging 12%?
Again, through a Central Bank Circular in 1974. Then, we have
this Central Bank Circular 799 which took effect on July 1, 2013
so 6% na naman siya.
Yung mga cases that we discussed, applying the interest rate
of 12% per annum are from 1974 until June 30, 2013. Since the
legal interest is now 6%, do you think that if the interest rate is
deemed unconscionable, the court will reduce it to 6%, not
12%?
We have these cases. Please take note of this.
In Albos vs Sps. Embisan G.R. No. 210831, November 26,2014,
the SC held that there was an agreement for 5% per month that
was deemed as unconscionable. The courts reduced it at 12%
interest per annum. This was already a 2014 ruling and the CB
Circular 799 is already in effect. The interest rate of 12% per
annum was still imposed. Instead of referring to it as legal
interest, the court used the term simple interest of 12% per
annum.
Another case is MCMP vs Monark, G.R. No. 201001. Again, it
also reduced theinterest rate to 12%. What was its guideline?
Prevailing jurisprudence.
You take note that despite of the lowering of the legal interest
rate by CB Circular 799 to 6% per annum, nevertheless, the SC
has already ruled in newer cases that unconscionable interests
will still be reduced at 12% per annum.
Article 1957. Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against
usury shall be void. The borrower may recover in accordance
with the laws on usury.
Again, the Usury Law has already been suspended. Why do we
still mention it every now and then? Because of the fact that it
is suspended and anything suspended may be lifted. Even if the
Usury Law is suspended in 1983, it can still be lifted. When we
talk of Usury, it is a prohibitive interest for contracting party
receiving any interest beyond the amount allowed by law.
Again, this was suspended. There is no more ceiling as it will
depend on the agreement of the parties. However, the courts
will reduce it if it is found to be unconscionable depending on
the factual circumstances of each case.
Also, take note that if we talk about usury, it is only in relation
to the existence of a loan or forbearance of money. If there is
no loan or forbearance of money, goods or credit, there is no
usury to speak of.
What is the effect if you have a usurious or unconscionable
interest? Again, the stipulation will be invalidated and
considered void by the court, interest will be reduced but the
principal obligation will still stand.
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Atty. Jazzie Sarona Lozare
Article 1958. In the determination of the interest, if it is payable
in kind, its value shall be appraised at the current price of the
products or goods at the time and place of payment.
Differentiate it from Article 1955
Article 1955. The obligation of a person who borrows money
shall be governed by the provisions of articles 1249 and 1250
of this Code.
If what was loaned is a fungible thing other than money, the
debtor owes another thing of the same kind, quantity and
quality, even if it should change in value. In case it is impossible
to deliver the same kind, its value at the time of the perfection
of the loan shall be paid.
But if you are talking about the interest, time and place of
payment.
Compound interest was mentioned earlier.
Q1: What do you mean by compound interest?
A1: Compound interest is the interest of the principal amount
and the interest already due.
TAN vs CA
Facts: Tan obtained several loans from CCP as evidenced by
several promissory notes. Petitioner defaulted but after a few
partial payments he had the loans restructured by respondent
CCP, and petitioner accordingly executed a promissory note
P3,411,421.32 payable in five (5) installments.
The pertinent portion of the promissory note (Exhibit "A")
imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to
the CULTURAL CENTER OF THE PHILIPPINES P3,411,421.32
With interest at the rate of FOURTEEN per cent (14%) per
annum from the date hereof until paid. PLUS THREE PERCENT
(3%) SERVICE CHARGE. In case of non-payment of this note at
maturity/on demand or upon default of payment of any portion
of it when due, I/We jointly and severally agree to pay
additional penalty charges at the rate of TWO per cent (2%) per
month on the total amount due until paid, payable and
computed monthly.
Petitioner Tan failed to pay any installment on the said
restructured loan of P3,411,421.32, the last installment falling
due on December 31, 1980.
CCP filed a complaint for the collection of sum of money. The
trial court rendered a decision ordering defendant to pay
plaintiff, the amount of P7,996,314.67, representing
defendants outstanding account as of August 28, 1986, with
the corresponding stipulated interest and charges thereof, until
fully paid, plus attorneys fees in an amount equivalent to 25%
of said outstanding account. This was upheld by the CA.
MANRESA 2015
Issue: Whether the court committed an error in upholding the
decision of the trial court which compounded the interest on
surcharges. No.
Ruling: The stipulated fourteen percent (14%) per annum
interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956
of the New Civil Code.7 On the other hand, the stipulated two
percent (2%) per month penalty is in the form of penalty charge
which is separate and distinct from the monetary interest on
the principal of the loan.
The compounding of the penalty or compensatory interest is
sanctioned by and allowed pursuant to Article 1959 of the New
Civil Code considering that:
First, there is an express stipulation in the promissory note
permitting the compounding of interest. The fifth paragraph of
the said promissory note provides that: "Any interest which may
be due if not paid shall be added to the total amount when due
and shall become part thereof, the whole amount to bear
interest at the maximum rate allowed by law."10 Therefore,
any penalty interest not paid, when due, shall earn the legal
interest of twelve percent (12%) per annum, in the absence of
express stipulation on the specific rate of interest, as in the case
at bar.
Second, Article 2212 of the New Civil Code provides that
"Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began to
run on the penalty interest upon the filing of the complaint in
court by respondent CCP on August 29, 1984. Hence, the courts
a quo did not err in ruling that the petitioner is bound to pay
the interest on the total amount of the principal, the monetary
interest and the penalty interest.
Q1: What was the ruling of the court with regard to the 2%
penalty per month?
A1: This was upheld by the court because this was expressly
stipulated in their contract. If there is an express stipulation in
the promissory note, then it will be permitted citing Article
2212.
Article 2212. Interest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent
upon this point.
Q2: Aside from the fixed rate, simple interest rate of 2% per
month, are you saying that the same penalty is also
compounded? Do you have a compound interest in the
stipulation of the parties?
A2: Yes. It was in the contract.
So what do we have here? Imposition of penalty and interest
that was upheld by the court. The Civil Code permits a penalty
apart from the monetary interest. This is what I mentioned
earlier. You have to distinguish monetary interest from
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Atty. Jazzie Sarona Lozare
compensatory interest. The 42% interest per annum here
which was upheld by the court was considered a monetary
interest. It complied with the requirements under Article 1956.
It was expressly stipulated in writing. As to the 2% per month
penalty, that refers to the compensatory interest. The SC still
held that such is valid. Penalty clauses can be in the form of
penalty or compensatory interest. Thus, the compounding of
the penalty or compensatory interest is sanctioned and
allowed by Article 1959 pf the New Civil Code,
Article 1959. Without prejudice to the provisions of article
2212, interest due and unpaid shall not earn interest. However,
the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn
new interest
Here, the promissory note provides: Any interest which may be
due, if not paid, shall be added to the total amount when due
and shall become part thereof. The whole amount of their
interest at the maximum rate allowed by law. Therefore, any
amount of interest not paid when due, shall earn the interest
of 12% per annum in the absence of an express stipulation of a
specific rate of interest as in the case at bar.
So when can there be compounding of interest? When you
have an Article where the stipulation is provided under Article
1959.
Another ground for the imposition of a compounding interest
is Article 2212.
Article 2212.
Article 2212. Interest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent
upon this point.
Under the facts of this case and by stipulation of the parties,
interest began to run on the penalty upon the filing of the
complaint on August 29, 1994. However, please take note of
the judgment here. The Supreme Court held that the penalty
charged was reduced to 12% per annum or 1% per month
starting August 28, 1996. Because from that time, there were
partial payments made so it took into consideration the good
faith on the part of Tan. That is why it reduced it to 12%
beginning August 28, 1996.
Recap:
We emphasized the Guidelines in the case of Eastern Shipping
and how it was changed based by virtue of the amendment
under BankoSentral Circular No. 799, as seen in the cases of
Nacar as well as ECE.
In the cases we have discussed, if the interest is deemed
exorbitant or unconscionable, then it would be reduced. In the
cases before 2013 or previous cases, the SC has ruled that the
interest rate be reduced to 12% interest per annum. With the
change or amendment in the legal interest rate, it was still 12%
MANRESA 2015
by using prevailing jurisprudence, under the cases of Albosvs.
Embisan[GR No. 210831] and MCMP vs. Monark[GR No.
201001].
We also looked at cases in determining whether the interest is
unconscionable or not. Always look at the factual
circumstances of the case. There is no definite interest rate to
say if it is unconscionable or not. Probably, we can take into
consideration if the parties failed to raise it as an issue, as in
the case of Prisma, or if it was voluntarily offered by the debtor,
as in the case of Dio.
Take note that the principle of estoppel by itself cannot be
used or cannot be based to say that the interest rate cannot be
deemed as unconscionable or not. The principle of estoppel
cannot be predicated on an illegal act. Validity of a contract
cannot be considered as valid by estoppel if it is prohibited by
law or contrary to public policy. Although in the case of Dio, it
is only for a 2-month period, but if you look at the facts of the
case, the SC did not say that you apply the principle of estoppel,
but it only said that it was voluntarily offered and cannot now
raise that defense that he be bound by the stipulated interest.
Again, estoppel should not be used haphazardly in saying that
there is no problem since the debtor agreed to it. Look at the
other factual circumstances available in each case. The
principle of estoppel in itself, you cannot use that to validate a
stipulation in a contract which is illegal by law or contrary to
law or contrary to public policy.
We also discussed the compounding of interest:
General Rule: Accrued interest, interest due and unpaid, shall
not earn interest unless in 2 instances.
Exception: There is no compounding of interest unless:
1. Article 1959 express stipulation
Article 1959. Without prejudice to the provisions of article
2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation
capitalize the interest due and unpaid, which as added
principal, shall earn new interest.
2. Article 2212 when it is judicially demanded
Article 2212. Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may
be silent upon this point.
Parties may stipulate on the imposition of both interest and
penalty in case of default on the part of the borrower. There is
a distinction between monetary interest and compensatory
interest as discussed in the case of Tan vs. CA.
What is the effect if the debtor has already paid interest but it
turns out therewas no express stipulation in writing? It is a
pg. 34

Atty. Jazzie Sarona Lozare
contractof simple loan but there is payment of interest but it
turns out there is no express stipulation in writing?
There is solutioindebiti.
What is solutioindebiti? There is a payment or delivery of a sum
of money to a person not entitled to it, by mistake.
Case: Sigaan vs. Villanueva
Facts:Sigaan is a PNO officer. Villanueva was approached by
Sigaan to offer a loan, since she needed it she availed of it.
The loan was not put in writing and there was no stipulation
of interest. Thereafter, Villanueva issued several checks, the
excess of which was to pay for the interest. Sigaan vexed her
to pay more, which amounted to 1.2 million. Villanueva then
demanded the refund of the excess of the amount since
there was no stipulation as to interest but Sigaan refused.
Issue: WON Sigaan has the obligation to refund Villanueva
Ruling: Yes, under Article 1960: If the borrower pays interest
when there has been no stipulation therefor, the provisions
of this Code concerning solutioindebiti, or natural
obligations, shall be applied, as the case may be.
The overpayment was in the form of solutioindebiti. The
creditor must refund back to the debtor. Here, it was proven
that the loan had no stipulation in writing, Sigaan should
refund the excess of the payment.
Q: But isnt it that there are 2 kinds of interest? We have
monetary interest, the requisites of which are provided in
Article 1956, that there must be an express stipulation in
writing. But the other instance is if there is default-
compensatory interest. Can the petitioner here be liable for
compensatory interest?
A: No. There is no showing or evidence that Villanueva had
difficulty or defaulted in paying the loan.
Article 1960. If the borrower pays interest when there has
been no stipulation therefor, the provisions of this Code
concerning solutioindebiti, or natural obligations, shall be
applied, as the case may be.
The phrase no stipulation therefor refers to Article 1956, in
reference to simple loan or mutuum.
Here, if there is a stipulated interest by mistake, the debtor can
recover based on the principle ofsolutioindebiti or undue
payment, or even if by natural obligation.
Natural obligation it is an obligation not based on law but on
equity and natural law; it does not grant a right of action to
enforce their performance but after voluntary fulfillment by
MANRESA 2015
the obligor, they authorize the retention of what has been
delivered or rendered by reason thereof
In the case of Sigaan, he already paid 660,000 in excess of the
principal amount. Considering that there was no express
stipulation in writing for the said interest, he should not have
been held liable to the creditor. With that, the creditor has the
obligation to return it to the debtor or petitioner in this case as
provided under Article 1960.
The principle of solutioindebiti applies where a payment is
made where there exists no binding relation between the
payor who has no duty to pay and the person received the
payment, and the payment is made through mistake and not
through liberality or some other cause.
How about for compensatory interest?
The SC held that the respondent should not also be liable for
compensatory interest as it was not proven that respondent
defaulted in paying the loan. As earlier found, no interest was
due on the loan because there was no written agreement as
regards to the payment of interest.
In this case, there was no monetary interest, no default, no
compensatory interest.
Article 1961. Usurious contracts shall be governed by the
Usury Law and other special laws, so far as they are not
inconsistent with this Code.
As we have pointed out numerous times already, usury is now
legally non-existent. The interest legally chargeable depends
upon the agreement between the lender and the borrower.
Usury defined as contracting for or receiving something in
excess of the amount allowed by law for the loan or
forbearance of money; the taking of more interest for the use
of money than the law allows.
There can be no usury of there is no loan or forbearance of
money to speak of.
Act No. 2655 otherwise known asThe Usury Law was enacted in
1916. Its purpose was for the protection of the borrowers from
the imposition of unscrupulous lenders who take undue
advantage of the necessities of others.
Under the Usury Law, the Monetary Board was authorized to
prescribe the maximum rate of interest for the loan or renewal
thereof or the forbearanceof money, goods or credits. By
virtue of the authority given to the Monetary Board, the MB
prescribed in 1974 that the rate of interest for loan or
forbearance of money, goods or credits, in the absence of
express contract as to such rates of interest, shall be 12% per
annum.
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Atty. Jazzie Sarona Lozare
That is why in the Civil Code, the Usury Law is mentioned even
in theprovisions under mutuum, because the Usury Law was in
effect at the time the New Civil Code was promulgated.
Thereafter it was suspended.
Q: When was the Usury Law suspended?
A: The suspension took effect in January 1, 1983.
Case: Solidbank vs. Permanent Homes
Facts: Permanent Homes is a real estate development
company and to finance its Buena Vida project, it was
granted an omnibus credit line facility by Solidbank. To
secure the loan, it mortgaged units within its project.
Issue: WON the increases in the interest rates should be void
for being unilaterally imposed
Ruling: No. The Usury Law had been rendered legally
ineffective by Resolution No. 224 dated 3 December 1982 of
the Monetary Board of the Central Bank, and later by Central
Bank Circular No. 905 which took effect on 1 January 1983.
These circulars removed the ceiling on interest rates for
secured and unsecured loans regardless of maturity. The
effect of these circulars is to allow the parties to agree on
any interest that may be charged on a loan. The virtual
repeal of the Usury Law is within the range of judicial notice
which courts are bound to take into account.Although
interest rates are no longer subject to a ceiling, the lender
still does not have an unbridled license to impose increased
interest rates. The lender and the borrower should agree on
the imposed rate, and such imposed rate should be in
writing.
The stipulations on interest rate repricing are valid because
(1) the parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbanks written notice to
Permanent of the new interest rate; and (3) Permanent has
the option to prepay its loan if Permanent and Solidbank do
not agree on the new interest rate. The phrases "irrevocably
authorize," "at any time" and "adjustment of the interest
rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent," emphasize that Permanent
should receive a written notice from Solidbank as a condition
for the adjustment of the interest rates.
Q: What did they agree upon as to the interest rates imposed
as to the loans? Can Solidbank increase the interest rates?
A: They agreed in their promissory notes that an increase or
decrease in the interest rates shall be mutually agreed by the
parties.
Q: Is that agreement considered valid?
MANRESA 2015
A: Yes, the SC said it is valid. First, the parties mutually agreed
on the said stipulations. Second, the repricing only takes effect
uponSolidbanks written notice to Permanent of the new
interest rate. Third, Permanent has the option to repay its loan,
if they do not agree on the new interest rate.
Q: Since the stipulation was valid, was it proper for Solidbank
to impose the increased rates to Permanent Homes? From
what time? From the time the interest rates were already
increased? What was the reason behind the increase of
interest rates by Solidbank? This was taken into consideration
by the court. Why was there a need for Solidbank to increase
the rates? What happened?
A: As contained in the promissory notes, there was a provision
stating that they irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in the note, or in
the business thereof, or the prevailing rates in the local or
international capital markets.
Q: What was the factor that made Solidbank increase the
interest rate to be imposed on the loans of Permanent?
A: Because of the Asian financial crisis during that time.
Q: With that, they increased the rate. The SC the increase was
proper and it was not unconscionable because of the Asian
financial crisis. We are saying that the stipulation is valid.
However, was it already proper for Solidbank to impose the
interest rate?
A: Permanent should first receive a written notice from
Solidbank as a condition for the adjustment of the interest. In
this case, they did not receive any notice.
Although as we have mentioned earlier, the Usury Law has
already been legally ineffective or suspended since January 1,
1983, and that there is no more ceiling in interest rates, the
lenders still do not have unbridled license to impose increased
interest rates.
Here, the stipulations on interest rate repricing are valid
because (1) the parties mutually agreed on said stipulations;
(2) repricing takes effect only upon Solidbanks written notice
to Permanent of the new interest rate; and (3) Permanent has
the option to prepay its loan if Permanent and Solidbank do
not agree on the new interest rate. The phrases "irrevocably
authorize," "at any time" and "adjustment of the interest rate
shall be effective from the date indicated in the written notice
sent to us by the bank, or if no date is indicated, from the time
the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for the
adjustment of the interest rates.
In relation to (1), take note that for parties to agree in any
increase in the interest rates, which is an escalation clause,
there must also be a provision that in case of lower interest
rates due to the financial markets, it should also be present in
the contract. In other words, there is an escalation clause and
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Atty. Jazzie Sarona Lozare
a de-escalation clause, which are both present in the
agreement between the parties.
Again, while the stipulation is considered valid, Solidbanks
computation of the interest due from Permanent should be
adjusted to take effect only upon Permanents receipt of the
written notice from Solidbank. In this case, Solidbank did not
present any written memorandum to support its allegation
that it promptly advised Permanent of the change in interest
rates.
The repricing in interest rates under the facts of this case were
held to be not unconscionably out of line with the upper range
of lending rates to other borrowers since it happened at
theheight of the Asian financial crisis in 1997. Here, the
repricing of the interest rate was not deemed unconscionable.
Remember- factual circumstances of the case.
Why do we still discuss the Usury Law? Because it was merely
suspended.
Elements for usury to exist:
1. There is a loan or forbearance of money, goods or
credits; and
2. There is an agreement or understanding between the
parties that the loan shall or may be returned
For the interest to be considered usurious, there must be
unlawful intent on the part of the creditor to take more that
the legal rate for the use of money or its equivalent, and that
the takingor agreeing to take for the use of the loan of
something in excess of what is allowed by law.
Purpose of the Usury Law: For the protection ofborrowers
from the imposition of unscrupulous lenders who take undue
advantage of the necessities of others.
Nevertheless, despite its suspension, the interest of borrowers
is still protected by the rulings of the SC as to what interest is
considered unconscionable or exorbitant.
Usury is not applicable in:
1. Rentals
2. Contracts of lease
3. Bona fide sale
4. Increase in price of things sold as a result of a sale on
credit
5. True pacto de retro sale
Just take note of that in case the Usury Law is no longer
suspended.
Part IV:
Deposit
I. Deposit in General and its Different Kinds
MANRESA 2015
Article 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same. If
the safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract.
Who are the parties in a contract of deposit?
1. Depositary or the depositorio the recipient
2. Depositor or the depositante the one who gives
There is no requirement in a contract of deposit that the
depositor be the owner of the thing delivered for safekeeping
as there is no transfer of ownership involved in a contract of
deposit.
Similar to a contract of loan, a contract of deposit is a real
contract as it is perfected by delivery. It can be a unilateral
contact if gratuitous, and bilateral if for compensation.
Under Article 1962, it is clear that the principal purpose of
deposit is that it is for safekeeping. If safekeeping is only an
accessory obligation, it could not be considered as a contract
of deposit; it could be a contract of lease, a commodatum or
even a contract of agency, wherein the purpose of safekeeping
is only ancillary to the main objective or main purpose in the
contract
Delivery of money to a person with payment or
delivery of records or documents to a lawyer hired to
represent a party That is not a contract of deposit
but it is a contract of agency wherein the money or
the documents delivered will be kept by the
depositary, but it is only ancillary to his principal
obligation as that of an agent
Balance of commission or account in agents
possession at the principals disposal It is a deposit
which the agent must return or restore to the
principal when demanded. The agent can be held
liable for estafa if he misappropriates it or diverts its
use to another purpose.
Case: BPI vs. IAC
Facts: This involves $3,000 which Zshornack gave to BPI for
safekeeping. However, BPI sold the dollar accounts and
converted it to peso which they deposited to the account of
Zshornack. BPI was not able to deliver the said amount
demanded by Zshornack.
Issue: WON there is a contract of deposit
Ruling: Yes, the real intention of the parties was for BPI to
safekeep the amounts for Zshornack.
pg. 37
 MANRESA 2015
Atty. Jazzie Sarona Lozare

Article 1287. Compensation shall not be proper when one of

Q: If it is a contract of deposit then the bank will be held liable the debts arises from a depositum or from the obligations of
to Zshornack? a depositary or of a bailee in commodatum.
A: Yes for the return of the exact amount, but the SC held that Neither can compensation be set up against a creditor who
Zshornack cannot anymore recover damages since the has a claim for support due by gratuitous title, without
contract is considered to be void since there is an existing prejudice to the provisions of paragraph 2 of article 301.
Circular issued by the BangkoSentral stating that foreign
currencies should be sold 1 day after they are received by the Depositum contract of deposit as defined under Article 1962.
bank. Although the parties entered into a contract of deposit,
it is contrary to law as there was an existing Circular prohibiting
the said act. He cannot recover damages. DEPOSIT MUTUUM
It can be a Only involves
What do we have here? It is clear that the purpose of the Subject
movable or an money or other
delivery of the $3,000 was for safekeeping. So, it is contract of matter
immovable thing consumable thing
deposit. But what did the employee of the bank do? He
The principal The principal
converted the $ to Php, and the peso equivalent was deposited Principal
purpose is for purpose is for use
to the account of Zhornack. purpose
safekeeping or consumption
Parties are the Parties are the
Here, the issue in relation to our case is with regard to damages
Parties depositor and the lender and the
because instead of returning the exact same thing subject of
depositary borrower
the contract of deposit, what happened was that they
The depositor can
converted it to their peso equivalent. The lender must
demand the
wait until the
return of the
The SC held it is true that there was a contract of deposit. As expiration of the
thing or subject
earlier stated, the document and the subsequent acts of the period granted to
matter at will, as
parties show that they intended the bank to safekeep the the debtor
a general rule
foreign exchange, and return it later to Zshornack, who alleged
Generally May be subject to
in his complaint that he is a Philippine resident. The parties did
gratuitous compensation
not intended to sell the US dollars to the Central Bank within
one business day from receipt. Otherwise, the contract In both commodatum and depositum, compensation or offset
of depositum would never have been entered into at all. is not available. But, we can do so and it is applicable or
available to extinguish the obligations of the parties if what is
Since the mere safekeeping of the greenbacks, without selling involved is onlymutuum or simple loan.
them to the Central Bank within one business day from receipt,
is a transaction which is not authorized by CB Circular No. 20, DEPOSITUM COMMODATUM
it must be considered as one which falls under the general class For safekeeping For transfer of the use
of prohibited transactions. Hence, pursuant to Article 5 of the
May be gratuitous Essentially gratuitous
Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly, As to extrajudicial Can have movable or
it affords neither of the parties a cause of action against the deposit, only movable immovable property
other. That is why Zhornack cannot recover for the second properties are involved
cause of action for damages.
Article 1963. An agreement to constitute a deposit is
Take note, maybe under this case, the employee did not binding, but the deposit itself is not perfected until the
understand or was mistaken as to the deposit; that is why it is delivery of the thing.
important to take note of the distinction between deposit and
mutuum. This emphasizes the nature of a deposit being a REAL contract-
it is perfected by mere delivery.
What is the difference between deposit and mutuum?
If you agree to enter into a contract of deposit what you have
is merely a consensual contract, an ordinary contract, and it
Another distinction or another important thing why we need will not yet give rise to a perfected deposit until the thing is
to distinguish between these 2 contracts is under Article 1287 delivered- same as that of a commodatum and simple loan or
in relation to compensation or set-off. mutuum. Unless it is delivered, it will not give rise to a
commodatum.

pg. 38
 MANRESA 2015
Atty. Jazzie Sarona Lozare

Article 1964. A deposit may be constituted judicially or Article 1966. Only movable things may be the object of a
extrajudicially. deposit.9

2 kinds of deposit: Obviously, this refers to an extrajudicial deposit. Only movable

1. Judicial or sequestration takes place when an attachment or personal property may be the object of an extrajudicial
or seizure of property in litigation is ordered 8 deposit, whether it is voluntary or necessary. The purpose is
2. Extrajudicial 2 kinds: for safekeeping. The possibility that the thing may disappear or
a. Voluntary deposit delivery is made by the will of the may be lost or stolen is not present in a real property. However
depositor, or by two or more persons, each of whom in judicial deposit, it may cover movable or immovable
believes himself entitled to the thing deposited properties but generally it involves immovable properties.
(complete freedom to choose to whom to give the
thing to be deposited) Notice that the contract of deposit does not embrace
b. Necessary deposit made in compliance with either a incorporeal or intangible property because incorporeal or
legal obligation, on the occasion of any calamity, or by intangible property follows the person of the owner, where he
travelers in hotels or inns or by travelers with goes. Essentially, you do not deliver since there is no physical
common carriers form for these kinds of property. How can it give rise to a
contract of deposit when you cannot even physically deliver?
JUDICIAL DEPOSIT EXTRAJUDICIAL DEPOSIT
Through the will of the Through the will of the Article 1967. An extrajudicial deposit is either voluntary or
court parties of the contract necessary.
Ensures the right of It is for custody and
the party to property safekeeping General rule: A deposit is voluntary.
or to recover in case of Exception: It is necessary only in 3 instances:
a favorable judgment 1. When there is a legal obligation
Generally involves Generally involves 2. On the occasion of any calamity
immovables movables only 3. For travelers in hotels and inns
Always onerous Generally gratuitous
The thing is returned Upon the demand of the
only upon order of the depositor II. Voluntary Deposit
court or when the
litigation has already We now go to the first kind of extrajudicial deposit which is the
ended voluntary deposit.
On behalf of the On behalf of the Article 1968. A voluntary deposit is that wherein the delivery
person who has a right depositor, or thing or is made by the will of the depositor. A deposit may also be
person designated made by two or more persons each of whom believes
himself entitled to the thing deposited with a third person,
who shall deliver it in a proper case to the one to whom it
Article 1965. A deposit is a gratuitous contract, except when belongs.
there is an agreement to the contrary, or unless the
depositary is engaged in the business of storing goods. In voluntary deposit, the delivery is made by the will of the
depositor. He gets to choose to whom he will deposit the thing
General rule: A contract of deposit is gratuitous. for safekeeping.
Exceptions: SBD
1. By stipulation of the parties as long as it is not contrary to Ordinarily, voluntary deposit involves two persons but three
law, morals, good customs, public order and public policy persons may be involved under the second sentence of Article
2. When the depositary is engaged in the business of storing 1968. In such case, the third persons assumes the obligation to
goods; such as a warehouseman where it is for deliver it to the one to whom it belongs.
compensation and not out of pure generosity
3. If the property is saved from the destruction without the In case there are two persons who are contesting as to who is
knowledge of the owner. There is an involuntary deposit entitled to the return of the thing, the third person will now
wherein the owner of the property is bound to pay just assume the obligation to deliver it to the one to whom it
compensation. belongs.
Ex. A thing is delivered to him then there is another person who
claims it as the owner. What is the option here on the part of

8 Will of the court 9 Refers to extrajudicial deposit

pg. 39

Atty. Jazzie Sarona Lozare
the third person? If he returns it to one of them then he might
be mistaken, and vice versa. Under special civil actions, there
is what we call interpleader. This is filed by the third person. He
will implead the two persons for the judge to determine who
the owner is, and in the meantime the third person will keep
the thing.
Interpleader a special civil action whereby a person who has
property in his possession, or an obligation to render wholly or
partially without claiming any right therein or an interest which
is not disputed by the claimant/s, comes to court and asks that
the persons entitled to demand compliance with the obligation
be required to litigate among themselves in order to determine
finally who is entitled to the same.
With that, it can still be considered a voluntary deposit under
the second sentence of Article 1968.
Voluntary Vs Necessary Deposit
in voluntary deposit, the depositor has complete freedom in
choosing the depositary; wherein such freedom is lacking in a
necessary deposit. It lacks the free choice on the part of the
depositor.
As mentioned earlier, there is no transfer of ownership in a
contract of deposit. It is not required that the depositor must
be the owner. The thing deposited maybelong to a person
other than the depositor.
Ex. Carrier, agent, lessee
They may temporarily deposit goods in their possession since
a contract of deposit does not involve transfer of ownership.
CALIBO V CA
FACTS: Pablo purchased an agricultural tractor. He asked his
son Mike to safe-keep it for him. Mike was renting a house,
owned by Calibo, for residential purposes. He kept the
tractor in the garage of the house. Sometime later, Mike
failed to pay his obligations to Calibo. However, the former
assured the latter that the account shall be settled with the
tractor as a security. Thereafter, despite demands from
Calibo, Mike was not able to pay his outstanding obligations.
When Pablo discovered this, he went to Calibo to obtain
possession of the tractor. Calibo denied this and insisted that
the tractor was given as security by Mike. Pablo offered to
pay Mikes indebtedness with checks. Calibo wanted that
Mikes electric bills be included in the check. Pablo did not
consent to this demand and this is where he instituted an
action for replevin, claiming ownership over the tractor.
However, according to Calibo, he has valid claim to keep he
tractor because Mike has not yet paid his obligations.
ISSUE: W/N CALIBO CAN VALIDLY HOLD ON TO THE TRACTOR
BECAUSE THERE IS AN ALLEGED CONTRACT OF DEPOSIT
BETWEEN HIM AND MIKE. NO.
MANRESA 2015
HELD: In a Contract of Deposit there must be an intention
between the parties to safe-keep the object. However, in this
case, Calibo himself said that he received the tractor not for
safekeeping but as a security for the payment of Mikes
obligations. Therefore, there was no deposit and the
principal purpose was for security. Consequently, Calibo had
no right to refuse the delivery of the tractor to the true owner
who is Pablo. Pablo as owner had every right to seek to
repossess the tractor as well as the institution of the present
action for replevin.
Q: While it is true that there is no Contract of Deposit between
Mike and Calibo because the purpose of the delivery of the
tractor was not for safekeeping. However, why cant Calibo
retain possession of the tractor despite the fact that Mike
delivered it for security?
A: Because Mike was not the owner of the tractor.
Q: Why would ownership be an issue? Because it was said
earlier that ownership is not required in a Contract of Deposit?
So the reason why the Supreme Court held that theres no
deposit is because when it was delivered the purpose is not for
safekeeping and Calibo said that its not for safekeeping but to
act as a security for the obligations of Mike. Why is it that
Calibo cannot retain possession of the tractor despite his
allegation that it was for the security of Mikes obligation to
pay?
A: Because Calibo raised the issue on pledge. For a contract of
pledge to be valid it is necessary that the pledge is constituted
to secure the fulfillment of a principal obligation and the
pledgor to be the absolute owner of the thing pledged. Here,
Mike is not the owner of the tractor and therefore there is a
necessity to return the object.
Q: So under the facts of this case there was no Contract of
Deposit at all?
A: There is a Contract of Deposit between Pablo and Mike.
Ok. Because it is clear that when Pablo delivered the tractor to
Mike, the purpose was for safekeeping. However, between
Mike and Calibo, there was no Contract of Deposit.
Take note here the reason why Calibo retained possession of
the tractor was because Mike delivered it as a security for his
obligation. So, it is a Contract of Pledge. However, there is no
valid pledge because for a Contract of Pledge to be valid, the
pledgor must be the absolute owner of the thing pledged. In
this case, Mike, the pledgor, is not the owner of the tractor. So,
there is no valid pledge. Also, it is alleged that there should be
a Contract of Agency here, however, the Supreme Court held
that there is no Contract of Agency as the purpose of the
delivery to Mike was for safekeeping. Mike was acting not only
without appellees authority but without the latters
knowledge as well. Mike here could not be considered as an
agent of Pablo when he delivered the tractor to Calibo. And
lastly, in relation to what we are discussing right now, there is
no valid deposit. Here, the purpose is not for safekeeping but
as a form of security for the payment of Mikes obligation.
pg. 40

Atty. Jazzie Sarona Lozare
There is no deposit where the principal purpose for receiving
the object is not for safekeeping.
So again, take note of the principal purpose: that is for
safekeeping.
Article 1969. A contract of deposit may be entered into
orally or in writing.
Contracts therefore shall be obligatory in whatever form
they may have been entered into provided all essential
requisites for their validity are present. (Article 1356)
So here, 1969 just tells us that even if it was orally entered into
or even if it is in writing, you relate this to Article 1963: As long
as there is a delivery, there is a perfected contract of deposit.
Of course, the purpose is for safekeeping. Other than that,
there are no other formalities required for the existence of the
contract.
Article 1970. If a person having capacity to contract accepts
a deposit made by one who is incapacitated, the former
shall be subject to all the obligations of a depositary, and
may be compelled to return the thing by the guardian, or
administrator of the person who made the deposit, or by
the latter himself if he should acquire capacity.
So with that we can say that as long as the depository is
capacitated, he is subject to the obligations of a depositary
regardless of the capacity or incapacity of the depositor. If the
depositor is incapacitated, the depositary must return the
property to the legal representative or to the depositor himself
if he should acquire capacity.
Q: What is the status of the contract if one of the parties is
incapacitated?
A: Voidable.
Q: What if both parties are incapacitated?
A: Unenforceable
So that is still the same case here. If it turns out that the
depositor is incapacitated who can demand the return? If you
are the depositary and you know that the depositor is
incapacitated, would you return the subject matter to him?
What is the effect if you would return the subject matter of the
deposit to the incapacitated depositor? Will it extinguish your
obligation as a depositary? Remember that for payment or
performance, the person receiving the payment or the
performance must be capacitated. Diba? So here, if the
depositor is incapacitated, what is the effect of the obligation?
It will not necessarily extinguish your obligation as a depositary.
So here, to whom will you return the thing deposited if the
depositor is incapacitated? Legal representative, or the
incapacitated if he has already acquired capacity. That is the
same thing/premise that you have learned in your obligations
and contracts. However, take note that as a depositary if the
MANRESA 2015
thing is demanded from you to be returned to the depositor
who is incapacitated, you cannot refuse to return it allegedly
because the contract is voidable. Why? Because again under
Contracts, persons who are capable cannot allege the
incapacity of those with whom they contract. Thats under
Article 1397.
Article 1971. If the deposit has been made by a capacitated
person with another who is not, the depositor shall only
have an action to recover the thing deposited while it is still
in the possession of the depositary, or to compel the latter
to pay him the amount by which he may be enriched or
benefited himself with the thing or its price. However, if a
third person who acquired the thing acted in bad faith, the
depositor may bring an action against him for its recovery.
As to the depositary who is incapacitated, he does not incur
the obligations of a depositary as provided in this chapter.
However, 1971 states that such incapacitated depositary shall
be liable for the thing deposited while it is still in his possession
or to pay the depositor the amount by which he may have
benefited himself with the thing or its price subject to the right
of any third person who acquired the thing in good faith. Notice
its not the value of the property but the price or the extent
that the incapacitated depositary was benefited.
Let us say you have a depositary who is a minor and received
the things from the depositor for safekeeping. He sold it to a
third person. What did he do with the purchase price? Punta
siyang Jollibee; kainsiya. The value of the property is let us say
P1000 for safekeeping. Peroyunnga, hindingatalagaalam kung
magkanotalaga so let us say that the purchase price is only
P500, ok? So to what extent can you demand from the
incapacitated depositary? Only to the extent that he may have
benefited himself, yungbinilinyasa Jollibee na P500 or kung
hindi man nabenefit, nandunlangsakanyayungpera, pwedeyun.
What if subject to the right of any third person who acquired
the thing in good faith. What if binentanyaperohindi pa
nadeliveryung purchase price? For what price niyabinenta?
P500. So tinanongsi incapacitated depositary, saannayung
thing? Ay binentakokay X. Magkano? P500.
Saannayungbinayad? Wala pa man siyanagbayadsa akin. So
puntahanmosi third person nanakabili. Anong liability nung
third person? Yung price lang if he is in good faith. Not the
value of the property. If the third person is in bad faith, in other
words he had knowledge that the depositary who sold the
thing to him is indeed incapacitated, then the depositor may
recover the thing from the said third person. If the third person
is in good faith, the depositors action only against the
depositary to compel him the price received or the amount
which he may have benefited himself.
Obligations of the depositary
Article 1972. The depositary is obliged to keep the thing
safely ad to return it, when required, to the depositor, or to
pg. 41

Atty. Jazzie Sarona Lozare
his heirs and successors, or to the person who may have
been designated in the contract. His responsibility, with
regard to the safekeeping and the loss of the thing, shall be
governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into
account in determining the degree of care that the
depositary must observe.
1972 emphasizes the two primary obligations of the
depositary:
1.) Safe-keep the thing and
2.) return the thing when required.
Also this article emphasizes the degree of care or diligence on
the part of the depositary: same diligence he would exercise
over his own property. Remember that considering that the
purpose of deposit is for safekeeping, then there must be some
confidence on the depositary. In a contract of deposit, it
involves depositors confidence in his good faith and trust. He
takes into account the diligence which the depositary is
accustomed with respect to his own property. The depositary
cannot excuse himself from liability in case of loss by claiming
that he exercised the same amount of care toward the thing
deposited as he would toward his own. What if nagdanghag
(hahaha), by nature, yungsi depositary.And then yung thing
that was deposited to him for safekeeping walana-take care.
So can we say nakung akuanamaopudnaangmahitabo?
Obviously hindi. Why? Because that would be less than
required under the circumstances. Again recall, what is the
standard diligence required in obligatioins? Diligence of a good
father of a family, unless, there is a different degree required
by law or by stipulations between the parties. So that is Article
1163 of Obligations and Contracts.
Likewise, under ObliCon, you have
Article 1170: A debtor shall be liable for loss if the loss is
due to his fault or negligence. And
Article 1265. Loss of the thing while in possession of the
debtor; it will give rise to the presumption that the fault is
on his part. If the contract of deposit is gratuitous, due
care is still required, as found in the second paragraph of
1972. If it is for compensation, a higher degree of care is
required than if it is a gratuitous contract of deposit.
CHAN V MACEDA
FACTS: Mr. Maceda obtained a loan from the Development
Bank of the Phils. (DBP). This was for the construction of a
hotel project in Tacloban. Maceda engaged the services of
Moreman Builders Corporation wherein they had a contract
wherein Moreman was going to build the project until
December 1977. Afterwards Moreman obtained several
construction materials and equipment and these were
deposited to certain Spouses Chan in their warehouse. This
deposit was then free of charge (gratuitous deposit). The
contract of deposit was between Moreman and Spouses
Chan. Now Moreman here failed to build the project which
MANRESA 2015
prompted Mr. Maceda to file an action for rescission and
damages against Moreman. While the case was pending,
Moreman pulled out the said construction materials and
equipment from Sps. Chan. After the case was pursued, Mr.
Maceda wanted to withdraw the said materials and
equipment from Sps Chan contending that he is the owner
the same; that he was the one that contracted with
Moreman for the construction of the hotel project which was
the purpose for the purchase of the said materials.
Meanwhile, Sps. Chan contend that the materials were
already withdrawn from them and were no longer in their
possession. This time, Mr. Maceda filed an action against
Sps. Chan because he alleges that he is the rightful owner of
the said materials and that he should be the one who should
have the right to withdraw the said deposited materials and
not Moreman.
ISSUE: W/N MR. MACEDA HAS THE RIGHT TO DEMAND THE
RELEASE OF THE SAID MATERIALS OR CLAIM DAMAGES
THEREOF. NO.
HELD: He has no right to claim damages nor does he have
the right to recover the said materials. In this case, the
Supreme Court noted that Mr. Maceda is not a party in the
contract of deposit between Moreman and the Sps. Chan.
And in this case, not being a party to the contract of deposit,
Mr. Maceda has no right to withdraw the said materials
based on the principle of Privity of Contracts.
Q: Now, in the Privity of Contracts, who is entitled to claim
demand and the obligation arising from the contract?
In the Privity of Contracts under the Civil Code, the ones who
are entitled to the rights is the party himself, his heirs and
assigns.
So in this case, Maceda is not any of those three. But is it not
that under the privity of contracts there are exceptions?
Q: Can we apply any of the exceptions here in the case of
Maceda
A: In this case, the exceptions cannot be applied because
Maceda failed to prove that he has the right to the saide
materials. What he can do is to go after Moreman and not Sps.
Chan.
Recall Article 1311 under oblicon which grants right to third
persons to demand the obligation arising from a contract even
if he is not a party nor an heir nor an assignee.
Q: What stipulation would that be so that a third person would
be entitled to the right arising from a contract? What do you call
that stipulation in favor of a third person?Because that was one
of the allegations here that there was a need to prove that
stipulation.
A: Stipulation pouratrui.
So, here, remember that there are exceptions to the principle
of privity of contract, one of which is stipulation pour atrui
pg. 42

Atty. Jazzie Sarona Lozare
under 1311. In this case however, there was a failure to prove
the existence of that stipulation in favor of Maceda. In other
words, there was no stipulation pour atrui.
Here, remember that the contract of deposit was between Sps.
Chan and Moreman. Applying 1311, contracts are binding upon
the parties (and their assigns and heirs) who execute
them. When there is no privity of contract, there is likewise no
obligation or liability to speak about and thus no cause of
action arises. Specifically, in an action against the depositary,
the burden is on the plaintiff to prove the bailment or deposit
and the performance of conditions precedent to the right of
action.
A depositary is obliged to return the thing to the
depositor, or to his heirs or successors, or to the
person who may have been designated in the
contract.
In the present case, the record is bereft of any contract of
deposit between petitioner and respondent if at all, it was only
between Moreman and Sps. Chan. Granting that there was
indeed a deposit between petitioners and Moreman, it is still
incumbent upon respondent to prove its existence and that it
was executed in his favor. In other words, we are looking for if
there was a stipulation pour atrui dito. But respondent
miserably failed to do so. Here, he only produced unsigned
delivery receipts. Since there was no contract of deposit and
respondent also failed to prove that there were construction
materials and equipment in petitioners warehouse at the time
he made a demand for their returnthe Supreme Court holds
that he has no right whatsoever to claim for damages. Take
note of that.
Article 1973. Unless there is a stipulation to the contrary,
the depositary cannot deposit the thing with a third person.
If deposit with a third person is allowed, the depositary is
liable for the loss if he deposited the thing with a person
who is manifestly careless or unfit. The depositary is
responsible for the negligence of his employees.
So the rule here is different. The exceptions here are different
with that of a commodatum. The same siya sa commodatum in
the sense that a depositary here is not allowed to deposit the
thing with a third person. Sacommodatum not allowed sa third
persons to use the thing. A depositary cannot allow third
persons as this is founded on trust and confidence. Exception:
if authorized by express stipulation.
In case of loss, the depositary shall be liable (take note of this)
if he transfers the deposit with a third person without authority
of the depositor although there is no negligence on the part of
the depositary and the part of the third person. So if he
deposited it for safekeeping with a third person without the
consent of the depositor, even if the thing was lost because of
a fortuitous event, the depositary shall be held liable; no need
for negligence.
MANRESA 2015
If he deposits the thing with a third person who is manifestly
careless or unfit, even if authorized, then the depositary may
be liable, even in the absence of negligence on his part. So dito,
he was authorized to deposit the thing with the third person
but if it is proven that the third person is manifestly careless or
unfit, the depositary shall be held liable.
And lastly, if the thing is lost through negligence of his
employees, then the depositary may be held liable, whether
the employees are manifestly careless or not. So with these
three instances, the depositary shall be held liable for the loss.
So with that, when can he not be held liable for the loss? If the
depositary deposits the thing with a third person when he was
allowed to do so and the thing was lost without the negligence
of the third person and such third person is not manifestly
careless or unfit. All the elements must be present. 1) Loss
without negligence; 2) allowed to deposit to a third person,
and 3) third person was not manifestly careless or unfit. If all
those are present the depositary is exempted from liability.
Article 1974. The depositary may change the way of the
deposit if under the circumstances he may reasonably
presume that the depositor would consent to the change if
he knew of the facts of the situation. However, before the
depositary may make such change, he shall notify the
depositor thereof and wait for his decision, unless delay
would cause danger.
Obligation on the depositary to change the way or the manner
of adeposit if there are circumstances indicating that the
depositor would consent to the change. However, it is required
that the depositary should notify the depositor and wait for the
latters decision, unless delay would cause danger as to the
subject matter. This is in keeping with the obligation of the
depositary to exercise the diligence of a good father of a family.
Ano bang way or manner? Probably, how it is stored,
packaging, among others
Article 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound
to collect the latter when it becomes due, and to take such
steps as may be necessary in order that the securities may
preserve their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for the rent
of safety deposit boxes.
So here, obligations on the depositary of the thing deposited
which earns interest:
1) To collect the interest as it becomes due, (of course,
also the capital itself when it is due) and
2) To take such steps as may be necessary to preserve its
value and the rights corresponding to it.
pg. 43

Atty. Jazzie Sarona Lozare
Notice the last paragraph in 1975; the above provision shall not
apply to contracts for the rent of safety deposit boxes.
Q: Whats the difference between a contract of lease and
lending of safety deposit boxes?
A: In a contract of lease, the renters possess the said property.
Meanwhile, in a contract of rent of a safety deposit box, it is a
special kind of deposit where the absolute possession and
control of the safety box is not given to the renters.
CA AGRO-INDUSTRIAL DEV. CORP. V. CA
FACTS: CA Agro through its president, purchased parcels of land
from Sps. Pugao. Among terms and conditions of the
agreement were that the titles to the lots shall be transferred
to CA Agro upon full payment of the purchase price and that
the owners copies of certificates of titles thereto, shall be
deposited in a safety deposit box in any bank. The same could
be withdrawn only upon the joint signatures of a representative
of CA Agro and the spouses upon full payment of the purchase
price.
CA Agro and the spouses then rented a safety deposit box of
private respondent Security Bank and Trust Company and for
this purpose they signed a contract of lease, which contains
inter alia, the following conditions. x xx 13. The bank is not a
depositary of the contents of the safe and has no interest
whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith.
Subsequently, two keys were given: 1 to CA Agro and 1 the Sps.
Pugao. There is also a guard key which remained in the
possession of the bank. The safety deposit box can only be
opened with the use of the guard key and any one of the other
keys simultaneously.
Thereafter, a certain Margarita Ramos offered to buy from CA
Agro the property at a higher price. When the safety deposit
box was opened in the presence of CA Agro, the spouses, and
the banks representative, the box yielded no certificates of
title. Because of the delay in the reconstitution of the title,
Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, CA Agro, petitioner, allegedly failed to
realize its expected profits. Hence, CA Agro filed a complaint for
damages against the respondent bank. In its answer, the bank
alleged that CA Agro had no cause of action because of
paragraphs 13 and 14 of the contract of lease.
(The contents of the safety deposit box which can be opened
only with the use of one of the two renters keys given to the
joint renters and by a guard key in the possession of the bank
were missing.)
ISSUE:
1) W/N THE CONTRACT IS AN ORDINARY CONTRACT OF LEASE.
2) W/N THE PROVISIONS CITED IN THE CONTRACT ARE VALID.
3) W/N THE RESPONDENT BANK IS LIABLE FOR DAMAGES.
HELD: The contract of rent of a safety deposit box is not an
ordinary contract of lease but a special kind of deposit because
1) the full and absolute possession of the safety deposit box was
MANRESA 2015
not given to the petitioner and spouses Pugao, 2) the guard key
remained in the possession of the bank and without this key
neither of the renters could open the box.
Q: What is a special kind of deposit because the purpose here
is for safekeeping? So what makes it a special kind of deposit?
We have already mentioned earlier that how it is different from
an ordinary contract of lease. But how will it be considered as
a special kind of deposit?
A: The possession of the thing does not remain in the renters
but remains in the possession of the bank.
Q: But thats a purpose of a deposit. You deliver it to the
depositary for purposes of safekeeping. But what is in a special
kind of deposit? You already know that its not an ordinary
contract of lease. You mentioned its a special kind of deposit.
Why is it special?
Who has access to the contents of the safety deposit box?
A: The Bank really. Because even if there is the presence of
duplicate keys which are in the possession of CA Agro and the
spouses, none of them could open the box without the guard
key which remains with the respondent bank.
In other words, the depositary bank here does not have full
access. While the safety deposit box is within its premises, it
cannot open the same without the keys in possession of the
depositor.
Q: Now, how about the provisions in the contract of lease that
were in dispute here? What were these provisions and were
they upheld by the Supreme Court?
A: The Supreme Court did not uphold the provisions which
provide that the respondent bank is not a depositary of the
contents of the safe and has no interest whatsoever in said
contents, except herein expressly provided, and that it
assumes absolutely no liability in connection therewith.
Q: Why are these two provisions not valid?
A: Because the prevailing view is that the relation between the
bank renting out safe deposits boxes and its customer with
respect to the contents of the box is that of a bail or/ and
bailee, the bailment being for hire and mutual benefits. That
prevailing rule has been adopted in Section 72 of the General
Banking Act.
Section 72. In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other that building
and loan associations may perform the following services:
(a) Receive in custody funds, document and valuable objects
and rents safety deposits taxes for the safeguard of such
effects.
xxxxxxxxx
The bank shall perform the services permitted under
subsections (a) (b) and (c) of this section as depositories or as
agents.
pg. 44

Atty. Jazzie Sarona Lozare
Q: Why would those provisions under the general banking act
make the stipulations you mentioned in the contract of lease
not valid?
The first (par. 13), why is it considered void?
A: Because the Supreme Court said in this case that the
condition under paragraph 13, it is on a wrong premise. It is
not correct to assert that the bank has neither the possession
nor the control of the contents of the box because in fact the
safety deposit box itself is located in its premises under its
absolute control and moreover, the respondent bank keeps
the guard key of the said box. And as stated earlier, the renters
cannot open the subject box unless the bank cooperates by
using the guard key.
In addition, the stipulation there that the bank is not a
depositary is not binding to the parties because the nature of
a contract is determined by the intention of the parties and not
by the nomenclatures of the contract that they entered into.
So here, despite of the stipulation, this is a deposit. Although it
is special kind of deposit, nevertheless a deposit with the bank
considered as a depositary.
Q: How about paragraph 14? Why is it considered void? What
does par.14 state?
A: Par. 14. The bank has no interest whatsoever in said
contents, except herein expressly provided, and itassumes
absolutely no liability in connection therewith.
Q: Why is it void? Doon pa langsa absolutely no liability in
connection therewith. What does that mean?
So here, again, the contract for the rent of a safety deposit box
is not an ordinary contract of lease but is considered a special
kind of deposit. It is not characterized as an ordinary contract
of lease because the full and absolute possession and control
of the safety deposit box was not given to the renters:
petitioner and Pugaos in this case. The guard key of the box
remained with the bank. The bank could not likewise open the
box without the renters key. This is clear that the depositary
cannot open the box without the renter being present. In other
words, that makes it a special kind of deposit.
The contractual relation between a commercial bank and
another party in a contract of rent of a safety deposit box with
respect to its contents placed by the latter is one of a bailor
and bailee, thebailment being for hire and mutual benefit, and
it is not an ordinary deposit but special kind of deposit. There
is an annual payment for the rent.
(Anybody here who has worked in a bank; has seen a safety
deposit box?)
So here, the Supreme Court held also that the contract of
deposit may be entered into orally or in writing and parties may
establish such stipulations, clauses, terms and conditions as
they may deem convenient provided that they are not contrary
to law, morals, good customs, public order or public policy.
Paragraphs 13 and 14 are considered void as they are contrary
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to law and public policy. Paragraph 13: bank is not a depositary
neither the possession nor the control of the same. The safety
deposit box is located in its premises and is under its absolute
control. Moreover the bank keeps the guard key to the said
box. In other words, as a depositary, it has to some extent
possession and control of the subject matter.
As to par.14: the bank has no interest whatsoever to the said
contents, except as herein expressly provided, and itassumes
absolutely no liability in connection therewith.
What would that mean? Hindi siya mag-exercise ng due
diligence as to the subject matter. And again that is considered
as void.
Now, is the bank liable in this case? The Supreme Court held
NO. No competent proof was presented to show that
respondent Bank was aware of the agreement between the
petitioner and the Pugaos to the effect that the certificates of
title were withdrawable from the safety deposit box only upon
both parties' joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title was
due to the fraud or negligence of the respondent Bank. It was
obvious that either of them could ask the Bank for access to
the safety deposit box.
Q: What happens in a safety deposit box?
Isipinnalangninyoyungmga Borne Identity namga movie, diba.
Yung mag-access sila, yunmga spy-spy, yungibathumbmark,
yungibasusi..yungibasamata..thenma-open yungisa..
mapansinninyoyungtagabankowalajanpag.open. So
makitaninyo may baril, may passporto ganyan. Deposit box
yan. Perodito, di kapwedemaglagayngbarilkaybawal man
magdalangbarilsabanko. Pero here, whats the practice in a
safety deposit box? Dalawayung keyholes. One is kept by the
bank and one saiyo. Ikaw may option kanyankungdalawa kayo
magkaroonng access or ikaw lang. Perodalawangsusi yang
ibigaysaiyo. Angisa, saiyoangisapwedesaiyongkilala, and then
meron yang authority; kasamayansa form kung sinoang
authorized to access the safety deposit box. Meronyansilang
picture doonsa form. Every time na mag-access ka, you have to
affix your signature. So icheckng bank
kungikawbayungtaonapwede mag access. So what do you
mean by that? Even if I give you the key, if you are not the
depositor mentioned therein whocan access the safety deposit
box, hindikanyanbasta-bastapayaganngbangko. So thats
something which we should consider.
So, what happened here? Dalawangsusi: Pugaos and the
petitioner. They never informed the bank nadapatisabay.
Kasiang ordinary agreement talagasa bank anyone who has the
key authorized, kumbaga OR silahindi and, pwedemaka-
access. So here, the bank was not liable because the one who
came, the spouses Pugao most probably, had key. Looking at
their forms, that person was authorized to access the safety
deposit box. So therefore, may access, ino-pen nila, kung may
nilagay or may kinuha, walasilangalam. Di yanalamngbangko
pg. 45

Atty. Jazzie Sarona Lozare
kunganoanglamanng safety deposit box. Yung bank, it does not
know kung anoangnilagay mo. Kung angnilagaymojan titles sa
property, jewelry, love letters..(chika2hehe) This is an available
service to most of the banks here in the Philippines.
Q: If the bank has no knowledge of what is inside the safety
deposit box, do they practice some precautionary measures
like for example I keep an illegal drug or something.
A: Wala. The bank would not be held liable for the contents of
the said safety deposit box. Why? Because if you try to rent a
safety deposit box, igoranasila mag-turn sa key. Walakang i-
fifill-up na form kung anoanginilagaymosaloobng box. You just
affix your signature and indicate the time you went out. Yun
lang. So if you placed something illegal, the bank wouldnt be
held liable, well unless it would be found that it had knowledge.
Ikawang liable kasiiyo man yunna safety deposit box.
(Mga 5k daw per year and rent sa safety deposit box. Avail na
kayo. :p)
So, still with the VOLUNTARY DEPOSIT. The last article that we
have discussed is Art 1975 with emphasis as to the next
sentence therein, The above provision (the first paragraph of
1975) shall not apply to contracts for the rent of safety deposit
boxes. Again, take note of the distinctions between a contract
of lease and a lease of a safety deposit box:
In the case of CA Agro, it was emphasized that the
(1) lease of a safety deposit box is a special kind of
deposit. It cannot be characterized as an ordinary
contract of lease because the full and absolute control
of the safety deposit box was not given to the lessees
or renters. The guard key remains as in the case, with
the bank and the bank could not open the box without
the renters key.
(2) The relation between a bank renting out a safety
deposit box and its customer with respect to the
contents of the box is that of a bailor and bailee.
Bailment being for hire and mutual benefits.
Now, we also have this case of
Sia v CA
Facts: Sia here has 2 stamp collections and he decided to
deposit them in the safety deposit box. Flood occurred in 2
instances. However, the bank did not notify Sia and as a result
of which, it aggravated the damage to the stamp. Sia filed a
claim for damages against SBTC. However, on its defense claim
that it was just an ordinary contract of lease. So their liability is
only with respect to preventing anyone from opening the safety
deposit box.
Issue: WON the rental of a safety deposit box is a mere contract
of lease
SC Ruled: Negative. As discussed earlier in Compana Agricola, it
is not a mere contract of lease. The rent of a safety deposit box
is a special kind of deposit. In this case, SC held that SBTC was
negligent and thus not exempt from any liability.
MANRESA 2015
Q1: But isnt it that In their contract of lease, there was a
stipulation that the bank will be exempted from liability in case
of damage of things deposited in the deposit box?
A1: Yes Maam. However, that is contained in Conditions 9 and
13 of the contract but the SC nullified the provisions and that
the bank cannot exempt itself from liability. They are void as
they are contrary to law and public policy. They should exercise
due diligence in the care of the safety deposit box.
Q2: What was the reason that the stamps kept in the safety
deposit box were damaged?
A2: The safety deposit box was located in the lowest part. And
despite the fact that there were two floods, they still did not
inform Sia, therefore, the water seeped into the stamps.
Q3: But with that, can the bank now raise a defense or
fortuitous event? That the loss or damage resulting from a
fortuitous event, the bank here could not be held liable.
A3: Yeah. however they were held negligent for failure to notify
Sia and that the court held that they did not go to court with
clean hands
Q4: How about the fact as defense that they could not have
access to the said safety deposit box?
A4: The least they could do was notify Sia so that he could take
his stamps from the safety deposit box.
So, in this case of SIA v CA, the Court pointed out that the
provisions in the contract that are similar to those struck out in
the case of CA Agro. So in this case, it is not at all difficult to
conclude that the conditions in no. 9 and 13 in the lease
agreement must be stricken down for being contrary to law
and public policy as they are meant to exempt the bank from
liability for any damage, loss or destruction of the contents of
the safety deposit box. Now take not here, the proximate cause
of the damage caused to the stamps placed in the safety
deposit box was due to a flood, but that fortuitous event
cannot be used by the bank because it is guilty of negligence.
The negligence here on the part of the was that they should
have lost no time in notifying Sia, that the box could have been
opened to retrieve the stamps to avoid any further
deterioration. But they failed to do so. In fact, notice there
were 2 floods (in) 1985 and 1986. But they did not do
anything. So the defense of fortuitous event is not available
because if you recall the requisites under your Obligations (and
Contracts); the obligor must be free from any participation to
the aggravation of the injuries resulting to the creditor. So in
this case, fortuitous event is not available as a defense. The fact
that the key or the other key is in possession of Sia was also not
available as a defense. Because here, the cause of action is
damages due to the negligence on the part of the bank.
So, a rent of a safety deposit box is again, not an ordinary
contract of lease. Its a special kind of deposit. It is not strictly
governed by the provisions on deposit. The contracts and laws
pg. 46

Atty. Jazzie Sarona Lozare
under the Civil Code governing deposit may be suppletorily
applied but since its a special kind of deposit, what will govern
will be:
1. Agreement of the parties as long as it is not contrary
to law, public policy, customs, public order among
others
2. General Banking Law as pointed out in the case of
CA Agro and Sia, it was pointed out with regards to
the functions of the banks as lessors of safety deposit
box
ART. 1976. Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall own
or have a proportionate interest in the mass.
General rule: The depositary is permitted to commingle grain
or other articles of the same kind and quality.
Various depositaries of commingled goods shall own the entire
mass in common and each depositor shall be entitled to such
portion of the entire mass as the amount deposited by him
bears to the whole.
Exemption: by stipulation. If the parties stipulated not to
commingle such grains or other articles, then that should
govern.
However, if its not of the same kind and quality; the duty of
the depositary is to keep them separate or at the very least,
identifiable as he must return to each depositor the identical
article delivered.
Why would this be relevant?
In case of loss, like for example you have several sacks of rice.
You put them in the same corner, in tne same place, they are
of the same kind and quality. So, we apply the general rule that
they can be commingled. What if there is a flood or there is a
fire and only portion of the sacks of rice were damaged? Who
will shoulder the said damage? As long as the depositary is not
at fault or negligent, like for example the cause is a fortuitous
event, then who will bear the loss? The owners, but
proportionate. They cannot say, sa baba lang yung nadamage,
sayo yan kasi ikaw yung unang nagdeposit. They cannot do so,
because we have a rule here in Art 1976, proportionate
interest in the mass. As there are 5 depositors, they will divide
the loss among themselves.
ART. 1977. The depositary cannot make use of the thing
deposited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.
So again, the principle purpose for a contract of deposit is for
safekeeping, not use. Because if the principal purpose is use
and not safekeeping, then that will be considered as
commodatum. Unauthorized use makes the depositary liable
for damages. However, there may be instances where in the
MANRESA 2015
depositary may use the thing even without the express
permission of the depositor when such use is for the
preservation of the thing. But the use must be limited only for
that purpose to preserve the thing. [example: car paandarin
mo but do not drive it from Dvo-Tagum, hindi na for
preservation yan]
What is the effect if the purpose is safekeeping but the
depositary made use of it?
ART. 1978. When the depositary has permission to use the
thing deposited, the contract loses the concept of a deposit
and becomes a loan or commodatum, except where
safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its existence must
be proved.
Baron v David
Facts: Silvestra and Guillermo Baron are the aunt and uncle of
Pablo David, who is running a rice mill. Silvestra placed 1, 012
cavans of rice, Guillermo 1, 865 cavans of rice. On January 17,
1921; a fire occurred in the rice mill which destroyed the palay
which were in the possession of Pablo David. Therefore Silvestra
and Guillermo seek to recover the value of their palay which
were deposited in the rice mill of David. However, David claims
here that the palay was deposited subject to future withdrawal
and he seeks to be relieved from liability because it was a
fortuitous event which was the fire.
Issue 1: What is the nature of the contract entered into by David
and Baron?
Issue 2: WON David is liable for the value of the palay
SC Ruled: [The contract entered between the parties is one of
commodatum. Under Art 1978 of NCC When the depositary has
permission to use the thing deposited, the contract loses the
concept of a deposit and becomes a loan or commodatum. And
by appropriating the thing, the bailee becomes liable for its
value....]
Q1: What is the nature of a commodatum?
A1: it is essentially gratuitous
Q2: What is the subject matter of the commodatum?
A2: non-consumable
Q3: What is the subject matter in this case?
A3: palay
Q4: Is it consumable or nonconsumable?
A4: Consumable
Q5: When can a consumable object or thing be the subject
matter in a contract of commodatum?
A5:
You said there was a commodatum. We have a palay, cavans
of palay being the object. But you mentioned that palay is a
consumable thing, even though generally the subject matter of
a commodatum is a nonconsumable thing. So why do you say
that we have a commodatum here?
Q6: Did the SC state here that the contract involved is a loan or
a commodatum?
pg. 47

Atty. Jazzie Sarona Lozare
A6: I think Maam, the contract that the parties entered into
here Maam was a contract of sale because there was a
payment made by David to Baron.
Q7: Based on the findings here of the SC, what was the nature
of the agreement between David and Baron(s)?
A7: It was a contract of sale
Q8: Why sale?
A9: it met the requisites of a contract of sale Maam. there was
a payment made by David
Q10: Why can it not be considered as a deposit?
A10: Because David cant deliver it to use or consume the palay
Maam by giving it to the Barons
Q11: What is his obligation if he will not now include these
palays delivered in the milling process?
A11: He will be liable for the palay Maam
The practice here is if you deliver sacks of palay to the miller
(David) then he will include it and then mill it and he will pay
the one who delivered the palay the value because he has the
intention to sell what has been milled grains to sya dba to
other buyers.
Q12: Now, what is the relevance here in determining if this is
really a deposit or a contract of sale?
A12: If its a contract of sale, David will be liable.
Q13: What will be the basis of his liability? It was alleged here
that the reason for the loss of the sacks of palay was a fire.
What is the effect of that cause to the liability of David?
A13: If it is a contract of sale then there is already a delivery.
Q14: What happens in delivery?
A14: There is transfer of ownership, Maam.
Q15: What happens when theres a fortuitous event which will
damage or deteriorate the object or the subject matter that
has been delivered? Who bears the loss in case of a fortuitous
event?
A15: The owner, Maam bears the loss. There was already a
delivery to Baron so therefore he is liable to pay for the value
of the palay which was delivered to David.
Q16: How would that be different if this was really a contract
of deposit?
A16: In a contract of deposit, David here will not be liable
because the occurrence f fire is a fortuitous event. (But there
was a delivery to him?) In a contract of deposit, he is obliged
to return the same thing to Baron and due to fortuitous event,
it is now impossible to return the palay.
So here, take note, David is held liable. There was an
understanding between the parties that the defendant (David)
was at the liberty to convert palay into rice and dispose of it at
his venture. So from palay, i-mill nya magiging rice diba. So
again, its really my question, Palay rice- and then rice. Walay
conversion? May conversion. So for sacks of rice burned in fire,
what do you call them? So theres no, whats the translation in
Tagalog? Palay, is yung hindi pa sya namill. Pag namill nay un
MANRESA 2015
yung rice or bigas. Pag naluto na sya, kanin pero rice parin sya.
Then meron pang tutong, sa Bisaya dukot.
So back in the case, considering that the defendant has milled
and doubtlessly sold the rice prior to the date of fire, 1920
dineliver yung palay, fire occurred January 1921. It was
customary in this instance that when palay is delivered it will
be milled. So what happened here, it results that David will be
bound to the Barons for its value and his liability was not
extinguish by the occurrence of fire. What will be his liability
now? Yung value of the said rice. It was really in a character of
sale. Even supposing that the palay had been delivered in the
character of deposit subject to future sale, nevertheless, if it
was understood that the defendant might mill the palay and
has in fact appropriated it for his own use, he is of course
bound to account for its value. In this case, as provided in Art
1978 NCC, it is mentioned that it does not necessarily mean
that what we have here is a loan or commodatum because:
First, it will not be a commodatum because:
1. In a commodatum, it is essentially gratuitous
2. The subject matter is a consumable thing
3. Nothing in the facts of the case that the purpose was
merely for exhibition
Second, will it be considered as a contract of loan? What will
be your obligation in a simple loan? You deliver the same kind
and quality. But what you are going to deliver here is the value.
So, the closest here to consider is a contract of sale. So, with
that, the fire did not extinguish the obligation unlike if it was a
true contract of deposit, the damage or the loss of the thing
subject of a deposit due to a fortuitous event will extinguish
the obligation of the depositary as long as there is no
negligence on his part.
Reiterates Art 1978. So here:
1. If the thing deposited is not consumable but allowed to
use it, it will lose the character of a contract of deposit and
it will be considered as a commodatum as long as it
conforms with the requisites thereof, despite being
denominated as a deposit, unless safekeeping is still the
principal purpose.
2. If the thing deposited is money or a consumable thing and
the depositary is allowed to use it and it results to
consumption and converts it to a simple loan or mutuum
with the obligation to deliver the same kind and quality.
3. If, however safekeeping is the principal purpose, then it
will be considered as a deposit but an irregular one.
Q1: Now, whats the difference between a contract of loan and
a deposit?
A1: In a contract of loan, there is an obligation to return the
equivalent of the thing of the same kind and quality but in a
contract of deposit, to return the exact same thing.
Javellana v Lim
Facts: They enter into a contract which was initially referred to
as a contract of deposit, whereas if you look into the contents
of the contract, it states that We have received from Angel
pg. 48

Atty. Jazzie Sarona Lozare
Javellana the sum with interest P2,658.58 which will be
returned to the said gentleman jointly and severally on January
20, 1898. However, the circumstances that follow would show
that there was actually a contract of loan because first, when
the amount was supposed to be returned to Javellana, Lim was
not able to return the said amount. However, he asked for an
extension of time. Moreover, there was also an interest which
was added to the original amount which was supposedly
deposited to Lim.
Issue: WON the agreement between the parties is a contract of
loan or a contract of deposit.
SC Ruled: It was a contract of loan of money although it was
denominated as a deposit, because of the earlier circumstances
discussed, therefore, it was a contract of loan.
Q1: Isnt it that there were 2 contracts that were executed
here? The first contract was denominated as a deposit, the
second one was a contract of loan. Can you say that there was
a conversion here of the contract between the parties form
deposit to loan?
A1: There was no conversion. As SC held, there was only a
renewal of a contract of loan and that the first contract which
was denominated as a deposit was already a real contract of
loan. [Despite the term that was used by the parties that it was
a contract of deposit.]
So, you have here the document of indebtedness states the
plaintiff left on deposit a sum of money they will jointly and
severally oblige to return on a certain day. Now in the second
document which is a real loan of money with interest as
appears perfectly defined. However, the SC ruled here that at
the very beginning, the contract entered into between the
parties is one of loan. They did not engage to return the same
coins received and of which the amount deposited consisted
and they could have accomplished the return agreed upon by
delivering the sum equal to the one received by them. Debtors
are therefore lawfully authorized to make use of the amount
deposited which they have done however when the payment
was demanded, they were not able to pay it or return it to the
creditor. So, it was really a contract of loan and not a deposit.
Remember, the depositary cannot make use of the thing
deposited without the express permission of the depositor. In
fact here, the creditor, by granting the debtors extension,
confirmed the express permission previously given to them to
use and dispose of the amount stated as having been
deposited. Further, there was no renewal of the contract of
deposit converted into a loan because the defendant received
the amount by virtue of a real contract (of loan) under the
name of deposit since the so-called bailees were forthwith
authorized to dispose of the amount deposited.
Again, do not confuse loan from deposit. Always look at the
intention of the parties and what are their respective
obligations. The contract will not be defined by the terms used
therein but as to what the law says such contracts will be
considered.
MANRESA 2015
Also consider, permission to use is not presumed under Article
1978 when such use is necessary for the preservation of the
thing deposited and the burden is upon the depositary to prove
that permission has been given.
ART. 1979. The depositary is liable for the loss of the thing
through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositors permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he him-self may
have been authorized to use the same.
General Rule: Depositary is not liable for the loss of the thing
deposited due to a fortuitous event as long as depositary is
without fault.
Exception: Article 1979
Notice under Article 1979, there is no negligence. But in the
case of Sia v CA, there was negligence which was the reason for
the bank to be held liable despite the damage due to a
fortuitous event. So, what is the basis there? Go back to the
general rule under obligations and contracts under Article
1170 [Article 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for
damages.]
Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan. (n)
As I mentioned a while ago, if the thing deposited is money and
you allow the depositary to use it, what do you have? It is still
considered as a deposit but an irregular one. Lets assume you
have money in the bank. Why will you put the money in the
bank? Interest? Primarily, it is for safekeeping. It is a deposit in
that sense. But when you withdraw your money, will it be the
exact same thing, same money, same serial number that you
deposited? No. And what does the bank do with the money
that you deposit? They use it, to invest or loan to other person.
So with that, what do you mean by an irregular deposit?
Q1: What is an irregular deposit? We have a special kind of
deposit which is the safety deposit box, but this is irregular
deposit. What makes it irregular?
A1: In a regular deposit, the benefit goes to the depositor. As
compared to an irregular deposit which will benefit both
parties.
Compania Agricola v Nepomuceno
Facts: It involves the Mariano Velasco & Company which was
declared as insolvent. In this case, Compania Agricola filed a
claim against one of the companies under Mariano Velasco
&Co. It claimed that it deposited an amount of money to the
said Company before. It presented a receipt which stated that
Marina Velasco & Co received from Compania Agricola the
pg. 49
 MANRESA 2015
Atty. Jazzie Sarona Lozare

sum of ten thousand Philippine pesos as a deposit at the As to That which accrues Necessity of the
interest of six per cent annually, for the term of three months benefit solely to the borrower
from date. This was used as evidence by Compania Agricola in depositor
its claim to be declared as a preferred creditor in the Right to Depositor can Lender is bound
proceedings of the insolvency of Mariano Velasco & Co. Demand demand return at by provisions of
Issue: WON there was indeed a deposit as evidenced by the Return of any time contract cannot
document Item seek restitution
SC Ruled: There was indeed a deposit in this case. SC referred to until the time
the case of Gavieres v De Tavera, Javellana v Lim and Rogers v for payment, as
Smith. The case of Gavieres is very similar to the case at bar provided in the
which involved a delivery of P3000 which was evidenced by an contract, has
agreement which was similar to the agreement made by arisen
Compania Agricola and Velasco & Co. The Court ruled that
although the document questioned said that it was a deposit, it Q1: What do we have in the case of Rogers v Smith, is there an
nevertheless is a contract of loan since an examination of the irregular deposit or a loan?
entire document would clearly show the intention of the parties A1: A contract of loan and not a deposit nor an irregular deposit
which was a loan and not a deposit since it also stipulated the
interest and a term if three months. Rogers v Smith
Facts: Sometime in the late 1800s, Jose Rogers deposited a sum
Q1: Will it not be considered as an irregular deposit? of P12,000 worth of gold in Smith, Bell & Co with interest of 8%
A1: Even though it is not a deposit, it cannot also be regarded per annum which accrued beginning 1876 and from then on for
as an irregular deposit. In this case also cited the case of Rogers more than 20 years, Rogers received such interest every month
v Smith citing Manresa, the court differentiated deposit from from Smith. Now, here happens the act of the Congress which
an irregular deposit. Some of the distinctions mentioned are: converted the currency of the Philippines form silver to gold.
1. In an irregular deposit, the benefit is solely for the Before such, Rogers received the interests in silver currency
depositor while in a loan, the cause for the from Smith and following the act of congress, Rogers sent a
transaction is the necessity of the borrower. In a loan letter of protest to Smith alleging that since he deposited the
for money, the benefit is for both of the parties, currencies in gold back in 1876, he is entitled now to the same
2. In an irregular deposit, the depositor can demand the gold. Apparently, when he deposited the money in gold, the
return of the item at any time, while in a loan; the value of silver was much higher but it all changed when the act
lender is bound by the stipulation in the contract and of the congress arrived, now that the value of the gold was
cannot seek restitution until the time for payment, as much higher than silver and it is actually doubled. Since it was
provided in the contract, has arisen. favourable to him, Rogers alleged that it was a contract of
deposit and that Smith must give him the same gold that he
So, it is clear in this case of Companis Agricola that the deposited from 1876.
transaction is not a contract of deposit but a contract of loan
since it was not mainly for the benefit of Compania Agricola but Issue: Whether it was a contract of deposit
for both parties. And neither could the alleged depositor
demand payment but should wait for the term stipulated that SC Ruled: No. The Court found it ridiculous since he was
is three months after. receiving such interest and he will invoke at the same time that
it was a contract of deposit, and demanded the Smith, Bell &
Q2: What is the effect that it is now regarded as a loan? What Co to give him the same gold that he deposited. There was also
if its a loan and not a deposit, whats the relevance? Why did a discussion whether it was an irregular deposit or a contract
we have to determine if its a loan or a deposit? of loan.
A2: To determine if they have a preferred claim.
In an irregular deposit, the benefit is one-sided and it is only for
Q3: When will it be considered as a preferred claim? the benefit of the depositor, while in a loan the contract is for
A3: If it is a deposit. the benefit of both. On the part of the depositor/lender is the
interest, and on the part of the borrower/debtor is the money
So, in this case of Compania v Nepomuceno, the Court he can appropriate for business.
emphasized the distinctions between a loan and an irregular
deposit. Secondly, in terms of when the lender/ depositor demand the
deposit; in an irregular deposit, he can actually demand the
IRREGULAR DEPOSIT LOAN return of the thing at any time while in a loan; he must wait for
the expiration or whatever stipulation they have agreed upon.

pg. 50
 MANRESA 2015
Atty. Jazzie Sarona Lozare

As to preference to the distribution of the properties of the loan was created between the plaintiff and the defendant and
debtor, the depositor has the preference while the creditor in a therefore the relationship was that of between a creditor and
loan does not have such preference. debtor and not that of a depositor and a depositary.

The Court said that it was actually a contract of loan and

though the court did not state estoppels, it somehow like that So the last article we discussed was Article 1978 wherein we
way because for more than 20 years he has been receiving silver have discussed that the contract of deposit loses its concept as
and now just because of the act of congress which he actually such when the depositary has permission to use the thing
construed erroneously, he is now estopped in demanding that deposited and the said contract will now be considered a loan
he is entitled to receive gold. or commodatum except where safekeeping is still the principal
purpose of the contract.
Q2: Is there a remaining liability since it is a loan, so aside from
the payment of interest, you have to give back the principal. In the case of Javellana vs. Lim, in recent cases the SC pointed
How about the principal here, is there a remaining obligation out three distinctions between a contract of loan, this refers to
as to the principal? To return the value of the principal? What a simple loan, and that of an irregular deposit:
was the cause of action in this case. IRREGULAR DEPOSIT SIMPLE LOAN
A2: The cause of action was for the return of 12,000 pesos I. The only benefit is that The essential cause for
worth of gold or 24, 000 pesos worth of silver. which accrues to the the transaction is the
depositor necessity of the borrower
So here, it is a contract of loan, not a deposit so there is no II. Depositor can demand A lender in a loan, as
obligation to return the exact same thing which was the gold. the return of the article at found by the provisions
However, since it is a loan, you must return the same kind and anytime of the contract, cannot
quality or the value thereof. seek restitution until the
Q3: So how about as to the principal obligation as to the time for payment as
principal contract of loan? Was there any ruling of the Court or provided in the contract
was there any fact presented that it was already made? Whats has arisen
the obligation here? III. The depositor has a Wherein if it is a contract
A3: The return of the money itself or the original deposit preference over other of loan, it is not
Maam. creditors in the considered as a preferred
distribution of debtors credit
He is entitled to recover the 12, 000 pesos which is the value. property
So there is still a liability. No extinguishment of the obligation
but no obligation to return what he has deposited nor what he Article 1979. Liability in case of fortuitous event:
has delivered because here, again, it is a loan and not a deposit. ART. 1979. The depositary is liable for the loss of the thing
No obligation to return the exact same thing that was delivered through a fortuitous event:
but rather the equivalent value thereof. (1) If it is so stipulated;
(2) If he uses the thing without the depositors
Here, again, the distinctions are emphasized. Aside from the permission;
benefits, if its for loan of money, for the benefit of both parties (3) If he delays its return;
otherwise it is an irregular deposit. An irregular deposit is solely (4) If he allows others to use it, even though he him-self may
accruing for the benefit of the depositor. Here the benefit of have been authorized to use the same.
Smith Bell & Co received was the use of money and the benefit And then Article 1980:
which Rogers received is the interest of his money.
Article 1980. Fixed, savings, and current deposits of money
In an irregular deposit, the depositor can demand the return of in banks and similar institutions shall be governed by the
the article at any time while the lender is bound by the provisions concerning simple loan. (n)
provisions of the contract and cannot seek restitution until the
time for payment. In this case, plaintiff cannot demand his
The cases of Rogers vs. Smith and Compania Agri-cola are those
money at any time.
cases which discuss the distinction between simple loan and
And the other distinction that was pointed out and it
irregular deposit.
was emphasized in the case of Compania, in an irregular
What is the nature of a bank deposit? A bank deposit is an
depositor, teh depositor has a preference over other creditors
irregular deposit but the provisions on the contract of loan will
in the distribution of the debtors property unlike that in a
be applied.
contract of loan.
So, the document in question is evidence of an
What happened in the case of BPI vs. Court of Appeals?
ordinary loan despite that they used the term deposit. And, a
pg. 51

Atty. Jazzie Sarona Lozare
BPI vs. COURT OF APPEALS
FACTS: Respondents Eastern Plywood Corporation (Eastern)
and Benigno D. Lim (Lim), an officer and stockholder of
Eastern, held one joint bank account with the Commercial
Bank and Trust Co. (CBTC), the predecessor-in-interest of
petitioner BPI.
Subsequently, a joint checking account in the amount of
P120,000.00 was opened in the name of Lim and Mariano
Velasco with funds withdrawn from the account of Eastern
and/or Lim.
Velasco died. At the time of his death, the outstanding
balance of the account stood at P662,522.87. By virtue of an
Indemnity Undertaking executed by Lim, one-half of this
amount, P331,261.44, was provisionally released and
transferred to one of the bank accounts of Eastern with
CBTC.
Thereafter, Eastern obtained a loan of P73,000.00 from
CBTC. Eastern issued a negotiable promissory note for
P73,000.00 payable on demand to the order of CBTC. In
addition, the loan was also secured by the joint checking
account of Velasco and Lim with a balance of P331,261.44
by virtue of a Holdout Agreement signed by Eastern and
Lim and CBTC wherein CBTC acceptsa holdout on the joint
account in the names of Lim and Velasco to the full extent of
their alleged interests.
On the other hand, a case for the settlement of Velasco's
estate was filed. In the said case, the whole balance of
P331,261.44 in the aforesaid joint account of Velasco and
Lim was being claimed as part of Velasco's estate. The
intestate court granted motion of the heirs of Velasco to
withdraw the balance and authorized the heirs to divide
among themselves the amount withdrawn.
BPI filed with the RTC a complaint against Lim and Eastern
demanding payment of the promissory note for P73,000.00.
Defendants Lim and Eastern, in turn, filed a counterclaim
against BPI for the return of the balance in the disputed joint
account of Lim and Velasco that is the subject of the Holdout
Agreement and the interests thereon after deducting the
amount due on the promissory note.
RTC dismissed the complaint. CA affirmed the decision that
that it was the duty of CBTC to to set off the loan of
P73,000.00 covered by the promissory noteto the joint
account of Lim and Velasco.
ISSUE:WON BPI is liable to the private respondents on the
account subject of the Holdout Agreement after its
withdrawal by the heirs of Velasco? YES
HELD:It should be noted that BPI cannot be compelled to set-
off Lim and Velasco's joint account to the payment of the
note for the loan obtained by Eastern in the amount of
P73,000. The Holdout Agreement only conferred on CBTC a
MANRESA 2015
power, not a duty. Generally, a bank is under no duty or
obligation to make the application. To apply the deposit to
the payment of a loan is a privilege, a right of set-off which
the bank has the option to exercise. Hence, BPI can demand
payment of the loan of P73,000.00 despite the existence of
the Holdout Agreement
However, BPI was not specifically ordered to release the
account to the heirs of Velasco; hence, it was under no
judicial compulsion to do so. , The order of the court merely
authorized the said heirs to withdraw the account. The
disputed joint account was proved and established to belong
to Eastern even if it was deposited in the names of Lim and
Velasco. As the real creditor of the bank, Eastern has the
right to withdraw it or to demand payment thereof.
SC held that bank deposits are in the nature of irregular
deposits; they are really loans because they earn interest.
The relationship then between a depositor and a bank is one
of creditor and debtor. The deposit under the questioned
account was an ordinary bank deposit; hence, it was payable
on demand of the depositor.
Because the ownership of the deposit remained
undetermined, BPI, as the debtor, had no right to pay to
persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment
is indisputable. Payment made by the debtor to the wrong
party does not extinguish the obligation as to the creditor
who is without fault or negligence, even if the debtor acted
in utmost good faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third person.
The payment then by BPI to the heirs of Velasco, even if done
in good faith, did not extinguish its obligation to the true
depositor, Eastern.
Q1: In whose name was the joint account that is at dispute
here?
A1: In the name of Lim and Velasco.
Q2:The one who is claiming against BPI is Eastern. What was
the basis of Easterns claim as to the money in that joint
account of Lim and Velasco?
A2: The basis is the fact that the money which was used to open
the checking account is that of the money of Eastern. Thats
why Eastern is claiming the half of the amount which was still
in the joint checking account. So the Court here ruled that BPI
is liable to Eastern because there was a hold-out agreement
and the nature of the contract between Eastern and the bank
is one of a loan. So there is a creditor-debtor relationship
between them.
Q3: Who is the creditor?
A3:Eastern and the debtor is the bank. So the bank, BPI, should
pay Eastern because although it is a deposit, it is an irregular
deposit and the nature of it is a loan. Thats why BPI should
pay Eastern.
pg. 52

Atty. Jazzie Sarona Lozare
Discussion: Here, it was emphasized that bank deposits are in
the nature of irregular deposits wherein they are really loans
because they earn interest. Relationship between a depositor
and a bank is one of creditor and debtor and the deposit under
the questioned joint account in the name of Lim and Velasco
was an ordinary bank deposit. Hence, it was payable on
demand of the depositor.
The account was proved and established to belong to Eastern.
That was necessary. Why? Because here if it cannot be proven
that the bank had knowledge that the amount belongs to
Eastern, then Eastern has no claim as to the half portion of that
account. Because really, the account here was in the name of
Lim and Velasco, it was proven here that the account belonged
to Eastern as the real creditor of the bank. Eastern has the
right to withdraw it or demand payment thereof. BPI should
not have allowed such withdrawal releasing half of the money
to the estate of Velasco because the bank had already
admitted in the hold-out agreement the question of ownership
of the money deposited in the account.
So take note here, bank deposit are in the nature of irregular
deposits wherein applying Article 1980, we apply the
provisions on loans. So here the distinction in the previous
cases we have discussed is not that too technical in form. Wala
masyado defining line kung ano iyong irregular deposit and
loan when it comes to laid back deposit. Very specific siya.
Recall in the previous cases we had, Compania and Rogers vs.
Smith, the transaction involved there did not involve a bank.
Partnership ang meron pero it was not a bank deposit. So in
those instances, the distinction between irregular deposit and
loan was really relevant. But when it comes to bank deposits,
it is clear that they are in the nature of an irregular deposit but
nevertheless they are considered still as loans because they
earn interest. Interest in the sense that you put the money in
the bank for the purpose of safekeeping, you get to earn
interest. The bank gets to use it, invest it, lend it to other
people and earn interest on it as well.
Now another case that we have is the case of Metrobank. What
happened in this case?
METROBANK vs. B.A. FINANCE
FACTS: Lamberto Bitanga obtained from respondent BA
Finance Corporation a loan, to secure which, hemortgaged
his car to respondent BA Finance. Bitanga had the
mortgaged car insured by respondentMalayan Insurance.
The car was stolen. On Bitangas claim, Malayan Insurance
issued a check payable to the order of "B.A. Finance
Corporation and Lamberto Bitanga", drawn against
China.The check was crossed with the notation For Deposit
Payees Account Only. Without the indorsement or authority
of his co-payee BA Finance, Bitanga deposited the check to
his account with the Asianbank, now merged with herein
petitioner Metrobank. Bitanga subsequently withdrew the
MANRESA 2015
entire proceeds of the check. In the meantime, Bitangas
loan became past due, but despite demands, he failed to
settle it.
BA Finance eventually learned of the loss of the car and
of Malayan Insurances issuance of a crossed check payable
to it and Bitanga, and of Bitangas depositing it in his
account at Asian bank and withdrawing the entire proceeds
thereof. BA Finance thereupon demanded the payment of
the value of the check from Asian bank but to no avail,
prompting it to file a complaint for sum of money and
damages against Asian bank and Bitanga, alleging that it is
entitled to the entire proceeds of the check.
ISSUE: WON Metrobank should be held liable for allowing
Bitanga to withdraw the whole proceeds of the check
without proper indorsement from BA Finance? YES
HELD: Section 41 of the Negotiable Instruments Law
provides: Where an instrument is payable to the order of two
or more payees or indorsees who are not partners, all must
indorse unless the one indorsing has authority to indorse for
the others.
Bitanga alone endorsed the crossed check, and petitioner
allowed the deposit and release of the proceeds thereof,
despite the absence of authority of Bitangas co -payee BA
Finance to endorse it on its behalf. The payment of an
instrument over a missing indorsement is the equivalent of
payment on a forged indorsement or an unauthorized
indorsement in itself in the case of joint payees. Clearly,
petitioner,through its employee, was negligent when it
allowed the deposit of the crossed check, despite the lone
endorsement of Bitanga, ostensibly ignoring the fact that
the check did not, it bears repeating, carry the indorsement
of BA Finance.
The SC does not agree, however, to the CAs affirmance of
the trial courts grant of legal interest of 12% per annum on
the value of the check since the obligation in this case did not
arise out of a loan or forbearance of money, goods or credit.
Article 1980 does not find application in this case since the
nature of the relationship between BA Finance and
petitioner is one of agency whereby petitioner, as collecting
bank, is to collect for BA Finance the corresponding proceeds
from the check.
Not being a loan or forbearance of money, the interest
should be 6% per annum computed from the date of
extrajudicial demand until finality of judgment; and 12% per
annum from finality of judgment until payment.
Q1:Who is/are the payee/s of the check?
A1: Bitanga and BA Finance.
Q2:What does that mean that they are the payees and it is a
cross-checked. You mentioned that it is for deposit only. For
deposit to whom?
A2:For deposit to both (Bitanga and BA Finance) maam.
pg. 53

Atty. Jazzie Sarona Lozare
Q3: Can you apply here Article 1980 of the Civil Code that the
transaction here is between that of a creditor and debtor
applying the provisions of a loan?
A3:No maam.
Q4: Why was there an issue as to the applicability of Article
1980?
A4:The Court ruled maam that Section 41 of the Negotiable
Instruments Law is applicable.
Q5: How about our topic right now, Article 1980, is the
transaction involved in this case related to Article 1980? What
is the relevance of Article 1980 here? Why was it necessary for
the Court to determine whether Article 1980 is applicable or
not? Is there a debtor-creditor relationship between the bank
and BA Finance?
A5: No maam.
Q6: What is their relationship between these two entites?
A6: Contract of Agency maam.
Q7: Who is the agent?
A7: The bank maam.
Q8: Okay, the bank is the agent of BA Finance. Why would that
be relevant? Agency and no debtor-creditor relationship, no
loan?
A8: The relationship of Metrobank and BA Finance is one of
agency maam where Metrobank, as a collecting bank, is to
collect for BA Finance the proceeds relating to the check. But
it failed to do so.
Q9: What now? Why was it necessary for the SC to discuss that
this is an agency and not a loan?
A9: In this case maam, the Court held that in order to
determine the applicable interest maam.
Q10: Okay. So since this is agency and not a loan, what is the
applicable interest?
A10: In this case maam, if it is not a loan then the applicable
interest is 6% per annum. That was the finding of the SC.
Discussion:Here, relate this to your Negotiable Instruments
when you get to Section 41, Indorsement of two or more
payees.
Here, the bank was negligent because it allowed Bitanga to
withdraw the proceeds of the check even if the payees are
both Bitanga and B.A. Finance. So that was the negligence on
the part of the bank. Remember a bank is imbued with public
interest such that the highest degree of diligence and the
highest standards of integrity and performance are expected
of banks in order to maintain the trust and confidence of the
public in general in the banking sector.
Further the SC emphasized that the obligation in this case did
not arise out of
MANRESA 2015
a loan or forbearance of money, goods, or credits. They did
not have a bank deposit in this account, so walay creditor and
debtor relationship. Article 1980 is not applicable since the
nature of the relationship between B.A. Finance and petitioner
is one of agency. Whereby petitioner, as collecting bank, was
to collect for B.A. Finance the corresponding proceeds of the
check. Not being a loan or forbearance of money, interest is
6% per annum from the day of extrajudicial demand until
finality of judgment and 12% from finality until payment.
What happened in the case of Reyes vs. Court of Appeals?
REYES vs. COURT OF APPEALS
FACTS: Philippine Racing Club, Inc. (PRCI) sent 4 delegates to
the 20th Asian Racing Conference to be held in Sydney,
Australia. Petitioner Gregorio H. Reyes sent Godofredo Reyes
to Far East Bank and Trust Company (respondent) to apply
for a foreign exchange demand draft in Australian dollars
(AU$1,610.00).
The banks assistant cashier first denied the application for
the reason that respondent bank did not have an Australian
dollar account in any bank in Sydney. Since Godofredo asked
if there could be a way for respondent bank to accommodate
PRCI's urgent need to remit Australian dollars to Sydney, the
cashier informed him of another way of effecting the
requested remittance.
The respondent bank would draw a demand draft against
Westpac-Sydney and have the latter reimburse itself from
the U.S. dollar account of the respondent in Westpac-New
York. This arrangement has been customarily resorted to
since the 1960's and the procedure has proven to be
problem-free.
The respondent bank approved the said application of PRCI
and issued a Foreign Exchange Demand Draft (FXDD) in the
sum applied forpayable to the order of the 20th Asian Racing
Conference Secretariat of Sydney, Australia, and addressed
to Westpac-Sydney as the drawee bank.
Upon due presentment of the FXDD the same was
dishonored stating thatNo account held with Westpac."
Meanwhile, Wespac-New York sent a cable to respondent
bank informing the latter that its dollar account in the sum
of AU$ 1,610.00 was debited. The respondent bank informed
Wespac-New York requesting the latter to honor the
reimbursement claim of Wespac-Sydney. Upon its second
presentment for payment, the FXDD was again dishonored
by Westpac-Sydney for the same reason.
When petitioner Reyes arrived in Sydney, he went directly to
the lobby of Hotel Regent Sydney to register as a conference
delegate. At the registration desk, the conference secretariat
said that he could not register because the FXDD for his
registration fee had been dishonored for the second time.
The same situation was experienced by his wife Consuelo
who is a member of the House of Rep representing the
District of Makati, Metro Manila.
The petitioners filed a complaint for damages against FEBTC.
Claiming that as a result of the dishonor of the said demand
pg. 54

Atty. Jazzie Sarona Lozare
draft, they were exposed to unnecessary shock, social
humiliation, and deep mental anguish in a foreign country,
and in the presence of an international audience. RTC and
CA ruled in favor of respondent.
ISSUE: WON the respondent bank was negligent?NO
HELD: The evidence shows that the respondent bank did
everything within its power to prevent the dishonor of the
subject foreign exchange demand draft. An employee of
Westpac-Sydney mistakenly read the printed figures in the
SWIFT cable message of respondent bank as "MT799"
instead of as "MT199". Such erroneous reading of its cable
message by a Westpac-Sydney employee could not have
been foreseen by the respondent bank. The respondent bank
had to re-confirm and repeatedly notify Westpac-New York
to debit its (respondent bank's) deposit dollar account with
it and to transfer or credit the corresponding amount to
Westpac-Sydney to cover the amount of the said demand
draft.
The degree of diligence required of banks is more than that
of a good father of a family where the fiduciary nature of
their relationship with their depositors is concerned. In other
words banks are duty bound to treat the deposit accounts of
their depositors with the highest degree of care. But the said
ruling applies only to cases where banks act under their
fiduciary capacity, that is, as depositary of the deposits of
their depositors. But the same higher degree of diligence is
not expected to be exerted by banks in commercial
transactions that do not involve their fiduciary relationship
with their depositors.
The case at bar does not involve the handling of petitioners'
deposit. Instead, the relationship involved was that of a
buyer and seller, that is, between the respondent bank as the
seller of the subject foreign exchange demand draft, and
PRCI as the buyer of the same, with the 20th Asian Racing
conference Secretariat in Sydney, Australia as the payee
thereof. The FXDD was intended for the payment of the
registration fees of the petitioners as delegates of the PRCI.
Hence, respondent bank was not required to exert more than
the diligence of a good father of a family in regard to the sale
and issuance of the subject FXDD.
Q1: What was the diligence required of the bank in this case?
A1:Degree of diligence required is more than that of a good
father of a family but it only applies to fiduciary relationships
wherein the bank was handling the deposit of a client. But in
this case, there was no fiduciary relationship between Far East
bank and Reyes because it was treated more like of a sales
transaction wherein Reyes bought the deman draft from Far
East bank. Therefore, the diligence required from Far East
bank was simply that of a good father of a family and not more
than of that.
Q2:So with that, is the bank liable to Reyes?
A2:No maam. It was held that the bank did exercise the
diligence of a good father of a family.
MANRESA 2015
Discussion:The Court emphasized that the degree of diligence
required of banks more than that of a good father of a family
is required when there is a fiduciary nature of their relationship
with their depositors. So you have here a contract between
the parties which does not involve a deposit account. When we
say higher degree of diligence, more than the standard of
diligence of a good father of family, that is only applicable for
contracts of deposits that are covered in Article 1980.
In this case, however, theres no contract of deposit. Highest
degree of care applies only to cases where banks act under
their fiduciary capacity that is as depositary of the deposits of
their depositors. Same higher degree of diligence is not
expected to be exerted by banks in commercial transactions
that do not involve their fiduciary relationship with their
depositors. Respondent bank is not required to exert more
than the diligence of a good father of a family in regard to
what happened here? Sale and issuance of a foreign exchange
demand draft. The case at bar does not involve the handling
of petitioners deposit, instead what we have here is a buyer
and seller relationship.
Under the facts of the case, it was proven that the respondent
bank acted in good faith and in fact did not cause the
embarrassment of the petitioners in Sydney, Australia as the
error, mali ang pagpasok sa number, was not on the part of Far
East bank but rather of West-pac Sydney. The employee of
West-pac Sydney made such error, so therefore the bank here
was not held liable.
What happened in the case of Guingona vs. City Fiscal?
GUINGONA vs. CITY FISCAL
FACTS: Respondent David invested with the Nation Savings
and Loan Association (NSLA) the sum of P1,145,546.20 on
nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time
deposit, US$15,000.00 under a receipt and guarantee of
payment and US$50,000.00 (jointly with Denise Kuhne).
David alleged that he was induced into making the
aforestated investments by Robert Marshall an Australian
national who was allegedly a close associate of petitioner
Guingona Jr., then NSLA President.
NSLA was placed under receivership by the Central Bank, so
that David filed claims therewith for his investments and
those of his sister. Thereafter, Guingona and Martin, upon
Davids request, assumed the banks obligation to David by
executing a joint promissory note in favor of private
respondent acknowledging an indebtedness of
Pl,336,614.02 and US$75,000.00. This promissory note was
based on the statement of account as prepared by the
respondent. The amount of indebtedness assumed appears
to be bigger than the original claim because of the added
interest and the inclusion of other deposits of private
respondent's sister.
pg. 55

Atty. Jazzie Sarona Lozare
Petitioners Guingona and Martin agreed to divide the said
indebtedness, and Guingona executed another promissory
note whereby he personally acknowledged an indebtedness
of P668,307.01 and US$37,500.00 in favor of David.
Subsequently, David received a report from the Central Bank
that only P305,821.92 of those investments were entered in
the records of NSLA.
David charged petitioners with estafa and violation of
Central Bank Circular No. 364 and related regulations on
foreign exchange transactions in the Office of the City Fiscal.
Petitioners moved to dismiss the charges against them for
lack of jurisdiction because Davids claims allegedly
comprised a purely civil obligation, but the motion was
denied. After the presentation of Davids principal
witness, petitioners filed this petition for prohibition and
injunction because the production of various documents
showed that the transactions between David and NSLA were
simple loans i.e., civil obligations which were novated when
Guingona and Martin assumed them
ISSUE: WON the contract perfected was a contract of simple
loan?YES.
HELD: It must be pointed out that when private respondent
David invested his money with NSLA, the contract that was
perfected was a contract of simple loan or mutuum and not
a contract of deposit. Thus, Article 1980 of the New Civil
Code provides that fixed, savings, and current deposits of-
money in banks and similar institutions shall be governed by
the provisions concerning simple loan.
Bank deposits are in the nature of irregular deposits. They
are really 'loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated
as loans and are to be covered by the law on loans. Current
and saving deposits, are loans to a bank because it can use
the same.
Hence, the relationship between the private respondent and
the Nation Savings and Loan Association is that of creditor
and debtor; consequently, the ownership of the amount
deposited was transmitted to the Bank upon the perfection
of the contract and it can make use of the amount deposited
for its banking operations, such as to pay interests on
deposits and to pay withdrawals. While the Bank has the
obligation to return the amount deposited, it has, however,
no obligation to return or deliver the same money that was
deposited. And the failure of the Bank to return the amount
deposited will not constitute estafa through
misappropriation punishable under Article 315, par. l(b) of
the Revised Penal Code, but it will only give rise to civil
liability.
But even granting that the failure of the bank to pay the time
and savings deposits of private respondent David would
constitute a violation of paragraph 1(b) of Article 315 of the
Revised Penal Code, nevertheless any incipient criminal
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liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank,
petitioners Guingona and Martin assumed the obligation of
the bank to private respondent David, thereby resulting in
the novation of the original contractual obligation arising
from deposit into a contract of loan and converting the
original trust relation between the bank and private
respondent David into an ordinary debtor-creditor relation
between the petitioners and private respondent.
Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would
merely be a failure to pay the obligation as a debtor.
Q1: Who is Guingona here?
A1: Guingona here is one of the officers of NSLA maam who
prompted David to invest.
Q2: To whom was these deposits made?
A2: To the bank.
Q3: Was there liability for Estafa?
A3:The SC held here maam that there was no liability for Estafa
because here, although the various pleadings and documents
filed by David indisputably showed that he invested money in
time and savings deposit with NSLA, it has already been ruled
in several cases by the SC that these arrangements are not
actually deposits but are actually in the form of mutuum or
loan. So the SC further discussed maam that because of this,
failure of the bank to honor the time deposit is failure to pay
its obligation as a debtor and it is not a breach of trust arising
from a depositarys failure to return the subject matter of
deposit.
If we would recall our lesson in Criminal Law II, one of the
essential elements of the crime of Estafa is breach of trust
wherein the offender is not able to return a thing that was
entrusted to him. In this case, the SC held that because it is
only a mutuum, a loan, that ownership of the money
transferred from David to Guingona, et.al through the bank
and because of that there was no fiduciary relationship that
was violated.
Q4: So in other words, there was no liability here at all? The
bank and Guingona would not be liable anymore?
A4: There was only no liability for Estafa, however, there will
still be civil liability for the said amount maam.
Discussion:Here, again the Court emphasized that when you
put money on the bank in the form of a deposit, that is a simple
loan or mutuum, not a contract of deposit for main purpose of
safekeeping in depositum. While it is true that people may put
money in the bank for principally for safekeeping, again, it is
clear under Article 1980 that such bank deposits will be
governed by the provisions of loan.
As a loan or simple mutuum, there is a transfer of ownership
to the debtor in this case the bank. So here it was again
pg. 56

Atty. Jazzie Sarona Lozare
emphasized bank deposits are in the nature of irregular
deposits, they are really loans because they earn interest. All
kinds of bank deposits are to be treated as loans and are to be
covered by law on loans. Failure of the respondent bank to
honor the time deposit is failure to pay its obligation as a
debtor and not in breach of trust arising from the depositarys
failure to return the subject matter of the deposit.
Ownership of the amount was transmitted to the bank upon
perfection of the contract and therefore the bank can make
use of the amount deposited for its banking operation. There
was no obligation to return or deliver the same money that was
deposited. The failure of the bank to return the amount
deposited will not constitute estafa through misappropriation
but it will only give rise to a civil liability over which, remember
City Fiscals ang respondents dito, so public respondents have
no jurisdiction. They can have a claim as to the bank but I think
its under receivership so what you have here is simple loan can
be included as an ordinary credit not a preferred credit.
However, take note, that it was also pointed out here in the
court that it appears there was a novation of the original
contractual obligation wherein there is now an ordinary
creditor-debtor relationship between petitioners and private
respondents. The failure of the bank or Guingona to pay the
deposit, again will still not constitute a breach of trust but
merely failure to pay the obligation of a debtor, only civil
liability.
What is Escrow? An escrow is a written instrument wherein the
terms thereof purports a legal obligation wherein it is
deposited by the grantor or is delivered to a third party for the
depositary to keep it until the performance of a condition or
the happening of a certain event.
Escrow was discussed in the case of Province of Bataan vs.
Villafuerte. What happened here?
PROVINCE OF BATAAN vs. VILLAFUERTE
FACTS: Pursuant to PD 464, otherwise known as the Real
Property Tax Code of 1974, the Provincial Treasurer of
Bataan advertised for auction sale the BASECO property due
to real estate tax delinquency amounting to P7,914,281.72,
inclusive of penalties. After its auction sale, the property
was acquired by petitioner Province of Bataan and
subsequently title over the same was consolidated in its
name.
Eventually, petitioner, entered into a ten-year contract of
lease with 7-R Port Services, Inc., whereby portions of the
BASECO property were leased to the latter. Petitioner forged
another contract of lease with Marina Port Services, over a
ten-hectare portion of the BASECO property.
PCGG filed for annulment of sale, principally assailing the
validity of the tax delinquency sale of the BASECO property
in favor of petitioner Province of Bataan. It filed an Urgent
Motion to Deposit Lease Rentals, alleging that the rentals
amounting to Hundreds of Millions of Pesos are in danger
of being unlawfully spent, squandered and dissipated to the
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great and irreparable damage of plaintiffs(the Republic of
the Philippines, BASECO and others) who are the rightful
owners of the property leased.
The lower court granted the PCGGs urgent motion and
ordered the defendant Province of Bataan to remit to the
court the lease rentals it may receive from the defendant 7-
R Port Services and the Marina Port Services from the receipt
of this order. It also ordered the clerk of court to deposit the
amount under special time deposit with the Land Bank in the
name or account of the Court to be held in trust for the
person, natural or juridical, who may lawfully be entitled
thereto.
According to petitioner, the escrow orders in question are
null and void ab initio for having been issued absent any
legal basis and are merely calculated to prejudice the
petitioner province without any practical or worthwhile,
much less legal objective.
ISSUE: WON the deposit of rentals in escrow was proper?YES
HELD: An escrow is a written instrument which by its terms
imports a legal obligation and which is deposited by the
grantor, promisor, or obligor, or his agent with a stranger or
third party, to be kept by the depositary until the
performance of a condition or the happening of a certain
event, and then to be delivered over to the grantee,
promisee, or obligee.
While originally, the doctrine of escrow applied only to deeds
by way of grant, or as otherwise stated, instruments for the
conveyance of land, under modern theories of law, the term
escrow is not limited in its application to deeds, but is applied
to the deposit of any written instrument with a third
person. Particular instruments which have been held to be
the subject of an escrow include bonds or covenants, deeds,
mortgages, oil and gas leases, contracts for the sale of land
or for the purchase of personal property, corporate stocks
and stock subscriptions, promissory notes or other
commercial paper, insurance applications and policies,
contracts for the settlement of will-contest cases, indentures
of apprenticeship, receipts assigning concessions and
discontinuances and releases of causes of action. Moreover,
it is no longer open to question that money may be delivered
in escrow.
The lower court, in the course of adjudicating and resolving
the issues presented in the main suit, is clearly empowered
to control the proceedings therein through the adoption,
formulation and issuance of orders and other ancillary writs,
including the authority to place the properties in custodia
legis, for the purpose of effectuating its judgment or decree
and protecting further the interests of the rightful claimants
of the subject property.
To trace its source, the courts authority proceeds from its
jurisdiction and power to decide, adjudicate and resolve the
issues raised in the principal suit. Stated differently, the
pg. 57

Atty. Jazzie Sarona Lozare
deposit of the rentals in escrow with the bank, in the name
of the lower court, is only an incident in the main
proceeding. To be sure, placing property in litigation under
judicial possession, whether in the hands of a receiver, and
administrator, or as in this case, in a government bank is an
ancient and accepted procedure.
Q1: What was the subject matter of this case?
A1: The lease rentals maam.
Q2:So money can be subject of an escrow. Where was the
money put?
A2:It was ordered to be deposited in the bank maam.
Discussion: So its in the bank. It served as an escrow. Again we
look at here the definition of an escrow, but it is in the form of
a deposit, you put money in the bank. So in other words, I think
it was also mentioned here that it was a time deposit, so its
really a bank account deposit wherein we could apply Article
1980. But again the conditions of putting the money, in this
case, in the bank is because by virtue of the order of the court
in the form of an escrow.
Escrow here is not a common practice but it is allowed under
our jurisdiction. It is a written instrument which by its terms
imports a legal obligation and which is deposited with the
grantor, depositor or obligor or his agentwith a stranger or
third party to be kept by the depositary until the performance
of a condition or the happening of a certain event and and then
to be delivered over to the grantee, promisee, or obligee.
Escrow is not limited in its application to deeds, but is applied
to the deposit of any written instrument with a third person. It
can be bonds, covenants, deeds, mortgages, leases, contracts
for the sale, stock subscriptions, promissory notes, insurance
applications, contracts for will-contest cases, indentures,
among other kinds of documents.
So if this is the subject matter you put it in the depositary, what
you have here is a contract of deposit for the purpose of
safekeeping in the meantime wala pa natapos iyong
transaction. However, here the SC likewise emphasized that it
is no longer open to question that the money may be delivered
in an escrow arrangement. So that is what happened in this
case. The deposit of the rentals, money, in escrow with the
bank happened and this was upheld by the SC. This is only an
incident to the main proceeding. Since the money here was put
into escrow by virtue of a deposit account, we would say that
Article 1980 is applicable. So just take note of that.
So those are the cases in relation to Article 1980. Again, take
note here, governed by the provisions concerning the loan,
deposits of money in banks that are fixed, savings and current
are really loans to a bank, so the bank is the creditor (?) and
you are the debtor (?).
They are really loans to a bank because the bank can use the
same in its ordinary transactions and for the banking business
in which it is engaged. And as what we have seen in the cases
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that we have discussed, in this kind of deposit, banks are
required to exercise higher diligence, more than the diligence
of a good father of a family.
Also take note, as in this instance, you say there is a contract of
loan, theyre simple mutuum, Estafa or misappropriation the
bank would not be held liable.
Also take note, recall your obligations and contract with regard
to compensation or offset. You cannot apply compensation or
offset if what you have is a contract of depositum through
contract of deposit. But if youd say contract of loan in the
form of a bank deposit, then compensation can be applied.
Most probably weve already discussed, may utang ka sa
banko, nag loan ka, and at the same time you have a savings
account deposit and then due na iyong loan mo, hindi ka pa rin
nagbabayad. What could the bank do? It can hold or it can
withdraw the amount from your savings account to pay off
your obligation. Can they do that? Yes, kung compensation or
set off, a mode of extinguishing an obligation.
Lets proceed to Articles 1981 and 1982.
Article 1981. When the thing deposited is delivered closed
and sealed, the depositary must return it in the same
condition, and he shall be liable for damages should the seal
or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless there
is proof to the contrary.
As regards the value of the thing deposited, the statement
of the depositor shall be accepted, when the forcible
opening is imputable to the depositary, should there be no
proof to the contrary. However, the courts may pass upon
the credibility of the depositor with respect to the value
claimed by him.
When the seal or lock is broken, with or without the
depositary's fault, he shall keep the secret of the deposit.
Article 1982. When it becomes necessary to open a locked
box or receptacle, the depositary is presumed authorized to
do so, if the key has been delivered to him; or when the
instructions of the depositor as regards the deposit cannot
be executed without opening the box or receptacle.
So these articles point out other obligations of a depositary:
1. Return the thing deposited when delivered, closed and
sealed in the same condition.
2. Obligation to pay for damages should the seal or lock be
broken through his fault. Remember there is a
presumption that if the seal or lock is broken, he is
presumed at fault unless proven otherwise.
3. Likewise, he has the obligation to keep secret of the
deposit, the contents thereof, when the seal or lock is
broken regardless if he is at fault or not
pg. 58

Atty. Jazzie Sarona Lozare
Why would be this relevant? Because again this
emphasizes the fiduciary nature of a contract of
deposit. Just because accidentally na-open or nasira
iyong lock does not mean that you are now entitled to
divulge the contents thereof. So otherwise, that
would be considered as a violation of trust. Although
that if it is open accidentally without the fault of the
depositary and then you discovered it has illegal
subject matter, then I think it is much proper that you
report it to the authorities.
4. Respect the secrets which the depositor desires to keep in
guard. Statement here on the part of the depositor is a
prima facie evidence only.
And take note under Article 1982, instances when the
depositary is authorized to open the said box. If there is a
presumed authority, the key has been delivered to him or
when the instructions of the depositor as regards the
deposit cannot be executed without opening the box. In
other words, there is a necessity to open it as well.
Article 1983. The thing deposited shall be returned with all
its products, accessories and accessions.
Should the deposit consist of money, the provisions relative
to agents in Article 1896 shall be applied to the depositary.
So we already know, fruits, accessions and accessories should
pertain to the owner. Depositor is the owner or represents the
owner of the thing deposited and therefore the products,
accessories and accessions should be returned to him. Return
the thing itself, subject of the deposit, plus the fruits,
accessions and accessories which are consequence of
ownership.
Depositary has no right to make use thereof and we are
through with that. And also take note in Article 1983 there is
reference to Article 1896, that is under agency. Depositary is in
delay or has used the money is liable for interest as indemnity.
He owes interest on the sums he has applied to his own use
from the day on which he did so, and those which he still owes
after the extinguishment of the deposit.
Article 1984. The depositary cannot demand that the
depositor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been
stolen and who its true owner is, he must advise the latter
of the deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be
relieved of all responsibility by returning the thing deposited
to the depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the
former may return the same.
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Alright, so here the depositary cannot require the depositor to
show proof that he is the owner of the thing deposited as a
condition for the return.
Remember ownership is not essential for the perfection of a
contract of deposit. Now, we have this rule here on not
requiring ownership because otherwise it may open ?? to bad
faith.The depositary may use it as a ground to refuse to return
the thing to the depositor. But the person who personally
deposited and delivered the thing to him on the pretense of
requiring proof of ownership, he will now be able to retain the
thing even if it turns out that he is in bad faith. Maghimo lang
siya reason that You are not the owner so I will not return it.
Again, ownership is not required in contract of deposit.
But what if the depositary has knowledge that the depositor is
not the true owner thereof. What are the steps that he should
take?
1.) If it appears that a third person is the owner of the thing
deposited, to be relieved of all the responsibility the
depositor must advise the true owner that he has in his
possession the thing that he own. Of course this is subject
that he has knowledge kung sino iyong may-ari.
Otherwise, if he has no knowledge that who is the true
owner, how could he inform the said owner.
2.) After he has informed the true owner, he will give that
owner one month period to claim. Why is there we have
this one month period? For the protection of the
depositary so that otherwise, he has to wait forever, Ill
just wait until the true owner will claim. So one month
lang.
3.) What happens after the one month period has expired?
The depositary can return the thing to the depositor
without any liability to the depositor and without any
liability to the true owner whom he has already informed
of the said thing in his possession. But of course, the true
owner can still go after the depositor or the one who is in
possession of the thing, can assert his right by the delivery
of the personal property to him by filing, for example, an
action for replevin.
What if he does not know who is the true owner but the
depositary has reasonable grounds to believe that it has not
been lawfully acquired by the depositor?
Example: The depositor delivered several jewelries for
safekeeping. No need to require ownership so you
just accept it for safekeeping. The next day that the
depositary found out that a pawnshop was robbed
several jewelries were stolen. He does not know
really kung sino ang true owner or he does not really
know kungito ba iyong jewelry na nandoon. At the
same time he has knowledge that the depositor does
not have the capacity to have this much jewelry.
So what is his remedy? Return the thing, those jewelries, to the
depositor. Return if there is reasonable grounds to believe that
the thing has not been lawfully acquired by the depositor.
pg. 59

Atty. Jazzie Sarona Lozare
Now however, if you take a look at Article 1984, it does not
state what would happen or what should happen if the true
owner was informed and within the one month period the
depositor will now demand the return of of the thing? If we
take into consideration the nature of the contract of deposit,
the depositary has the obligation to return the thing, di ba iyan
ang kanyang primary obligation. Otherwise, if he refuses then
it would be contrary to the nature of a deposit.
But on the other hand, it is also risky on the part of the
depositary having knowledge that there is a different owner of
the subject property. So what is the best thing to do on the
part of the depositary? He can file and action for interpleader.
You have the depositor here whos demanding for the return
of the thing to him and then you have, on the other hand, its
true owner who alleges in some form that he is the true owner
of the subject property. So better for the depositary to file an
action for interpleader. These two parties will litigate among
themselves who really has the better right to the possession of
the real property.
Article 1985. When there are two or more depositors, if they
are not solidary, and the thing admits of division, each one
cannot demand more than his share.
When there is solidarity or the thing does not admit of
division, the provisions of articles 1212 and 1214 shall
govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the depositary
shall return it only to the person designated.
What we have here? Two or more depositors. Take note the
assumption here is they are only joint depositors, not solidary.
If the thing deposited is divisible, and the depositors are not
solidary, then each depositor can demand only his share.
So let us say the two depositors delivered 100 sacks of rice to
the depositary. Subject matter is divisible, depositors are not
solidary, presumption applies that they are joint. So when one
of them demands for the delivery or the return of the sacks of
rice, its only as to the extent of their proportionate shares. So
50 sacks lang ang mademand ng isang depositor.
However, if it is stipulated that the depositors are solidary
depositors or the thing deposited is not divisible, then we apply
the rule on active solidarity, these are discussed under
obligations.
Article 1212. Each one of the solidary creditors may do
whatever may be useful to the others, but not anything
which may be prejudicial to the latter.
Article 1214. The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial, has
been made by one of them, payment should be made to
him.
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However, take note of the last sentence, if there is a stipulation
that the thing should be returned to one of the depositors,
dapat sa kanya lang. Depositary siya with only to the person
designated even if such person has not yet made any demand.
Return of the deposits stipulated bound to return it only to the
person designated, although he has not made any demand for
its return.
Article 1986. If the depositor should lose his capacity to
contract after having made the deposit, the thing cannot be
returned except to the persons who may have the
administration of his property and rights
Alright, if at the time of the contract of deposit was perfected,
one of the parties is incapacitated, we already know the
contract is voidable.
But what if at the time the contract was perfected or both
parties were capacitated but subsequently they became
incapacitated. So we take into consideration what we have
discussed before in relation to Article 1986. If the depositor
subsequently became incapacitated, the property must be
return to his guardian or administrator or the person who
made the deposit or to the depositor himself if he should
acquire capacity. Article 1970, in relation to Article 1986, it
cannot be returned to the same depositor since he has already
lost his capacity except to the persons who may have the
administration of his property and rights.
Ito iyong sabi ko last time when we discussed Article 1970.
Again, what is the effect if you delivered to the other party who
was already incapacitated? That will not extinguish your
obligation. So to extinguish your obligation as a depositary,
deliver it to one who administers the property and rights of the
incapacitated depositor.
Article 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must
take the thing deposited to such place; but the expenses for
transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be
made where the thing deposited may be, even if it should
not be the same place where the deposit was made,
provided that there was no malice on the part of the
depositary.
Place to return. Obviously if there is a stipulation, then it should
be at that place agreed upon wherein the expenses shall be
borne by the depositor.
In the absence of stipulation, where the thing deposited might
be even if it is not the same place where the original deposit
was made provided, that the transfer was accomplished
without malice on the part of the depositary.
Differentiate this from the general rules as to delivery under
Article 1251.
pg. 60

Atty. Jazzie Sarona Lozare
Article 1251. Payment shall be made in the place designated
in the obligation.
There being no express stipulation and if the undertaking is
to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation
was constituted.
In any other case the place of payment shall be the domicile
of the debtor.
If the debtor changes his domicile in bad faith or after he
has incurred in delay, the additional expenses shall be borne
by him.
These provisions are without prejudice to venue under the
Rules of Court.
If theres no express stipulation and the subject matter is a
determinate thing, place of delivery is wherever the thing
might be at the moment the obligation was constituted which
is different here in Article 1987.
Article 1988. The thing deposited must be returned to the
depositor upon demand, even though a specified period or
time for such return may have been fixed.
This provision shall not apply when the thing is judicially
attached while in the depositary's possession, or should he
have been notified of the opposition of a third person to the
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of
the attachment or opposition.
When we distinguish depositum from mutuum, we have
already emphasized that as to a depositum, the general rule is
that the depositor can demand the return of the thing
deposited at will whether a period has been stipulated or not.
Whenever a period is agreed, the same is for the benefit of the
depositor and therefore when he demands for the return of
the thing before the period, it means that he has waived it and
he can validly waive such period because it is for his benefit.
However, if the deposit is for compensation, while the
depositor can demand for the return of the thing, the
depositary is nevertheless entitled to the compensation
corresponding to the entire period.
Article 1988, however, provides for the exceptions wherein the
depositor cannot compel the depositary to return the thing:
1. When the thing is judicially attached while in depositarys
possession. Otherwise, the depositary will be disobeying
the judicial order of attachment.
2. Notified of the opposition of a third person to the return
or the removal of the thing deposited.
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However, as the exception provided in Article 1988 is really
prone to abuse. The depositary should only be authorized in
case of conflicting claims to consign the thing in court through
again an action of interpleader.
What is the effect notified and here comes a third person who
asserts his right over the subject property despite such demand,
if you are the depositary and then you return it to the depositor?
Mamaya ikaw ang hahabolin ng third person. So whats the
best thing? Again, for the depositary to file an action for
interpleader.
Article 1989. Unless the deposit is for a valuable
consideration, the depositary who may have justifiable
reasons for not keeping the thing deposited may, even
before the time designated, return it to the depositor; and
if the latter should refuse to receive it, the depositary may
secure its consignation from the court.
Take it into consideration, if its gratuitous, the depositary may
likewise return the thing deposited notwithstanding that a
period has been fixed but it must be for a justifiable reason.
If the depositor refuses to receive the thing, the remedy
available for the depositary is to deposit the thing at the
disposal of judicial authority through consignation.
However, if the contract of deposit is for a valuable
consideration, compensation, depositary has no right to return
the thing deposited before the expiration of the time
designated even if he should suffer any convenience as a
consequence.
Distinguish Article 1988 from Article 1989:
ART. 1988 ART. 1989
It refers to the kind Refers to the
of depositor to depositary to return
demand the return the thing
the thing at anytime. notwithstanding it
has been fixed, if it
is gratuitous, cannot
return if it is subject
for a valuable
consideration.
Article 1990. If the depositary by force majeure or
government order loses the thing and receives money or
another thing in its place, he shall deliver the sum or other
thing to the depositor.
Recall one of the primary obligations of a depositary, to return
the exact thing that has been deposited.
Now what happens in Article 1990? The thing was lost due to
a force majeure or government order. In this case, the
depositary shall not be liable for loss. However, if the
depositary receives something in exchange for the loss of the
pg. 61
 MANRESA 2015
Atty. Jazzie Sarona Lozare

thing, money or other thing, then he has the duty to deliver to 13. And advise the true owner if discovered that the thing
the depositor what he has received. Otherwise, he will have deposited was stolen.
unjust enrichment, he would unjustly enrich himself at the
expense of the depositor.

Article 1991. The depositor's heir who in good faith may Obligations of the Depositor
have sold the thing which he did not know was deposited, Art. 1992. If the deposit is gratuitous, the depositor is obliged
shall only be bound to return the price he may have received to reimburse the depositary for the expenses he may have
or to assign his right of action against the buyer in case the incurred for the preservation of the thing deposited. (1779a)
price has not been paid him.
This article only applies to gratuitous deposit. This is based on
Alright, so what happens here? Take note here nakalagay dyan
gratuity. The depositor then would have incurred just the
depositors heir but it should be depositary. Bakit? In
same. Otherwise, the depositor would unjustly enrich himself
possession man of the thing. So the depositary already died
at the expense of the depositary.
and its the heir who has sold the thing subject of the deposit.
So take note, it must be depositary instead of depositor.
This is different from commodatum---it is the bailee who pays
for the expenses.
If the depositary dies, the object is left to the heir. The heir has
no knowledge that it was subject to a contract of deposit. So
Unlike in commodatum, there is a distinction for
what does he do? He sells it in good faith. So what would now
ordinary and extraordinary expenses for preservation.
be the obligation of the heir? Return the price received or
With regard to depositum, there is no distinction
assign the right to collect the same if he has not been paid.
because the right to reimbursement here covers all
Take note, again it refers to price and to the value of the thing.
expenses for preservation whether ordinary or extra
ordinarybut these must be necessary expenses.
However, if the heir is in bad faith, in other words he has
Useful expenses or luxurious expenses for mere
knowledge that the thing was subject to a deposit, then there
pleasure are not covered in this article.
will be liability for damages.
So with that, we could say that the following are the obligations
If the deposit is subject to compensation:
of the depositary:
General Rule: The expenses for the preservation of the thing
1. Under Article 1972, to keep the thing safely.
shall be borne by the depositary because the expenses are
2. The same article, to return the thing. General rule, upon
already included in the compensation paid to the depositary as
demand. However, if gratuitous there must be justifiable
agreed upon by the parties.
reason, return the thing plus accessories and accession.
However, if the thing was lost due to a force majeure or
Exception: Unless otherwise stipulated by the parties.
government order, obligation to return money or another
thing that was received in its place.
Art. 1993. The depositor shall reimburse the depositary for any
3. Where to return? By agreement or where the thing is
loss arising from the character of the thing deposited, unless at
deposited.
the time of the constitution of the deposit the former was not
4. Obligation not to deposit in the third person unless
aware of, or was not expected to know the dangerous
authorized.
character of the thing, or unless he notified the depositary of
5. Under Article 1974, to change the way of deposit.
the same, or the latter was aware of it without advice from the
6. To earn interest under Article 1980. Again, differentiate
depositor. (n)
from rent of safety deposit box.
7. Collect interest from capital to preserve its value, thats
Article 1975. General rule:
8. Obligation not commingle the thing if so stipulated and if The depositary shall be reimbursed for any loss suffered by him
its of different kind and quality. because of the character of the thing deposited; flammable,
9. Obligation not to make use of the thing deposited unless chemical, breakable. In case of loss arising from the character
authorized. of the thingdeposited it will be the depositor who will bear the
10. Liability for loss in case of fortuitous event. What are loss. You have to reimburse the depositary.
those instances? Take note of that.
11. Obligation when the thing deposited is delivered sealed Exceptions:
and closed (1) At the time of the constitution of the deposit the
12. Obligation to pay interest on sums converted to personal depositor was not aware of it;
use if deposit consist of money. (2) Depositor was not expected to know the dangerous
character of the thing;

pg. 62

Atty. Jazzie Sarona Lozare
(3) Depositary was notified of the character of the thing and
should have exercised the proper care;
(4) Depositary was aware of it even without the advice of the
depositor.
Art. 1994. The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of the
deposit. (1780)
This is different from commodatum. Under 1994, the
depositary has the right to hold or retain the thing until he is
paid of what is due him by reason of the deposit.
In 1994, there is a contract of pledge created by operation of
law. The thing deposited acts as a security for the obligation of
the depositor. The thing retained serves as a security for what
may be due to the depositary by reason of the deposit.
This is similar to a contract of agency, the right of the agent to
retain but different from that of commodatum.
Art. 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary. (n)
First, the modes of extinguishing a contract of deposit are not
exclusively stated in 1995 because obviously there are other
causes for the extinguishment of a contract of deposit which
may be applied here:
(1) when the thing is returned
(2) in case there is novation
(3) merger
(4) expiration of the term
(5) fulfillment of the resolutory condition.
If the contract of deposit is gratuitous then either of the
depositor or the depositary shall extinguish the contract of
deposit. The depositary will not be obliged to continue with the
contract of deposit and return it to the heirs of the depositor.
If the deposit was for compensation, the contract of deposit
shall not be extinguished by the death of either party. It is an
onerous deposit thus it is not personal in nature.
In 1978, rights of transmission are transmissible to their
respective heirs and the heirs if either party have a right to
terminate the deposit even before the expiration of the term
and even if it is for compensation. It is however automatic.
III. NECESSARY DEPOSIT
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Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other similar
events. (1781a)
Art. 1997. The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall
be regulated by the provisions concerning voluntary deposit
and by Article 2168. (1782)
In necessary deposit there is no freedom to choose who will be
the depositary unlike in a voluntary deposit.
Kinds of necessary deposits
1. (1996)When it is made in compliance with a legal
obligation
2. (1196)When it takes place on the occasion of any
calamity, such as fire, storm, flood, pillage, shipwreck,
or other similar events.
3. (1998) Travelers in hotels and inns
4. (1754) Passengers in common carriers
First type of deposit:
Par1: Those made in compliance with a legal obligation:
1. Article 538: Judicial deposit of a thing, the possession
of which is being disputed in a litigation by two or
more persons
2. Article 586: Deposit in the bank or public institution of
public bonds payable to order or bearer
3. Article 2104: The deposit of a thing pledge when the
creditor uses the thing without the authority of the
owner or uses it in any other way.
4. Those required in suits as provided in the Rules of
Court.
5. Those constituted to guarantee contracts with the
government.
In this case the deposit arises from an obligation of a
public or administrative character.
Second type of deposit:
2nd Par.: Those that take place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or other similar
events.
The law imposes on the recipient the obligations of a bailee.
The object here is not for safekeeping but to save the property.
It is still considered as a necessary deposit. It is also considered
as a quasi bailment, involuntary bailment or involuntary
deposit or depositum miserable. The cause of relation here is
between the calamity and the constitution of the deposit.
The governing rule with regard to this deposit is 2168 on quasi
contract. During a calamity, the properties saved from
destruction by another person without the knowledge of the
owner the latter is to pay the former just compensation
pg. 63

Atty. Jazzie Sarona Lozare
otherwise unjust enrichment. This is a negotiorumgestio quasi
contract.
The third type of necessary deposit is under Articles 1998 and
1999.
Art. 1998. The deposit of effects made by the travellers in
hotels or inns shall also be regarded as necessary. The keepers
of hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees,
of the effects brought by the guests and that, on the part of
the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of
their effects. (1783)
Art. 1999. The hotel-keeper is liable for the vehicles, animals
and articles which have been introduced or placed in the
annexes of the hotel. (n)
The terms travelers and guests are used here synonymously.
This refers to transients and not boarders. They shall be
governed by the rules on contract of lease.
Hotel keeper and in keeper are used synonymously under the
civil code.
Hotel is a building of many rooms chiefly for overnight
accommodation of transients and several floors served by
elevators usually with large open street-level lobby.
Innis a public house for the lodging of travelers for
compensation and until capacity is reached; a place of public
entertainment that does not provide lodging.
Motel is an establishment which provides lodging and parking
and in which the rooms are usually accessible from an outdoor
parking area.
Hotel keepers and in-keepers may be held responsible as
depositaries with regard to the effects of their guests;
1. Previously informed about the effects brought by the guests
2. The guests have taken precaution prescribed regarding the
safekeeping of their effects.
The liability is not limited to the effects lost or damaged in the
hotel rooms which come under the term the term baggage or
articles such as clothing as are ordinarily used by travelers but
includes those lost or damaged in hotel annexes such as
vehicles in the hotels garage.
DURBAN APARTMENTS CORPORATION vs. PIONEER
INSURANCE AND SURETY CORPORATION, G.R. No. 179419
(January 12, 2011),
The Supreme Court passed upon the liability of hotels for
providing valet parking to guests.
FACTS:
This arose after a hotel guest, and Pioneers insured, checked
into the City Garden hotel in Makati. The hotels parking
MANRESA 2015
attendant and co-defendant got the keys to the guests
vehicle and parked it an adjacent lot owned by a third party.
The guest was subsequently awakened so as to be advised
that his car had been taken. The guest made the necessary
reports and thereafter filed a claim for insurance with
Pioneer which paid the same as indemnity for the vehicles
loss. Pioneer alleged that the loss was an offshoot of the
hotels negligence and accordingly filed a claim by means of
subrogation, against the hotel and its parking valet. It was
established that there was a previous similar incident and
yet no no necessary precautions were taken to prevent its
repetition xxx. Pioneer argued that the hotel was was
wanting in due diligence in the selection and supervision of
its employees particularly its parking valet.
The Hotel argued that the insured was not a guest of the
hotel but a visitor therein, that its valet did not get his keys
but it was the insured who requested him to find a space
wherever one was available, that valet parking was provided
for convenience of its customers and that it was a special
privilege that was given to the insured. The vehicle was
taken without using the key which was even turned over to
the owner. Its valet even tried to run after the carnappers to
no avail.
The guest testified that he drove his vehicle in front of the
hotel where the parking attendant approached and asked
him for his key, and issued a valet parking customers claim
stub. He then checked in at the hotel with a companion. At
around 1 a.m., he was advised of the carnapping incident.
An adjuster testified that based on his investigation, the
hotel would assist guests in parking, and with only 12
parking slots, entered into an agreement with an adjacent
bank to use the latters space at night. He discovered that a
van had been carnapped from the same lot barely a month
before.
The lower court ruled in favor of Pioneer and ordered Durban
to pay the sum of P1,163,250.00 with legal interest thereon
from July 22, 2003 until the obligation is fully paid and
attorneys fees and litigation expenses amounting to
P120,000.00. This was affirmed by the Court of Appeals.
RULING:
The High Court upheld the ruling that the hotel was in
default for failure to appear at the pre-trial conference and
to file a pre-trial brief, and thus, correctly allowed
respondent to present evidence ex-parte. It also affirmed
the finding that it was liable for the loss of the vehicle. The
procedural aspect will not be dealt with in detail here.
Despite the finding of default, the Supreme Court
emphasized that defendants (petitioners) preclusion from
presenting evidence during trial does not automatically
result in a judgment in favor of plaintiff (respondent). The
plaintiff must still substantiate the allegations in its
complaint.
pg. 64

Atty. Jazzie Sarona Lozare
It found that the allegations of Pioneer in the complaint were
substantiated, i.e., a contract of necessary deposit existed
between the insured xxx and petitioner. On this score, we
find no error in the following disquisition of the appellate
court:
[The] records also reveal that upon arrival at the City Garden
Hotel, See gave notice to the doorman and parking
attendant of the said hotel, x xxJustimbaste, about his Vitara
when he entrusted its ignition key to the latter. x
xxJustimbaste issued a valet parking customer claim stub to
See, parked the Vitara at the Equitable PCI Bank parking
area, and placed the ignition key inside a safety key box
while See proceeded to the hotel lobby to check in. The
Equitable PCI Bank parking area became an annex of City
Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in
the evening after banking hours.
Interesting is the finding that the banks parking area was
deemed an annex to the hotel. A hotels use of an adjacent
lot appears to subject the same to its control.
The Court cited Article 1962, in relation to Article 1998, of
the Civil Code:
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract.
Art. 1998. The deposit of effects made by travelers in hotels
or inns shall also be regarded as necessary. The keepers of
hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on
the part of the latter, they take the precautions which said
hotel-keepers or their substitutes advised relative to the care
and vigilance of their effects.
The insured deposited the vehicle for safekeeping with the
hotel, through its employee. This employee issued a claim
stub to the insured. The contract of deposit was perfected
from the delivery of the vehicle, when the keys were handed
over to the hotels employee, and which he received with
the obligation of safely keeping and returning it.
This could conceivably be used as basis for users of mall and
other public parking lots to claim indemnity for loss or
damage to their vehicles. It would be interesting to see if the
practice of placing disclaimers of liability in the parking stub,
as well as in signages, would be upheld by the courts as
binding on the users. It does stand to reason that when you
are made to park and pay, parking lot providers owe a
degree of care to insure your vehicle is kept safe and sound.
And if they fail to adhere to this standard, then they should
be sorry they didnt, as in this case.
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You have here a contract of a necessary deposit. Regardless of
the facts that see was not a recorded or checking guest of the
hotel, remember that the parking attendant of the hotel duly
accepted the keys thus there was a contract of deposit
perfected even if the car was not parked in the hotel premises.
So with that see deposited his car for safekeeping with
petitioner who is its employee and therefore they should have
exerted the diligence required in taking care of the subject car.
Notice that this was actually the second time that such incident
happened. So in this case the hotel was made liable.
Take note, the liability is not limited to the effects lost or
damaged in the hotel rooms which come under the term the
term baggage or articles such as clothing as are ordinarily used
by travelers but includes those lost or damaged in hotel
annexes such as vehicles in the hotels garage.
Art. 2000. The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
the keepers of hotels or inns as well as strangers; but not that
which may proceed from any force majeure. The fact that
travellers are constrained to rely on the vigilance of the keeper
of the hotels or inns shall be considered in determining the
degree of care required of him.
Art. 2001. The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force.
Art. 2002. The hotel-keeper is not liable for compensation if 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
brought into the hotel.
Arts 2000-2002 further discusses the liability of the hotel-
keeper. Hotel-keeper is responsible regardless of the amount
of care exercised if:
1) There is loss or injury caused by his servants or employees,
as well as strangers, provided all the elements in Art 1998
are present;
2) If the loss is caused by the act of a thief or robber, without
the use of arms or irresistible force, then the hotel-keeper
is liable; because in that case, the hotel-keeper is
considered negligent.
When is the hotel-keeper not liable?
1.) If the loss or injury is caused by force majeure; (2000)
2.) Theft or robbery committed by a stranger, not the
employee or the servant of the hotel-keeper, with the use
of arms and irresistible force (unless the hotel-keeper is
guilty of fault or negligence) (2001)
3.) The hotel-keeper is not liable for compensation if 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 brought into the hotel. (2002)
pg. 65

Atty. Jazzie Sarona Lozare
With regard again to theft or robbery by a stranger, you have
to consider whether there was use of arms or irresistible force.
If it is done without the use of arms or irresistible force, hotel-
keeper is liable. However, if it is with the use of arms or
irresistible force, the general rule is that the hotel-keeper is not
liable; except if the hotel-keeper is found to be negligent or at
fault failing to provide against the loss or injury. If the loss is
due to the employee or servant of the hotel-keeper, do not
take into consideration, whether there was use of firearms or
not. Servants and employees are deemed to be under the
direct supervision and control of the hotel-keeper. Thats why
if such loss is due to the act of servant or employee of the
hotel-keeper, the hotel-keeper will be liable. If loss is due to
the acts of the guest, his family, servants or visitors, the hotel
will not be held liable. As well as if the loss arises from the
character of the thing brought into the hotel These 2 instances
are provided under Art 2002.
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void.
This similar to the law on common carriers which does not
allow a common carrier to dispense with or limit its
responsibility by stipulation or posting of notices as this is
against the law morals and public policy.
Therefore, hotel-keepers or inn-keepers as depositary should
be subject to extraordinary degree of care for the protection
and safety of travelers who have no alternative but to rely on
the good faith and care of those with whom they make lodging.
YHT Realty Corp. v. CA, et al.,
G.R. No. 126780, February 17, 2005
Facts:
Maurice Peaches McLoughlin is an Australian businessman-
philanthropist who used to stay at the Sheraton Hotel during
his trips to the Philippines prior to 1984. He met Brunhilda
Mata-Tan who befriended him and showed him around. Tan
convinced Mcloughlin to transfer to the Tropicana from the
Sheraton where afterwards he stayed during his trips from
Dec 1984 to Sept 1987.
On 30 Oct 1987, McLoughlin arrived from Australia
and registered with Tropicana. He rented a safety deposit
box as his usual practice. The box required two keys, the
guest had one and one from the management. He placed
US $10,000 in one envelope and US$5,000 in another ,
AU$10,000 in another envelope and other envelopes with his
passport and credit cards. On 12 Dec 1987, he took from the
box the envelope with US$5,000 and the one with
AU$10,000 to go to Hong Kong for a short visit, because he
was not checking out. When he arrived in HK, the envelope
with US$5,000 only contained US$3,000, but because he had
MANRESA 2015
no idea if the safety deposit box has been tampered, he
thought it was just bad accounting.
After returning to Manila, he checked out of the
Tropicana on 18 Dec 1987 and left for Australia. When he
arrived he discovered that the envelope with US$10,000 was
short of US$5,000. He also noticed that the jewelry he
bought in Hong Kong which he stored in the safety deposit
box upon his return to Tropicana was likewise missing,
except for a diamond bracelet.
He went back to the PH on 4 Apr 1988 and asked Lainez
(who had custody of the management key) if some money
was missing or returned to her, to which the latter answered
there was not. He again registered at the Tropicana and
rented a safety deposit box. He placed an envelope
containing US$15,000, another of AU$10,000. On 16 Apr, he
opened his safety deposit box and noticed that US$2,000
and AU$4,500 was missing from the envelopes.
He immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the
key assigned to McLoughlin. McLoughlin went up to his room
where Tan was staying and confronted her. Tan admitted
that she had stolen McLoughlins key and was able to open
the safety deposit box with the assistance of Lopez, Payam
and Lainez. Lopez also told McLoughlin that Tan stole the key
assigned to McLoughlin while the latter was asleep.
McLoughlin requested the management for an
investigation of the incident. Lopez got in touch with Tan
and arranged for a meeting with the police and McLoughlin.
When the police did not arrive, Lopez and Tan went to the
room of McLoughlin at Tropicana and thereat, Lopez wrote
on a piece of paper a promissory note.
He made Lopez and Tan sign a promissory note for him
for the loss. However, Lopez refused liability on behalf of the
hotel, reasoning that McLoughlin signed an "Undertaking for
the Use of Safety Deposit Box" which disclaims any liability
of the hotel for things put inside the box.
On 17 May 1988 McLoughlin went back to AU and
consulted his lawyers. They wrote a letter addressed to Pres.
Cory Aquino which was pushed back to the DOJ and the
Western Police District. He went back from the PH to AU
several times more to attend business and follow up but the
matter was only filed on 3 Dec 1990 since he was not there
to personally follow up.
McLoughlin filed an action against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan.
The RTC rendered judgment in favor of McLoughlin.
The CA modified only the amount of damages awarded.
Tan and Lopez, however, were not served with
summons, and trial proceeded with only Lainez, Payam and
YHT Realty Corporation as defendants.
(a) whether the loss of money and jewelry is supported by
the evidence. YES.
Where the credibility of a witness is an issue, the established
rule is that great respect is accorded to the evaluation of the
credibility of witnesses by the trial court. The trial court is in
the best position to assess the credibility of witnesses and
pg. 66

Atty. Jazzie Sarona Lozare
their testimonies because of its unique opportunity to
observe the witnesses firsthand and note their demeanor,
conduct and attitude under grilling examination.
(b) whether there was gross negligence on the part of the
innkeepers
Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the loss
took place. They even admitted that they assisted Tan on
three separate occasions in opening McLoughlins safety
deposit box.
The management contends that McLoughlin made its
employees believe that Tan was his spouse for she was
always with him most of the time. The evidence on record is
bereft of any showing that McLoughlin introduced Tan to the
management as his wife. Mere close companionship and
intimacy are not enough to warrant such conclusion. They
should have confronted him as to his relationship with Tan
considering that the latter had been observed opening
McLoughlins safety deposit box a number of times at the
early hours of the morning.
Art 2180, par (4) of the same Code provides that the owners
and managers of an establishment or enterprise are likewise
responsible for damages caused by their employees in the
service of the branches in which the latter are employed or
on the occasion of their functions. Given the fact that the
loss of McLoughlins money was consummated through the
negligence of Tropicanas employees both the employees
and YHT, as owner of Tropicana, should be held solidarily
liable pursuant to Art 2193.
WON the "Undertaking for the Use of the Safety Deposit Box"
is null and void.
Yes, it is null and void. Art. 2003[1] is controlling.
This is an expression of public policy that the hotel business
like common carriers are imbued with public interest. This
responsibility cannot be waived away by any contrary
stipulation in so-called "undertakings" that ordinarily appear
in prepared forms imposed by hotel keepers on guests for
their signature.
The CA (former case) even ruled before that hotelkeepers are
liable even though the effects are not delivered to them or
their employees, but it is enough that the effects are within
the hotel or inn.
Pars. 2 and 4 of the undertaking manifestly contravene Art.
2003 of the NCC. Meanwhile, the defense that Art. 2002
exempts the hotel-keeper from liability if the loss is due to
the acts of the guest, family or visitors falls because the hotel
is guilty of negligence as well. This provision presupposes
that the hotel-keeper is not guilty of concurrent negligence
or has not contributed in any degree to the occurrence of the
loss.
MANRESA 2015
Q: Isnt it that in Art 2002 if the loss is due to the act of the
guest, the hotel is not liable? Can we not apply 2002 saying that
the loss is due to the act of the guest or family of the guest?
A: There was negligence on the part of the hotel-keeper as they
merely assumed that Tan is the wife of the guest, thus Art 2002
is not applicable.
Q: What is the ruling of the court with respect to Art 2002? In
order to apply Art 2002, what is required for the inn-keeper?
Here you have a contract of deposit between the guest of the
hotel for the use of a safety deposit box. Under the provisions
of the Civil Code, this is considered as a necessary deposit. In
this case, a person (Tan) other than the one who is registered
as guest, had access to the safety deposit box. Therefore
Tropicana Hotel should be held liable for damage due to the
negligence of their employee.
Take note that the depositary also possess a key that is needed
to open the safety box. The depositary must ascertain the
authority of the person who wants to access the box. In this
case, there was no instruction from McLaughlin that Tan would
be allowed to access the said safety-deposit box.
Suspicious circumstances also surround this case. When would
Tan usually open? Dawn or early morning. The very least that
the hotel could have done is to call McLaughlin and inquire
whether Tan is authorized to access the deposit box. In relation
to the agreement and undertaking executed that lease of that
safety deposit box, this is again similar to the provisions on
stipulations limiting liability in the previous cases that we had.
Paragraphs (2) and (4) of the undertaking manifestly
contravene Article 2003 of the New Civil Code for they allow
Tropicana to be released from liability arising from any loss in
the contents and/or use of the safety deposit box for any cause
whatsoever.
Remember that such provision in the contract is void for being
contrary to public policy. The hotel business like the common
carriers business is imbued with public interest. Also with
regard to the effects of their guests, the SC held that it is not
necessary that they be actually delivered to the innkeepers or
their employees. It is enough that such effects are within the
hotel or inn. With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken
without the guests knowledge and consent from a safety
deposit box provided by the hotel itself.
The responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if caused by
servants or employees ofthe keepers of hotels or inns as well
as by strangers, except as it may proceed from any force
majeure.
In the case at bar, there is no showing that the act of the thief
or robber was done with the use of arms or through an
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Atty. Jazzie Sarona Lozare

irresistible force to qualify the same as force majeure. With

regard to the application of Art 2002, wherein the hotel
Article 2008. The depositary of property sequestrated is
anchors their defense, this provision presupposes that the
bound to comply, with respect to the same, with all the
hotel-keeper is not guilty of concurrent negligence or has not
obligations of a good father of a family.
contributed to the loss.A depositary is not responsible for the
loss of goods by theft, unless his actionable negligence
contributes to the loss. Here Tropicana is guilty of concurrent
A judicial deposit or sequestration takes place when an
negligence in allowing Tan, who is not the registered guest, to
attachment or seizure of property in litigation is ordered. The
open the safety-deposit box of McLaughlin.
properties here may be attached by the sheriff upon the filing
of a complaint or a receiver may be appointed by the court to
This provision (Art 2003) it similar to that of the common
administer and preserve the property in litigation. If it is a
carrier, which does not allow a common carrier to dispense
personal property, it may be seized by the sheriff in actions
with or limit its liability by posting notices. Such notices
such as replevin or manual delivery of personal property.
(limiting liability) is obviously contrary to law and public policy.
Hotel-keepers or inn-keepers as depositary should be subject
Is a notice of lis pendens equivalent to a judicial deposit? No
to extraordinary degree of care as this is a necessary deposit.
What is the effect of a notice of lis pendens? It serves as a
notice to third persons that the property is under litigation.
TAKE NOTE:
Hotelkeepers are liable even though the effects are not Los Banos Rural Bank vs Africa
delivered to them or their employees, but it is enough that the
effects are within the hotel or inn. In June 1989, the Quezon City Hall building where the
Register of Deeds was then holding office was razed by fire,
Art. 2004. The hotel-keeper has a right to retain the things destroying some of its records/ documents among which
brought into the hotel by the guest, as a security for credits on was the original Transfer Certificate of Title covering a parcel
account of lodging, and supplies usually furnished to hotel of land situated in Diliman, Quezon City, and registered in
guests. (n) the name of Pacita Africa. The aforesaid property was part
of the conjugal property of Pacita and her late husband
Art 2004, is another instance wherein a contract of pledge is Alberto Africa.
created by law. This is given to the hotel-keepers to
compensate them for the liability imposed upon them by law. On request of Pacita, respondent Macy Africa, the common-
This is different from the general rule in commmodatum, law wife of petitioner Antonio Africa, worked for the
because the bailee can retain the thing for reason of hidden reconstitution of the aforesaid TCT. The same was done and
defect. a new Transfer Certificate of Title was issued in the name of
However if you remember in your Criminal Law, the act of not Pacita Africa. While the reconstituted title was in her
paying the hotel for accommodation constitutes estafa and not possession, Macy allegedly forged, or caused the forgery of,
only civil liability. Pacitas signature on a Deed of Absolute Sale dated
December 29, 1992, purporting to transfer ownership of the
subject property to Macy. On the strength of the forged
We are already done with the two kinds of extrajudicial Deed of Absolute Sale, Macy was able to cause the issuance
deposit, voluntary and necessary deposit. Now lets go over the of the title in her name. Macy caused the preparation of a
second kind of deposit which is fake title in the name of Pacita, which the former showed to
the latter to make Pacita believe that the said title was
IV. SEQUESTRATION OR JUDICIAL DEPOSIT issued in Pacitas name.

Article 2005. A judicial deposit or sequestration takes place
when an attachment or seizure of property in litigation is
ordered.
Article 2006. Movable as well as immovable property may
be the object of sequestration.
Article 2007. The depositary of property or objects
sequestrated cannot be relieved of his responsibility until
the controversy which gave rise thereto has come to an end,
unless the court so orders.
Sometime in March 1994, petitioners discovered private
respondents fraudulent act. They likewise came to know that
the subject property was mortgaged by Macy to the
respondent bank. To protect their interests over the subject
property, petitioners lodged an action in court against Macy
and the respondent bank for Annulment of Title, Deed of
Absolute Sale and Deed of Mortgage. The respondent bank
foreclosed the subject property on June 11, 1996 without
due notice to the petitioners, prompting the petitioners to
amend the complaint, this time incorporating therein a
prayer for the issuance of a temporary restraining order
and/or writ of preliminary injunction, to stop the respondent
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Atty. Jazzie Sarona Lozare

bank from, among others, consolidating title to the subject pendens does not suffice to protect herein respondents
property. rights over the property. It does not provide complete and
ample protection.
Issue 1: Whether or not the issuance of the writ of
preliminary injunction was proper. A notice of lis pendens is not equivalent to a judicial deposit.
It merely serves as an announcement to the whole world
Ruling: Yes. Injunction is a preservative remedy aimed at no that the property in question is subject to litigation, and as a
other purpose than to protect the complainants substantive warning that those who have an interest in the property do
rights and interests during the pendency of the principal so at their own risk.
action. A preliminary injunction, as the term itself suggests,
is merely temporary, It is to be resorted to only when there The purpose of a judicial deposit is to maintain the status quo
is a pressing necessity to avoid injurious consequences that ante during the litigation or to ensure the rights of the parties
cannot be remedied under any standard of compensation. to the property in case there is a favorable judgment. It is
merely auxiliary to a case pending in court. The depositary of
Moreover, injunction, like other equitable remedies, should the sequestrated property or the property subject of judicial
be issued only at the instance of a suitor who has sufficient deposit is the person appointed by the court, and under Article
interest in or title to the right or the property sought to be 2008, has the obligation to take care of the property with the
protected. It is proper only when the plaintiff appears to be diligence of a good father of the family and may not be relieved
entitled to the relief demanded in the complaint. In of this responsibility until the litigation is ended or the court so
particular, the existence of the right and the violation thereof orders.
must appear in the allegations of the complaint and must
constitute at least a prima facie showing of a right to the Take note of the distinction between judicial and extrajudicial
final relief. Thus, there are two requisite conditions for the deposit:
issuance of a preliminary injunction, namely, (1) the right to
be protected exists prima facie, and (2) the acts sought to be
enjoined are violative of that right. It must be proven that JUDICIAL EXTRA JUDICIAL
the violation sought to be prevented would cause an How it By the will of the By the will of the
irreparable injustice. happens court parties (contract)
Security (secure For the
Further, while a clear showing of the right is necessary, its the right of the safekeeping of
existence need not be conclusively established. In fact, the party in case of a the property
evidence required to justify the issuance of a writ of favorable
preliminary injunction in the hearing thereon need not be judgement)
conclusive or complete. The evidence need only be a Subject Generally Only movable
sampling intended merely to give the court an idea of the matter immovable property
justification for the preliminary injunction, pending the property
decision of the case on the merits. Thus, to be entitled to the Remuneration Always onerous May be gratuitous
writ, respondents are only required to show that they have or subject to
the ostensible right to the final relief prayed for in their compensation
Complaint. For whom In behalf of the In behalf of the
person who in depositor or third
Issue 2: Is a notice of lis pendens enough to protect the rights judgment has a party who
of the petitioners such that a writ of preliminary injunction is right deposited
no longer needed? Right of return Through the Upon demand of
order of the court the depositor
Ruling: No. A notice of lis pendens serves as an or when litigation
announcement to the whole world that a particular real has ended
property is in litigation and as a warning that those who
acquire an interest in the property do so at their own risk --
Article 2009. As to matters not provided for in this Code,
they gamble on the result of the litigation over it. However,
judicial sequestration shall be governed by the Rules of Court.
the cancellation of such notice may be ordered by the court
that has jurisdiction over it at any given time. Its continuance
or removal -- like the continuance or the removal of a Judicial deposit is remedial or procedural in nature, therefore
preliminary attachment or injunction -- is not contingent on the Rules of Court are applicable.
the existence of a final judgment on the action and ordinarily
has no effect on the merits thereof. Thus, the notice of lis
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 MANRESA 2015
Atty. Jazzie Sarona Lozare

Now lets go to the warehouse receipts law and the trust

receipts law. We will discuss this because it is still included in What is the difference between a negotiable warehouse
the syllabus for the Bar. These two laws are special credit reciept and a negotiable instrument?
transactions which are covered under your commercial law.
NIL NWR
RA 2137: Subject matter is money Subject matter is goods
WAREHOUSE RECEIPTS LAW Object of value is the Object of value refers to the
instrument itself goods deposited
What is the purpose of Warehouse Receipts Law? There are parties No parties that are
1.) To regulate the status, rights, and liabilities of a person in secondarily liable secondarily liable
a warehousing contract; An original bearer An original bearer
2.) To protect those who in good faith and for value, acquire instrument will always be instrument subsequently
negotiable warehouse receipts by negotiation; considered a bearer indorsed, it becomes an
3.) To render the title to and right of possession of property instrument, thus can be order instrument
stored in warehouses more easily convertible; negotiated by mere delivery
4.) To facilitate the use of warehouse receipts as documents There is a concept of holder There is no concept of holder
of title; in due course who has a in due course In negotiable
5.) To place greater responsibility on the warehouseman better title than the instruments, an originally
transferor bearer instrument, can still
What is the scope of the Warehouse Receipts Law? It covers all be negotiated by delivery
types of warehouses whether public or private warehouses even if it has been indorsed.
bonded or not bonded. However there is a special law towards
bonded warehouses (General Bonded Warehouse Act). In warehouse receipt, even if it is originally bearer, once it is
especially indorsed it is considered an order document or
GBWA regulates and supervises warehouses which puts up a receipt.
bond. While the WRL, describes mutual duties and rights of a
warehouseman who issues warehouse receipts to the Under Section 9 of the Negotiable Instruments Law, even if it
depositor; and covers all warehouses whether bonded or not. is originally an order instrument, when the last or only
endorsement is an endorsement in blank, that can be
Applicability of the WRL: it applies to warehouse receipts issued considered as a bearer instrument. We do not have the same
by a warehouseman as defined under Section 58 of the WRL. rule with regard to a warehouse receipt. A bearer instrument
The civil code (specifically provisions on documents of title) is if specially endorsed becomes an order instrument under the
applied to all other instances where the receipt is not issued by WRL.
the warehouseman. This is in connection to a contract of
deposit wherein you deliver the goods to a warehouse man for Sec. 2. Form of receipts; essential terms. Warehouse
the purpose of security. However, a depositary is not receipts need not be in any particular form but every such
necessarily a holder of a warehouse receipt. receipt must embody within its written or printed terms:
(a) The location of the warehouse where the goods are
Warehouse receipts are considered as a negotiable document stored,
of title, as distinguished from your negotiable instruments. (b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
Warehouseman is a person lawfully engaged in the business of (d) A statement whether the goods received will be
storing goods for profit. Warehouse, on the other hand, is delivered to the bearer, to a specified person or to a
defined as a building or place where the goods are deposited specified person or his order,
and stored for profit. (e) The rate of storage charges,
(f) A description of the goods or of the packages
Take note of what is described as a warehouse receipt. It is a containing them,
written acknowledgment by a warehouseman that he has (g) The signature of the warehouseman which may be
received and holds certain goods therein described in store for made by his authorized agent,
the person whom it is issued. As document of title it is provided (h) If the receipt is issued for goods of which the
under Art 1636. warehouseman is owner, either solely or jointly or in
common with others, the fact of such ownership, and
It therefore has a threefold nature: (i) A statement of the amount of advances made and of
(1) A contract a contract of deposit or a contract of carriage liabilities incurred for which the warehouseman claims
(2) Evidence of receipt of goods a lien.
(3) Operates as a transferable document of title
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Atty. Jazzie Sarona Lozare
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.
If the goods are improperly described, it does not make the
warehouse receipt ineffective, as long as the identity of the
goods be fully established by evidence.
What is the effect of omission of these essential terms in the
warehouse receipt? The validity of the warehouse receipt is not
affected. What can happen? The warehouseman be liable for
damages. In any case, the negotiability of the receipt will not
be affected and the contract will be converted to ordinary
deposit wherein it will be the civil code which is applicable. Just
like any contract, the warehouse receipt shall not contain
stipulations that are contrary to public policy, and laws. It also
must not contain a stipulation exempting the warehouseman
from liability for misdelivery or negligence. Any provision to
that note will be void.
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
safekeeping of the goods entrusted to him which is reasonably
careful man would exercise in regard to similar goods of his
own.
Section 3 provides for the power of a warehouseman to insert
specific terms and conditions subject to the limitation provided
under Sec 3.
Sec. 4. Definition of non-negotiable receipt. A receipt in
which it is stated that the goods received will be delivered to
the depositor or to any other specified person, is a non-
negotiable receipt.
Sec. 5. Definition of negotiable receipt. A receipt in which it
is stated that the goods received will be delivered to the bearer
or to the order of any person named in such receipt is a
negotiable receipt. No provision shall be inserted in a
negotiable receipt that it is non-negotiable. Such provision, if
inserted shall be void.
There are two kinds of warehouse receipt
1. Negotiable
2. Non-negotiable
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To be considered negotiable it must be indicated therein that
the goods are deliverable to bearer or order. We have here the
terms of negotiability similar to negotiable instruments.
However as seen under sections 4 and 5, a provision in the
negotiable warehouse receipt that the instrument is non-
negotiable is void. The word negotiable is usually printed on
the face of the negotiable warehouse receipt. The failure to
mark it as negotiable however does not necessarily render it
non-negotiable. As long as it is indicated therein or it bears the
terms of negotiability, bearer or order, it could still be
considered as negotiable document or a negotiable receipt
even though it is indicated as non-negotiable
A document is non-negotiable when it is deliverable to the
depositor or any specified person. As a general rule, it should
be stamped on its face as nonnegotiable or not negotiable. It
cannot be negotiated, but it can be transferred or assigned.
Failure to mark it as non-negotiable shall make it negotiable if
it carries the terms of negotiability. A negotiable warehouse
receipt is negotiated by delivery if it is a bearer document. If
there is a special endorsement, it becomes an order
instrument and it has to be indorsed plus delivered for a valid
negotiation.
If the warehouse receipt is non-negotiable, transferee of the
non-negotiable warehouse receipt must notify the
warehouseman of the transfer to him of such receipt. Notice is
required. Prior notice will not affect the levy of attachment or
execution. If the warehouse receipt is negotiable, notice is not
required. It is as if the warehouseman directly issued the
receipt to the person in possession.
Obligations of a warehouseman
The warehouseman issues the warehouse receipt, take good
care of the goods and to deliver the goods to the person
lawfully entitled (taking into consideration of it is negotiable or
not). There is also a rule not to comingle the goods even if they
are of the same kind and quality, unlike in an ordinary deposit
where it is not an issue if the goods are mixed if they are the
same. There are also obligations to ensure the goods under
certain circumstances, to mark a non-negotiable receipt as
such, to mark as such the duplicates of a warehouse receipt, to
give proper notice in case of the sale of the goods, to take out
and cancel the warehouse receipt when the goods are
delivered. The warehouseman shall not be liable for non-
delivery without surrender of the warehouse receipt. In the
absence of the warehouse receipt, you cannot demand the
delivery of the goods from the warehouseman kasi dyan siya
magdepend if whether or not you are entitled to the goods.
What happens in the absence of the warehouse receipt,
walang duplicate and hindi talaga mahanap?
Section 14. Lost or destroyed receipts. Where a negotiable
receipt has been lost or destroyed, a court of competent
jurisdiction may order the delivery of the goods upon
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Atty. Jazzie Sarona Lozare
satisfactory proof of such loss or destruction and upon the
giving of a bond with sufficient sureties to be approved by the
court to protect the warehouseman from any liability or
expense, which he or any person injured by such delivery may
incur by reason of the original receipt remaining
outstanding. The court may also in its discretion order the
payment of the warehouseman's reasonable costs and counsel
fees.
Section 25. Attachment or levy upon goods for which a
negotiable receipt has been issued. If goods are delivered to a
warehouseman by the owner or by a person whose act in
conveying the title to them to a purchaser in good faith for
value would bind the owner, and a negotiable receipt is issued
for them, they can not thereafter, while in the possession of
the warehouseman, be attached by garnishment or otherwise,
or be levied upon under an execution unless the receipt be first
surrendered to the warehouseman or its negotiation enjoined.
The warehouseman shall in no case be compelled to deliver up
the actual possession of the goods until the receipt is
surrendered to him or impounded by the court.
Goods covered by the negotiable receipt cannot be attached
or levied upon directly and creditors must resort to attaching
or levying the receipts in the hands of a debtor-transferor. If it
is in the hands of the holder, it may be free from legal
attachment or levy of transferors creditors.
Rights of a warehouseman
A warehouseman has the right to be paid, he has the right to
exercise his lien on the goods if not paid, to refuse delivery for
proper legal circumstances
Sec. 27. What claims are included in the warehouseman's lien
Subject to the provisions of section thirty, a warehouseman
shall have a lien on goods deposited or on the proceeds thereof
in his hands, for all lawful charges for storage and preservation
of the goods; also for all lawful claims for money advanced,
interest, insurance, transportation, labor, weighing, coopering
and other charges and expenses in relation to such goods, also
for all reasonable charges and expenses for notice, and
advertisements of sale, and for sale of the goods where default
had been made in satisfying the warehouseman's lien.
In case the warehouseman is not paid he has the right to
exercise his lien on the goods wherein it is a form of security
on his part. Just like a pledge or mortgage, this is for the
payment of the charges, money advanced and other expenses
provided in section 27.
Sec. 30. Negotiable receipt must state charges for which the lien
is claimed. If a negotiable receipt is issued for goods, the
warehouseman shall have no lien thereon except for charges
for storage of goods subsequent to the date of the receipt
unless the receipt expressly enumerated other charges for
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which a lien is claimed. In such case, there shall be a lien for
the charges enumerated so far as they are within the terms of
section twenty-seven although the amount of the charges so
enumerated is not stated in the receipt.
Unless the charges are so specified in a negotiable receipt, then
it is understood that the warehousemans lien is limited to
charges for storage of the goods subsequent to the date of
receipt.
Under Section 36 the remedies available to the warehouse
man in enforcing his lien.
Sec. 36. Effect of sale. After goods have been lawfully sold to
satisfy a warehouseman's lien, or have been lawfully sold or
disposed of because of their perishable or hazardous nature,
the warehouseman shall not thereafter be liable for failure to
deliver the goods to the depositor or owner of the goods or to
a holder of the receipt given for the goods when they were
deposited, even if such receipt be negotiable.
A warehouseman can exercise lien over the goods deposited
to him however if he remains unpaid he can refuse to deliver
the goods until the lien is satisfied. Another remedy available
to him is to cause the extra-judicial sale of the property and
apply the proceeds to the value of the lien. This right is
provided under sections 33 and 34. Another option is to file an
action for the collection of unpaid charges or by way of
counterclaim he claims an action to recover the property for
him, or other such remedies as allowed by law.
Proper negotiation under Section 41, ipso jure grants to the
holder of the warehouse receipt, not only the title of the
transferor of the goods but also the title of the depositor, the
person who actually delivered the goods to the
warehouseman. There is also a direct obligation of the
warehouseman to hold possession of the goods for him, the
holder, without need of notice. If the warehouseman releases
the goods to a person who is not the holder of the warehouse
receipt, the warehouseman can be held liable.
Sec. 42. Rights of person to whom receipt has been transferred.
A person to whom a receipt has been transferred but not
negotiated acquires thereby, as against the transferor, the title
of the goods subject to the terms of any agreement with the
transferor. If the receipt is non-negotiable, such person also
acquires the right to notify the warehouseman of the transfer
to him of such receipt and thereby to acquire the direct
obligation of the warehouseman to hold possession of the
goods for him according to the terms of the receipt. Prior to
the notification of the warehouseman by the transferor or
transferee of a non-negotiable receipt, the title of the
transferee to the goods and the right to acquire the obligation
of the warehouseman may be defeated by the levy of an
attachment or execution upon the goods by a creditor of the
transferor or by a notification to the warehouseman by the
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Atty. Jazzie Sarona Lozare
transferor or a subsequent purchaser from the transferor of a
subsequent sale of the goods by the transferor.
If you have an order warehouse receipt, it must be endorsed
and delivered for a valid negotiation. Under Section 42, if such
order receipt is delivered without endorsement, the mere
delivery of the negotiable receipt transfers title to the goods to
the holder as against the transferor. This also grants the holder
the right to compel transfer or to endorse the receipt but the
effects of negotiation shall take place after actual
endorsement. This is similar to the provisions of negotiable
instruments.
What if the negotiable receipt has warranties?
Sec. 44. Warranties of a sale of receipt. A person who, for value,
negotiates or transfers a receipt by indorsement or delivery,
including one who assigns for value a claim secured by a
receipt, unless a contrary intention appears, warrants: (a) That
the receipt is genuine, (b) That he has a legal right to negotiate
or transfer it, (c) That he has knowledge of no fact which would
impair the validity or worth of the receipt, and (d) That he has
a right to transfer the title to the goods and that the goods are
merchantable or fit for a particular purpose whenever such
warranties would have been implied, if the contract of the
parties had been to transfer without a receipt of the goods
represented thereby.
Warranties of sale of receipt:
1. That the receipt is genuine
2. That the transferor has legal right to negotiate or
transfer it
3. That the transferor has no knowledge of any defect
that may impair the validity or worth of the receipt
4. The right to transfer the title to the goods and that the
goods are merchantable or fit for a particular purpose
The transferor may be held liable for breach of any of the
warranties provided.
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.
Indorsement of a negotiable receipt does not make an indorser
liable for the failure of the warehouseman or previous
indorsers to comply with their obligations.
Sec. 46. No warranty implied from accepting payment of a debt.
A mortgagee, pledgee, or holder for security of a receipt who,
in good faith, demands or receives payment of the debt for
which such receipt is security, whether 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 warrant the genuineness
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of such receipt or the quantity or quality of the goods therein
described.
We have a mortgagee or pledgee who subjected the goods
covered by the warehouse receipt as a security for the
payment of an obligation. A mortgagee, pledgee, or holder for
security who demands or receives payment for the debt for
which such receipt is security such receipt of payment shall not
be deemed to represent or to warrant the genuineness of the
receipt nor the quality or quantity of goods. When the goods
are delivered to the mortgagee, pledgee, or holder for security
by virtue of their right as such, the warranties under section 46
is not applicable.
Sec. 49. Negotiation defeats vendor's lien. Where a negotiable
receipt has been issued for goods, no seller's lien or right of
stoppage in transitu shall defeat the rights of any purchaser for
value in good faith to whom such receipt has been negotiated,
whether such negotiation be prior or subsequent to the
notification to the warehouseman who issued such receipt of
the seller's claim to a lien or right of stoppage in transitu. Nor
shall the warehouseman be obliged to deliver or justified in
delivering the goods to an unpaid seller unless the receipt is
first surrendered for cancellation.
No sellers lien or right of stoppage in transitu shall defeat the
rights of any purchaser for value in good faith to whom such
receipt has been negotiated. If the goods covered in that
warehouse receipt are in the possession of the
warehouseman, the goods are still in transit, and you have an
unpaid seller, if he wants to exercise his right to stoppage in
transitu, his right to stop the goods in transit will have to give
way to the right of an innocent purchaser for value; one who
purchase the warehouse receipt from the buyer. In stoppage
in transitu under sales, the general rule is the unpaid seller can
exercise his right to stoppage in transit and his right will prevail
over that of the buyer.
The exception here is when the goods are covered by a
warehouse receipt and are validly negotiated to an innocent
purchaser for value; a purchaser who has no knowledge that
the unpaid seller has already exercised his right to stoppage in
transitu. What is important is the buyer has in his possession
the warehouse receipt, he can validly negotiate it to another
person and that person must have no knowledge of the right
to stoppage in transitu as exercised by the unpaid seller.
With regard to levy and attachment if the warehouse receipt is
negotiable, there must be surrender of the receipt or
negotiation is enjoined or the receipt is impounded by the
court. If it is a negotiable receipt, hindi basta basta maclaim ang
goods unless you present the warehouse receipt itself. The
depositor who originally deposited the goods actually has no
title over the same unless he has the warehouse receipt. If it
has been negotiated, even if he is the depositor, he cannot
claim the goods without the receipt. But if it is non-negotiable
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Atty. Jazzie Sarona Lozare
it can be attached with prior notification to the
warehouseman.
Trust Receipts Law
When is there liability for estafa for violation of the trust
receipts law?
When the entrustee fails to turn over the proceeds of the sale
of goods covered by the trust receipt, or when the entrustee
fails to return the goods of the trust receipt if not disposed in
accordance with the agreement of the trust receipt.
Under section 4 of the trust receipt law trust receipt is defined
as a written document signed by the trustee in favor of the
entruster whereby the latter releases the goods to the
possession of the former upon the trustees promise to hold
the said goods in trust for the entruster (the one who delivered
the goods) to sell or dispose of the goods and to return the
proceeds thereof to the extent of the amount owing to the
entruster or to return the goods if unsold or not otherwise
disposed.
Purpose of the law:
(1) To punish dishonesty and abuse of one who tends in the
handling of money or goods to the prejudice of the owner
regardless of whether or not the latter is the owner. (crime
of estafa);
(2) To encourage and promote the use of trust receipts as an
additional and convenient aid to commerce and trade;
(3) To provide for the regulation of trust receipts transactions
in order to assure the protection of the rights and
enforcement of obligations of the parties involved therein;
(4) To declare the misuse and/or misappropriation of goods
or proceeds realized from the sale of goods, released
under trust receipts as a criminal offense punishable
under the revised penal code.
The trust receipt need not be in any particular form however it
must substantially contain the following essential terms:
(a) a description of the goods, value of the goods, undertaking
or a commitment of the entrustee to hold in trust for the
entruster the goods;
(b) to dispose of them in the manner provided for in the trust
receipt; and
(c) to turn over the proceeds of the sale of the goods
Generally, there is no contract of agency established wherein
you have a trust receipt. However, the entrustees breach of
trust may subject him to criminal and civil liability like for
estafa.
A trust receipt is applied to items destined for sale or items
process as a component of a product ultimately sold and
manufactured and used to repair equipment used in the
business. The trust receipt law does not cover the sale of
goods, document or instruments by a person in the business of
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selling goods, documents or instruments for profit who has
general property rights in such goods documents or
instruments or sells the same to the buyer on credit retaining
title and other interest as security of the payment of the
purchase price.
Trust receipt vs. consignment
There is no processing transaction if the assignment is for the
mere consignment of the goods. If you are going to apply the
trust receipts law it is more than the arrangement of the
consignor and consignee. There are similarities because you
are delivering goods to the entrustee. But if you are going to
apply the trust receipt law, again take not of what is the
purpose therein. Because there is no trust receipt transaction
if it is for mere consignment of the goods with the obligation
on the part of the person to whom it is delivered to release
proceeds or to return if unsold. Essentially in trust receipt you
have here the seller does not retain title to the property. In
consignment you have a transaction to consider between the
consignor and consignee wherein the consignor retains
ownership over the property.
Trust receipt vs. pledge
In a transaction covered by a trust receipt, the person financed
possesses the property, the entrustee. In pledge, it is the
financer that possesses the property or the creditor. I trust
receipt agreement there is no sale.
Trust receipt vs. Chattel mortgage
In trust receipt there is no lien stated over the property in
chattel mortgage is subject the property to a lien.
Parties to a Trust Receipt
With regard to trust receipt there are three parties, the
entruster, entrustee, and the seller. When you talk about the
entruster you have a lender or financier. He is the person who
has title over the goods, not necessarily the owner of the goods
but merely the holder of security interest. Entrustee is the
borrower, buyer, or the importer to whom the goods are
delivered for sale with the obligation to return the proceeds of
the same. The entrustee is considered the owner of the goods
purchased and the law imposes on him the risk of loss of the
goods. The seller is not actually a party to the trust receipt
contract but to the contract of sale under the trust receipt.
Rights of an entruster:
(1) entitled to the proceeds
(2) entitled to the return of the goods if unsold
(3) as against an innocent purchaser for value the entruster is
not preferred. But as against creditors of the entrustee,
the entrustor has a preferred claim over the goods
covered by the receipt. (Section 11)
(4) the entruter has the right to transfer the trust take
possession of the goods and to sell the goods in a public
sale (Section 12)
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Atty. Jazzie Sarona Lozare
(5) the entruster likewise has the right to purchase the same
goods at the intended public sale(Section 7)
Obligations of an entruster
(1) to give possession of the goods to the entrustee and to
give at least 5 day notice to the entrustee of the intention
to sell the goods at an intended public sale. The entrustee
on the other hand has the right to receive the surplus in
case of a public sale as provided under section 7.
(2) To have possession of the goods as a condition for his
liability.
Obligations of the entrustee
(1) To hold the goods or the sale proceeds;
(2) To return the goods in the event of non-sale or upon
demand of the entruster;
(3) To comply with his alternative obligation to return the
proceeds or the goods. The return of the proceeds enbre
garla. The obligation to deliver the goods vevol vera.
(4) To ensure against loss of the goods
(5) To keep the goods and sale proceeds separate and
identifiable
(6) If there are other conditions provided under the trust
receipt, observe those conditions.
Letters of Credit
There are instances wherein banks would resort to agreements
like trust receipts. This letter of credit is mostly used in
international transactions. It is actually a bank to bank
transaction. It is actually easier because banks can be trusted
more than individuals, lalo na kung kilala na ang bank.
What happens here? If you have for example X in the
Philippines who wants to purchase goods from Y in Hong Kong,
he cannot just send his payment and hope that the goods will
be delivered, there is no assurance or security as to the
agreement. On the part of Y, he cannot expect that the goods
he will send will be paid immediately by X. What would happen
is X will apply from a bank a letter of credit. The bank will
guarantee that X will actually make the payment. It is actually
like a contract of loan wherein the bank lends X the money and
X is expected to pay the bank, but the money does not actually
go to X but to Ys bank. Y will then send the goods. What
happens next is there will be a trust receipts agreement
between X and his bank wherein the bank will be the entruster
and X will be the entrustee. The goods will be delivered to X
but there is the expectation that the bank will be paid. The
purpose of the trust receipt was merely for security of the loan
obtained by X thru the letter of credit.
This is not strictly a trust receipts agreement, we have to make
a distinction. If X refuses to pay in this case, this does not
necessarily mean that he is liable for estafa just like in a regular
trust receipts agreement. Since this is a mutuum or loan and
the trust receipt was only issues as a security, then there is no
criminal liability for estafa, there can only be a recovery of sum
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of money and damages, civil case lang. Kung hindi makabayad
si X sa bank, the obligation to pay did not arise from the trust
receipt but through the contract of loan. Hindi napunta ang
title ng goods sa bank, hinawakan lang nila ang title as security.
In a real trust receipts agreement, the entruster has the title to
the goods and the title is not passed to the entrustee. The
money and goods never belonged to the entrustee, what the
entrustee does is merely to hold the goods and sell them, if
unsold, return them, but not to take possession over the goods
or the money when the goods are sold. Ipasa lang niya, hindi
niya inagkin na kanya.
In cases of letters of credit and trust receipts agreements, you
have to take into consideration what the real agreement of the
parties is. Sometimes it may really be closer to a trust receipt
agreement than to a mutuum and that will open up the
possibility for estafa. You really have to distinguish between
the two possible transactions. If the goods are held merely as
a security, then it can be considered as a simple loan. If there
is an intention by the bank or financial institution to maintain
the title to the goods, then it can be a trust receipt agreement.
As a guide you can check the case of Rosario Textile Mills vs
Home Bankers. Take into consideration the discussion of res
perit domino, wherein the same does not apply when what you
have is a real trust receipts agreement.
Rosario Textile Mills vs Home Bankers
Rosario Textile Mills Corporation (RTMC) applied from Home
Bankers Savings & Trust Co. for an Omnibus Credit Line
for P10 million. The bank approved RTMCs credit line but for
only P8 million. Yujuico signed a Surety Agreement in favor
of the bank, in which he bound himself jointly and severally
with RTMC for the payment of all RTMCs indebtedness to the
bank from 1989 to 1990. RTMC availed of the credit line by
making numerous drawdowns, each drawdown being
covered by a separate promissory note and trust receipt.
RTMC, represented by Yujuico, executed in favor of the bank
a total of eleven (11) promissory notes.
Despite the lapse of the respective due dates under the
promissory notes and notwithstanding the banks demand
letters, RTMC failed to pay its loans. Hence the bank filed a
complaint for sum of money against RTMC and Yujuico
RTMC and Yujuico contend that they should be absolved
from liability. They claimed that although the grant of the
credit line and the execution of the suretyship agreement are
admitted, the bank gave assurance that the suretyship
agreement was merely a formality under which Yujuico will
not be personally liable. They argue that the importation of
raw materials under the credit line was with a grant of
option to them to turn-over to the bank the imported raw
materials should these fail to meet their manufacturing
requirements. RTMC offered to make such turn-over since
the imported materials did not conform to the required
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Atty. Jazzie Sarona Lozare
specifications. However, the bank refused to accept the
same, until the materials were destroyed by a fire which
gutted down RTMCs premises. RTMC and Yujuico contend
that under the trust receipt contracts between the
parties, they merely held the goods described therein in trust
for respondent Home Bankers Savings and Trust Company
(the bank) which owns the same. Since the ownership of the
goods remains with the bank, then it should bear the loss.
With the destruction of the goods by fire, petitioners should
have been relieved of any obligation to pay.
Issue: Whether or not the concept of res perit domino applies
in this case
Ruling: No.
It is thus clear that the principal transaction between
petitioner RTMC and the bank is a contract of loan. RTMC
used the proceeds of this loan to purchase raw materials
from a supplier abroad. In order to secure the payment of
the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to
evidence this security arrangement. Simply stated, the trust
receipts were mere securities.
A trust receipt as a security transaction intended to aid in
financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. It secures an
indebtedness and there can be no such thing as security
interest that secures no obligation.
If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of legal fiction
than fact, for if it were really so, it could dispose of the goods
in any manner it wants, which it cannot do, just to give
consistency with purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof...
The contract between the parties is a loan. What respondent
bank sought to collect as creditor was the loan it granted to
petitioners, not the proceeds from the sale of the goods
under a trust receipt.
You can also read the case of Land Bank vs Lamberto Perez:
Land Bank vs Lamberto Perez
On June 7, 1999, LBP filed a complaint for estafa against the
respondents. LBP extended a credit accommodation to ACDC
through the execution of an Omnibus Credit Line Agreement
(Agreement). In various instances, ACDC used the Letters of
Credit/Trust Receipts Facility of the Agreement to buy
construction materials. The respondents, as officers and
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representatives of ACDC, executed trust receipts in
connection with the construction materials.. The trust
receipts matured, but ACDC failed to return to LBP the
proceeds of the construction projects or the construction
materials subject of the trust receipts. LBP sent ACDC a
demand letter for the payment of its debts, including those
under the Trust Receipts Facility. When ACDC failed to
comply with the demand letter, LBP filed the complaint for
estafa.
The respondents contended that the trust receipts in this
case do not contain (1) a description of the goods placed in
trust, (2) their invoice values, and (3) their maturity dates, in
violation of Section 5(a) of P.D. 115. Moreover, they alleged
that ACDC acted as a subcontractor for government projects
and its clients for the construction projects, which were the
general contractors of these projects, have not yet paid
them; thus, ACDC had yet to receive the proceeds of the
materials that were the subject of the trust receipts and
were allegedly used for these constructions. As there were
no proceeds received from these clients, no
misappropriation thereof could have taken place.
Issue: Whether or not the transactions were trust receipt
agreements
Ruling: No.
There are two obligations in a trust receipt
transaction. The first is covered by the provision that refers
to money under the obligation to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered by
the provision referring to merchandise received under the
obligation to return it (devolvera) to the owner. Thus, under
the Trust Receipts Law, intent to defraud is presumed when
(1) the entrustee fails to turn over the proceeds of the sale of
goods covered by the trust receipt to the entruster; or (2)
when the entrustee fails to return the goods under trust, if
they are not disposed of in accordance with the terms of the
trust receipts.
In all trust receipt transactions, both obligations on
the part of the trustee exist in the alternative the return of
the proceeds of the sale or the return or recovery of the
goods, whether raw or processed. When both parties enter
into an agreement knowing that the return of the goods
subject of the trust receipt is not possible even without any
fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the only
obligation actually agreed upon by the parties would be the
return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the purchase
of the goods.
In concluding that the transaction was a loan and not a trust
receipt, we noted in that the industry or line of work that the
borrowers were engaged in was construction. We pointed
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 MANRESA 2015
Atty. Jazzie Sarona Lozare

out that the borrowers were not importers acquiring goods

for resale. Indeed, goods sold in retail are often within the
custody or control of the trustee until they are purchased. In
the case of materials used in the manufacture of finished
products, these finished products if not the raw materials or
their components similarly remain in the possession of the
trustee until they are sold. But the goods and the materials
that are used for a construction project are often placed
under the control and custody of the clients employing the
contractor, who can only be compelled to return the
materials if they fail to pay the contractor and often only
after the requisite legal proceedings. The contractors
difficulty and uncertainty in claiming these materials (or the
buildings and structures which they become part of), as soon
as the bank demands them, disqualify them from being
covered by trust receipt agreements.

Based on these premises, we cannot consider the agreements

between the parties in this case to be trust receipt transactions
because (1) from the start, the parties were aware that ACDC
could not possibly be obligated to reconvey to LBP the
materials or the end product for which they were used; and (2)
from the moment the materials were used for the government
projects, they became public, not LBPs, property. Since these
transactions are not trust receipts, an action for estafa should
not be brought against the respondents, who are liable only for
a loan.

~END OF PRELIMS COVERAGE~

If its easy, it will not last; because everything that lasts is not
easy....

pg. 77