CREDIT TRANSACTION NOTES and the property returned or duly accounted for when the special purpose is

accomplished or kept until the bailor reclaims it.

INTRODUCTION
Parties to a bailment
Meaning and scope of credit transactions 1. Bailor (Comodatario). — the giver; the party who delivers the possession
or custody of the thing bailed; and
Credit transactions are: 2. Bailee (Comodante). — the recipient; the party who receives the
- contracts of security possession or custody of the thing thus delivered.
- include all transactions involving the purchase or loan of goods, services, or
money in the present with a promise to pay or deliver them in the future. Kinds of contractual bailment
In every bailment, there is an obligation on the part of the bailee to restore the
2 Types of Credit Transaction: subject of the bailment in the same or in altered form or to account therefor.

1. Secured transactions or CONTRACTS OF REAL SECURITY — Those 1. Those for the sole benefit of the bailor – it is a bailment of goods without
supported by a collateral or an encumbrance of property. Encumbrance is recompense where the mandatory or person to whom the property is
effected as follows: delivered undertakes to do some act with respect to the same; as simply to
 Pledge – placing the movable property in the possession of the carry it, or keep it, or otherwise to do something with respect to it
creditor gratuitously.
 Chattel mortgage – execution of the corresponding deed 2. Those for the sole benefit of the bailee
substantially in the form prescribed by law 3. Those for the benefit of both parties
 Real estate mortgage - the execution of a public instrument
encumbering the real property covered thereby The first 2 kinds of are the gratuitous bailments. There is really no consideration. The
 Antichresis - by a written instrument granting to the creditor the third kind usually involves business transactions. These are known as mutual-benefit
right to receive the fruits of an immovable property with the bailments.
obligation to apply such fruits to the payment of the interest and
principal obligation. What is bailment for hire? (location et conductio)
2. Unsecured transactions or CONTRACTS OF PERSONAL SECURITY It arises when goods are left with the bailee for some use or service by him and is
— Those the fulfillment of which by the principal debtor is secured or always for compensation.
supported only by a promise to pay or the personal commitment of another
such as a guarantor or surety.  Hire of things (location rei)
 Hire of service (location operis faciendi)
What is security?  Hire for carriage of goods (location operis mercium vehendarum)
The term security is something given, deposited, or serving as a means to ensure the  Hire of custody (location custodiae)
fulfillment or enforcement of an obligation or of protecting some interest in property. I. LOAN
Kinds of Security:
1. Personal Security – as when an individual becomes a surety or a guarantor
2. Real Security – as when a mortgage, pledge, antichresis, change or lien or
other device used to have property held, out of which the person to be made
secure can be compensated for loss.

What is bailment?
It is defined as 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
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 ARTICLE 1933. By the contract of loan, one of the parties delivers to another, interest.
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 Commodatum v Mutuum
other consumable thing, upon the condition that the same amount of the same kind COMMODATUM MUTUUM
and quality shall be paid, in which case the contract is simply called a loan or ordinarily involves something not subject matter is money
mutuum. consumable or other consumable thing
Commodatum is essentially gratuitous. ownership of the thing loaned is ownership is transferred to the
retained by the lender borrower
Simple loan may be gratuitous or with a stipulation to pay interest. may be gratuitous or it may be
essentially gratuitous
In commodatum the bailor retains the ownerships of the thing loaned, while in onerous
simple loan, ownership passes to the borrower. borrower need only pay the
borrower must return the same thing
same amount of the same kind and
loaned
quality
may involve real or personal property refers only to personal property
2 Kinds loan for use or temporary possession loan for consumption
1. Commodatum (gratuitous) – a contract of loan where one of the parties bailor may demand the return of the lender may not demand its return
delivers to another, either something not consumable so that the latter may thing loaned before the expiration of before the lapse of the term agreed
use the same for a certain time and return it. It is essentially gratuitous. The the term in case of urgent need upon
bailor retains ownerships of the thing loaned. borrower suffers the loss even if
2. Mutuum (simple) – a contract of loan where the lender money or other caused exclusively by a fortuitous
loss of the subject matter is suffered
consumable thing, upon the condition that the same amount of the same event and he is not, therefore,
by the bailor since he is the owner
kind and quality shall be paid. Ownership passes to the borrower. discharged from his
duty to pay.
Characteristics of a contract of loan
a. Real contract – delivery of the thing loaned is necessary for the perfection
of the contract ART. 1934. An accepted promise to deliver something by way of commodatum
b. Unilateral contract – once the thing is delivered, it creates obligation on or simple loan is binding upon the parties, but the commodatum or simple loan
the part of the borrower. itself shall not be perfected until the delivery of the object of the contract.

Delivery essential to perfection of loan.

The rule contained in the above article is a necessary consequence of the fact that
commodatum and mutuum are real contracts which require the delivery of the
subject matter thereof for their perfection. Delivery is necessary in view of the
Loans distinguished from credit
purpose of the contract which is to transfer either the use or ownership of the thing
LOAN CREDIT
loaned.
the delivery by one party (lender/ The credit of an individual means his
creditor), and the receipt by the other ability to borrow money or things by Binding effect of accepted promise to lend.
party (borrower/debtor) who become virtue of the confidence or trust An accepted promise to make a future loan is a consensual contract5 and, therefore,
the owner, of a given sum of money reposed by a lender that he will pay binding upon the parties but it is only after delivery, will the real contract of loan
or other consumable thing upon an what he may promise within a arise. Thus:
agreement, express or implied, to specified period. 1. Application for loan approved by corporation. - Where an application for a
repay the same amount of the same loan of money was approved by resolution of the corporation (lender) and
kind and quality, with or without

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 the corresponding mortgage was executed and registered, there arises a In commodatum, the subject matter is generally non-consumable things, whether real
perfected consensual contract of loan. or personal. This but conforms to reality, for the bailee cannot use and return
2. Mortgage executed by virtue of loan granted. - Where the mortgage deed something which is consumed when used.
was executed for and on condition of the loan granted to the mortgagors,
contract of loan being consensual, it was perfected at the same time that the However, if the purpose of the contract is not the consumption of the object as when
contract of mortgage was executed. it is merely for exhibition, consumable goods may be the subject of the
Commodatum. If the intention of the parties is to have the consumable goods loaned
CHAPTER 1 returned at the end of the period agreed upon, the loan is a commodatum and not a
mutuum.
COMMODATUM
ART. 1938. The bailor in commodatum need not be the owner of the thing
SECTION 1 – NATURE OF COMMODATUM loaned.

ART. 1935. The bailee in commodatum acquires the use of the thing loaned but Bailor need not be owner.
not its fruits; if any compensation is to be paid by him who acquires the use, the In commodatum, the bailor need not be the owner of the thing loaned since by the
contract ceases to be a commodatum. loan, ownership does not pass to the borrower. Hence, a mere lessee of the thing or
the usufructuary may lend but the borrower or bailee himself may not lend nor lease
the thing loaned to him to a third person.
Commodatum essentially gratuitous.
The contract ceases to be a commodatum if any compensation is to be paid by the It is sufficient if the bailor has such possessory interest in the subject matter or right
borrower who acquires the use. In such a case, there arises a lease contract. If the to its use which he may assert against the bailee and the third persons although not
consideration is the rendering of some service, an innominate contract will result. against the rightful owner.

Extent of bailee’s right of use. ART. 1939. Commodatum is purely personal in character.
The right to use is limited to the thing loaned but not to its fruits unless there is a Consequently:
stipulation to the contrary. As owner of the thing loaned (Art. 1933, last par.), the 1. The death of either the bailor or the bailee extinguishes the contract;
bailor is naturally entitled to its fruits. 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
Purpose of the contract. of the thing loaned, unless there is a stipulation to the contrary, or unless
The purpose of the contract of commodatum must be the temporary use of the thing the nature of the thing forbids such use.
loaned. If the bailee is not entitled to the use of the thing, the contract may be a
deposit not a commodatum. It is an essential feature of the contract of commodatum
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 Commodatum, purely personal in character.
purpose of the contract is not the consumption of the object, as when it is merely  commodatum is a purely personal contract, the lender having in view the
for exhibition. character, credit, and conduct of the borrower.
 the death of either party terminates the contract unless by stipulation, the
commodatum is transmitted to the heirs of either or both parties.
ART. 1937. Movable or immovable property may be the object of commodatum. o If there are two or more borrowers, the death of one does not
extinguish the contract in the absence of stipulation to the contrary.
 Article 1939 – exception to the general that all rights acquired in virtue of
Subject matter of the contract. an obligation are transmissible.

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 ART. 1940. A stipulation that the bailee may make use of the fruits of the thing  As a general rule, the bailee is not liable for loss or damage due to a
loaned is valid. fortuitous event. (see Art. 1174.) The reason is that the bailor retains the
ownership of the thing loaned.
Contrary stipulations as to fruits.  Article 1942 specifies the instances when the bailee is liable even for a loss
 The right to use a thing is distinct from the right to enjoy the fruits since, as due to a fortuitous event. It would seem that the purpose of the law is to
a rule, the fruits pertain to the owner of the thing producing the fruits. punish the bailee for his improper acts although they may not be the
 However, the parties may stipulate that the bailee may also make use of the proximate cause of the loss.
fruits of the thing. Such stipulation cannot be presumed. ART. 1943. The bailee does not answer for the deterioration of the thing loaned
 The enjoyment of the fruits must only be incidental to the use of the thing due only to the use thereof and without his fault.
itself for if it is the main cause, the contract may be one of usufruct.
Liability for deterioration of thing loaned.
SECTION 2 – OBLIGATIONS OF A BAILEE 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.
ART. 1941. The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned. The bailee is liable if he is guilty of fault or negligence or if he devotes the thing to
any purpose different from that for which it has been loaned.

Liability for ordinary expenses. ART. 1944. The bailee cannot retain the thing loaned on the ground that the
It is logical that the borrower should defray the expenses for the use and preservation bailor owes him something, even though it may be by reason of expenses.
of the thing loaned for after all, he acquires the use of the same, and he is supposed However, the bailee has a right of retention for damages mentioned in Article
to return the identical thing. (Art. 1933.) As a rule, the borrower must take good care 1951.
of the thing with the diligence of a good father of a family. (Art. 1163.)
Obligation to return thing loaned.
As to extraordinary expenses, Article 1949 governs. 1. Ownership remains in bailor. — The borrower acquires only the use of the
thing the ownership of which remains in the lender. It would be extremely
ART. 1942. The bailee is liable for the loss of the thing, even if it should be harsh if the bailor, after benefiting the bailee, and the use having been
through a fortuitous event: accomplished, should be deprived of its enjoyment on the excuse of the
1. If he devotes the thing to any purpose different from that for which it has expenses more or less certain or just.
been loaned; 2. Only temporary use given to bailee. — Furthermore, the bailee would be
2. If he keeps it longer than the period stipulated, or after the violating the bailor’s trust in him to return the thing as soon as the period
accomplishment of the use for which the commodatum has been stipulated expires or the purpose has been accomplished.
constituted;
3. If the thing loaned has been delivered with appraisal of its value, unless Effect of retention or adverse claim by bailee.
there is a stipulation exempting the bailee from responsibility in case of a  The mere failure of the bailee to return the subject matter of commodatum
fortuitous event; to the bailor does not constitute adverse possession on the part of the bailee
4. If he lends or leases the thing to a third person, who is not a member of who holds the same in trust.
his household;
5. If, being able to save either the thing borrowed or his own thing, he Right of retention for damages.
chose to save the latter. The exception in Article 1951 is of evident justice. Note, however, that the bailee’s
right extends no further than to the retention of the thing loaned until he is
Liability for loss of thing loaned. reimbursed for the damages suffered by him. He cannot lawfully sell the thing to
satisfy said damages.

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 Precarium is a kind of commodatum where the bailor may demand the thing at will.
ART. 1945. When there are two or more bailees to whom a thing is loaned in the It has been defined as a “contract by which the owner of a thing, at the request of
same contract, they are liable solidarily. another person, gives the latter the thing for use as long as the owner shall please.”

Liability when there are two or more bailees. Cases when contract is precarium.
The reason for imposing solidary liability where there are two or more borrowers is In either of the two cases mentioned in Article 1947, it is presumed that use of the
to safeguard effectively the rights of the lender. thing has been granted subject to revocation by the bailor at any time, whether or not
the use for which the thing has been loaned has been accomplished. Hence, the name
SECTION 3 – OBLIGATIONS OF THE BAILOR precarium.

In the ordinary commodatum, the possession of the bailee is more secure for he has
the right to retain the thing loaned until the expiration of the period agreed upon, or
ART. 1946. The bailor cannot demand the return of the thing loaned till after the
the accomplishment of the use for which the commodatum has been constituted.
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. ART. 1948. The bailor may demand the immediate return of the thing if the
bailee commits any acts of ingratitude specified in Article 765.
In case of temporary use by the bailor, the contract of commodatum is suspended
while the thing is in the possession of the bailor.
Right of bailor to demand return of thing for acts of ingratitude.
Based on Article 765 of the Civil Code, any of the following constitutes act of
ingratitude:
Obligation to respect duration of loan. 1. If the bailee should commit some offenses against the person, the honor or
 primary obligation of the bailor is to allow the bailee the use of the thing the property of the bailor, or of his wife or children under his parental
loaned for the duration of the period stipulated or until the accomplishment authority;
of the purpose for which the commodatum was constituted. 2. If the bailee imputes to the bailor any criminal offense, or any act involving
 if he should have an urgent need of the thing, he may demand its return or moral turpitude, even though he should prove it, unless the crime or the act
temporary use. This right of the bailor is based on the fact that has been committed against the bailee himself, his wife or children under
Commodatum is essentially gratuitous. his authority; and
 the return may be only temporary or it may be permanent because the law 3. If the bailee unduly refuses the bailor support when the bailee is legally or
uses “its return” (meaning permanent) or “temporary use.” In case of morally bound to give support to the bailor.
temporary use of the thing by the bailor, the rights and duties of the parties
are likewise temporarily suspended. Under Article 1948, the contractual relation between the parties is that of the
ordinary commodatum. In the case of Precarium (Art. 1947.), the bailor can always
demand the thing loaned at will.
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.

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 ART. 1949. The bailor shall refund the extraordinary expenses during the contract ART. 1951. The bailor, who, knowing the flaws of the thing loaned, does not
for the preservation of the thing loaned, provided the bailee brings the same to the advise the bailee of the same, shall be liable to the latter for the damages which he
knowledge of the bailor before incurring them, except when they are so urgent that may suffer by reason thereof.
the reply to the notification cannot be awaited without danger.
Liability to pay damages for known hidden flaws.
If the extraordinary expenses arise on the occasion of the actual use of the thing by The following are the requisites which must concur for the application of the above
the bailee, even though he acted without fault, they shall be borne equally by both article:
the bailor and the bailee, unless there is a stipulation to the contrary. 1. There is flaw or defect in the thing loaned;
2. The flaw or defect is hidden;
3. The bailor is aware thereof;
4. He does not advise the bailee of the same; and
Obligation to refund extraordinary expenses. 5. The bailee suffers damages by reason of said flaw or defect.
1. Extraordinary expenses for the preservation of the thing loaned. — Such
expenses shall be borne by the bailor. As a rule, notice is required because it The bailee is given the right of retention until he is paid damages. (Art. 1944.) The
is possible that the bailor may not want to incur the extraordinary expenses same responsibility of a bailor in commodatum is imposed on a pledgor.
at all. He should be given discretion as to what must be done with his
property. Where flaw unknown to bailor.
Where the defect is not known to the bailor, he is not liable because commodatum is
2. Extraordinary expenses arising from actual use of the thing loaned . — Such gratuitous.
expenses arising on the occasion of the actual use of the thing loaned shall
be borne by the bailor and bailee alike on a 50-50 basis. ART. 1952. The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee.
 The bailee pays one half because of the benefit derived from the
use of the thing loaned to him and the bailor pays the other one- No right of abandonment for expenses and damages.
half because he is the owner and the thing will be returned to him. The reason for the above rule is that the expenses and/or damages may exceed the
 The parties, however, may, by stipulation, provide for a different value of the thing loaned, and it would, therefore, be unfair to allow the bailor to just
apportionment of such expenses, or that they shall be borne by the abandon the thing instead of paying for said expenses and/or damages.
bailee or bailor only.

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.

All expenses other than those referred to in Articles 1941 and 1949 “for the purpose
of making use of the thing” that is, not necessary for the use and preservation of the
thing, must be shouldered by the borrower. Ordinary expenses incurred for the CHAPTER 2
preservation of the thing are also for the account of the bailee. This can be inferred SIMPLE LOAN OR MUTUUM
from the first paragraph of Article 1949.
ART. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.

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Simple loan or mutuum defined. By the contract of barter or exchange, one of the parties binds himself to give one
Simple loan or mutuum is a contract whereby one of the parties delivers to another thing in consideration of the other’s promise to give another thing.
money or other consumable thing with the understanding that the same amount of the MUTUUM VS BARTER
same kind and quality shall be paid. MUTUUM BARTER

Obligation of borrower is to pay. it is money or any other fungible things non-fungible (non-consumable) things
The law uses the word “pay” and not the word “return” because the consumption of
the thing loaned is the distinguishing character of the contract of mutuum from that bailee is bound to return the identical
the equivalent thing is given in return
of commodatum. thing borrowed when the time has
for what has been received.
expired or the purpose has been served
No criminal liability for failure to pay.
In simple loan or mutuum, as contrasted to commodatum, the borrower acquires It is an onerous contract. It is really a
may be gratuitous
ownership of the money, goods, or personal property borrrowed. Being the owner, mutual sale.
the borrower can dispose of the thing borrowed and his act will not be considered
misappropriation thereof. ART. 1955. The obligation of a person who borrows money shall be governed by
the provisions of Articles 1249 and 1250 of this Code.
SIMPLE LOAN VS CONTRACT OF RENT
MUTUUM RENT If what was loaned is a fungible thing other than money, the debtor owes another
signifies the delivery of money or a contract by which one of the parties thing of the same kind, quantity and quality, even if it should change in value. In
some other consumable thing to delivers to another some non- case it is impossible to deliver the same kind, its value at the time of the
another with a promise to repay consumable thing in order that the perfection of the loan shall be paid.
an equivalent amount of the same kind latter may use it during a certain
and quality, but not a period and return it to the former. Form of payment.
promise to return the same thing 1. Loan of money. — If the thing loaned is money, payment must be made in
loaned which becomes the In a contract of rent, the owner or the currency stipulated, if it is possible to deliver such currency; otherwise,
property of the obligor. lessor of the property does not lose his it is payable in the currency which is legal tender in the Philippines.
ownership. He simply loses his control
over the property rented during the 2. Loan of fungible thing. — If what was loaned is a fungible thing other
period of the contract than money, the borrower is under obligation to pay the lender another thing
the relation between the parties is that The relation is that of landlord and of the same kind, quality, and quantity. In case it is impossible to do so, the
of obligor and oblige tenant borrower shall pay its value at the time of the perfection of the loan.
the creditor receives “payment” for his the owner of the property rented
loan receives compensation or “price” ART. 1956. No interest shall be due unless it has been expressly stipulated in
writing.
Fungible things - are those which are usually dealt with by number, weight, or
measure such as rice, oil, sugar, etc. so that any given unit or portion is treated as the Requisites for recovery of interest.
equivalent of any other unit or portion. In order that interest may be chargeable, the following are the requisites:
(1) The payment of interest must be expressly stipulated
ART. 1954. A contract whereby one person transfers the ownership of non- (2) The agreement must be in writing (Art. 1956.); and
fungible things to another with the obligation on the part of the latter to give (3) The interest must be lawful.
things of the same kind, quantity, and quality shall be considered a barter.
Existence of stipulation to pay interest.

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 1. If a particular rate of interest has been expressly stipulated by the parties,  When the judgment of the court awarding a sum of money becomes final and
that interest, not the legal rate of interest, shall be applied. executory, the rate of legal interest, regardless of whether the obligation involves
2. If the exact rate of the interest is not mentioned, the legal rate of 12% shall a loan or forbearance of money shall be 12% per annum from such finality until
be payable. its satisfaction.
3. No increase in interest shall be due unless such increase has also been
expressly stipulated.  While the interest agreed upon forms part of the consideration of the contract
4. Sales invoices or slips issued by a store to its customers, stating interests itself, interest as indemnity for damages is payable only in case of default or non-
and attorney’s fees in the usual printed forms as terms and conditions, performance of the contract. As they are distinct claims, they may be demanded
without the signature of the obligor, do not constitute the express stipulation separately.
required by Article 1956.
5. It is only in contracts of loan, with or without security, that interest may be 2. Interest accruing from unpaid interest. - Article 1212 contemplates the
stipulated and demanded. presence of stipulated or conventional interest which has accrued when
demand was judicially made. In cases where no interest had been stipulated
Liability for interest even in the absence of stipulation. by the parties, no accrued conventional interest could further earn interest
Article 1956 is subject to two exceptions: upon judicial demand.
1. Indemnity for damages. — The debtor in delay is liable to pay legal interest Interest separate and distinct from surcharges and penalties.
(6%/12%) as indemnity for damages even in the absence of stipulation for The essence or rationale for the payment of interest often referred to as “cost of
the payment of interest. money,’’ is separate and distinct from that of surcharges and penalties. A penalty
 No interest is due where there was tender of payment prior to any demand to pay stipulation is not necessarily preclusive of interest, if there is an agreement to that
or perform an agreed act. A debtor cannot be considered in delay who offered effect, the two being distinct concepts which may separately be demanded. What
check backed by sufficient deposit or ready to pay cash if the creditor chose that may justify a court in not allowing the creditor to impose full surcharges and
means of payment. penalties, despite an express stipulation therefor in a valid agreement, may not
 Art. 2209. If the obligation consists in the payment of a sum of money, and the equally justify non-payment or reduction of interest.
debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence ART. 1957. Contracts and stipulations, under any cloak or device whatever,
of stipulation, the legal interest, an which is six per cent per annum. intended to circumvent the laws against usury shall be void. The borrower may
i. The “obligation consisting of the payment of a sum of money’’ recover in accordance with the laws on usury.
referred to in Article 2209 is not confined to a loan or forbearance of
money. It has also been applied by the Supreme Court in cases
involving default in the payment of price or consideration under a
Usurious contracts declared void.
contract of sale and an action for damages for injury to persons and
1. Form of contract not conclusive. — The above provision is deemed
loss of property and an action for damages arising from unpaid
necessary to defeat the cunning devices of usurers. The form of the contract
insurance claims.
is not conclusive.
 Central Bank Circular No. 416 fixing the legal rate of interest at 12% per annum, 2. Contract void only as to interest involved. — A usurious contract should not
deals with 1) loans; 2) forbearance of any money, goods or credits; and 3) be considered void in its entirety but only as to the interest involved. It is
judgments involving such loans or forbearance, in the absence of express only the stipulation on usurious interest which should be treated as void so
agreement as to such rate of interest. that the loan becomes without stipulation to pay interest. The nullity of the
stipulation on the usurious interest does not affect the lender’s right to
 If the obligation arises from other sources (e.g., sale) or by way of damages receive back the principal amount of the loan.
arising from injury to persons and loss of property which does not involve a loan,
what is applicable is the rate of 6% annually as provided in Article 2209 and 3. Right of debtor. — With respect to the debtor, the amount paid as interest
NOT the rate of 12% per annum provided by Central Bank Circular No. 416. under a usurious agreement is recoverable by him, since the payment is
deemed to have been made under

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 restraint, rather than voluntarily.
ART. 1961. Usurious contracts shall be governed by the Usury Law and other
ART. 1958. In the determination of the interest, if it is payable in kind, its value special laws, so far as they are not inconsistent with this Code.
shall be appraised at the current price of the products or goods at the time and
place of payment. Note: Usury is now legally non-existent. The interest legally chargeable depends
upon the agreement between the lender and the borrower.
Determination of interest payable in kind.
This article has the same purpose: to make usury harder to perpetrate.
III. DEPOSIT
ART. 1959. Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may by stipulation
CHAPTER 1
capitalize the interest due and unpaid, which as added principal, shall earn new DEPOSIT IN GENERAL AND ITS DIFFERENT
interest. KINDS
When unpaid interest earns interest. ART. 1962. A deposit is constituted from the moment a person receives a thing
As a general rule, accrued interest (interest due and unpaid) shall not earn interest belonging to another, with the obligation of safely keeping it and of returning the
except in two instances: same. If the safekeeping of the thing delivered is not the principal purpose of the
1. When judicially demanded as provided for in Article 2212 contract, there is no deposit but some other contract.
2. When there is an express stipulation made by the parties to wit: that the
interest due an unpaid shall be added to the principal obligation and the
resulting total amount shall earn interest. (This practice is called
Characteristics of the contract.
compounding interest)
1. It is a real contract like commodatum and mutuum because it is perfected by
the delivery of the subject matter.
Under Article 1959, the compounding of not only of the monetary interest but also of
2. When the deposit is gratuitous, it is a unilateral contract because only the
the penalty charge, also called penalty or compensatory interest is allowed. In view
depositary (depositorio) has an obligation. But when the deposit is for
of Article 1956, the stipulation as to compound interest must be in writing.
compensation, the juridical relation created becomes bilateral because it
gives rise to obligations on the part of both the depositary and depositor
ART. 1960. If the borrower pays interest when there has been no stipulation (depositante).
therefor, the provisions of this Code concerning solutio indebiti, or natural
obligations, shall be applied, as the case may be. Safekeeping, principal purpose of the contract.
1. Effect where safekeeping only an accessory obligation. — The principal
Recovery of unstipulated interest paid. purpose of the contract of deposit is the safekeeping of the thing delivered
 This article simply means that if unstipulated interest (it is, therefore, not so that if safekeeping is only an accessory or secondary obligation of the
due) is paid by mistake, the debtor may recover as this would be a case of recipient of the thing, deposit is not constituted but some other contract like
solutio indebiti or undue payment. lease, commodatum, or agency.
 But where the unstipulated interest, or interest stipulated, there being a
stipulation but it is not in writing, is paid voluntarily because the debtor 2. Balance of commission account in agent’s possession at principal’s disposal
feels morally obliged to do so, there can be no recovery as in the case of appropriated by agent. — Where the balance of a commission account
natural obligations. remains in the possession of the agent at the principal’s disposal, the same
acquires at once the character of a deposit which the former must return or
restore to the latter at any time it is demanded.

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 ART. 1965. A deposit is a gratuitous contract, except when there is an
agreement to the contrary, or unless the depositary is engaged in the business of
storing goods.

Contract of deposit generally gratuitous.

DEPOSIT VS MUTUUM General Rule: A contract of deposit is generally gratuitous.
DEPOSIT MUTUUM
the principal purpose is safekeeping or the consumption of the subject matter Exception:
mere custody 1. Where there is contrary stipulation. —the parties may establish any
the depositor can demand the return of the lender must wait until the stipulation they may deem convenient provided it is not contrary to law,
the subject matter at will expiration of the period granted to the morals, good customs, public order, or public policy. (Art. 1306.)
debtor 2. Where depositary engaged in business of storing goods. — The second
both movable and immovable property only money and any other fungible exception is based on the fact that the depositary is engaged in the business
may be the object thing. of storing goods (as in the case of a warehouseman) for compensation and
not out of pure generosity.
3. Where property saved from destruction without knowledge of the owner. —
DEPOSIT VS COMMODATUM
In involuntary deposit, where property is saved from destruction during a
DEPOSIT COMMODATUM
calamity by another person without the knowledge of the owner, the latter is
the principal purpose is safekeeping the transfer of the use
bound to pay the former just compensation.
may be gratuitous Essentially and always gratuitous
only movable (corporeal) things may both movable and immovable property
ART. 1966. Only movable things may be the object of a deposit.
be the object may be the object.
Subject matter of deposit.
ART. 1963. An agreement to constitute a deposit is binding, but the deposit itself 1. Only movable or personal property may be the object of extrajudicial
is not perfected until the delivery of the thing. deposit, whether voluntary or necessary.
2. Judicial deposit (Arts. 2005-2006.), however, may cover movable as well as
immovable property its purpose being to protect the rights of parties to a
ART. 1964. A deposit may be constituted judicially or extrajudicially. suit.

ART. 1967. An extrajudicial deposit is either voluntary or necessary.

Creation of deposit.
A deposit may be created by virtue of a court order or by law and not by the will of Kinds of extrajudicial deposit.
the parties. In a deposit, it is essential that the depositary is not the owner of the Deposit is generally voluntary. It becomes necessary in the three cases mentioned in
property deposited. Articles 1996 and 1998, i.e., when made in compliance with a legal obligation, on
the occasion of any calamity, or by travellers in hotels and inns.
Kinds of deposit. The deposit of goods made by travellers or passengers with common carriers may
1. Judicial - or one which takes place when an attachment or seizure of also be regarded as necessary.
property in litigation is ordered; or
2. Extrajudicial - which may be: CHAPTER 2
a. voluntary or one wherein the delivery is made by the will of the VOLUNTARY DEPOSIT
depositor or by two or more persons each of whom believes
himself entitled to the thing deposited SECTION 1 – GENERAL PROVISIONS
b. necessary or one made in compliance with a legal obligation or on
the occasion of any calamity, or by travellers in hotels and inns or
by travellers with common carriers.
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 ART. 1968. A voluntary deposit is that wherein the delivery is made by the will of SECTION 2 – OBLIGATIONS OF THE DEPOSITARY
the depositor. A deposit may also be made by two or more persons each of whom
believes himself entitled to the thing deposited with a third person, who shall ART. 1972. The depositary is obliged to keep the thing safely and to return it,
deliver it in a proper case to the one to whom it belongs. when required, to the depositor, or to his heirs and successors, or to the person
who may have been designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by the provisions of
Title I of this Book.
Voluntary and necessary deposits distinguished.
 Voluntary - the depositor has complete freedom in choosing the depositary If the deposit is gratuitous, this fact shall be taken into account in determining the
 Necessary - there is lack of free choice in the depositor. degree of care that the depositary must observe.
General Rule: depositor must be the owner of the thing deposited.
Exception: a carrier, commission agent, a lessee, etc. may deposit goods temporarily
in his possession considering that the contract does not involve the transfer of Obligation to keep the thing deposited and return it.
ownership. The safekeeping and the return of the thing when required, are the two primary
obligations of the depositary.
Where there are several depositors.
Two or more persons each claiming to be entitled to a thing may deposit the same 1. Degree of care. — Ordinarily, the depositary must exercise over the thing
with a third person. In such case, the third person assumes the obligation to deliver to deposited the same diligence as he would exercise over his property.
the one to whom it belongs. a. Reasons:
 First, because it is an essential requisite of the judicial relation
The action to compel the depositors to settle their conflicting claims among which involves the depositor’s confidence in his good faith and
themselves would be in the nature of an interpleader. Here, one of the depositors is trustworthiness; and
not the owner.  Second, because of the presumption that the depositor, in choosing
the depositary, took into account the diligence which the depositary
ART. 1969. A contract of deposit may be entered into orally or in writing. is accustomed with respect to his own property.

2. Rules applicable. — The liability of the depositary for the care and delivery of
the thing is governed by the rules on obligations.
ART. 1970. If a person having capacity to contract accepts a deposit made by one a. He is liable if the loss occurs through his fault or negligence (Art.
who is incapacitated, the former shall be subject to all the obligations of a 1170.), even if the thing was insured.
depositary, and may be compelled to return the thing by the guardian, or b. The loss of the thing while in his possession, ordinarily raises a
administrator of the person who made the deposit, or by the latter himself if he presumption of fault on his part.
should acquire capacity. c. The required degree of care is greater if the deposit is for
compensation than when it is gratuitous.
Where depositary incapacitated and depositor capacitated. ART. 1973. Unless there is a stipulation to the contrary, the depositary cannot
The incapacitated depositary (like a minor or an insane person) does not incur the deposit the thing with a third person. If deposit with a third person is allowed, the
obligation of a depositary. He is liable: depositary is liable for the loss if he deposited the thing with a person who is
(1) to return the thing deposited while still in his possession and manifestly careless or unfit. The depositary is responsible for the negligence of his
(2) to pay the depositor the amount by which he may have benefited himself employees.
with the thing or its price subject to the right of any third person who
acquired the thing in good faith.
Obligation not to transfer deposit.

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 various depositors shall own or have a proportionate interest in the mass.
(1) Liability for loss. — Under Article 1973, the depositor is liable for the loss of
the thing deposited if: Obligation not to commingle things deposited if so stipulated.
(a) he transfers the deposit with a third person without authority In such case, the various depositors of the mingled goods shall own the entire mass
although there is no negligence on his part and the third person; in common and each depositor shall be entitled to such portion of the entire mass as
(b) he deposits the thing with a third person who is manifestly careless the amount deposited by him bears to the whole. (see Sec. 23, Warehouse Receipts
or unfit although authorized, even in the absence of negligence; or Law.)
(c) the thing is lost through the negligence of his employees whether the
latter are manifestly careless or not. ART. 1977. The depositary cannot make use of the thing deposited without the
express permission of the depositor.
(2) Exemption from liability. — The depositor is not responsible in case the thing
is lost without negligence of the third person with whom he was allowed to Otherwise, he shall be liable for damages.
deposit the thing if such third person is not “manifestly careless or unfit.”
However, when the preservation of the thing deposited requires its use, it must be
Obligation not to change way of deposit. used but only for that purpose.
ART. 1974. The depositary may change the way of the deposit if under the
circumstances he may reasonably presume that the depositor would consent to the Obligation not to make use of thing deposited unless authorized.
change if he knew of the facts of the situation. However, before the depositary The unauthorized use by the depositary would make him liable for damages. But the
may make such change, he shall notify the depositor thereof and wait for his depositary may make use of the thing deposited even without the express permission
decision, unless delay would cause danger. of the depositor where such use is necessary for its preservation but in such case the
use is limited for that purpose only.

ART. 1975. The depositary holding certificates, bonds, securities or instruments ART. 1978. When the depositary has permission to use the thing deposited, the
which earn interest shall be bound to collect the latter when it becomes due, and to contract loses the concept of a deposit and becomes a loan or commodatum,
take such steps as may be necessary in order that the securities may preserve their except where safekeeping is still the principal purpose of the contract.
value and the rights corresponding to them according to law. The above provision
shall not apply to contracts for the rent of safety deposit boxes. The permission shall not be presumed, and its existence must be proved.

Obligation to collect interest on choses in action deposited. Effect if permission to use is given.
Thus, the depositary of a negotiable promissory note which has been dishonored by (1) Thing deposited, non-consumable. - the contract loses the character of a
nonpayment by the maker, must give notice of dishonor to indorsers for under the deposit and acquires that of a commodatum despite the fact that the parties
law, indorsers to whom such notice is not given may have denominated it as a deposit, unless safekeeping is still the
are discharged from liability. (see Sec. 89, NIL.) Under Article 1975, the depositary principal purpose of the contract.
is bound to collect not only the interest but also the capital itself when due. (2) Thing deposited, money or other consumable thing. — If the thing
deposited is money or other consumable thing, the permission to use it will
Contract for rent of safety deposit boxes. result in its consumption and converts the contract into a simple loan or
A contract for the rent of safety deposit boxes (second paragraph) is not an ordinary mutuum. But if safekeeping is still the principal purpose of the contract, it
contract of lease of things but a special kind of deposit; hence, it is not to be strictly is still a deposit but an irregular one; hence, it is called an irregular deposit.
governed by the provisions on deposit. Relationship is that of a bailor and bailee. Bank deposits are in the nature of irregular deposits but they are really
(Read De Leon’s explanation) loans governed by the law on loans. (see Art. 1980.)

Irregular Deposit vs Mutuum

ART. 1976. Unless there is a stipulation to the contrary, the depositary may
commingle grain or other articles of the same kind and quality, in which case the Irregular Deposit Mutuum

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 the consumable thing deposited The lender is bound by the provisions should the seal or lock be broken through his fault.
may be demanded at will by the of the contract and cannot seek Fault on the part of the depositary is presumed, unless there is proof to the
irregular depositor for whose benefit restitution until the time for payment, contrary.
the deposit has been constituted as provided in the contract, has arisen
The only benefit is that which accrues the essential cause for the transaction is As regards the value of the thing deposited, the statement of the depositor shall be
to the depositor the necessity of the borrower. accepted, when the forcible opening is imputable to the depositary, should there
the depositor in an irregular deposit has be no proof to the contrary. However, the courts may pass upon the credibility of
preference over other creditors with the depositor with respect to the value claimed by him.
respect to the thing deposited
When the seal or lock is broken, with or without the depositary’s fault, he shall
Liability for loss through fortuitous event. keep the secret of the deposit.
ART. 1979. The depositary is liable for the loss of the thing through a fortuitous
event: ART. 1982. When it becomes necessary to open a locked box or receptacle, the
(1) If it is so stipulated; depositary is presumed authorized to do so, if the key has been delivered to him;
(2) If he uses the thing without the depositor’s permission; or when the instructions of the depositor as regards the deposit cannot be executed
(3) If he delays its return; without opening the box or receptacle.
(4) If he allows others to use it, even though he himself may have been
authorized to use the same. Where thing deposited delivered closed and sealed.
1) Obligations of depositary. — Under Article 1981, the depositary has the
ART. 1980. Fixed, savings, and current deposits of money in banks and similar obligation to:
institutions shall be governed by the provisions concerning simple loan. a) return the thing deposited when delivered closed and sealed, in
the same condition
Relation between bank and depositor. b) pay for damages should the seal or lock be broken through his
(1) Contract of loan. — Deposits of money in banks, whether fixed, savings, fault which is presumed unless proved otherwise; and
and current, are really loans to a bank because the bank can use the same c) keep the secret of the deposit when the seal or lock is broken,
for its ordinary transactions and for the banking business in which it is with or without his fault.
engaged. While the bank has the obligation to return the amount (2) When depositary justifi ed to open. — The depositary is authorized by
deposited, it has, however, no obligation to return or deliver the same Article 1982 to open the thing deposited which is closed and sealed when
money that was deposited. there is (a) presumed authority; or (b) necessity.
(2) Relation of creditor and debtor. — Accordingly, the relation between a
depositor and a bank is that of a creditor and a debtor. The depositor ART. 1983. The thing deposited shall be returned with all its products,
(creditor) lends the bank (debtor) money and the bank agrees to pay the accessories and accessions.
depositor on demand. The deposit agreement between the bank and the
depositor determines the rights and obligations of the parties. Should the deposit consist of money, the provisions relative to agents in Article
 A bank’s failure to honor a deposit is failure to pay its obligation as 1896 shall be applied to the depositary.
debtor and not a breach of trust arising from a depositary’s failure to
return the subject matter of the deposit.  Obligation to return products, accessories, and accessions. – for it is a
 The general rule is that a bank can compensate or set off the deposit consequence of consequence of ownership.
in its hands for the payment of any indebtedness to it on the part of  Obligation to pay interest on sums converted to personal use. - If the
the depositor. depositary be in delay or has used the money without permission, he shall
be liable for interest as indemnity. The depositary owes interest on the sums
ART. 1981. When the thing deposited is delivered closed and sealed, the he has applied to his own use from the day on which he did so, and those
depositary must return it in the same condition, and he shall be liable for damages which he still owes after the extinguishment of the deposit.

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 thing to any one of the solidary depositors (creditors) unless a demand, judicial or
ART. 1984. The depositary cannot demand that the depositor prove his ownership extrajudicial, for its return has been made by one of them in which case delivery
of the thing deposited. should be made to him. (Art. 1214.)

Nevertheless, should he discover that the thing has been stolen and who its true ART. 1986. If the depositor should lose his capacity to contract after having made
owner is, he must advise the latter of the deposit. the deposit, the thing cannot be returned except to the persons who may have the
administration of his property and rights.
If the owner, in spite of such information, does not claim it within the period of
one month, the depositary shall be relieved of all responsibility by returning the Person to whom return must be made.
thing deposited to the depositor. (1) The depositary is obliged to return the thing deposited, when required, to the
depositor, to his heirs and successors, or to the person who may have been
If the depositary has reasonable grounds to believe that the thing has not been designated in the contract.
lawfully acquired by the depositor, the former may return the same. (2) If the depositor was incapacitated at the time of making the deposit, the
property must be returned to his guardian or administrator or the person who
 To constitute a deposit, it is not essential that the depositor be the owner of made the deposit or to the depositor himself should he acquire capacity.
the thing deposited. Furthermore, to acquire proof of ownership may open (3) Even if the depositor had capacity at the time of making the deposit but he
the door to fraud and bad faith, for the depositary, on the pretense of subsequently loses his capacity during the deposit, the thing must be
requiring proof of ownership, may be able to retain the thing. returned to his legal representative.

 Where third person appears to be owner. – refer to paragraph 2, 3 and 4; to ART. 1987. If at the time the deposit was made a place was designated for the
be relieved from liability. return of the thing, the depositary must take the thing deposited to such place; but
the expenses for transportation shall be borne by the depositor.
For paragraph 2 to apply, these conditions must exist:
(1) the thing deposited must have been stolen; and If no place has been designated for the return, it shall be made where the thing
(2) the depositary knows who its true owner is. deposited may be, even if it should not be the same place where the deposit was
made, provided that there was no malice on the part of the depositary.
Effect of failure of owner to claim within one month. ART. 1988. The thing deposited must be returned to the depositor upon demand,
Intended merely for protection of the depositary. If the thing is returned even though a specified period or time for such return may have been fixed.
to the depositor after one month, the true owner of the thing may still recover it
through other legal processes. This provision shall not apply when the thing is judicially attached while in the
depositary’s possession, or should he have been notified of the opposition of a
ART. 1985. When there are two or more depositors, if they are not solidary, and third person to the return or the removal of the thing deposited. In these cases, the
the thing admits of division, each one cannot demand more than his share. depositary must immediately inform the depositor of the attachment or opposition.

When there is solidarity or the thing does not admit of division, the provisions of Time of return.
Articles 1212 and 1214 shall govern. However, if there is a stipulation that the In a deposit, whenever a period is agreed to, the same is for the benefit of the
thing should be returned to one of the depositors, the depositary shall return it depositor, but it may be validly waived by him.
only to the person designated.
If the deposit is for a compensation, the depositary is entitled to the compensation
Important: if the thing is not divisible, the rules on active solidarity (solidarity corresponding to the entire period. In this case, the period is also for the benefit of
among creditors) shall apply, to the effect that each one of the solidary depositors the depositary.
(creditors) may do whatever may be useful to the others but not anything which may
be prejudicial to the latter (Art. 1212.), and the depositary (debtor) may return the When depositary not obliged to return thing deposited.

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  Right to immediate restitution
 In the first case, if the depositor returns the thing, he would be disobeying SECTION 3. — OBLIGATIONS OF THE DEPOSITOR
the judicial order of attachment.
 In connection with the second case, the depositary should only be ART. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse the
authorized in case of conflicting claims to consign the thing in court through depositary for the expenses he may have incurred for the preservation of the thing
an action of interpleader. deposited.

ART. 1989. Unless the deposit is for a valuable consideration, the depositary who Obligation to pay expenses of preservation.
may have justifiable reasons for not keeping the thing deposited may, even before  The above article applies only if the deposit is gratuitous. The rule is
the time designated, return it to the depositor; and if the latter should refuse to different in Commodatum.
receive it, the depositary may secure its consignation from the court.  As the law makes no distinction, the right to reimbursement covers all
expenses for preservation, whether ordinary or extraordinary. The law refers
Right of depositary to return thing deposited. to necessary expenses.
(1) Deposit gratuitous. — The depositary may likewise return the thing  If the deposit is for a valuable consideration, the expenses of preservation
deposited notwithstanding that a period has been fixed for the deposit if (a) are borne by the depositary because they are deemed included in the
the deposit is gratuitous and (b) justifiable reasons exist for its return. In compensation.
case the depositor refuses to receive the thing, the depositary may deposit Obligation to pay losses incurred due to character of thing deposited.
the thing at the disposal of judicial authority. ART. 1993. The depositor shall reimburse the depositary for any loss arising from
the character of the thing deposited, unless at the time of the constitution of the
(2) Deposit for a valuable consideration. — If the deposit is for a valuable deposit the former was not aware of, or was not expected to know the dangerous
consideration, the depositary has no right to return the thing deposited character of the thing, or unless he notified the depositary of the same, or the latter
before the expiration of the time designated even if he should suffer was aware of it without advice from the depositor.
inconvenience as a consequence. He is bound by the period and restitution
before its expiration constitutes a breach of his obligation. Depositary’s right of retention.
ART. 1994. The depositary may retain the thing in pledge until the full payment
Liability for loss by force majeure or government order. of what may be due him by reason of the deposit.
ART. 1990. If the depositary by force majeure or government order loses the thing
and receives money or another thing in its place, he shall deliver the sum or other ART. 1995. A deposit is extinguished:
thing to the depositor. (1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the depositor or
ART. 1991. The depositor’s heir who in good faith may have sold the thing which the depositary.
he did not know was deposited, shall only be bound to return the price he may have
received or to assign his right of action against the buyer in case the price has not Causes of extinguishment of deposit.
been paid him. There are other causes such as return of the thing, novation, merger,
expiration of the term, fulfillment of the resolutory condition ,etc. (see Art. 1231.)
Alienation in good faith by depositary’s heir.
 If the purchaser who acquired the thing acted in bad faith, the depositor may Effect of death of depositor or depositary.
bring an action against him for its recovery. The sale or appropriation of the  Gratuitous – extinguishes the deposit.
thing deposited constitutes estafa.  Deposit for compensation – not extinguished; Hence, the rights and
 The obligation of the heir is limited to the return of the price received or to obligations arising therefrom are transmissible to their respective heirs. But
assign the right to collect the same if it has not been paid and not the real the heirs of either party have a right to terminate the deposit even before the
value of the thing. expiration of the term.

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