Credit Transactions

Introduction
Credit Transactions (1) all transactions including purchase or loan of goods, services, or money in the
present with a promise to pay or deliver in the future
(2) Credit enables more exchanges possible
(3) Credit transactions are contracts of security
- Secured transactions or contracts of real security – are those with
collateral
- Unsecured transactions or contracts of personal security – supported
only by a promise to pay or the personal commitment of another such as
guarantor
(4) Includes bailment, usury, guaranty, suretyship, mortgage, etc.

Security (1) Security is something given, deposited or serving as a means to ensure the
fulfillment or enforcement of an obligation of a person to another
(2) Types of security
- Personal security – individual becomes a guarantor
- Property or real security – mortgage, pledge, or other device is used to
have property held in which the creditor may be compensated for the
loss

Bailment Meaning: To deliver a property by one person to another in trust for a specific
purpose, with a contract (expressed or implied), that the trust shall be
faithfully executed and the property returned or duly accounted for when
the special purpose is accomplished

Creation: (1) Created through an agreement or contract and by operation of law

(2) Not required to be in writing. It should contain all elements of a valid
contract for it to be legally enforceable

Parties: Bailor (giver; who delivers the possession of the thing bailed)
Bailee (recipient)

Subject: Only for movable properties.

*Some moveable and immovable properties may be subject by
commodatum

Kinds: (1) Obligation of the Bailee to restore the subject of the bailment
(2) With reference to compensation
- For the sole benefit of the Bailor (gratuitous deposit)
- For the sole benefit of the Bailee (commodatum and mutuum)
- For the benefit of both (mutual0benefit bailments)
Part 1 – Loan

Kinds of Loan
(1) Commodatum – applies to non-consumable goods so that the Bailee may use it for a certain time and
return the identical thing on the date specified; essentially gratuitous
(2) Mutuum – applies to money or consumable goods in which the Bailee may use or consume upon the
condition that the Bailee shall pay the amount of the same kind and quality

Commodatum
Applies to non-consumable goods
Ownership of the thing is retained
Essentially gratuitous
The thing loaned must be returned
May involve real or personal property
Loan for use
Return may be demanded in case of
urgent need
Loss is suffered by the Bailor
Mutuum
Applies to money and consumable goods
Ownership is transferred to borrower
May be gratuitous or onerous (with stipulation to pay interest)
Borrower need only to pay the same quality or same amount
Personal property only
Loan for consumption
Return (or payment of the same kind or amount) cannot be
demanded until the lapse of the term agreed
Loss is suffered by the Bailee

Characteristics of a Contract of Loan

(1) Real Contract – the delivery of the thing is necessary for the perfection of the contract
(2) Unilateral Contract – once the subject matter is delivered, obligation is now only at the part of one
party (Bailee).

Chapter 1 – Commodatum

Section 1. Nature of Commodatum

Commodatum as Gratuitous
- Commodatum is essentially gratuitous
hence, the benefit is on the Bailee
(receipient)
- Any agreement in commodatum is
terminable by the Bailor at any time without
violating any right giving rise to damages for
the Bailee.
- The right of use is limited to the thing loaned
and not to its fruits unless stipulation is
specified.
- Similar to donation, the benefit is on the
recipient only on the presumption that the
Bailor loaned the thing for having no need
for it.
- Concept of commodatum is for the thing to
be used for a specific period of time. If the
thing loaned is not intended to be used by
the Bailee, it may be considered as a Deposit
(not as commodatum).
Subject or Thing Loaned in Commodatum
- Subject matter is non-consumable things
whether real or personal
- If the thing loaned is not for use but for
exhibition, still considered as commodatum
- If a real property (ex. Land) is loaned for a
period of time without payment of rental or
the likes, considered as commodatum
(precarium as a sub-kind).
- Bailor need not be the owner of the thing
loaned since ownership is not passed to the
Bailee.
- Death of either Bailor or Baille terminates
the contract unless there is a stipulation of
passage to the heirs
- Bailee cannot pass, lend, or lease the subject
of commodatum. However, use of the thing
may extend to the members of the
household unless a prohibition is stipulated
and the nature of the thing prohibits it
(dress cannot be shared to a son).
Section 2. Obligations of the Bailee
Liability in Usage
- Bailee is obliged to pay for the ordinary
expenses for the use and preservation of the
thing loaned.
Liability in Loss (even in Fortuitous Event)
- If he used the thing to any purpose different
from the stipulated purpose of the loan.
- If used it further from the agreed period of
the loan (delay or intentional – which acted
in bad faith)
- 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 fortuitous event.
- If being able to save either the thing
borrowed or his own thing, he chose to save
the latter.
Liability in Deterioration
- The depreciation is borne by the Bailor
Section 3. Obligations of the Bailor
Obligation to Respect the Duration of the Loan
- 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 he should have urgent need of
the thing, he may demand its return or
temporary use.
- In case of temporary use of the thing by the
Bailor, the rights and duties of the parties
are likewise temporarily suspended. No
extension of the agreement will occur unless
stipulated in another contract.
Precarium
- A kind of commodatum where the Bailor
may demand the thing at will. The use of the
thing has been granted subject to revocation
by the Bailor at any time.
Right of Bailor to Demand Return of the Things
for Acts of Ingratitude
- If the Bailee should commit some offenses
against the person, the honor or the
property of the Bailor, or to his family
- If the Bailee imputes to the Bailor any
criminal offense or any act involving moral
turpitude unless the crime has been
committed against the Bailee himself or to
his family.
- Bailee is liable if he is guilty of fault or
negligence or if he devotes the thing to any
purpose different from the stipulated
purpose of the loan.
Retention
- Borrower has no right to retain the thing
loaned as security for claims that he has
against the lender
- The borrower acquires only the use of the
thing the ownership of which remains in the
lender.
Liability of Two or More Bailees
- When there are two or more Bailees to
whom a thing is loaned in the same contract,
they are liable solidarity
- The law presumes that the Bailor takes into
account the personal integrity and
responsibility of all the Bailees.
- If the Bailee unduly refuses the Bailor
support when the Bailee is legally or morally
bound to give support to the Bailor.
- The Bailee who commits any of the acts of
ingratitude makes himself unworthy of the
trust reposed upon him by the Bailor.
Obligation to Refund Extraordinary Expenses
- Extraordinary expenses for the preservation
of the thing loaned shall be borne by the
Bailor provided the Bailee informs the Bailor
before incurring them. Except when so
urgent and danger is factored.
- Extraordinary expenses arising on the
occasion of the actual use of the thing
loaned shall be borne by the Bailor and
Bailee (50-50). Bailee pays one-half because
he is the owner. Bailor pays the remaining
half because he benefited from using it.
Obligation on Usage Expenses and Other
Expenses
- Ordinary expenses on the usage of the thing
loaned is not reimbursable.
 Liability to Pay Damages for Known Flaws o There is a flaw/defect in the thing
- The Bailor who, knowing the flaws of the loaned
thing loaned, does not advise the Bailee, o The flaw/defect is hidden
shall be liable to the latter for the damages o The Bailor is aware
which he may suffer on the following o Bailor does not advise the Bailee
criteria: o Bailee suffers damages from the
flaws/defects

Chapter 2 – Mutuum or Simple Loan

Contract of Mutuum involves the return of the equivalent only and not the identical thing because the borrower
acquires ownership of the thing loaned (money or consumable thing).
- Ownership is transferred
- Word to use is “pay” not “return”.
- No criminal liability for failure to pay. Being the owner, the borrower can dispose of the thing borrowed
and his act will not be considered misappropriation thereof. No estafa is committed by a person who
refuses to pay his debt or denies its existence.
Mutuum Commodatum Barter
Subject matter is money or fungible
things (with weight, number, or is Non-consumable things Non-fungible things
measured)
Same value or number of the thing Bailee is bound to return the Equivalent thing is given in return
loaned identical thing borrowed for what has been received
May be gratuitous Always gratuitous Onerous contract; Mutual sale

Payment
(1) Loan of Money – If the thing loaned is money, payment must be made in the currency which is legal
tender in the Philippines. In case of extraordinary inflation/deflation, basis of payment shall be the value
of the currency at the time of the creation of the obligation.
(2) Loan of Fungible Thing – the borrower is under obligation to pay the lender another thing of the same
kind, quality, and quantity. If impossible to do so, the borrower shall pay its value at the time of the
perfection of the loan (when the thing is physically transferred).

Interest
- No interest shall be due unless it is stipulated in writing on the following conditions:
o The payment of the interest must be expressly stipulated
o Agreement must be in writing
o Interest must be lawful (if rate is not mentioned, legal rate of 6% shall be imposed)
- Exemptions are (1) when delay of payment is incurred even if not stipulated; (2) interest accruing from
unpaid interest.
- Interest is payable in case of breach of obligation (p.346)
- If the interest 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.
- Accrued interest shall not earn interest except in 2 instances:
o When judicially demanded
o When there is an express stipulation made by parties
- If interest is paid without stipulation (paid by mistake), the debtor may recover as this would be a case of
undue payment. If the interest is paid voluntarily (out of moral obligation), there can be no recovery.
Usury
- 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 law on usury.
Part 2 – Deposit

Chapter 1 – Deposit in General and its Different Kinds

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.

Characteristics of Deposit compensation, it becomes bilateral because

- Real contract because it is perfected by the
delivery of the subject matter
- If deposit is gratuitous, it is a unilateral
contract because only the depositary has
an obligation. If the deposit is for
obligation rises from both parties.
Purpose of Deposit
- Principal purpose is the safekeeping of the
thing delivered. Custody and preservation
of the thing delivered.

Deposit Mutuum Commodatum

Safekeeping of the subject matter
Depositor can demand the return
of the subject matter at will
Subject can be movable and
immovable property
May be gratuitous
Consumption of the subject Transfer of usage (not ownership)
matter (transfer of ownership)
Lender must wait for the
expiration of the period granted to
the debtor
Subject is money and fungible
things only
Always gratuitous

Kinds of Deposit Subject Matter of Deposit

(1) Judicial – ordered in litigation
(2) Extrajudicial – voluntarily (at will of the
depositor) or necessary (in compliance to a
legal obligation)
a. In compliance with legal obligation
b. On the occasion of any calamity
c. By travelers in hotels and inns
d. By travelers with common carriers
- Only movable or personal property may be
the object of extrajudicial deposit whether
voluntary or necessary. Keys of a house is not
considered to be a subject matter of a
contract of deposit.
- Judicial deposit may cover movable as well as
immovable property to protect the things of
parties to a suit.

Chapter 2 – Voluntary Deposit

Section 1. General Provisions
Voluntary Deposit – a voluntary deposit is one wherein the delivery is made by the will of the depositor.
- Depositor need not be owner of the thing
- No formalities required for the existence of the contract

Incapacitated and Capacitated

Depository Subject to all obligations of a depositary whether or not the depositor is capacitated
Capacitated
Depositary Depositary does not incur the obligations of a depositary but he is liable to:
Incapacitated a. Return the thing deposited while still in his possession
b. Pay the depositor the amount by which he may have benefited himself
Depositor Depositary must return the property to the legal representative of the incapacitated or to
Incapacitated the depositor himself if he should acquire capacity
Section 2. Obligations of the Depositary
Obligation to Keep the Thing Deposited and Return it
Obligation Not to Transfer Deposit
Obligation Not to Change Way of deposit
Obligation to Collect Interest on Thing Deposited Earning Interest
Obligation Not to Commingle Things Deposited if so Stipulated
Obligation Not to Make Use of Thing Deposited Unless Authorized
Liability of Loss through Fortuitous Event
Bank and Depositor
Obligation Where Thing Deposited Delivered is Closed and Sealed
Obligation to Return Products and Accessories
Obligation to Pay Interest on Money Converted to Personal Use
Right of Two or More Depositors to Demand Return of Their Respective Shares
Return – Person, Place, Time
Liability for Loss by Force Majeure

Section 3. Obligations of the Depositor

Obligation to Pay Expenses of Preservation
- Applies only if the deposit is gratuitous
- Opposite to Commodatum, the depositor is
obliged to reimburse the depositary for the
expenses he may have incurred for the
preservation of the thing deposited.
- The depositor shall reimburse the depositary
for any loss arising from the character of the
thing deposited, unless the depositor is not
aware of such conditions that may occur.
Depositary’s Right of Retention
- The thing retained serves as security for the
payment of what may be due to the
depositary by reason of the deposit.
Depositary may retain the thing until the full
payment.
- Deposit is extinguished (1) upon the loss or
destruction of the thing deposited (2) in case
of gratuitous deposit, upon the death of
either the depositor or the depositary.

Chapter 3 – Necessary Deposit

Conditions when a Deposit is Necessary
- When it is made in compliance with a legal
obligation
o Judicial deposit of a thing the possession
of which is in dispute by two or more
persons
o The deposit of a thing pledged when the
creditor uses the same without the
authority of the owner or misuses it in
any other way
o Those required in suits as provided in the
courts
o Those constituted to guarantee contracts
with the government
- When it takes place on the occasion of any
calamity such as fire, storm, flood, etc.
o Deposit created by accident (A saves the
phone of B during a fire, A is the
depositary)
o If it occurred by accident, the depositary
is entitled for just compensation.
Travelers
- Deposit made by travelers in hotels or inns
shall also be regarded as necessary. For it to
take into effect, following elements must
occur:
o They have been previously informed
o The latter have taken the precautions
prescribed regarding their safekeeping.
- The liability is not limited to effects lost or
damaged in the hotel rooms under the term
baggage or clothing, but includes those lost or
damaged in hotel annexes such as hotel
vehicles.
- Hotel keepers are liable on the following
cases:
o The loss or injury caused by his servants
or employees as well as by strangers
o The loss is caused by the act of a thief or
robber done without the use of arms and
irresistible force.
- Hotel keepers not liable on the following
cases:
o The loss or injury is caused by force
majeure
 o Robbery committed by a stranger by
force or intimidation
o Loss is due to acts of the guests, family,
servants, visitors
o The loss arises from the character of the
things brought into the hotel
- Hotel-keepers cannot free himself from
responsibility by posting notices to the effect
Chapter 4 – Sequestration or Judicial Deposit
that he is not liable for the articles brought by
the guest. Any articles posted shall be void.
- Hotel keepers has the right to retain the things
brought into the hotel by the guest as a
security for credits on account of lodging, and
supplies usually furnished to hotel guests.
Part 3 – Guaranty

Chapter 1 – Nature and Extent of Guaranty

Chapter 2 – Effects of Guaranty

Section 1. Effects of Guaranty Between the Guarantor and Creditor
Section 2. Effects of Guaranty Between the Debtor and the Guarantor
Section 3. Effects of Guaranty as Between Co-Guarantors
Chapter 3 – Extinguishment of Guaranty