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introduction
MEANING AND SCOPE OF CREDIT TRANSACTIONS It includes 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. Contracts of security: o Secured transactions (real security): Supported by a collateral or encumbrance of property (PLEDGE - placing the movable in the possession of creditor; CHATTEL MORTGAGE execution of the corresponding deed substantially in the form prescribed by law; REAL ESTATE MORTGAGE - execution of public instrument encumbering the real property covered; ANTICHRESIS - written instrument granting to creditor right to receive the fruits of immovable) o Unsecured transactions (personal security): Fulfillment of which by the principal debtor is secured or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety. Bailment contracts, usury, guaranty, suretyship, mortgage, antichresis, concurrence and preference of credits MEANING AND KIND OF SECURITY Something given, deposited or serving as a means to ensure the fulfilment or enforcement of an obligation or of protecting some interest in property. May be PERSONAL (individual becomes surety or guarantor) or PROPERTY/REAL (mortgage, pledge, antichresis, charge or lien used to have property held out of which person to be made secured can be compensated for loss) SECURITY. MEANING OF BAILMENT

Sole benefit of bailor Gratuitous deposit and mandatum (bailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same; as to carry it, keep it, do something with respect to it gratuitously) o Sole benefit of bailee Commodatum and mutuum (gratuitous simple loan) o Benefit of both Deposit for compensation, including involuntary deposit, pledge, bailments for hire First 2 are GRATUITOUS bailments - NO consideration, for they are considered more as a favor by one to the other who is benefited. Third is MUTUAL-BENEFIT BAILMENTS - usually results from bailments involving business transactions. o KINDS OF BAILMENTS FOR HIRE (locatio et conductio) Such arises when goods are left with the bailee for some use or service by him and is always for some compensation. o Hire of things (locatio rei): Where goods are delivered for temporary use of hirer (lease) o Hire of service (locatio operis faciendi): Where goods are delivered for some work or labor upon it by the bailee (contract for piece of work) o Hire for carriage of goods (locatio operis mercium vehendarum): Where goods are delivered either to a common carrier or private person for purpose of being carried from place to place. o Hire of custody (locatio custodiae): Where goods are delivered for storage (Warehouse Receipts Law)

Italian bailer, meaning to deliver. Delivery of property of one to another in trust for a specific purpose, with a contract (express or implied) that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it. CREATION OF BAILMENT Contractual relation; to be legally enforceable, it must contain all elements of a valid contract. It may be created by operation of law. PARTIES Bailor (comodatario; commodans): Giver, party who delivers possession or custody of thing bailed

loan
GENERAL PROVISIONS 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 ownership of the thing loaned, while in simple loan, ownership passes to the borrower.

Bailee (comodante; commodatarius): Recipient, party who receives the possession or custody of the thing thus delivered. KINDS OF CONTRACTUAL BAILMENT In every bailment, there is an obligation on part of bailee to restore the subject of the bailment in the same or in altered form or to account therefor. With reference to compensation:

CHARACTERISTICS OF LOAN

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REAL contract: Delivery of the thing loaned is necessary for the perfection of the contract. UNILATERAL contract: Once the subject matter has been delivered, it creates obligations on the part of only one of the parties (borrower) CAUSE OR CONSIDERATION As to BORROWER: Acquisition of the thing. As to LENDER: Right to demand its return or its equivalent KINDS OF LOAN COMMODATUM: Where the bailor (lender) delivers to the bailee (borrower) a non-consumable thing so the latter may use it for a certain time and return the identical thing. SIMPLE LOAN/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. o Thing is consumable when it is consumed when used in a manner appropriate to its purpose or nature. LOAN V. CREDIT CREDIT: Ability to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period. LOAN: Delivery by one (lender/creditor) and the receipt by the other (borrower/debtor) who becomes the owner of a given sum of money/consumable upon an agreement (express/implied) to repay the same amount of same kind/quality, with or without interest.

thing loaned May involve real or personal property Loan for use or temporary possession Bailor may demand the return of thing loaned before the expiration of the term in case of urgent need Loss of the subject matter is suffered by the bailor since he is the owner

Real/personal Purpose

amount of the same kind and quality Refers only to personal property Loan consumption for

Demand to return

Lender may not demand its return before the lapse of the term agreed upon Borrower suffers the los even if caused exclusively by fortuitous event and he is not discharged from his duty to pay

Loss

KINDS Ordinary Precarium: Bailor may demand the thing loaned at will.

Art. 1934
An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. DELIVERY ESSENTIAL TO PERFECTION Consequence of fact that commodatum and mutuum are REAL contracts which require delivery of the subject matter thereof for their perfection. Delivery is necessary in view of purpose of the contract (transfer the use or ownership of thing loaned) BINDING EFFECT OF ACCEPTED PROMISE TO LEND An accepted promise to make a future loan is a consensual contract, therefore BINDING upon the parties, but it is only AFTER delivery will the REAL contract of loan arise. Ex. Application for loan approved by corporation: There arises a perfected consensual contract of loan. While it can give rise to action for damages, said contract DOES NOT constitute REAL contract of loan. (Saura Import v. DBP)

*Concession of credit: Granting of loans up to limit of amount fixed in the credit CREDIT V. DEBT CREDIT: Presupposes creditor-debtor relationship, implies ability to make a promised payment. DEBT: Correlative of debt or indebtedness. LOAN V. DISCOUNTING OF PAPER DISCOUNTING: Mode of loaning money. o DISCOUNT - Interest is deducted in advance; LOAN - Interest is usually taken at the expiration of credit. o DISCOUNT - always on double-name paper; LOAN - generally on single-name paper. COMMODATUM V. MUTUUM COMMODATUM Ordinarily W/N involves consumable something not consumable Retained by Ownership lender Essentially W/N gratuitous gratuitous What to return Borrower must return the same MUTUUM Subject matter is money or other consumable thing Transferred to borrower May be gratuitous or onerous (w/ stipulation to pay interest) Borrower need only pay the same

COMMODATUM
nature of commodatum art. 1935
The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. COMMODATUM ESSENTIALLY GRATUITOUS

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Contract ceases to be a commodatum if any compensation is to be paid by the borrower who acquires the use. Lease If the consideration is rendering of some service Innominate contract SIMILAR TO DONATION It confers a benefit to the recipient. Presumption is that the bailor has loaned the thing for having no need therefor. EXTENT OF BAILEES RIGHT OF USE Limited to the thing loaned, but NOT to its fruits unless there is a stipulation to the contrary. As owner of thing loaned, bailor is naturally entitled to the fruits. PURPOSE

(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. (n) COMMODATUM PURELY PERSONAL IN CHARACTER It is a purely personal contract, lender having in view the character, credit and conduct of the borrower. Death of either party terminates the contract unless by stipulation, the commodatum is transmitted to the heirs of either or both parties. (Valid, because Par. 1 presupposes absence of any contrary stipulation). EXCEPTION to the GR that all rights acquired in virtue of an obligation are transmissible. RIGHT OF BAILEE TO LEND THING LOANED TO 3PS GR: Bailee can neither lend nor lease the object of the contract to a 3P, in the absence of some understanding or agreement to that effect. However, the use of the thing loaned may extend to the members of the bailees household (not considered as 3Ps) EXCEPT in 2 cases: (1) there is a stipulation to the contrary, (2) nature of the thing forbids such use.

Temporary use of the thing loaned. If bailee is not entitled to the use, the contract may be a deposit. Essential feature is that the use of the property of another shall be for a certain time.

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. SUBJECT MATTER OF CONTRACT Generally NON-CONSUMABLE, whether real or personal. (For bailee cannot use and return something consumed when used).

Art. 1940
A stipulation that the bailee may make use of the fruits of the thing loaned is valid. CONTRARY STIPULATION AS TO FRUITS

If the purpose is not the consumption of the object as when it is merely for exhibition, consumable goods may be the subject of the commodatum.

ART. 1938
The bailor in commodatum need not be the owner of the thing loaned. BAILOR NEED NOT BE OWNER By the loan, ownership does NOT pass to the borrower. Mere lessee or usufructuary may lend, but the borrower or bailee may not lend nor lease the thing loaned to him to a 3P. Sufficient if the bailor has such possessory interest in the subject matter or right to its use which he may assert against the bailee and 3Ps although not against the rightful owner.

Bailee entitled only to the use of thing loaned, not to its fruits. (Right to enjoy the fruits pertain to the owner of thing producing it) However, parties may stipulate that the bailee may also make use of the fruits of thing (stipulation cannot be presumed) Enjoyment of fruits must only be incidental to the use of the thing itself (if it is main cause USUFRUCT).

OBLIGATIONS OF BAILEE ART. 1941

The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. LIABILITY FOR ORDINARY EXPENSES Logical - he acquires the use of the same, he is supposed to return the identical thing. Borrower must take good care of the thing with the diligence of a GFF. Extraordinary expenses - Art. 1949.

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

Art. 1942
The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

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(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 exemption 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. LIABILITY FOR LOSS OF THING LOANED Bailee must exercise proper diligence with regard to care and preservation of the thing loaned for he must return the thing after its use. GR: Bailee is NOT liable for loss or damage due to fortuitous event (bailor retains ownership of thing loaned). EXC: Art. 1942. Purpose of the law is to punish bailee for his improper acts although they may not be the proximate cause of the loss. REASONS: o 1 - Bailee acts in BF o 2 - He incurs in delay o 3 - Law presumes that the parties intended that the borrower be liable for the loss even if it is due to a fortuitous event o 4 - Commodatum is purely personal o 5 - Bailee shows ingratitude after the thing is gratuitously loaned to him.

he has against lender, even though they may be by reason of extraordinary expenses. o Ownership remains in bailor: Borrower acquires only the use of the thing. o Only temporary use given to bailee: Bailee would be violating the bailors trust in him to return the thing as soon as the period stipulated expires or purpose has been accomplished. Law imposes upon him the obligation to return the same. EFFECT OF RETENTION OR ADVERSE CLAIM BY BAILEE Mere failure to return does not constitute adverse possession on the part of bailee who holds the same in trust. RIGHT OF RETENTION FOR DAMAGES Exception in 1951 is of evident justice. BUT, bailees right extends no further than to retention of the thing loaned until he is reimbursed for the damages suffered by him. He cannot lawfully sell the thing to satisfy said damages.

Art. 1945
When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. LIABILITY WHEN THERE ARE 2 OR MORE BAILEES Reason: To safeguard effectively the rights of the lender. o Law presumes that bailor takes into account the personal integrity and responsibility of all bailees, and he would not have constituted the commodatum if there were only one bailee. o EXC to GR that concurrence of 2 or more parties in the same obligation gives rise to a joint obligation.

Art. 1943
The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. LIABILITY FOR DETERIORATION OF THING LOANED The parties knew that the thing borrowed cannot be used without deterioration due to ordinary wear and tear. In the absence of agreement to the contrary, the depreciation caused by the reasonable and natural use of the thing is borne by the bailor. Bailee is liable if he is guilty of fraud or negligence or if he devotes the thing to any purpose different from that for which it has been loaned.

Obligations of the Bailor 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 possession of the bailor. OBLIGATION TO RESPECT DURATION OF LOAN Primary obligation of bailor: Allow bailee the use of the ting loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was constituted. (Bailor bound by terms of commodatum which is for a certain time) If he should have an urgent need of thing or if borrower commits an act of ingratitude, he may demand it return or temporary use. (Commodatum is essentially gratuitous)

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. OBLIGATION TO RETURN THING LOANED

EXCEPT for claim for damages suffered because of flaws of thing loaned, borrower has NO right to retain thing loaned as security for claims

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Return may only be temporary or may be permanent (its return or temporary use) In case of temporary use by bailor, rights and duties of parties are suspended.

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. OBLIGATION TO REFUND EXTRAORDINARY EXPENSES For preservation of thing loaned: Borne by bailor. o REASON: It is bailor who profits by said expenses. If they are incurred by bailee, bailor must refund them provided the bailee brings the same to knowledge of bailor before he incurs them. NOTICE is required. (Bailor must have discretion as to what must be done with his property. o EXCEPTION: Expenses are so urgent that the reply to the notification cannot be awaited without danger. Arising from actual use of thing loaned: Borne by bailor and bailee alike (50-50 basis) o Bailee pays because of benefit derived from the use of thing loaned to him, bailor pays because he is the owner and the thing will be returned to him. o Parties MAY stipulate a different apportionment of such expenses or that they shall be borne by only one of them.

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. PRECARIUM DEFINED Kind of commodatum where bailor may demand the thing at will. 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. CASES WHEN CONTRACT IS PRECARIUM In either case in Art. 1947, it is presumed that the use of the thing has been granted subject to revocation by bailor at any time, w/n the use for which the thing was loaned has been accomplished. In ordinary commodatum - possession of bailee is more secure for he has the right to retain the thing loaned until expiration of thing loaned or accomplishment of use for which it is constituted. De Leon: Use of owner is inaccurate.

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. NO OBLIGATION TO ASSUME ALL OTHER EXPENSES

Art. 1948
The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. RIGHT OF BAILOR TO DEMAND RETURN OF THING FOR ACTS OF INGRATITUDE o 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; o 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; o If the bailee unduly refuses him support when the donee is legally or morally bound to give support to the bailor. Like donation, commodatum is essentially gratuitous. Bailee who commits said acts makes himself unworthy of the trust reposed upon him by the bailor. HERE: Ordinary commodatum.

All expense not necessary for use and preservation of the thing must be shouldered by the borrower. Ordinary expense incurred for the preservation of the thing are also for the account of the bailee.

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. LIABILITY TO PAY DAMAGES FOR KNOWN HIDDEN FLAWS Requisites: o There is flaw or defect in the thing loaned. o It is hidden. o Bailor is aware thereof. o He does not advise the bailee of the same. o Bailee suffers damages by reason of said flaw or defect.

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

Bailor is made liable for his bad faith. Bailee is given the right of retention until he is paid damages.

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WHERE FLAW UNKNOWN TO BAILOR

He is NOT liable because commodatum is gratuitous. Rule is different in sale and lease because valuable consideration is received by vendor and lessor.

Art. 1952
The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. NO RIGHT OF ABANDONMENT FOR EXPENSES AND DAMAGES REASON: Expenses and or damages may exceed the value of thing loaned (unfair)

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