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- INCLUDE all relevant cases cited by Hector de Leon and Paras

INTRODUCTION. The Concept of Credit

a. Credit, Debt and Security

Credit as opposed to Debt.

“Credit,” in its usual meaning, is a sum credited on the books of a company to a person who appears to be
entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of
property or estates, to make a promised payment. It is the correlative to debt or indebtedness, and that
which is due to any person as distinguished from that which he owes.

It is a debt considered from the creditor’s standpoint. It may consist of money, goods, or services.

Security is something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an
obligation or of protecting some interest in property.

It may be personal security - when an individual becomes a surety or a guarantor; or

Property or real security - when a mortgage, pledge, antichresis, charge or lien or other device used to have
property held, out of which the person to be made secure can be compensated for loss.

Thus, a secured creditor is one who holds a security from his debtor for payment of the latter’s debts.

b. Credit and Credit Transactions Defined

 Credit – refers to belief or trust by a person in another’s ability to comply with an obligation;
o its use makes more exchanges possible; persons are able to enjoy a thing today but pay for it later

 Credit Transactions – refers to the contracts or agreements based on said trust or credit;
o include all transactions involving the purchase or loan of goods, services, or money in the present
with a promise to pay or deliver in the future

c. Commercial Credit Transactions

Our law formerly made a distinction between civil loans governed by the old Civil Code and commercial loans
regulated by the Code of Commerce. This distinction has been abolished. Title V, Articles 311-314 of the Code
of Commerce which are the provisions on commercial loans are repealed.

d. The Relevance of Trust and Confidence

It is inherent and essential in establishing juridical relation between the parties. It is the consideration on the
part of the bailor that the thing borrowed shall be returned to him as soon as the period stipulated expires or
the purpose has been accomplished.


A. General Concepts

1. Obligation to Deliver (Real Contract) - delivery of the thing is necessary for the perfection of the
contract because the purpose of the contract is to transfer either the use or ownership of the thing
loaned. (Art. 1316)

Object of a Loan

2 kinds of loan, namely:

(1) Commodatum — where the bailor (lender) delivers to the bailee (borrower) a non-consumable thing so
that the latter may use it for a certain time and return the identical thing; and

(2) Simple loan or mutuum — where the lender delivers to the borrower money or other consumable thing
upon the condition that the latter shall pay the same amount of the same kind and quality.

3. Consideration of a Loan:

As to the borrower – the acquisition of the thing

As to the lender – the right to demand its return or its equivalent

4. Obligation to Return or Pay (Unilateral Contract) - once the subject matter has been delivered, it
creates obligations on the part of only one of the parties, i.e. borrower. 

B. Contract to Loan

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable
so that the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to

pay interest.

In commodatum the bailor retains the ownerships of the thing loaned, while in simple loan, ownership passes
to the borrower.

2 Kinds of Loan:


Loan for (Art. 1935) for use or temporary possession for consumption
(If bailee is not entitled to the use
of the thing, the contract may be
a deposit.)
Subject Matter/Intention of Use non-fungible – (if the intention Fungible – (if the intention is to
(Art. 1935) compels a return of the identical allow a substitution of the thing
thing given) given)
Nature of the Thing (Art. 1936) non-consumable - (a movable Consumable - (a movable which
which can be used in a manner cannot be used in a manner
appropriate to its nature without appropriate to its nature without
its being consumed, i.e. a book) being consumed, i.e. gasoline)
Ownership (Art. 1933) retained transferred to buyer
Consideration gratuitous gratuitous or onerous (interest)
Return same thing loaned pay the same amount of the same
kind and quality
Property (Art. 1937) real or personal property personal property
Bailor may demand the return of the lender may not demand its return
thing loaned before the expiration before the lapse of the term
of the term in case of urgent need agreed upon
(Art 1946)
Risk of Loss Suffered by the bailor since he is Borrower suffers the loss even if
the owner (Art. 1942, Art. 1174) caused exclusively by a fortuitous
event; he is not therefore
discharged from his duty to pay
Payment Generally, to be returned at the At the end of the period
end of period; in some cases,
return can be demanded even
before the end of the period
Character Personal Not Personal
Use of Fruits not allowed unless stipulated consumed/used

 Perfected by delivery of the object loaned (real contract), and not by mere consent (consensual
contract). Because unless there is delivery, borrower cannot exercise due diligence over the thing
 Aside from the real contracts of commodatum and loan, there can also be a consensual contract created
by an accepted promise to deliver something by way of commodatum or simple loan.

Example: A promised to lend P1,000,000 to B. The promise was accepted by B. This contract
(consensual) is already binding upon the parties so that if A does not fulfill his promise, B has the right
to demand compliance thereof. But note here that the real contract of loan does not yet exist.


A. General Concepts

1. Consideration in Commodatum

Commodatum is essentially gratuitous. Hence, the contract ceases to be a commodatum if any compensation
is to be paid by the borrower who acquires the use. In such a case, there arises a lease contract. If the
consideration is the rendering of some service, an innominate contract will result. Commodatum is similar to a
donation in that it confers a benefit to the recipient. The presumption is that the bailor has loaned the thing
for having no need therefor.


Facts: B borrowed from L (Bureau of Animal Industry) three bulls for breeding purposes for a period of
1 year, later on renewed for another year as regards one bull. The loan was subject to the payment by
the borrower of breeding fee of 10% of the book value of the bulls. B kept and used the bull (the loan
of which was renewed) for 4 years after the period stipulated in the contract until it was killed during a
Huk raid by stray bullets.

B contends that the contract was commodatum, and that, for that reason, as L retained ownership or
title to the bull, it should suffer the loss.

Issue: As the death of the bull was due to force majeure, is B relieved from the duty of paying its value?

Held: No. A contract of commodatum is essentially gratuitous. If the breeding fee be considered
compensation, then the contract would be a lease of the bull. Under Article 1671 of the Civil Code, the
lessee would be subject to the responsibilities of a possessor in bad faith because she had continued
possession of the bull after the expiration of the contract. And even if the contract be commodatum,
still B is liable under Article 1942(2, 3).

Purpose of the contract.

The purpose of the contract of commodatum must be the temporary use of the thing loaned. If the bailee is
not entitled to the use of the thing, the contract may be a deposit (see Art. 1962.) not a commodatum.

2. Object of Commodatum

ART. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

ART. 1937. Movable or immovable property may be the object of commodatum.

 The subject matter is generally non-consumable things, whether real or personal (for the bailee
cannot use and return something which is consumed when used).
o Example of commodatum involving real property: A person allowed
 Except: If the purpose is merely for exhibition.
o Example: L lends to B an oversized bottle of wine to be used as a sample or for
advertisement. If the intention of the parties is to have the consumable goods loaned
returned at the end of the period agreed upon, the loan is commodatum and not a mutuum.

B. Parties to a Commodatum

1. Ownership by Bailor

Art. 1938. The bailor in commodatum need not be the owner of the thing loaned.
Reason for the law: The contract of commodatum does not transfer ownership.
Case: Mercado and Ebora v. Aguilar (C.A.) 45 O.G. 5th S. 118, Jun. 30, 1947
FACTS: Mercado, the occupant of a stall in the Batangas market, allowed Aguilar to occupy the
same gratuitously with the promise of Aguilar to return it upon demand. Aguilar claims that
Mercado as no right to demand because Mercado, being a mere lessee of the Batangas
municipality had no right to cede its occupancy in commodatum.
HELD: Mercado had the right to give it in commodatum. If a lessee, by a contract of a sub-lease,
may transfer to another the enjoyment of the thing leased for a consideration, there is no reason
why he should be unable to cede gratuitously its use to the commodatory. Aguilar should return
the stall.

2. Use by Bailee

Art. 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third person.
However, the members of the bailee’s household may make use of the thing loaned, unless
there is a stipulation to the contrary, or unless the nature of the thing forbids such use.
Example of the 2nd Paragraph: A loaned to B a home theatre component by way of
commodatum. B cannot lend or lease this to a friend. But the children of B in his household may
use the same unless there is a stipulation to the contrary. But said component cannot be used as
a chair, because the nature of the thing forbids such use.
Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

 As a rule, the bailee is not entitled to the fruits, otherwise the contract may be one of usufruct.
It should be noted that the right to use is distinct from the right to enjoy the fruits, since under
the law fruits should as a rule pertain to the owner of the thing producing the fruits. (Art. 441,
Civil Code). However, to stipulate that the bailee makes use of the fruits would not destroy the
essence of a commodatum, for liberality is still the actual cause or consideration of the contract.

Example: A is the bailee in commodatum of B’s land. Incidentally, they may stipulate that A can get
some lanzones from a lanzones tree on the land. Unless there is such a stipulation, A would not be
entitled to the lanzones.

3. Solidary Liability of Bailees

ART. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are
liable solidarily.
Reason of the Law: To safeguard effectively the rights of the lender. The law presumes that the bailor
takes into account the personal integrity and responsibility of all the bailees and that, therefore, he
would not have constituted the commodatum if there were only one bailee.

C. Liability for Expenses and Damages

1. Ordinary Expenses

Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing
Reason for the law: The bailee is supposed to return the identical thing (Art. 1933), so he is obliged to
take care of the thing with, as a rule, the diligence of a good father of a family. (Art. 1163). It follows
necessarily that ordinary expenses for the use and preservation of the thing loaned must be borne the
(a) A borrowed an automatic Rolls Royce automobile. He repay for the gasoline, motor oil, and expenses
of greasing and spraying. He cannot ask reimbursement for these. (Art. 1941). 

(b) A borrowed a horse for a journey. If the horse is ex- hausted, rest must be given to the horse;
otherwise, if A continues the journey with a tired horse, he should be responsible for the consequences
of his folly.

2. Extraordinary Expenses

Art. 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.
Reason of the Law: Because the bailor is the one who profits by said expenses; otherwise, the thing
borrowed would be destroyed.
Notice Required: Because the bailor should be given discretion as to what he intends to do with his own
Reason for 2nd Par. (Bailee Pays Half When in Actual Use) – On bailee’s part: because he derived
benefit from the use of the thing. On bailor’s part: because the thing will be returned to him.
Example: A borrowed a motorbike from B. While A was riding on it, he met an accident which
greatly damaged the bike. A was not at fault for he was driving carefully. Both A and B should
share equally in the extraordinary expenses unless there is a stipulation to the contrary.
3. Other Expenses

Art. 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.
Example: The borrower of a car buys an extra jack to be used as a reserve on a trip. Here, he is not
entitled to reimbursement.

4. Abandonment by Bailor

Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the
thing to the bailee.
Reason for the Law: The value of the thing borrowed might be less than the value of the expenses or
Example: For extraordinary expenses on A’s car, B the borrower spent P125,000. A cannot exempt
himself from payment thereof by just giving B the thing borrowed.

5. Right of Retention by Bailee

Art. 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.
Reason for the Law: Bailment implies a trust that as soon as the time has expired, or the purpose
accomplished, the bailed property must be restored to the bailor.
Art. 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.

 It is evident that the flaws referred to in this Article are hidden defects, not obvious ones.

Reason for the Law: When a person lends, he ought to confer a benefit, and not to do a mischief. If he
does not reveal the flaws, he is liable for his bad faith. (Gagnon v. Dana).
Example: A lent B a Fisher & Paykel, the electric connections of which were defective. If although he
knows said defect, A does not inform B thereof, A will be liable in case B is injured by reason thereof.

D. Liability for Loss

ART. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (D K A
L S)
(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 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 save the latter.
General rule: The bailee is not liable for loss or damage due to a fortuitous event. (Art. 1174)

Exception: Art. 1942

Rationale of the Law: To punish the bailee for his improper acts although they may not be the
proximate cause of the loss.

No. 1 - the bailee acts in bad faith (Art. 1170.);

No. 2 - he incurs in delay (Art. 1169, par. 2[1].);

No. 3 - the law presumes that the parties intended that the borrower shall be
liable for the loss of the thing even if it is due to a fortuitous event for otherwise they would not have
appraised the thing

No. 4 - commodatum is purely personal (Art. 1939.)

No. 5 - the bailee shows his ingratitude after the thing is gratuitously loaned to him.

ART. 1943. The bailee does not answer for the deterio- ration of the thing loaned due only to the use
thereof and without his fault. (1746)
Rationale of the Law: The parties to the contract know that the thing borrowed cannot be used
without deterioration due to ordinary wear and tear.

E. Obligation to Return

Art. 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 contract of commodatum is suspended while the thing is in the pos-
session of the bailor.

Reason for 1st sentence, 1st par: Otherwise, the bailee may not be able to make proper use of the thing

Reason for 2nd sentence, 1st par (Urgent Necessity): A bailor usually lends his property because he does
not need it. Hence, the reason for the exception. NOTE that the return may be only temporary, but it
can also be permanent.

Art. 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.

 The possession of the borrower in precarium is precarious, that is, dependent on the lender’s will,
hence the name precarium. 

Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of
ingratitude specified in Article 765.

Article 765 provides: “The donation may also be revoked at the instance of the donor, by reason of
ingratitude in the following cases:

“(1) If the donee should commit some offense against the person, the honor or the property of the
donor, or of his wife or children under his parental authority;

“(2) If the donee imputes to the donor any criminal offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the act has been committed against the donee himself,
his wife or children under his authority;

“(3) If he unduly refuses him support when the donee is legally or morally bound to give support to the


A. General Concepts

ART. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.


Republic v. Jose Grijaldo L-20240, Dec. 31, 1965

FACTS: In 1943, Jose Grijaldo borrowed money from a bank, evidenced by five promissory notes, and secured
by a chattel mortgage on the standing crops on his land. During the war, the crops were destroyed as a result
of enemy action. Issue: Must the borrower still pay?

HELD: Yes, for his obligation was to pay a generic thing — money representing the loan with interest. The
chattel mortgage on the crops simply stood as security for the fulfill- ment of his obligations, and therefore,
the loss of the crops did NOT extinguish his obligation to pay, because the account can still be paid from
sources other than said mortgaged crops.

Carlos Gelano, et al. v. Court of Appeals and Insular Sawmill, Inc. L-39060, Feb. 24, 1981
If a husband incurs debts which redound to the benefit of the conjugal partnership, who is liable?

HELD: The conjugal partnership is liable under Art. 161, par. 1, of the Civil Code [now Art. 121, last par., Fam-
ily Code]. It is wrong to say that the conjugal partnership is liable jointly and severally, for the conjugal
partnership is a single entity.

Bonnevie v. Court of Appeals GR 49101, Oct. 24, 1983

(1) A contract of loan is consensual (author believes it to be a real contract — a borrower of money who has
not yet been given the money is not yet a borrower; he is only a would-be borrower).
(2) If a loan (money is given only some time after the execution of a mortgage, the mortgage is still valid.
After all, the promissory note is only evidentiary of the debt. The late execution of the promissory note does
not mean that the mortgage had no consideration.

2. Similarity to Abnormal Usufruct. 
Mutuum is similar to an abnormal usufruct. 

3. Effect of Mutual Error

Rural Bank of Caloocan v. Court of Appeals L-32116, Apr. 21, 1981

Thru fraud committed by a third party (the Valencia Spouses), Maxima Castro found herself indebted to a
Rural Bank for a total debt of P6,000 (P3,000 was what she intended to borrow; the Valencias added another
P3,000 for themselves, with Castro signing the promissory note as co-maker). For how much is Castro liable?

HELD: Only for P3,000 plus interest. The extra P3,000 can be annulled insofar as Castro is concerned, not
because of fraud (neither party — the Bank nor Castro — had commit- ted fraud), but because of mutual error
caused by the fraud attributable to the Valencias. The mortgage over Castro’s lot is reduced insofar as it
exceeds Castro’s personal loan.

4. ‘Behest’ Loans

Presidential Ad Hoc Fact-Finding Commit- tee on Behest Loans v. Hon. Aniano A. Desierto
(Recovery of Ill-Gotten Wealth) GR 130340, 114 SCRA 707 Oct. 25, 1999
The “behest” nature of the loans could not be reason- ably known by a mere eye examination of the
mortgage contracts.

Behest loans are part of the ill-gotten wealth which former President Ferdinand E. Marcos and his cronies
accumulated and which the Government thru the Presidential Commission on Good Government (PCGG)
seeks to recover.

B. Obligation to Pay

Art. 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.

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines. 
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 abeyance. 

Art. 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. 

Example of 2nd Paragraph (Loan of Things Other Than Money): A borrowed from B five sacks of rice.
At the time the loan was perfected, each sack cost P1,800. Even if at the time of payment the price
would change, five sacks of the same kind and quality of rice should be returned. However, if it is
impossible to deliver the same kind, P1,800 should be paid.

NOTE: The value at the time of PERFECTION (not payment) applies.

C. Interest

1. Conventional Interest

2. Interest on Interest

Compound Interest

Compound interest is interest on accrued interest. It is valid to charge compound interest, but there must be a
written agreement to this effect; otherwise said compound interest should not be charged unless it be the
interest charged upon judicial demand. (Art. 2212).

3. Compensatory, Penalty or Indemnity Interest

4. Finance Charges

5. Usury

a. General Concepts

b. Usurious Acts

c. Remedies

1. Remedy of Debtor

2. Remedy of Creditor