Credit a person’s ability to borrow money by virtue of the confidence or trust reposed in him by the

lender that he will pay what he may promise it is the trust or belief reposed by a person in another, of the latter’s ability to comply with an

obligation

Credit Transaction – agreements based on trust or belief of someone on the ability of another person to comply with his obligations

Involves loans of money, goods or services extended to another either gratuitously or onerously

Security – it is something promised or delivered to ensure the fulfillment of an obligation

Kinds of Credit Transactions

a. Contracts of Real Security – contracts supported by collateral or burdened by an encumbrance on property

Example: mortgage and pledge

b. Contracts of personal security – contracts where performance by the principal debtor is supported by a promise to pay or by the personal undertaking or commitment of another person

Example: surety or guaranty

c. Principal Contracts – contracts that exist alone and does not depend on the existence of another contract

d. Accessory Contracts – contracts that depend on another contract (principal contract)Examples: guaranty, suretyship, pledge, mortgage and antichresis

Antichresis – a contract for security between the debtor and his creditor; a transfer of possession of the pledged real property from the debtor to the creditor, including the the fruits or rent income therefrom, in lieu of payments on the loan, including interest, for any such time period as is provided for in the contract.

e. Onerous – a contract where there is a consideration or burden imposedExample: interest

f. Gratuitous – a contract where there is no consideration or burden imposedExample: commodatum

Bailment – the delivery of property of one person 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

Parties in Bailmenta. Bailor – one who gives or delivers the property bailedb. Bailee – one who receives the thing delivered or bailed

Letter of Credit – Trust Receipt Transaction Arrangement A bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as a

security of loan

Bridge Financing To obtain funds through an interim loan, while the main loan is not yet available

Loan

Kinds of Contract of Loans

a. Contract of Commodatum – where one of the parties (bailor) delivers to another (bailee) something not consumable so that the bailee may use the thing for a certain time and thereafter returns it

b. Contract of Mutuum (Simple Loan) – where money or other consumable thing is delivered by the lender to the borrower subject to the condition that the same amount of the same kind and quality shall be paid

Consumable – when it cannot be used in a manner appropriate to its nature without being consumedExample: food, firewood, gasoline

Non-consumable – a movable thing which can be used in a manner appropriate to its nature without being consumedExample: car, television, radio

Fungible Thing – one where the parties have agreed to allow the substitution of the thing given or delivered with an equivalent thing

Non-fungible Thing – one where the parties have the intention of having the same identical thing returned after the intended use

Kinds of Commodatum

a. Precarium – where the bailor may demand the thing loaned at will; the use of the thing by the bailee depends on the pleasure of the bailor (no time was fixed for the use of the thing)

b. Ordinary Commodatum – where the bailor cannot just demand the return of the thing at will because there is a period agreed upon which must be respected

Distinction between Commodatum and Mutuum

Basis Commodatum MutuumSubject Matter Non-consumable thing

Same thing must be returnedMoney or consumable thing

Equivalent amount of same kind and quality is to be returned

Nature Gratuitous Gratuitous or Onerous (when there is interest)

Purpose Loan for use of temporary possession Loan for consumptionKind of Property Real or Personal Personal

Risk of Loss Lender or Bailor retains ownership Ownership is transmitted to borrower or bailee

Time of Payment Returnable at the end of the period in case of urgent need

Not returnable until the end of the period

Character Personal Not personal

Credit vs Loan

Credit – an individual’s ability to borrow money by virtue of the confidence or trust reposed by the lender unto him that he will pay what he has promised

Loan – the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest

Note: An agreement for a loan with the stipulation that if the loan is not paid, a parcel of land would

be deemed sold to the lender for the amount of the loan is valid (no pacto comisorio)

pacto comisorio – one prohibited, by which the creditor can endorse the thing given as collateral for the debt in case of default

Note: Perfection of Commodatum and Mutuum delivery of the objects of the obligations

o No delivery, no contract The legal effect of promise to deliver is binding upon the promissor and promissee because

contracts are obligatory when all the essential requisites for the validity are presento Non-fulfillment will justify the filing of an action for damages

Commodatum

Characteristics of Commodatum1. Gratuitous2. Transfer the temporary use of the thing loaned to the bailee3. Use of the thing is for a certain time4. Real Contract5. Principal Contract6. Unilateral Contract7. Personal

Subject of Commodatum: non-consumable (the thing must be returned)

Object of Commodatum: immovable and movable property

Note: If any compensation is payable for the use of the thing, it ceases to be a commodatum Usufruct will result of the bailee is authorized to enjoy the fruits of the property It is valid If there is a stipulation in the contract allowing the bailee to enjoy the fruits of the

thing loaned Consumable goods may be the object of commodatum if the purpose is for ad ostentationem or

exhibition Bailor need not be the owner of the thing loaned

o The lessee may sublease and transfer the enjoyment of the thing leased to another for a consideration, as long as there is no prohibition for subleasing in the contract of lease

The rights and obligations arising from commodatum are extinguished by the death of the bailor or bailee

GR: The Bailee cannot lend or lease the object to a third personXPN: The third person is a member of the household of the bailee subject to the following conditions: (1) there is no agreement or stipulation to the contrary, and (2) the nature of the object forbids such use

Note: Members of the household of the bailee are not considered third persons All rights acquired in virtue of an obligation are transmissible

GR: The bailee is not entitled to the use or enjoyment of the fruits of the thing loanedXPN: If there is a stipulation to that effect

Note:The enjoyment of the fruits must be incidental to the use of the thing

Obligations of the Bailee (Borrower)a. To pay for ordinary expenses

Bailee is obliged to return the thing to the bailor Bailee should take good care of the thing with the diligence of a good father of a family

Note:

If the expenses incurred by the bailee are extraordinary, the bailor must reimburse the bailee provided that before incurring them, the bailor has been notified

If extraordinary expenses are incurred during the actual use of the thing, the bailee and bailor shall equally bear the expenses unless there is a stipulation to the contrary

Bailee is not entitled to the refund of other expenses (neither ordinary or extraordinary)

Bailee (Borrower) is liable for the loss of the thing even through a Fortuitous Event1. If bailee used the thing to a different purpose from what is has been loaned2. If bailee keeps the thing longer than the period stipulated or after the accomplishment of the use3. If the thing loaned has been delivered with appraisal of its value, unless stipulated exempting the bailee from responsibility in case of a fortuitous event4, If bailee lends or leases the thing to the third person, who is not a member of bailee’s household5. If being able to save either the thing borrowed or own thing, bailee choose to save his own thing

Note: Bailee has no liability for deterioration of the thing in the absence of fault

GR: The bailee (borrower) cannot retain the thing loaned to him on the ground that the bailor (lender) owes him something including claims for extraordinary expenses incurred by bailee.

XPN: Claims for damages which the bailee suffered by reason of the hidden defects or flaws of the thing loaned, of which he was not warned or advised by the bailor (lender)

Note: The bailee’s right is to retain the thing until he is reimbursed The bailee has no right to sell the thing to satisfy his claim for damages

Solidary Obligation – where each one of the debtors is obliged to pay the entire obligation, and where each one of the creditors has the right to demand from any of the debtors, the payment or fulfillment of the entire obligation

Passive Solidarity – solidarity on the part of the debtorsActive Solidarity – solidarity on the part of the creditors

Obligations of the Bailor (Lender)

When the return of the thing loaned may be demanded by the bailor1. after the expiration of the period stipulated2. after the accomplishment of the use for which the commodatum has been constituted

Note: When the bailor has an urgent need of the thing loaned, he may demand its (a) return, or (b) its

temporary use In case of temporary use, the commodatum is not extinguished but merely suspended while the

possession of the thing loaned remains in the bailor (lender) When loan is for unlawful purposes, the contract is void

Precarium – where the bailee (borrower) is bound to return the thing upon the demand of the bailor (lender) in any of the following circumstances:

1. If the duration of the contract is not stipulated2. If the use of the thing loaned is not stipulated3. If the use of the thing is by tolerance of the owner

GR: The bailor (lender) can always demand the immediate return of the thing at will or at his pleasure

Note:If the bailee has committed acts of ingratitude, the bailor may immediately demand the return of the thing loaned even of the period stipulated has not yet expiredActs of Ingratitude1. if the bailee committed offenses against the person, honor, property of the bailor, or his wife or children2. if the bailee imputes to the bailor any criminal offenses, or act involving moral turpitude3. If the bailee refuses the bailor support when the bailee is legally or morally bound to give support to the bailor

Flaws or Defects of the Thing LoanedThe bailor (lender) is liable if he failed to advise bailee of defects or flaws of the thing loaned (tortious act)The omission constituted negligenceThe gross violation of the contract is a tort or quasi-delictWhen the bailor (lender) is not aware of the flaws of the thing loaned, he is not liable because commodatum is gratuitous and not onerousIf both parties are aware of the flaws or defects, the bailor is not liable for damages suffered by bailee because the bailee (borrower) is deemed to have assume the riskAbandonment of the thing cannot exempt bailor (lender) from payment of expenses and damages

Simple Loan or Mutuum

Mutuum – a contract whereby one of the parties (lender) delivers to another (borrower), money, or other consumable thing with the condition or agreement that the same amount of the same kind and quantity shall be paid

Note:In a contract of loan, the borrower becomes the owner of the thing or property delivered to him

Barter – a contract where one of the parties binds himself to give one thing or another in consideration of latter’s promise to give another thing

Distinction between Loan and Barter

Basis Loan BarterSubject Matter Money or other fungible things Non-fungible things

Nature Gratuitous or onerous onerousEffect There is transfer of ownership, there is

no saleMutual sale resulting in the transfer of

ownership on both sidesReturn of the Thing After the expiration of the period Parties do not return the thing subject

of the exchange

Payment of Loan The value of the thing at the time of its perfection (delivery) shall be the basis

Interest – the compensation agreed to be paid by the borrower for the use of the money lent to him by the lender

Classes of Interest

a. Simple – interest paid for the use of the principal at a certain rate stipulated in writing by the parties

b. Compound – interest imposed upon the accrued interest (due and unpaid)

c. Legal – interest which the law directs to be paid in the absence of any agreement as to the rate (6% per annum)

Note: No liability for interest without written agreement

Right to Interest Arises by the reason of the contract (stipulation in writing) or by reason of delay or failure to pay

principal on which interest is demanded

Note:

The reckoning period for payment of interest on unliquidated claims shall run from the promulgation of judgement of court

Interest on Damages – imposed in a judgment as indemnity for damageso Need not to be in writingo Computed from the time of the finality of the decision

Note: Floating rate of interest is void Interest could not be collected on equitable mortgage because the same is not stipulated in

writing Compound interest is not automatic, there must be a stipulation for payment of interest and

when it is judicially demanded In usurious loans, the entire obligation does not become void – the unpaid principal debt still

stands and remains valid but the stipulation as to the usurious interest is void The amount paid as interest under a usurious agreement is recoverable by the debtor, since the

payment is deemed to have been made under restraint, rather than voluntary To determine the interest, the basis is the current price of the products or goods at the time and

place of payment

GR: Accrued interest shall not earn compound interestXPN: (a) when there is a written stipulation, or (2)when there is judicial demand

Note: In the absence of written stipulation, borrower cannot be compelled to pay interest because no

interest is due If the borrower paid interest by mistake, he can recover what he had paid (solutio indebiti – no

one shall be enriched at the expense of another) If the borrower agreed orally to pay the interest (reasonable interest) but there was no written

agreement, no interest is dueo If the borrower paid the interest as moral obligation, the payment is valid as

performance of a natural obligation The lender cannot unilaterally increase the rate of interest to an iniquitous level

Forbearance – the contractual obligation of the creditor to forebear during a given period to require the debtor, payment of an existing debt then due and payable

Note: Usury Law has been rendered legally inexistent by CB Circular 905 by abolishing the ceilings on

interest A Central Bank Circular cannot repeal a law, only a law can repeal another law CB Circular 905 did not repeal or amend the Usury Law but it suspend its effectivity Back rentals, equivalent to loan or forbearance – 12% interest The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a

penalty if they are iniquitous or unconscionable

Deposit

Deposit – a contract whereby a person (depositor) delivers a thing to another (depositary) for the principal purpose of safekeeping it with the obligation of returning it when demanded

Characteristics of Contract of Deposit1. Real contract – perfected by the delivery of the object2. Object – movable things or personal property3. Principally intended for the safekeeping of the thing deposited4. Gratuitous5. Depository cannot use the thing deposited except with the permission of the depositor or when the preservation of the thing requires its use but only for said purpose

Note: Judicial deposit is provided by law even if the subject matter is land When money is placed in a bank for safekeeping, same money must be returned

Classes of Deposit

a. Judicial Deposit (Sequestration) – one which is brought about by the attachment or seizure of a property by order of the court

Object: either immovable or movable property

Movable Things – tangible things which can be transported from one place to another without being destroyed

o May include intangible or incorporeal things (rights and actions)

b. Extra- Judicial Deposit1. Voluntary – one made by the will of the depositor with the consent of the depositary2. Necessary – one made in compliance with a legal obligation, or on occasion of a calamity

o Object: movable property

Note: Contract to make a future deposit is binding if the offer is accepted For deposit to be perfected, there must be delivery of the object

GR: Deposit is a gratuitous contractXPN: (a) if the parties have agreed that compensation be paid; and (b) the depository is engaged in the business of storing goods

Note: Deposit should be considered as a loan if there is a stipulation for payment of interest

Voluntary Deposit

Voluntary Deposit – a contract of judicial relation where a thing is delivered at the will of depositor to depositary for the purpose of safekeeping by the depositary coupled with the obligation of returning it upon demand

Note: The depositor need not be the owner of the thing The depositary cannot demand that the depositor prove his ownership of the thing deposited

Interpleader – deposit made by 2 or more persons where each one believes that he is the owner of the thing which is deposited with a third person. When the issue of ownership is settled, the depositary shall deliver the thing to the proclaimed owner

Form of the Contract of Deposit – orally or in writing or partly oral and partly in writing

Incapacitated Person – a person which cannot give consent to the contract Minors, insane, demented, deaf-mutes who don’t know how to write Civil interdiction, insolvency

Civil Interdiction - a legal restraint upon a person incapable of managing his estate, because of mental incapacity, from signing any deed or doing any act to his own prejudice, without the consent of his curator or interdictor

Voidable Contract – where one of the parties is incapable of giving consent to a contract

Note: The capacitated person who accepts the deposit made by an incapacitated person shall be

subject to all the obligations of a depositoryo If the depositary refuses to return the thing deposited, he can be compelled to return it

by the legal representative of the incapacitated person or by the incapacitated person if he becomes capacitated

The depositor may recover the thing deposited if it is in the possession of the incapacitated depositary

o If the thing is already disposed of in favor of a third person who acted in good faith, the depositor can collect the amount by which the incapacitated depositary had been enriched or benefited

o If the third person acted in bad faith, the depositor can recover the thing from him with damages

Obligations of the Depositary1. To keep the thing safely2. To return the thing deposited when required, to the depositor or his heirs and successors in interest

Note: The depositary shall observe the diligence of a good father of a family in the performance of his

obligations to protect and preserve the thing deposited The depositary is responsible for the negligence of his employees If the thing is lost, the depositary is liable if the loss is due to his own fault but not when the loss

is due to fortuitous event or force majeure

GR: The depositary is not liable when loss of a thing is due to fortuitous eventXPN:

1. If it is stipulated2. If he uses the thing without the depositor’s permission3. If he delays in return4. If he allows others to use it, even though he himself may have been authorized to use the same

Fortuitous Event – unforeseen happening arising from acts of God Storms, earthquakes, lightning

Note: The owner-depositor bears the loss as long as the depositary is not at fault (Res perit domino)

GR: The depositary is prohibited from depositing the thing with a third personXPN: If there is a stipulation to the contraryXPN to the XPN: If the thing is deposited with a person manifestly careless and unfit

GR: Way or manner of deposit cannot be changed by depositaryXPN: When depositary may reasonably presume that the depositor would agree to the modification if the depositor knew of the facts of the situation

Note: Before any change be made in the way or manner of deposit, notice and decision of the

depositor is required unless time is of the essence to avoid danger If the thing deposited generates interests (bonds, securities), the depositary must collect the

interest as well as the principal when they become due

Rent of Safety Deposit Boxes Not an ordinary contract of lease of things but a special kind of deposit Not strictly governed by the provisions on deposit

GR: The depositary may commingle grains or other items of same kind and quality pertaining to 2 or more depositorsXPN: There is a prohibition

Note: Different depositors shall own a proportionate share in the mass of the things deposited If the grains, etc. are not of the same kind and quality, the depositary must keep them

separately

GR: The depositary is prohibited from using the thing depositedXPN: Expressly allowed by the depositor

Note: If the depositary uses the thing deposited, he will be liable for damages

If the depositary is expressly allowed by the depositor to use the thing deposited, the contract ceases to be a deposit and becomes a loan or commodatum unless the principal reason for the contract is the safekeeping of the property (irregular deposit)

The depositor cannot dispose of the thing deposited for the use of another person The burden of proof to establish that permission to use the thing was granted is on the

depositary When the use of the thing is necessary to preserve it, the depositary may use the same but only

for such purposeo Depositary is not liable for damages

Deposit in banks are considered simple loans because they earn interest – covered by law on loans

Closed and Sealed Deposit Must be returned in the same condition by the depositary If the seal or lock is broken due to the fault of the depositary, he shall be liable for damages If the seal or lock is broken without fault of the depositary, he has the duty to keep secret the

contents thereof If the depositor has instructions which could not be performed by the depositary without

opening the box or receptacle, the depositary is presumed to be authorized to do so If the depositor has left the key to the box or receptacle to the depositary, there is a

presumption of authority to open

Note: If there is a controversy on the value of the thing deposited which is delivered closed and

sealed, the statement of the depositor shall be prima facie evidence of the value if the forcible opening of the box or receptacle is imputable to the depositary

Returning of the Thing Deposited When the depositary returns the thing in deposit, it also includes all its products, accessories

and accessions The money deposited must be returned together with interest for the use If there is an agreement that the thing deposited shall be returned to a particular depositor, the

depositary shall return the thing only to the designated depositor If the depositor loses his capacity to contract after having made the deposit, the depositary

should return the thing to the person who has the administration of the depositor’s property and rights

Place of Returning Place designated in the contract If no place is designated, In the place where the things may be

Note: Expenses for transportation shall be borne by the depositor

Time to Return Thing Deposited GR: Upon demand – whether or not a period is fixed for the return

o The term or period if agreed upon is for the benefit of the depositoro Depositor can always seek the return of the thing at any time

XPN: o When the thing in the possession of the depositary is subject to a writ of attachmento When there is an opposition to the return of the thing to the depositor and the

depositary is duly notifiedo When there is an opposition to the removal of the thing deposited and the depositary is

duly notifiedo When the thing is stolen and the period of 30 days from notice to the true owner to

claim it had not yet lapsed the depositary cannot return the thing to the depositor to protect the true owner

Note: When there is no fixed period for the return of the thing deposited, the depositor may withdraw

the thing at any time even without judicial orders The depositary must immediately notify the depositors of the attachment or opposition so that

he can protect his rights and interests If the depositary return the thing despite the attachment, opposition, non-lapse of 30 day

period, he may be liable for damages

GR: Depositor cannot be required by depositary to prove his ownership There is no transfer of ownership in contract of deposit Bailee is estopped from asserting title to the thing received as against the bailor

Note: When things appears to be unlawfully acquired, the depositary may return the thing to the

depositor to avoid liability

When Thing is a Stolen Property If true owner is identified, the depositary must advise the owner of the deposit so that he may

take necessary precautions or actions to retrieve it If the depositor insists on his ownership as against the true owner, the depositary may file an

interpleader suit against both of them to avoid responsibility If the identity of the true owner cannot be ascertained, the depositary may return the thing to

the depositor If the true owner failed to claim the thing within 30 days from advisement, the depositary shall

be relieved from responsibility by returning the thing to the depositoro The depositary shall wait until the lapse of 30 days but inform the depositor of the legal

reason for the retention

Rights of 2 or more Depositors If joint depositors – each one may only demand the return of his proportionate share in the

divisible things deposited If solidary depositor – and the thing deposited is not capable of division, the depositary may

return the thing to anyone of the solidary depositors

Note:

If the depositor refuses to accept the thing, the depositary may resort to judicial consignation to be relieved from responsibility

The depositary cannot just return the thing until the arrival of the period designated in the contract

The depositary may return the thing if he could not perform his obligations as a depositary

GR: If the thing deposited is lost due to force majeure or confiscated by the government, the depositary is not liable for failure to return the thing upon demand of the depositor

Note: If the depositary had received money or an equivalent thing for the property, he must deliver he

same to the depositor

GR: The depositary’s heir who in good faith sold the thing deposited, the heir must return the purchased price received to the depositor or assigned to the depositor the right of action against the buyer in case the price has not been paid

Note: If the heir is in bad faith, the depositor may sue them for recovery of the price with damages or

may annul the contract of sale on the basis of fraud or file a criminal case of estafa for the appropriation of the thing under deposit

Obligations of the Depositor If the deposit is for compensation, the depositor is not required to pay the depositary for the

depositary’s expenses for the preservation of the property (necessary expenses) If the deposit is gratuitous, the depositor must reimburse the depositary for the depositary’s

expenses for the preservation of the property deposited (necessary expenses) To pay the compensation agreed upon as consideration for the deposit To indemnify the depositary for any loss or damages arising from the character of the thing

deposited The depositor has no obligation to reimburse the depositary for useful or luxurious expenses

GR: The depositor is liable for losses or damages suffered by depositary arising from the character of the thing depositedXPN:

1. The depositor is not aware of such character2. The depositor was not expected to know such dangerous character of the thing3. The depositor has notified the depositary of such character4. The depositary was independently aware of it without need of advice from the depositor

Note: If the depositary has not been paid by the depositor for what may be due to him, the depositary

may retain the thing deposited until he is fully reimbursed If it is for compensation and the agreed consideration has not been paid, the depositary has the

right to retain the thing The right of the depositary is similar to an agent, he could retain the thing in pledge until full

payment is made by reason of deposit

May the depositary sell the thing retained in pledge?Yes, there is no prohibition to sell

When Deposit is Extinguished1. Upon the loss or destruction of the thing deposited2. In case of gratuitous deposit, upon the death of either the depositor or the depositary3. Expiration of the period agreed upon4. Demand at will of the depositor5. Mutual withdrawal from the contract6. Fulfillment of the purpose of thee deposit7. Fulfillment of the resolutory condition agreed upon

Note: If the deposit is for a compensation (onerous), death of either party shall not extinguish the

contract because the rights and liabilities are transmissible to their heirs unless there is a contrary agreement

Necessary Deposit

Necessary Deposit When made in compliance with a legal obligation When it takes place on the occasion of any calamity

o Fire, storm, flood, pillage, shipwreck

Note: When during a fire, flood, storm, or other calamity, property is save from destruction by another

person without the knowledge of the owner, the owner is bound to pay the person who save the property just compensation

Deposit of Traveler’s Effects or Belongings Keepers of Inns or Hotels have the obligations as depositaries provided that they are notified by

the guest and the guests observe precautions prescribed by the inn or hotel keepers as to the care and vigilance over their effects or belongings

Hotel-keeper is liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel

Note: Persons criminally liable, innkeepers, tavern-keepers, and any other persons or corporations

shall be civilly liable for crimes committed in their establishment, in all cases committed by them of their employees

Innkeepers are subsidiarily liable for the restitution of the goods taken by robbery or theft

Responsibility of Hotel-Keepers

Liable for damages arising from the loss of, injury to, the personal effects of hotel guests caused by the negligence of its servants or employees and loss or damages due to strangers

Note: There is no liability when the loss is due to force majeure If the loss of the things of a guest is due to the act of a thief or robber, the hotel-keeper is liable

o If the thief or robber used arms and irresistible force, this act is deemed a force majeure, hotel-keeper is free from liability

Losses Not Chargeable to Hotel-Keepersa. acts of the guestb. acts of the guest’s familyc. acts of the guest’s servants or visitorsd. character of the thing of the guests

Note: Notices posted in the hotel announcing that the hotel-keeper is not liable for article brought by

the guest or traveler cannot free the hotel-keeper from responsibility for losses or damages suffered by the guest or traveler

Any agreement for the suppression or diminution of the responsibility of the hotel-keeper shall be void

If the guest who checked-in has brought things or belongings in to the hotel and does not pay his hotel bills, the hotel-keeper has the right to retain the things or belongings as security for payment

The right to sell the retained things or belongings is debatableo In the nature of pledge created by law allowedo Right to retain does not include right to sell without judicial authorization (filing a

petition in court) not allowed The act of obtaining food or accommodation in a hotel or in without payment is estafa

Guaranty

Guaranty – where a guarantor binds himself to creditor to fulfill the obligation of the principal debtor in case the principal debtor fails to do so

Suretyship – where the guarantor binds himself to be solidarily liable with the principal debtor

Note:

Guaranty cannot exist without valid obligation

Characteristic of Guaranty1. consensual contract2. accessory contract3. conditional contract4. unilateral contract5. subsidiary contract

Distinction between Guarantor and Surety

Basis Guarantor SuretyLiability Depends upon an independent

agreement to pay the obligation of the principal if he fails to do so

As a regular party to the contract

Obligation Secondary PrimaryUndertaking To pay if the principal debtor cannot pay To pay if the principal debtor cannot pay

(obligation is onerous)Role Insurer of the solvency of the principal

debtorInsurer of a debt

Benefit Right to Excussion – the exhaustion of properties of the principal debtor before

he may be held liable

Not entitled to Excussion

Kinds of Guaranty

Personal Guaranty – an individual personally assumes the fulfillment of the principal obligation of the debtor

Real Guaranty – where a property (immovable or movable) is formally committed to answer for the principal obligation of the debtor

Conventional / Voluntary – constituted by agreement of the guarantor and the debtor

Legal – created or required by law

Judicial – ordered by a court in a pending case

Gratuitous – the guarantor receives n valuable consideration because it is entered into for free

Onerous – the guarantor by stipulation is paid a valuable consideration for his guaranty of the obligation of the debtor

Definite – confined or limited to the principal obligation only or over a specific part

Indefinite (Simple) – covers or comprises the principal obligations and its accessories

Requisites for Enforcement of Surety’s Liabilitya. application for damages must be filed before trial or before entry of judgmentb. due notice must be given the other party and his suretyc. proper hearing and the award of damages, if any, must be include in the final judgment

Note: An essential alteration in the terms of a loan agreement without the consent of the surety

extinguishes the surety’s obligation An extension granted to the debtor by the creditor without the consent of the guarantor

extinguishes the guaranty

Guaranty vs WarrantyGuaranty is a contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party, whereas warranty is an undertaking that the title, quality or quantity of the subject matter of a contract is what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty

Note: Guaranty is a gratuitous contract; it becomes onerous when there is a stipulation to the contrary

Wife as Guarantor – Consent of Husband Not Required May guarantee an obligation of another person without the consent of her husband Cannot bind the conjugal partnership or absolute community without the consent of her

husband except in cases allowed by law May administer and dispose of her own exclusive or separate properties If she is appointed sole administratrix of the property of the husband, she may bind th property

of the husband except to sell unless with a court authority

Note: Conjugal Partnership is liable for all debts and obligations contracted during the marriage by the

designated administrator-spouse for the benefit of the conjugal gains, or by both spouses or by one of them with the consent of the other

GR: Guaranty may be constituted without the knowledge or consent of the principal debtor or even against his will

It is for the benefit of the creditor and not the debtor Debtor is not a party to tine contract

Note: The guarantor may recover from the debtor what the guarantor paid to the creditor but only to

the extent of the benefit enjoyed by the debtor The guaranty is not binding until accepted by the creditor

Effects of Guaranty with Consent of Debtor The guarantor is subrogated (substituted) by all the rights which the creditor may have against

the debtor

Effects of Guaranty without Consent of Debtor The guarantor cannot enjoy the right of subrogation

GR: Guaranty may be constituted in favor of another guarantor with or without the guarantor’s consent or even against his opposition or objection

Sub-guarantor – second or subsequent guarantor The sub-guarantors assume the obligation of the guarantors, while the guarantors assume the

obligation of principal debtor

Requisites for Guaranty A valid obligation between a debtor and a creditor

Note: There can be no valid guarantee of a void obligation or contract A guaranty must depend upon the existence of a valid principal obligation

o If the principal obligation is void, the guaranty is also void

Voidable Contract – considered valid until it is annulled in a judicial proceeding

Unenforceable Contract – contract is not void; subject to ratification

Natural Obligation – obligation which is not civil and cannot be enforced in court

Conditional Obligation May be an object of guaranty Not void Valid subject only to the fulfillment of the condition – not demandable at once

Continuing Guaranty – covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty until its expiration or termination

Note: Future debts may be secured by a guarantee even if the exact amount is not yet known The guarantor cannot be sued until the debt is liquidated

Test of Continuing GuarantyWhen by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain periodDebt when considered Liquidated

If the contract fixed the price of the delivery of future goods and the seller manifests its readiness to deliver the said goods within the period stipulated

Note: Contract of suretyship are prospective in effect unless the parties have intended them to be

retrospective If the principal obligation is subject to a suspensive condition, the guarantor shall be liable only

to the creditor after the happening or fulfillment of the condition

If the principal obligation is subject to a resolutory condition, the happening of the condition will extinguish the principal obligation as well as the accessory contract of guaranty

o Creditor has no cause of action against the guarantor If there is any doubt on the terms and conditions of the surety agreement, the doubt should be

resolved in favor of the surety A guaranty anchored on the fulfillment of a condition subsequent will nullify the guaranty if the

condition is not fulfilled

Limit of Surety’s Liability amount of the bond

Limit of Guarantor’s Liability cannot go beyond the obligation of the principal debtor

Note: If the guarantor agreed to pay more than the obligation of the debtor, the obligation is not

rendered void and shall be reduced to the extent or limit of the debtor’s obligation If upon demand, a guarantor or surety fails to pay the obligation, he can be held liable for

interest, even paying will increase the liability more than that in the principal obligationo The increased liability is because of the default and the necessity of judicial collectiono The interest runs from the time the complaint is filed

Form of Contract of Guaranty To be enforceable, it must be expressed and in writing

o Oral guaranty is unenforceable

Note: Guaranty as a contract, requires the expression of the consent of the guarantor in order to be

bound Guaranty cannot extend beyond what is expressly stipulated

Extinguishment of Guaranty or Suretyship Payment by the principal debtor If the principal obligation is mutually changed or modified by the creditor and debtor without

the knowledge or consent of the guarantor or surety Material alternation of the contract which imposes new obligation on the party promising or

takes away some obligation already imposed, changing the effect of the original

Note: Surety is not released by a change in the contract which does not have the effect of making the

obligation more onerous

Qualifications of Guarantora. Person of integrityb. has Full legal capacityc. has sufficient property to answer for the obligation of the debtor

Note:

The creditor may waive the qualifications which are intended for his protection Qualifications must be present at the time of the perfection of the contract If one or more qualifications are impaired due to supervening events, the creditor may demand

for another qualified guarantor

Venue of Action in Guaranty The guarantor shall be subject to the jurisdiction of the court of the place where the obligation

is to be complied with

When Creditor may Demand a Substitute Guarantora. when the original guarantor is convicted of a crime involving dishonestyb. when the original guarantor becomes insolvent

Effect of Guarantor’s Death His heirs are still liable, to the extent of the value of the inheritance because the obligation is

not purely personal, and is therefore transmissible

Effect of Debtor’s Death His obligation will survive His estate will be answerable

o If the estate has no sufficient assets, the guarantor shall be liable

Effects of Guaranty

Benefit of Exhaustion or Excussion – the right of the guarantor to be free from execution of his own properties until the creditor shall have first exhausted all the properties of the principal debtor and has resorted to all legal remedies against the debtor

Note: All the properties of the principal debtor should first be exhausted before the guarantors

properties may be levied upon

Requisites of Benefit of Exhaustion or Excussion1. Guarantor must set up the right of excussion against the creditor upon the creditor’s demand for payment2. Guarantor must point out to the creditor the available property of the debtor found within the Philippine territory and sufficient to cover the amount of the debt

Note: If the guarantor pledged or mortgaged his own property to the creditor to secure the principal

obligation, excussion cannot be invoked for it is not being available to a pledger or mortgagor Excussion is not applicable to Contract of Suretyship

o Surety binds himself solidarily with the principal debtor

May a complaint be filed against the debtor and guarantor simultaneously in one case before the exhaustion of all the properties of the debtor?Yes. There is nothing procedurally objectionable in impleading the guarantor as a co-defendant.

Note: If the creditor obtained a favorable judgment against the debtor and guarantor, the guarantor is

entitled to a deferment of the execution of judgment against him until all the properties of the debtor shall have been exhausted to satisfy he debtor’s obligation

A good proof of the debtor’s inability to pay is an unsatisfied writ of execution

Instances Where Guarantor Cannot Invoke Right of Excussion (RAIDE)1. Renunciation of Right2. Assumption of solidarily liability with the debtor3. Insolvency of the debtor4. Debtor absconded (escaped) or cannot be sued in the Philippines5. Execution against the property of the principal debtor would be fruitless (without value)

Note: The demand from guarantor is made after the judgment has rendered against the principal

debtor and which could not be satisfied

Effect of Creditor’s Negligence He shall suffer the loss to the extent of the value of the pointed property which was not

exhausted by the creditoro The guarantor shall remain liable for the remaining obligation after deducting the value

of the loss caused by the negligence of the creditor

GR: The principal debtor should be sued aloneXPN: If the benefit of excussion is not available to the guarantor, he can be sued jointly with the debtor

Note: If debtor and guarantor lose in the suit, the guarantor is still entitled to the benefit of excussion A surety may be sued independently of the principal debtor without prior exhaustion or

excussion of the debtor’s properties Guarantor must be notified of the complaint filed against the debtor alone so that, if the

guarantor desires to set up defenses he may have the opportunity to do so

Consequences of Guarantors Appearance or non-Appearance in the Debtor’s Case upon Judgment1. Non-Appearance he cannot set up defenses and cannot question the decision2. Appearance he is entitled to the benefit of excussion if he loses the case

Note: There is no waiver of the right of excussion by guarantor’s appearance in the case

Compromise – a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put up and end to one already commenced

Effect of Compromise1. Between Creditor and Principal Debtor

If beneficial to the guarantor, it is valid If not beneficial to the guarantor, it is not binding upon him

2. Between Creditor and Guarantor If beneficial to the principal debtor, it is binding upon him If not beneficial to the principal debtor, it is not binding upon him

Note: The compromise agreement is only between 2 persons – No 3rd person could be a party unless

there is a specific agreement

GR: Sub-Guarantor is entitled to right of excussion

Note: Before the sub-guarantor’s property may be levied upon on execution, the sub-guarantor can

compel the creditor to first exhaust the properties of the debtor and guarantor The sub-guarantor becomes liable when the debtor and guarantor failed to pay the principal

obligation

Benefit of Division – a co-guarantor is entitled to claim of a division of liability among his co-guarantors, and to pay only his aliquot part of the debt when the principal debtor fails to pay the debt

Liability of 2 or more Co-Guarantors Each one is liable only for his individual share in the debt

Note: If several guarantors agreed with the creditor to be liable solidarily, anyone of them may be

compelled by the creditor to pay the entire obligation when the principal debtor fails to pay The benefit of division must be claimed at the time demand for payment is made upon the

guarantors

Pawnshop Regulation Act

Pawnshop – person or entity engaged in the business of lending money on personal property delivered as security for loan

Pawner – borrower from a pawnshop

A pawnshop may be established as a single proprietorship, partnership or corporation Minimum Capital Php 100,000 The amount of loan shall not be less than 30% of appraised value of the security offered for the

loan unless the pawner manifest in writing the desire to borrow a lesser amount In addition to interest charges: maximum service charge of Php 5.00, but does not exceed 1% of

the principal loan Redemption 90 days – payment of the principal debt with interest

o Failure to redeem, the pawnbroker may sell or dispose the article pawned (through public auction) provided the pawner is notified

Computing interest due after maturity of obligation sum of the principal of the obligation and interest earned at the time the obligation matured