contracts undercredit transaction s_lecture notes

7/31/2019 Contracts Undercredit Transaction S_lecture Notes

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Credit Transactions

Credit transactions include all transactions involvingpurchase or loan of goods, services, or money in the presentwith a promise to pay or deliver in the future.

By the use of credit, more exchanges are possible, personsare about to enjoy a thing today but pay for it later, andthrough the banking system, actual money transfer iseliminated by cancellation of debts and credits.


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Credit TransactionsScope of Credit Transactions:

The study of Credit Transaction is wider in scope thanBailments, the following make up the whole credittransactions:

1. Commodatum it is the gratuitous loan of a thing, to beused for a certain time and for certain purpose and withthe obligation to return the same thing after the timeexpires or the purpose accomplished. (Art. 1935)

2. Mutuum A contract by virtue of which one of thecontracting parties delivers to the other money or anyother consumable thing subject to the condition that thesame amount of the same kind and quality to be paid orreturn (Art. 1938)


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Credit Transactions3. Deposit When a person receives a thing belonging

to another, with the obligation to safely keeping andreturning it at the instance of the owner ordepositor.

4. Pledge The deposit of personal property by adebtor a creditor as security for payment of debt.

5. Lease A written agreement under whichpossession and use of property is granted for aspecified time, for a specified payment. Thelandlord (lessor) and tenant ( lessee) relationship.


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Credit Transactions

6. Warehouse Receipt A receipt showing storage of goods orproperty in a warehouse.

7. Usury Charging a rate of interest in excess of themaximum rate allowed by law.

8. Guaranty An undertaking to be legally responsible for thepayment of a debt of another or for performance of anothers act secondarily that is required as a legalobligation.

9. Suretyship A contract where one party agrees to beanswerable for the debt of another solidarily in anagreement reduced to a formal contract.


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Credit Transactions10. Mortgage the transfer of property passing conditionally as

a security for a debt. Mortgage may be:a. Real Estate Mortgage: I is an accessory obligation wherebyreal property is offered as security for debt or loan.b. Chattel Mortgage: It is an accessory obligation whereby

personal property is offered as security for a debt.11. Antichresis- A contract by virtue of which the creditor

acquires the right to receive the fruits if an immovable of his debtor, with the obligation to apply them to thepayment of the interest, if owing, and thereafter to theprincipal of his credit. (Art. 2132)


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Credit TransactionsBailment

Etymology of the word bailment -It is derivative of theFrench word bailler which means to deliver.

Bailment is defined as the delivery of goods or personalproperty in trust for a specific purpose, with a contract,

express or implied, that the trust shall be faithfullyexecuted and the property returned.How created? Generally bailment is created by agreement.

Bailment by operation of law may also be created .


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Credit Transactions

Parties in Bailmenta) BAILOR one who delivers goods or personalproperty to another in trust. The giver; and

b) BAILEE One who receives the goods orpersonal property in trust with the obligation toreturn them at the request of the owner of thegoods or personal property. The recipient;


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Credit Transactions

Nature of contract Bailments :

Bailments create different rights and obligationson the part of the bailor and the bailee

although different kinds are of the samegeneral character. There is always obligationon the part of bailee to restore.


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Credit Transactions

(1) Those for the sole benefit of the bailor belonging to gratuitous deposit. Bailment of goods without recompense where themandatory or person to whom the property isdelivered undertakes to do some act with

respect to the same as simply to carry it orotherwise to do something with respect to itgratuitously .


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Credit Transactions

(2) Those for sole benefit of the bailee- commodatumand gratuitous mutuum or simple loan.

(3) Those for the benefit of both: Bilateral includesdeposit for compensation,


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Credit Transactio ns

Subjects Under the Bailments:

1. Commodatum

2. Mutuum

3. Deposit

4. Pledge

5. Lease


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LOANSDefinition:

By the contract of loan, one of the parties delivers toanother, either something not consumable so that thelatter may use the same for a certain time and returnit, 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 andquality shall be paid, in which case the contract issimply called a loan or mutuum .


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LOANSCommodatum is essentially gratuitous.

Simple loan may be gratuitous or with astipulation to pay interest.

In commodatum the bailor retains the

ownership of the thing loaned, while insimple loan, ownership passes to theborrower. ( Art. 1933)


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LOANSTwo kinds of Loans

a) Mutuum (Simple Loan)b) Commodatum

Loans under the Old Lawa) Civil loans governed by the old Civil Code; andb) Commercial Law governed by the Code of

Commerce. Under the new Civil Code thisdistinction has been abolished. (Art. 2270)


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LOANS

An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, butthe commodatum or simple loan itself shall not beperfected until the delivery of the object of the contract.

(ART. 1934)Nature of the Contract of Law:Commodatum and loan are real contracts. They areperfected by the delivery of the object loaned.


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LOANS

Consideration or Cause in a Bailment of loanInsofar as the borrower is concerned, thecause is the acquisition of the thing; insofar asthe lender is concerned, it is the right torequire the return of the same thing or itsequivalent.


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LOANS

MUTUUM

a) Equivalent amount to bereturned (subject matter

is fungible).b) May be gratuitous oronerous ( with interest)

COMMODATUM

a) Same thing to bereturned (subject

matter is non-fungible)b) Essentially gratuitous (if

there is compensation itcease to becommodatum)


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LOANS

MUTUUM c. Ownership goes to borrower

or bailee.

d. Refers to personal propertyonly.

e. Referred to as LOAN FORCONSUMPTION.

COMMODATUMc. Ownership retained by

lender or borrower.d. May involve real or

personal property.e. Referred to as LOAN FOR

USE OR TEMPORARYPOSSESSION


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LOANS

MUTUUM f) Borrower, because of his

ownership bears risk of lost.

g) Can be generally obliged topay only at the end of theperiod.

h) Not personal in character.

COMMODATUMf) Lender because of his

ownership bears risk of lost.g) While generally obliged to

return object at the end of period, still in some cases it caneven be demanded before theend of the period.

h) Personal in character


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COMMODATUMThe bailee in commodatum acquires the used of the thing loaned but

not its fruits; if any compensation is to be paid by him whoacquires the use, the contract ceases to be a commodatum . (Art.1935)

Consumable goods may be the subject of commodatum if thepurpose of the contract is not the consumption of the object, aswhen it is merely for exhibition. (Art. 1936)

1937. Movable or immovable property may be the object of commodatum. ( Art. 1937 )


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CONSUMABLE VS. NON-CONSUMABLE

CONSUMABLE

A movable which cannot beused in a manner

appropriate to its naturewithout its beingconsumed. Example:Gasoline

NON CONSUMABLE

A movable which can beused in a manner

appropriate to its naturewithout its beingconsumed. Example: abook


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Whether a thing is consumable or not dependson the nature of the thing; whether it is fungibleor not depends on the intention of the parties.Hence, sugar is consumable and ordinarilyfungible, but if the intention is merely to displaythe sugar for exhibition, then it is stillconsumable (nature) but non-fungible (intention)


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COMMODATUM

COMMODATUM- is a real, principal, essentially gratuitousand personal contract where one of the parties (calledthe bailor or lender) delivers to another (called thebailee or borrower) a non-consumable object, so thatthe latter may USE the same for certain period and laterreturn it. The term is derived from Latin termcommodum (usefulness) or commodo (particularusefulness to a borrower)


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COMMODATUM

Commodatum gives the right to use and not theright to the fruits otherwise the contract isusufruct. But a stipulation that the bailee may

make use of the fruits of the thing loaned isvalid (Art. 1940). In such case the right ismerely incidental and not the main cause of the contract.


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COMMODATUM

Subject Matter:Usually, only non-consummable goods may beobject of a commodatu,m for the thing itself should not be consumed and must be returned.

But given merely for exhibition the thing itself isnot consumed. In this example is non-fungiblethough consumable.


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COMMODATUM

Nature of the Object of Commodatuma) Immovableb) Movable

Art. 1938. The bailor in commodatum need not be the ownerof the thing loaned.

Reason: The contract of commodatum does not transferownership. All that is required is that the bailor has theright to the use of the property which he is lending andthat he is allowed to alienate the right to use.


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COMMODATUMCommodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishesthe contract;

(2) The bailee can neither lend nor lease the object of thecontract 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 thenature of the thing forbids such use. (Art. 1939)


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COMMODATUMExample for 1 st paragraph:

A loaned to B the formers car by way of commodatum. If either Aor dies, the contract is extinguished.

Example for 2 nd paragraph:A loaned to B a phonograph by way of commodatum. B cannotlend or lease this to a friend. But the children of B in his householdmay use the same unless there is a stipulation to the contrary. Butsaid phonograph cannot be used as a chair, because the nature of thing forbids such use.


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COMMODATUM

A stipulation that the bailee may make

use of the fruits of the thing loaned is valid.(Art. 1940)


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Obligations of the BaileeArt. 1941. The bailee is obliged to pay for the ordinary

expenses for the use and preservation of the thingloaned.

Reason: The bailee is supposed to return the identicalthing. (Art. 1933, so he is obliged to take care of thething with, as a rule, the diligence of a good father of family. It follows necessarily that ordinary expenses foruse and preservation of thing loaned must be borne bythe bailee.


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Obligations of the BaileeArt. 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;

As a rule, a debtor of a thing is not responsible for its lostdue to fortuitous event. Exception is if he is guilty of badfaith and abuse of generosity the fact that commodatum is

gratuitous.


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Obligations of the Bailee

(2) If he keeps it longer than the periodstipulated, or after the accomplishment of theuse for which the commodatum has beenconstituted;

Reason: Bailee is guilty of certain kind of default


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Obligations of the Bailee(3) If the thing loaned has been delivered with appraisal of its

value, unless there is a stipulation exemption the baileefrom responsibility in case of a fortuitous event;

Reason: Evidently the giving of the value was made to hold thebailee liable for after all this is not a sale and neither isownership transferred in commodatum. Exception whenthere is a stipulation to the contrary. It may in a sense besaid that the appraisal converts the commodatum tomutuum.


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(4) If he lends or leases the thing to a thirdperson, who is not a member of his

household; Reason: This prohibited by the law for it

amounts to a violation of the personal

character of a commodatum.


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(5) If, being able to save either the thing borrowedor his own thing, he chose to save the latter.

Reason: This amounts to an act of ingratituted andto a failute to exercise due diligence, consideringthe fact that commodatum is gratuitous.


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The bailee does not answer for thedeterioration of the thing loaned due only tothe use thereof and without his fault. (Art.1943)


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The bailee cannot retain the thing loaned onthe ground that the bailor owes himsomething, even though it may be by reasonof expenses. However, the bailee has a rightof retention for damages mentioned in Article1951. (Art. 1944)


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Generally borrower cannot retain. Bailee is notallowed to set up compensation against the bailor.Facultative compensation. Art. 1287 provides Compensation shall not be proper when one of

the debts arises from a depositum or fromobligatios of a depositary or bailee incommodatum .


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Reason:Bailment implies a trust that as soon as thetime has expired, or the purpose

accomplished, the bailed property must beresored to the bailor.


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When there are two or more bailees to whom athing is loaned in the same contract, they areliable solidarily. (Art. 1945)

This is one of the instances when solidaryliability is imposed by law.


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Obligations of the Bailor

The bailor cannot demand the return of the thingloaned till after the expiration of the periodstipulated, or after the accomplishment of theuse for which the commodatum has been

constituted. However, if in the meantime, heshould have urgent need of the thing, he maydemand its return or temporary use.


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In case of temporary use by the bailor, thecontract of commodatum is suspended whilethe thing is in the possession of the bailor.(Art. 1946)


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Reasons:1st paragraph

Generally, bailor cannot demand immediate return. A

commodatum is for a certain time (Art. 1933) This isthe reason for the 1 st sentence of Art. 1946. This isbased on equitable grounds for otherwise the baileemay not be able to make proper use of the thing.


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2nd paragraph:A bailor usually lends his property because he does not need it.Hence the reason for the exception. Note that the return may notonly temporary but also permanent. This is sob because the lawuses its retun ( meaning permanent) or temporary use.

The gratuitous use by the borrower must yield to the necessity of thelender. This follows naturally from the gratuitous nature of acommodatum.


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Obligations of the BailorThe 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.(Art. 1947)Precarium is a special form of commodatum. In a true commodatum, the

possession of the borrower is more secured. The possession of theborrower in precarium is precarious, that is borrower on the lenders will,hence the name is precarium.

Above relates to two (2) kinds of precarium.


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Art. 1948. The bailor may demand theimmediate return of the thing if the baileecommits any act of ingratitude specified in

Article 765.


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Art. 765. The donation may also be revoked atthe instance of the donor, by reason of ingratitude in the following cases:

(1) If the donee should commit some offenseagainst the person, the honor or the property of the donor, or of his wife or children under hisparental authority;


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(2) If the donee imputes to the donor any criminaloffense, or any act involving moral turpitude, eventhough he should prove it, unless the crime or the acthas been committed against the donee himself, hiswife or children under his authority;

(3) If he unduly refuses him support when the doneeis legally or morally bound to give support to thedonor.


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The bailor shall refund the extraordinaryexpenses during the contract for thepreservation of the thing loaned, provided thebailee brings the same to the knowledge of the

bailor before incurring them, except when theyare so urgent that the reply to the notificationcannot be awaited without danger.


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Obligations of the Bailor If the extraordinary expenses arise on the

occasion of the actual use of the thing by thebailee, even though he acted without fault,

they shall be borne equally by both the bailorand the bailee, unless there is a stipulation tothe contrary. (Art. 1949)


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As a rule, extraordinary expenses should be paid by the bailorbecause it he who profits by said expenses otherwise thething borrowed would be destroyed.

Generally notice is required because the bailor should begiven discretion as to what he wants to do with his ownproperty.

In the second paragraph, this is most equitable solution. Thebailee pays one half because of the benefit derived fromthe use of the thing loaned to him and the bailor pays theother half because he is the owner of the thing.


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EXAMPLE:A borrowed a bicycle from B. While A wasriding on it, he met with an accident whichgreatly damaged the bicycle. A was nto atfault for he was driving carefully. Both A and Bshould share equally in the extraordinaryexpenses unless there is a stipulation to thecontrary.


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OBLIGATION OF THE BAILOR

Art. 1950. If, for the purpose of making use of the thing,the bailee incurs expenses other than those referredto in Articles 1941 and 1949, he is not entitled toreimbursement.

Example : The borrower of the car buys extra jack to beused as a reserve on a trip. Here, he is not entitled toreimbursement.


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The bailor who, knowing the flaws of the thing loaned,does not advise the bailee of the same, shall be liableto the latter for the damages which he may suffer byreason thereof. (Art. 1951)

The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to thebailee. (Art. 1952)


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Reason for Article 1951When a person lends, he ought to confer a benefit and notto do a mischief. If he does not reveal the flaws, he is liablefor bad faith.

Right of retention or legal pledge. For the damages sufferedby the bailee on the given instance, he can retain the thingborrowed until paid of said damages.

The flaws referred to herein are hidden defects and not theobvious ones.


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Bailor cannot exempt himself from paying theexpenses or damages by abandoning the thingto the bailee because the value of the thing

borrowed might be less than the value of theexpenses or damages.


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Notes in Contract of Simple Loan (Mutuum)

Definition of Simple Loan or Mutuum:

Art. 1953. A person who receives a loan of moneyor any other fungible thing acquires theownership thereof, and is bound to pay to thecreditor an equal amount of the same kind andquality.


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Ownership passes to the borrower, but of course he must pay later. It is also similar to anabnormal usufruct.

Fixed, savings and current deposits of moneyin banks and similar institutions shall be governedby the provisions concerning loan.


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Parties: The Lender or creditor who delivers to another the

money or other fungible things The Borrower or debtor who receives the money or

fungible things and become owner thereof withobligation to pay the creditor an equal amount of thesame kind and quality.

f


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Capacity of the Parties:The lender must be the owner or must have

authority from the owner to lend the thing,

because he is obliged to transfer ownershipthereof to the borrower. The borrower, of course, must have capacity to enter into acontract.


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N i C f Si l L (M )


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The word non-fungible should be taken asnon-consumable because the object hereshall not be returned but instead anequivalent thereof is given.

N i C f Si l L (M )


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Art. 1955. The obligation of a person who borrows moneyshall be governed by the provisions of Articles 1249 and1250 of this Code.

If what was loaned is a fungible thing other than money,

the debtor owes another thing of the same kind, quantityand quality, even if it should change in value. In case it isimpossible to deliver the same kind, its value at the timeof the perfection of the loan shall be paid.

N i C f Si l L (M )


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Liability of Borrower of money is governed byArticles 1249 as amended by Republic Act.No. 8183 and Articles 1250.

N i C f Si l L (M )


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Payment of debts in money shall be made only in the

Philippine currency which the legal tender pursuant toArt. 1249 of the Civil Code in relation to Republic Act No.8183. Obligation shall now be payable in the legal tenderin the Philippines. Legal tender means the currencywhich the debtor may compel his creditor to accept

payment of his debt. However, the parties may stipulatethat the payment may be made in currency under thanthe legal tender of Philippines at the time of payment. (R.A. No. 8183)

N t i C t t f Si l L (M t )


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Note that under the New Central Bank Act:Centavo (0.25) and above is legal tender upto P 50.00Centavo (0.10) and below is legal tender upto P 20.00All coins P 1.00 and above including bills arelegal tender up to any amount



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In case of extraordinary inflation and deflationof the Philippine currency should supervenethe basis of the value of the currency forpayment shall be the value of the currency atthe time of the establishment of the obligation.Unless there is a stipulation to the contrary(Art. 1250)



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Two interpretations: Basis of payment shall be the value of the currency

at the time of the establishment of the obligation.Hence if the value at the time of establishment is P5,000 and later on extraordinary inflation ordeflation supersedes, the amount remains the sameunless there is a contrary agreement.



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Value of the currency at the time of the establishment of the obligation is computed by using the followingformula.

Amount to be paid at maturity =

Amount of the obligation x Amount of ObligationValue at the date of Maturity



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D borrowed P 1 Million from c payable at the end of 10years. Suppose that before maturity of the loan, anextraordinary inflation supervened causing the value of the debt to fall to P 500,000 on the date of maturity.Following the above formula:

A = ( 1 million/500,000.00) x P 1Million= 2 x P 1 M= P 2 Million is the equivalent value of P 1 M in the date

of maturity



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Suppose that before maturity of the loan, anextra-ordinary deflation supervened causing thevalue of the debt to rise to P 4 Million on thedate of the maturity of the loan, how much

must D pay C on maturity?A = ( 1M/4 M) x 1 M

= P 250,000 equivalent value of P 1 M on thedate of maturity



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Art. 1956. No interest shall be due unless ithas been expressly stipulated in writing.

Interest refers to the compensation allowed

by law or fixed by the parties for the loan orforbearance of money, goods or credits.



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Formality for Interest (for the Use of the Money)The interest must be stipulated in writing.Otherwise, it is void in the absence thereof.Example: A borrowed P 1,000 from B. No mentionwas made of interest. No interest can be charged.But if interest had been stipulated upon in writing,but no rate was mentioned, then it is 12% perannum provided of course the agreement as tointerest was made in writing.



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Purpose of Interest:Interest may be paid either ascompensation for the use of the money

(monetary interests) or as damages(compensatory interests). Article 1956refers to interest for use of money.



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Requisites for recovery of interest: The payment must be expressly stipulated. The agreement as to interest must be in

writing. Interest must be lawful.



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Kinds of Interest:

Simple Interest paid for the principal at certain rate fixed orstipulated by the parties. Compound Interest- imposed upon interest due and unpaid. The

accrued interest is added to the principal sum and the whole(principal and accrued interest) is treated as a new principal upon

which the interest for the next period is calculated. Legal interest The interest imposed by law in the absence of stipulation by the parties. Central Bank Circular No. 416 (July29.1974) imposes legal interest at the rate of 12% per annum.



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Notes in Contract of Simple Loan (Mutuum) Art. 1957. Contracts and stipulations, under any cloak or device

whatever, intended to circumvent the laws against usury shall bevoid. The borrower may recover in accordance with the laws onusury.

Usury law was suspended by the Central Bank pursuant toCentral Bank No. 905. It was not repealed because the Central Bankcannot repeal laws passed by Congress. Today, there is no moremaximum rate of interest. The rate will just depend in the mutualagreement of the parties. Banks and other financial corporations areregulated by the Central Bank as to impositions of interest. Ceilingsare prescribed to protect the general public and avoid fraud.



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Art. 1958. In the determination of the interest,if it is payable in kind, its value shall beappraised at the current price of the products orgoods at the time and place of payment.

Determination of Interest in Kind:Value of said goods or products shall be at

the time and place of payment.



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Art. 1959. Without prejudice to the provisions of Article

2212, interest due and unpaid shall not earn interest.However, the contracting parties may by stipulationcapitalize the interest due and unpaid, which asadded principal, shall earn new interest.

When Accrued Interest Earns Interest:



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The general rule is that accrued interest ( interestdue and unpaid) will not bear interest except:

If there is agreement to this effect (art. 1959) If there is judicial demand (Art. 2212) Then such accrued interest will bear interest at

the legal rate unless a different rate is stipulated.



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Compound Interest is interest in accruedinterest. It is valid to charge compoundinterest but there must be a writtenagreement to this effect, otherwise the

compound interest should not be chargedunless it be the interest charged upon judicialdemand.


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Art. 1961. Usurious contracts shall be governed bythe Usury Law and other special laws, so far asthey are not inconsistent with this Code.

Usury law is now suspended.

contracts undercredit transaction s_lecture notes

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