REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

COVERAGE:
A. Contract of Pledge, Real Mortgage and Chattel Mortgage
a. Nature and requisites
b. Requirements to bind contracting parties and third persons
c. Obligations and rights of pledgor and pledge
d. Obligations and rights of mortgagor and mortgagee
e. Effect of pactum commissorium
f. Modes of Extinguishment
B. Contract of Agency
a. Nature, forms and kinds
b. Obligations of agents and principal
c. Guarantee commission agent
d. Modes of extinguishing an agency

Direction: Read and select the best answer for the following questions.

1. Essential requisites to the contracts of pledge and mortgage and antichresis

a. That they be constituted to secure the fulfillment of a principal obligation.
b. That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged.
c. That the persons constituting the pledge or mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the purpose.
d. That when the principal obligation becomes due, the things in which the pledge or mortgage consists may
be alienated for the payment of the creditor.

2. Kinds of principal obligations that may be secured by a pledge or mortgage

a. Pure or conditional obligations whether suspensive or resolutory
b. Natural obligations
c. Rescissible, voidable or unenforceable obligations

3. Period the pledgor or mortgagor required to be the owner of the thing pledged or mortgaged for the
validity of contract of pledge or mortgage
a. At the time the pledge or mortgage is constituted.

4. Pactum Commissorium is a stipulation whereby the thing pledged or mortgaged shall automatically become the
property of the creditor in the event of non-payment of the debt within the term fixed.

5. The following are the instances where the thing pledged or mortgaged may be sold or alienated to pay the
principal obligation
a. If the pledgor or mortgagor fails to fulfill certain conditions and such violation would make the debt due
and demandable.
b. If the debtor has lost the right to make use of the period or where there is an acceleration clause in the
payment of installment.
c. Upon default to pay the obligation at maturity.

6. Indivisibility of contract of pledge or mortgage or antichresis

7. Nature of promise or contract to constitute a pledge or mortgage are correct

8. Contract of pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a
movable, or instrument evidencing incorporeal rights for the purpose of securing the fulfillment of a principal
obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with
all its fruits and accessions.

9. The following are the characteristics of a contract of pledge

a. Real – It is perfected by delivery of the subject matter.
b. Accessory – It has no independent existence of its own.
c. Unilaterial – It creates an obligation on the part of the creditor to return the thing upon the fulfillment of
the principal obligation.
d. Subsidiary – The obligation incurred does not arise until the fulfillment of the principal obligation which
is secured.

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 10. The following are the essential requisites of conventional pledge
a. That it be constituted to secure the fulfillment of a principal obligation.
b. That the pledgor be the absolute owner of the thing pledged.
c. That person constituting the pledge has the free disposal of his property, and in the absence thereof, that
he be legally authorized for the purpose.
d. That the thing pledged be placed in the possession of the creditor, or a third person by common
agreement.

11. Nature of a contract to constitute a pledge vs nature of contract of pledge

12. Subject matter of a contract of pledge

a. All movable or personal property susceptible of possession.
b. Incorporeal rights which are evidenced by negotiable instruments, bill of lading, shares of stocks, bonds,
warehouse receipts and similar documents.

13. Form of contract of pledge for validity/bind contracting parties vs. form of contract of pledge to bind third
persons

14. Rights of the debtor-pledgor

a. To alienate, with the consent of the pledgee, the thing pledged.
b. To ask that the thing pledged be judicially or extra-judicially deposited if it is used without authority or
for a purposes other than for its preservation.
c. To continue to be the owner of the thing pledged unless it is expropriated.
d. To ask for the return of the thing pledged after he has paid the debt and its interest, with expenses in a
proper case.
e. To require that the thing be deposited with a third person if it is in danger of being lost or impaired
through the negligence or willful act of the pledgee.
f. To demand the return of the thing pledged, upon offering another thing in pledge, provided the latter is of
the same kind and quality, if there are reasonable grounds to fear the construction or impairment of the
thing pledged without the fault of the pledgee. This right is without prejudice to the right of the pledgee to
have the thing sold at a public sale.

15. Obligations of the debtor-pledgor

a. To pay the debt and its interest, with expenses, in a property case, when they are due.
b. To pay damages that the pledge may suffer by reason of the flaws of the thing pledged, if he was aware of
such flaws but did not advise the pledgee of the same.
c. To pay for the expenses which are not necessary for the preservation of the thing pledged.

16. Rights of the creditor-pledgee

a. To retain in his possession the thing pledged until the debt is paid.
b. To demand reimbursement of the expenses made for the preservation of the thing pledged.
c. To bring actions which pertain to the owner of the thing pledged in order to recover it from, or defend it
against third person.
d. To use the thing pledged if he is authorized to do so, or when its use is necessary of the preservation of
the thing.
e. To cause the sale of the thing pledged at a public sale, if there is a danger of destruction, impairment or
diminution of value of the thing pledged without his fault.
f. To collect and receive the amount due if the thing pledged is a credit which becomes due before it is
redeemed, and to apply the same to the payment of his claim.
g. To sell the thing pledged upon default of the debtor.
h. To appropriate the thing pledged upon failure to sell the property in two public auctions

17. Obligations of creditor-pledgee

a. To take care of the thing pledged with the diligence of a good father of a family.
b. To be liable for the loss or deterioration of the thing pledged unless it is due to a fortuitous event.
c. To deposit the thing pledged with a third person.
d. To be responsible for the acts of his agents or employees with respect to the thing pledged.
e. Not to use the thing pledged except when he is authorized by the owner or when the use of the thing is
necessary for its preservation.
f. To deliver to the debtor the surplus after paying his claim from what he has collected on a credit that was
pledged and which has become due before it is redeemed.

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 18. Instances when a third person who pledges his own movable property to secure the debt of another shall be
released from liability
a. If the creditor voluntarily accepts immovable or other property in payment of the debt even if the creditor
thereafter loses the same by eviction.
b. If an extension of time is granted to the debtor by the creditor without pledgor’s consent.
c. If through some act of the creditor, the pledgor cannot be subrogated to the rights, mortgages and
preferences of the creditor.
d. If the thing pledged is deteriorated on the fault of the pledgee.

19. Modes of extinguishment of a contract of pledge/Direct vs. Indirect/Effects

a. When the principal obligation secured by the pledged is extinguished.
b. Return by the pledge of the thing pledged to the pledgor or owner.
c. Renunciation or abandonment in writing by the pledgee of the pledge.
d. Sale of the thing pledged.
e. Appropriation of the thing pledged if the thing pledged is not sold in the first and second auctions.

20. Null and void stipulations in a contract of pledge

I. A stipulation which provides that the pledge is not extinguished by the return of the thing pledged.
II. A stipulation allowing the automatic appropriation by the pledgee of the thing pledged in case of default of
the debtor.
III. A stipulation for the recovery of deficiency in case the proceeds from the sale of the thing pledged is less than
the amount of the obligation.

21. Excess vs. Deficiency in a contract of pledge

22. Legal Pledge - is a type of pledge which refers to the right of a person to retain a thing until he receives payment
of his claim.

23. Examples of legal pledge

a. A possessor in good faith may retain the movable upon which he has incurred necessary and useful
expenses until he has been reimbursed therefore.
b. He who has executed work upon movable has a right to retain it by way of pledge until he is paid.
c. The depositary may retain the thing deposited until the full payment of what may have been due from him
by reason of the deposit.

24. Conventional pledge vs. Legal pledge

25. Essential requisites of a contract of real estate mortgage

a. That it be constituted to secure the fulfillment of a principal obligation.
b. That the mortgagor be the absolute owner of the thing pledged.
c. That the person constituting the mortgage must have the free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose.

26. Important characteristics of real estate mortgage

a. Accessory – It cannot exist without a principal obligation.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which lien continues until
the obligation is secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted.
d. Real right – It creates a lien on the property mortgaged.
e. Consentual contract – It is perfected by mere consent.

27. Types of real estate mortgage

a. It is one which is created by the agreement of the parties.
b. It is one executed pursuant, to an express requirement of a provision of law.
c. It is one which although lacks certain formality, form or words or other requisites provided by statute,
shows the intention of the parties to charge the real property as a security for a debt and contains nothing
contrary to law.

28. Subject matter of contract of real estate mortgage

a. Immovable property
b. Rights on immovable property

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 29. Formality of a contract of pledge

30. Judicial Forclosure vs. Extrajudicial foreclosure

31. Equity of redemption vs. Right of redemption

32. Excess vs. Deficiency in Contract of Real Estate Mortgage

33. Chattel mortgage - is a conditional sale of personal property as security for the payment of a debt, or the
performance of some other obligation specified therein, the condition being that the sale shall be void upon the
seller paying to the purchaser a sum of money or doing some other act named. If the condition is performed
according to its terms the mortgage and sale immediately become void, and the mortgagee is thereby divested of
his title.

34. Essential requisites of chattel mortgage for its validity

a. That it be constituted to secure the fulfillment of a principal obligation.
b. That the mortgagor be the absolute owner of the thing mortgaged.
c. That the person constituting the mortgage must have the free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose.
d. That the document in which the mortgage appears be recorded in the Chattel Mortgage Register.

35. Important characteristics Contract of chattel mortgage

a. Accessory – It cannot exist without a principal obligation.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which lien continues until
the obligation is secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted.
d. Formal contract – It is perfected by the registration if the chattel mortgage register.

36. Subject matter of chattel mortgage

a. Personal property
b. Movable property

37. Rules for the place of registration of Chattel Mortgage

a. As a general rule, it must be recorded in the Chattel Mortgage Register of the province where the
mortgagor resides.
b. If must be recorded in the both Chattel Mortgage Registers of the provinces where the mortgagor resides
and where the property is located.
c. If the mortgagor is domiciled outside the Philippines, the mortgage must be registered in the Chattel
Mortgage Register where the property is located.
d. With respect to motor vehicles, Chattel Mortgage Register and LTO.
e. With respect to shares of stock, Chattel Mortgage Register in the province where the corporation has its
principal office and in the domicile of the mortgagor.
f. With respect to vessel, Bureau of Customs at port of entry.

38. Excess vs. Deficiency in Contract of Chattel Mortgage

39. Antichresis - is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation,
especially subjecting to such security, immovable property or real rights over immovable property in case the
principal obligation is not complied with at the time stipulated. In this contract, the creditor acquires the right to
receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest,
if owing, and thereafter to the principal of his credit.

40. Important characteristics Contract of Antichresis

a. Accessory – It cannot exist without a principal obligation.
b. Indivisible – It creates a lien on the whole or all of the properties mortgaged, which lien continues until
the obligation is secures has been fully paid.
c. Inseparable – It subjects the property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted.
d. Formal contract – It is perfected by the written agreement on the contract of antichresis including the
principal and interest of the loan.

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 Comparison of Pledge, Real Mortgage, Chattel Mortgage and Antichresis
Basis of Difference Conventional Pledge Real Estate Mortgage Chattel Mortgage
Type of Contract as to Real – By delivery of object Consensual – By mere Formal – By registration in
perfection consent the Chattel Registry
To bind third persons Must be in a public Must be registered in the Must be accompanied by
instrument showing a Registry of Property affidavit of good faith
description of the thing
pledged and the date of the
pledge
Object of contract Movable or personal Immovable or real property Movable or personal
property property
As to deficiency Deficiency can never be Deficiency can be recovered Deficiency can be recovered
recovered even if there is a unless there is stipulation to except in case of personal
stipulation. (Exception – the contrary. property sold in installment
Legal Pledge) (Recto Law)
As to excess of proceeds Excess is retained by Excess belongs to the Excess belongs to the
pledee-creditor unless there mortgagor unless there is mortgagor unless there is
is stipulation to the contrary. stipulation to the contrary. stipulation to the contrary.
(Exception – Legal Pledge)
As to appropriation of The pledgee may The mortgagee cannot The mortgagee cannot
property appropriate the thing appropriate the thing appropriate the thing
pledged if the same is not mortgaged. mortgaged.
sold in two public auctions.
As to selling of property The pledgor may only sell The mortgagor can sell the The mortgagor can sell the
after the pledge or mortgage the property with the property. Any stipulation property. Any stipulation
by the owner. consent of the pledgee. prohibiting the mortgagor to prohibiting the mortgagor to
sell the property is void. sell the property is void.

41. Agency - is a contract, whereby a person binds himself to render some service or to do something in
representation or in behalf of another, with the consent and authority of the latter.

42. Characteristics of a contract of agency

a. Principal – it can stand by itself.
b. Preparatory – It is a means by which other contracts may be entered into.
c. Consensual – It is perfected by mere consent.
d. Onerous – It is generally presumed to be with just compensation.
e. Nominate – It has a name given to it by law.
f. Bilateral – The parties are bound reciprocally to it by law.
g. Commutative – The parties give and receive almost equivalent values.

43. Instances of implied contract of agency

a. Acts of the principal
b. Silence of the principal
c. Lack of action of the principal
d. Failure of the principal to repudiate the agency knowing that another person is acting in his behalf without
authority.
e. Special power of attorney

44. Status of contract of entered into by the agent in behalf of the principal

45. Acts of Administration vs. Acts of Strict Dominion

46. Basic principles of contract of agency

a. The agent must act within the scope of his authority.
b. The agent may do such acts as may be conducive to the accomplishment of the purpose of the agency.
c. The limits of the agent’s authority shall not be considered exceeded even it has been performed in a
manner more advantageous to the principal than that specified by him.
d. The agent must act in behalf of his principal and should disclose the principal.

47. Effects if the agent acts within the scope of his authority but in his (agent’s) behalf or without disclosing the
principal
a. The principal has no right of action against the person with whom the agent has contracted.
b. The person with whom the agent has contracted has no right of action against the principal.
c. The agent is directly bound in favor of the one with whom he has contracted.
d. The contract binds the third person and the principal even if the contract involves thing belonging to the
principal.

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 48. General obligations of an agent
a. To carry out the agency.
b. To be liable for damages through the non-performance, the principal may suffer.
c. He shall observe diligence of a good father of a family in the custody and preservation of the goods if he
declines the proposed agency.
d. To finish the business already begun on the death of the principal, should delay entail any danger.
e. Not to continue the agency despite the fact that its execution would manifestly result in loss or damage.

49. Special obligations of an agent

a. To advance the necessary funds if there was stipulation to that effect except when the principal is
insolvent.
b. To act in accordance with the instructions of the principal in the execution of the agency and in the
absence of instructions of the principal, he shall exercise the diligene of a good father of a family.
c. No to carry out an agency if the execution would manifestly result in loss or damage to the principal.
d. To be liable for damages if there being a conflict between interest and that of the principal, he should
prefer his own.
e. To lend money to the principal at current interest rate if he has been authorized to borrow money.
f. Not to borrow money of the principal at current interest rate without the principal’s consent, if the latter
has authorized him to lend principal’s money at interest.
g. To render an accounting of his transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the principal. Any obligation exempting the
agent from the obligation to render an account shall be void.
h. To be liable for 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 agency.
i. To be responsible not only for fraud, but also for negligence which shall be judged with more or less right
by the court.

50. Rules that shall be observed as regards to the liability of agent when he appoints a substitute
a. If the agent is not prohibited to appoint a substitute, the agent may appoint a substitute but he shall be
responsible for the acts of the substitute.
b. If the agent is authorized to appoint a substitute and the principal designated the person to be appointed as
substitute, the agent is not responsible for the acts of the substitute.
c. If the agent is authorized to appoint a substitute and the principal does not designate the person to be
appointed as a substitute, the agent shall be liable if the person appointed as substitute is notoriously
incompetent or insolvent man.
d. If the agent is prohibited to appoint a substitute, the agent cannot appoint a substitute. If he appoints one,
all the acts of the substitute shall be void.

51. Degree of liability of two or more agents vs Degree of liability of two or more principals

52. Obligations of the principal in the contract of agency

a. To comply with all the obligations which the agent may have contracted within the scope of his authority.
b. To be bound for any obligation wherein the agent exceeded his power if he ratifies such obligation
expressly or tacitly.
c. To be solidarily liable with the agent if he allowed the latter to act as though he had full powers when the
agent exceeded his authority.
d. To advance to the agent the sums necessary for the execution of the agency should the agent so request.
e. To reimburse the agent the sums advanced by the seller even if the business or undertaking was not
successful provided that the agent is free from fault including the interest on the sum.
f. To indemnify the agent for all damages which the execution of the agency may have caused the latter,
without the fault or negligence on his part.
g. When two or more persons have appointed an agent for a common transaction or undertaking, the
principals shall be solidarily liable for all the consequences of the agency.

53. Instances wherein the principal shall not be liable for the expenses incurred by the agent
a. When the agent acted in contravention of the principal’s instructions and the principal avails himself of
the benefits derived from the contract.
b. When the expenses were not due to the fault of the agent.
c. When the agent incurred them with knowledge that an unfavorable result would ensue if the principal was
not aware thereof.
d. When it was stipulated that the expenses would be borne by the agent, or that the latter would be allowed
only a certain amount.

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 54. Modes of extinguishment of agency: (EDWARD)
a. E – Expiration of the period for which the agency was constituted.
b. D – Death, Civil interdiction, Insanity or Insolvency of the principal or agent.
c. W – Withdrawal of the agent.
d. A – Accomplishment of the object or purpose of the agency.
e. R – Revocation of the agency by the principal.
f. D – Dissolution of the firm or corporation which entrusted or accepted the agency.

55. Implied revocation of contract of agency

a. When a new agent is appointed for the same business or transaction.
b. If the principal directly manages the business entrusted to the agent, dealing directly with third persons.
c. When a special power of attorney is granted to an agent with a general power of attorney.

56. Instances when agency may not be revoked at will by the principal
a. If a bilateral contract depends upon an agency.
b. If the agency is a means of fulfilling an obligation already contracted.
c. If a partner appointed a manager of a partnership in the contract of partnership and his removal from the
management is unjustifiable.

57. Principles concerning revocation

a. If the agency has been entrusted for the purpose of contracting with specified persons, the principal must
give a timely notice of the revocation to such third persons.
b. If the agent had general powers, he was entrusted to contract with general public or any person,
revocation of the agency does not prejudice third persons who acted in good faith and without knowledge
of the revocation.
c. Notice of revocation of general powers in a newspaper of general circulation is sufficient warning to third
persons.
d. Revocation binds third persons who had knowledge thereof.

58. Principles concerning withdrawal by the agent

a. The agent must give notice to the principal of the withdrawal.
b. The agent must indemnify the principal for any damage suffered by reason of the withdrawal.
c. The agent shall not be liable for withdrawal if it is based upon the impossibility of continuing the
performance of the agency without grave detriment to himself.
d. The agent who withdraws should take care of the object of the agency if his reason is valid.

59. Instances when the agency is not extinguished by the death of the principal.
a. If the agency has been constituted in the common interest of the principal and the agent.
b. If the agency has been constituted in the interest of a third person who has accepted the stipulation in his
favor.
c. In so far as to finish the business already begun on the death of the principal, should delay entail any
danger.

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