LOAN

Articles 1933 – 1961

Civil Code of the Philippines
 WHAT IS A LOAN?

Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.

Parties:

1. Lender/bailor - person who delivers money or goods, consumable or non-

consumable, to another
2. Borrower/bailee - receives something not consumable so that he may use the
same for a certain time with the obligation to return the same, or something
consumable (or money) so that he may consume it with the obligation to pay the
same amount of the same kind and quality.

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 LOAN

Characteristics

1. Real Contract
2. Unilateral Contract

Kinds of loan
1. Commodatum – where the bailor (lender) delivers to the bailee
(borrower) a non-consumable thing so that the latter may use it for a given
time and return the identical thing;

2. Mutuum or Simple Loan – where the lender delivers to the borrower

money or other consumable thing upon the condition that the latter shall
pay same amount of the same kind and quality. (Pineda, 2006)

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 LOAN

Commodatum vs. Mutuum

1. As to type
2. As to purpose
3. As to object
4. As to consideration
5. As to ownership of the thing
6. As to the duty of the borrower
7. As to the effect of death of the lender
8. As to who bears the loss
9. As to when it is extinguish

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 COMMODATUM

Parties to a commodatum

1. Bailor/Comodatario/Commodans – The giver/ lender; the party who

delivers the possession or custody of the thing bailed; and
2. Bailee/Comodante/Commodatarius – The recipient/ borrower; the party
who receives the possession or custody of the thing thus delivered.

Kinds of a contract of commodatum

1. Ordinary Commodatum – use by the borrower of the thing is for a certain
period of time.
2. Precarium - one whereby the bailor may demand the thing loaned at will.
(Art. 1947, NCC)

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 COMMODATUM

Object of a contract of commodatum:

GR: Non-consumable, so that the bailee may use the same for a certain time
and return it. (Art. 1933, NCC)

XPN: Consumable goods may be the subject of commodatum if the purpose

of the contract is not the consumption of the object, as when it is merely for
exhibition. (Article 1936, NCC)

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 COMMODATUM

Commodatum is purely personal in character.

1. As to the death of a party (Art. 1939)

2. As to lease of the object (Art. 1939)
3. As to the bailee’s right to fruit (Art. 1935 & Art. 1940)
4. As to bailee’s right of retention (Art. 1944, Art 1951 – Art 1952)

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 COMMODATUM

Obligations of the Bailee (Borrower)

Principal Obligations
1. Take care of the thing with diligence of a good father of a family. (Arts.
1163, 1169, 1170 and 1173, NCC)
2. Use the thing loaned only for the purpose for which it was loaned and not
for any other purpose. (Art. 1935, 1939(2), 1942[1], NCC)
3. Return the thing upon expiration of terms or upon accomplishment of
purpose. (Art. 1933, NCC)

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 COMMODATUM

Obligations of the Bailee (Borrower)

Other obligations
1. To pay for the ordinary expenses for the use and preservation of the thing
loaned. (Art. 1941, NCC)
2. To be liable for the loss of the thing, even if it should be through a
fortuitous event, in the following cases:
a. When the bailee devoted the thing for any purpose different from that for
which it has been loaned (Art. 1942[1], NCC);
b. When he keeps it longer than the period stipulated, or after the
accomplishment of its use (Art. 1942[2], NCC);

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 COMMODATUM

Obligations of the Bailee (Borrower)

Other obligations (continued)
c. When the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from responsibility in case
of fortuitous event (Art. 1942[3], NCC);
d. When he lends or leases it to third persons who are not members of his
household (Art. 1942[4], NCC);
e. When, being able to save either of the thing borrowed or his own things,
he chose to save the latter (Art. 1942[5], NCC).

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 COMMODATUM
Obligations of the Bailee (Borrower)
Other obligations (continued)
3. Liability for the deterioration due to the use of the thing:
GR: Bailee is not liable for the deterioration of the thing loaned due only to the use
thereof and without his fault (Art. 1943, NCC). This refers only to the normal use of
the thing loaned.
XPNs:
a. If expressly stipulated;
b. If guilty of fault or negligence (Art. 1170, NCC);
c. If he devoted the thing to any purpose different from that for which it has been
loaned (Art.1942[1], NCC); or
d. If he uses the thing beyond the period stipulated (Art. 1942[2], NCC).

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 COMMODATUM

Obligations of the Bailee (Borrower)

Other obligations (continued)
4. Unless there’s stipulation to the contrary, to be equally liable with the bailor for
the extraordinary expenses arising from the actual use of the thing by the bailee,
even though the latter acted without fault, (Art. 1949 [2], NCC).
5. If in making use of the thing, the bailee incurred expenses other than ordinary and
extraordinary expenses, he shoulders such liability and is NOT entitled to
reimbursement. (Art. 1950, NCC)

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 COMMODATUM

Obligations of the Bailor (Lender)

1. To respect the duration of the loan because the bailor is bound by the
terms of the contract of commodatum which is for a certain time. (Art.
1946)
2. To refund to the bailee the extraordinary expenses for the preservation
of the thing loaned.
3. Unless there’s stipulation to the contrary, to be equally liable with the
bailee for extraordinary expenses, even without his own fault, arising from
the actual use of the thing by such bailee. (Art. 1949).
4. To be liable to the bailee for damages for hidden flaws known to him
which he did not disclose to the bailee. (Art. 1951).

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 COMMODATUM

Extinguishment

1. Expiration of the term agreed upon;

2. Accomplishment of the stipulated purpose or use of the thing;
3. Return of the thing with the consent of the bailor;
4. Return of the thing in case the agreement is precarium (Art. 1947, NCC),
5. Return of the thing for acts of ingratitude (Art. 1948, NCC); and
6. Death of a party.

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 COMMODATUM
Cruz lent Jose his car until Jose finished his Bar exams. Soon after Cruz
delivered the car, Jose brought it to Mitsubishi Cubao for maintenance check-up
and incurred costs of ₱8,000.00. Seeing the car’s peeling and faded paint, Jose
also had the car repainted for ₱10,000.00. After the Bar exams, Cruz asked for
the return of his car.

Jose said he would return it as soon as Cruz has reimbursed him for the car
maintenance and repainting costs of ₱18,000.00. Is Jose’s refusal justified?

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 MUTUUM

Nature of a contract of mutuum

1. The purpose of the contract is consumption;
2. The subject-matter is either money or consumable property;
3. Ownership passes to the borrower;
4. It is a real contract;
5. It may be gratuitous or with stipulation to pay interest; and
6. It is a unilateral contract.

Object of a contract of loan – Fungible things

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 quantity. (Art. 1953)

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 MUTUUM

Perfection of a contract of mutuum

Mere issuance of checks to the debtor does not perfect the contract of loan. It is only after the
checks have been cashed by the debtor that the contract may be deemed perfected. (Art.
1249, NCC)

Forms of Payment

1. If the thing loaned is money, payment must be made in the currency stipulated, otherwise
that which in legal tender in the Philippines. (Arts. 1955 [1] and Art. 1249)
2. If the thing loaned is other than money, payment shall be of another thing of the same kind,
quality and quantity. In case it is impossible to do so, the borrower shall pay its value at the
time of the perfection of the loan. (Art. 1955 [2], NCC)

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 MUTUUM
Legal Tender

Legal Tender Power - All notes and coins issued by the Bangko Sentral ng Pilipinas
shall be fully guaranteed by the Government of the Republic of the Philippines and
shall be [the only] legal tender in the Philippines for all debts, both public and
private. (Section 52 of Republic Act No. 7653 a.k.a. The New Central Bank Act)

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 MUTUUM

Obligations of a borrower:

1. Pay the creditor an equal amount of the same kind and quality (Art. 1953, NCC)
2. Pay interest, if stipulated in writing (Art. 1956, NCC)

GR: No interest shall be due on the loan.

XPN: Unless it has been expressly stipulated in writing. (Art. 1956, NCC)

Payment of unstipulated interest

1. Where unstipulated interest is paid by mistake, the debtor may recover, this
would be a case of solutio indebiti or undue payment.

2. Where the unstipulated interest is paid voluntarily because the debtor feels
morally obliged to do so, there can be no recovery as in the case of natural
obligations. (Art. 1960, NCC)

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 MUTUUM

Requisites for Recovery of Interest:

1. The payment of interest must be expressly stipulated. (Art. 1956, NCC)

XPNs:
a. Indemnity for damages. (Art. 2209, NCC)
b. Interest accruing from unpaid interest. (Art 2212, NCC)

2. The interest must be lawful and not unconscionable (not against morals and
public policy).
3. The stipulation must be in writing.

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 MUTUUM

Recovery of Compound Interest

GR: Accrued/Unpaid interest shall not earn interest.

XPNs:

1. When judicially demanded as provided in Art. 2212, interest due shall earn legal
interest from the time it is judicially demanded although the obligation may be silent
upon this point.
2. When there is an express stipulation made by the parties that the interest due and
unpaid shall be added to the principal obligation and the resulting total amount
shall earn interest. (Art. 1959, NCC)

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 DEPOSIT
It is a contract constituted from the moment a person receives a thing belonging to
another with the obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal purpose of the contract, there
is no deposit but some other contract (Art. 1962, NCC)

Characteristics of deposit:
1. Real Contract
2. Unilateral
3. Bilateral
4. Voluntary as a general rule.
5. Principal

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 DEPOSIT
Kinds of Deposit:

A. Extra-judicial – only MOVABLE

1. Voluntary – delivery is made by the will of the depositor or by 2 or more persons

each of whom believes himself entitled to the thing deposited. (Arts. 1968-1995,
NCC)

2. Necessary – made in compliance with (1) a legal obligation; or (2) on occasion of

any calamity; or (3) by travelers in hotels and inns; or (4) by travelers with common
carriers. (Arts. 1996-2004, NCC)

B. Judicial (sequestration) – MOVABLE / IMMOVABLE

- when an attachment or seizure of property in litigation is ordered. (Art.
2005, NCC)

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 DEPOSIT
Voluntary – It is a deposit wherein the delivery is made by the will of 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 deliver it in a proper
case to the one to whom it belongs. (Art. 1968, NCC)
RULES ON THE CAPACITY OF DEPOSITARY AND DEPOSITOR
Depositary (capacitated) Depositary (incapacitated)
Depositor (incapacitated) Depositor (capacitated)
(Art. 1970) (Art. 1971)
Depositary is subject to ALL the obligations of a depositary Depositary does not incur obligations of a depositary
whether or not the depositor is capacitated.
Depositary must return the property either to: Depositary, however is liable to:

1. The legal representative of the incapacitated; 1. Return the thing deposited while still in his possession; and
2. The depositor himself if he should acquire capacity
2. Pay the depositor the amount by which he may have
benefited himself with the thing or its price subject to the right
of any third person who acquired the thing in good faith.

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 DEPOSIT
General Obligations of Depositary

1. To keep the thing safely (Art. 1972, NCC)

2. To not use the thing without express permission of the depositor. (Art. 1977, NCC)

3. To return the thing. (Art. 1972, NCC)

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 DEPOSIT

Under Art. 1973, the depositary is liable for the loss under the following:

a. He transfers the deposit with a 3rd person without authority, although there is
no negligence on his part and the third person;

b. He deposits the thing with a 3rd person who is manifestly careless and unfit,
although authorized, even in the absence of negligence; or

c. The thing is lost through the negligence of his employees whether the latter are
manifestly careless or not.

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 DEPOSIT
Commingle things deposited

The depositary may not commingle things deposited if so stipulated. (Art. 1976)
Depositary can only commingle if the articles are of the same kind and quality. In
case of commingling, each depositor shall be entitled to each portion of the entire
mass as the amount deposited by him bears to the whole.

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 DEPOSIT
Use of the Thing Deposited

GR: Deposit is not for use of the thing. Use by the depositary would make him liable for
damages.
XPNs:
a. When the preservation of the thing deposited requires its use;
b. When authorized by the depositor (the authorization shall not be presumed and its
existence must be proved). (Art. 1977, NCC)

Effect if permission to use is given:

If the thing deposited is non-consumable, the contract is a commodatum, unless safekeeping is
still the principal purpose. (Art. 1978, NCC)

If the thing deposited consists of consumable things, the contract is converted into a simple
loan or mutuum unless safekeeping is still the principal purpose in which case it is called an
irregular deposit (example: bank deposit) (De Leon, Comments and Cases on Credit
Transactions, 2016, p. 180)

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 DEPOSIT

Liability for loss through fortuitous event

The depositary is liable for the loss of the thing through fortuitous event:
a. If stipulated;
b. If he uses the thing without the depositor’s permission;
c. If he delays its return;
d. If he allows others to use it. (Art. 1979).

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 DEPOSIT
Obligation when the thing deposited is delivered closed and sealed

When the thing deposited is delivered closed and sealed, the depositary must:
a. Return the thing deposited in the same condition;
b. Pay for damages should the seam or lock be broken through his fault, which is
presumed unless proven otherwise;
c. Keep the secret of the deposit when the seal or lock is broken with or without his
fault. (Art. 1981, NCC):

The depositary is authorized to open the thing deposited which is closed and sealed
when:
a. There is presumed authority; or
b. There is necessity to do so. (Art. 1982, NCC)

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 DEPOSIT
Rule as to ownership - Art. 1984

The depositary cannot demand that the depositor prove his ownership of the thing deposited.

The depositary has the obligation to advise the true owner that a deposit has been made
should he discover that the thing deposited was stolen from the owner (Art. 1984, NCC)

If the owner despite such information does not claim it within the period of one (1) month, the
depositary shall be relieved from all responsibility by returning the same to the depositor. (De
Leon, Comments and Cases on Credit Transactions. 2016, p. 198).

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 DEPOSIT
Rules when there are two or more depositors

1. If the thing deposited is divisible and depositors are not solidary. Each depositor can demand
only his proportionate share thereto.

2. If obligation is solidary or if the thing is not divisible. (Art. 1985, NCC)

3. If there is a stipulation that the thing should be returned to one of the depositors, the
depositary is bound to return it only to the person designated although the latter has not made
any demand for its return.

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 DEPOSIT
General Obligations of the Depositor:

1. To pay expenses for preservation (contemplates ordinary and extraordinary & necessary
expenses);
2. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for
expenses incurred for the preservation of the thing deposited (Art. 1992);
3. If the deposit is for valuable consideration, expenses for preservation are borne by the
depositary due to the character of the thing deposited.

GR: The depositor shall reimburse the depositary for any loss arising from the character of the
thing deposited. (Art. 1993, NCC)

XPNs:
a. At the time of the deposit, the depositor was not aware of the dangerous character of the
thing;
b. When the depositor was not expected to know the dangerous character of the thing;
c. When the depositor notified the depositary of the same; or
d. The depositary was aware of it without advice from the depositor. (Art. 1993, NCC)

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 DEPOSIT
A voluntary deposit is extinguished:
1. Upon the loss or destruction of the thing deposited;
2. In case of gratuitous deposit, upon the death of either the depositor or the
depositary (Art. 1995, NCC); or
3. Other causes, such as return of the thing, novation, merger, expiration of the
term, fulfillment of the resolutory condition, etc. (Art. 1231, NCC)

A deposit for compensation is not extinguished by the death of either party because,
unlike a gratuitous deposit, an onerous deposit is not personal in nature. (De Leon,
Comments and Cases on Credit Transactions, 2010 ed., p. 145)

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 DEPOSIT
Necessary Deposits:

A deposit is necessary:
1. When it is made in compliance with a legal obligation.
2. When it takes place on the occasion of any calamity, such as fire, storm, flood,
pillage, shipwreck or other similar events. (Art. 1996, NCC)
3. When made by travelers in hotels and inns or by travelers with common carrier.
(Art. 1998, NCC)

Judicial Deposit or Sequestration

Judicial Deposit or sequestration takes place when an attachment or seizure of

property in litigation is ordered. (Art. 2005)

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 DEPOSIT
Ginny arrived at Star Viva Hotel (SVH) and entrusted the ignition key of
her vehicle to parking attendant Marco, who in turn, issued a valet
parking customer claim stub. After parking the vehicle, Marco placed
the ignition key inside a safety box. Ginny proceeded to the hotel lobby
to check in. At midnight, the hotel security officer informed Ginny that
her vehicle was carnapped. Ginny filed against SVH an action for
damages for the loss of the vehicle. In its answer, SVH denied
responsibility for any loss or damage to vehicles in the parking area
since the valet parking service is a special privilege given for the
convenience of hotel guests. Is SVH liable for the loss of Ginny's
vehicle? Explain.

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 DEPOSIT
Judicial Deposit or Sequestration

Judicial Deposit or sequestration takes place when an attachment or seizure of

property in litigation is ordered. (Art. 2005)

JUDICIAL EXTRA-JUDICIAL
Creation
By order of the court. By the will of the parties or by contract.
Purpose
For security or to insure the right of a party For custody and safekeeping
to a property or to recover in case of
favorable judgment
Subject Matter
Movables or immovable, but generally Movables only.
immovable
Cause
Always onerous Maybe onerous or gratuitous
When must the thing be returned
Upon order of the court or when litigation is Upon demand of the depositor
ended.

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THE LAW ON GUARANTY

Articles 2047 – 2084

Civil Code of the Philippines
 GUARANTY

Article 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail to
do so.

Characteristics of guaranty

1. Gratuitous, unless there is a stipulation - Art. 2048

2. Accessory
3. Subsidiary
4. Conditional
5. Unilateral
6. Express - Art. 2055
7. Covered by Statutes of Fraud – Art. 1403 (2) (b)
8. Prospective

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 GUARANTY
Parties to a Guaranty
1. Principal-obligor - the person whose obligation is secured by the guarantor
2. Obligee - the person in whose favor the guarantee is made; he will be paid or
reimbursed if the principal fails to performs his obligation and the proper procedure
is complied with.
3. Guarantor - agrees to enter into a contract to accommodate the obligor either
gratuitously or for consideration.

Qualifications of a Guarantor – Art. 2056

Replacement of a Guarantor – Art. 2057

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 GUARANTY
Consent

Is the consent of the husband necessary for a married woman to enter into a guaranty?

Is the consent of debtor necessary for a person to be a guaranty on his behalf?

What are the effects if the debtor did not consent?

1. There is limited right of reimbursement.

− the guarantor can recover only insofar as the payment has been beneficial to the debtor
− the same defenses which could have been set up against the creditor can be set up against the paying
guarantor.
−
2. The guarantor has no right of subrogation.
− Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or
penalty. (Art. 1237, NCC)

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 GUARANTY
Is the creditor required to accept the guaranty offered?

Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the
sense that it requires action by the creditor before the obligation becomes fixed, it does not become a
binding obligation until it is accepted and, unless there is a waiver of notice, until notice of such
acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor
has performed the conditions, and intends to act upon the guaranty. (Philippine National Bank vs. Garcia,
G.R. No. 23175, March 18, 1925)

Where, upon the other hand, the transaction is not merely an offer of guaranty but amounts to a direct
or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all
that is necessary to make the promise binding is that the promisee should act upon it, and notice of
acceptance is not necessary,. (Visayan Surety and Insurance Corporation vs. Laperal, G. R. No. 46515, June
14, 1940) the reason being that the contract of guaranty is unilateral

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 GUARANTY
Obligations Secured by Guaranty
1. Valid obligations; (Art. 2052, NCC)
2. Voidable obligations, unless it is annulled by proper action in court; (Art. 2052, NCC)
3. Unenforceable obligations; (Article 2052, NCC)
4. Natural obligations -When the debtor himself offers a guaranty for his liability, thereby
transforming the obligation from a natural into a civil one; (Art. 2052, NCC) and
5. Conditional obligations – In the case of suspensive condition, it’s happening gives rise to the
principal obligation and hence, it also gives rise to the accessory obligation. (Art. 2053, NCC)

There can be a guaranty for:

6. Present debts; and
7. Future debts, even if the amount is not yet known. (Art. 2053, NCC) – liquidated debt

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 GUARANTY
Continuing Guaranty

By executing a continuing guaranty or suretyship agreement, the principal debtor

places himself in a position to enter into the projected series of transactions with its
creditor; with such suretyship or guaranty agreement, there would be no need to
execute separate contracts or bond (in surety) for each financing or credit
accommodation extended to the principal debtors. (Atok Finance Corporation vs.
Court of Appeals, G.R. No. 80078, May 18, 1993)

The continuing nature of the obligation of the guarantor or surety must be expressly
provided for. (Willex Plastic Industries Corp. vs. Hon. Court of Appeals, G.R. No.
103066, April 25, 1996)

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 GUARANTY
Debts to be Guaranteed
If it be simple or indefinite, it shall compromise not only the principal obligation, but
also all its accessories, including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay. (Art. 2055, NCC)
Accessories under Article 2055 include damages, interest and charges, and judicial
costs incurred after the principal debtor is judicially required to pay." Attorney's
fees may also be imposed whenever appropriate. (Dino vs. Hon. Court of Appeals, G.R.
No. 89775, November 26, 1992)
Unless a specific period is fixed in the contract or the bond, the obligation of the
surety subsists so long as the principal obligation subsists.

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 GUARANTY
Amount of the debt guaranteed – Art. 2054

Compensatory interest
If a surety upon demand fails to pay, he can be held liable for interest, even if in thus
paying, the liability becomes more than that in the principal obligation. The
increased liability is not because of the contract but because of the default and the
necessity of judicial collection. It should be noted, however, that the interest runs
from the time the complaint is filed, not from the time the debt becomes due and
demandable. (Philippine National Bank vs. Luzon Surety Co., Inc., G.R. No. L-29587,
November 28, 1975)

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 GUARANTY
What is Excussion? Art. 2058

The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the debtor.

When excussion is not required.

1. If the guarantor has expressly renounced it;
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor;
4. When the guarantor has absconded, or cannot be sued within the Philippines unless he has left a
manager or representative;
5. If it may be presumed that an execution on the property of the principal debtor would not result in the
satisfaction of the obligation;
6. If the guarantor did not set it up against the creditor upon the latter's demand for payment from him;
and
7. If the guarantor did not point out the creditor available property of the debtor within Philippine
territory, sufficient to cover the amount of the debt. (Arts. 2059 and 2060, NCC)
8. When there is special security.

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 GUARANTY
Procedure When Creditor Sues:
The guarantor cannot be sued with the principal, much less alone, except in Article 2059.
1. The guarantor is still given the benefit of exhaustion even if judgment should be rendered against him and
the principal debtor. His voluntary appearance does not constitute a renunciation of his right to excussion.
The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law.
(Art. 2062, NCC)
Guarantor cannot set up the defenses if he does not appear and it may no longer be possible for him to
question the validity of the judgment.
2. A guarantor is entitled to be heard before execution can be issued against him where he is not a party in
the case involving his principal (procedural due process). (Ang Tibay vs. CIR, G.R. No. L-46496, February 27,
1940)

Effect of failure of the creditor to exhaust and resort to all legal remedies
The creditor shall suffer the loss but only to the extent of the said property, for the insolvency of the debtor
resulting from such negligence. (Art. 2061, NCC)
Not applicable to a contract of suretyship (Arts. 2047[2]2 and 2059[2] NCC)

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 GUARANTY
Rights of Co-Guarantors
Should there be several guarantors of only one debtor and for the same debt, the obligation to
answer for the same is divided among all. The creditor cannot claim from the guarantors
except the shares which they are respectively bound to pay, unless solidarity has been
expressly stipulated. (Art. 2065, NCC)

Effect if the division is solidary

The guaranty agreement may stipulate that the obligation of the co-guarantors is solidary.
This relates to the agreement between the guarantors on one hand and the creditor on the
other. However, solidarity of the obligation of the guarantors may also be limited to the liability
between themselves. (Art. 2065 [1], NCC; Tupas IV & Tupas vs. Court of Appeals, G.R. No. 145578,
November 18, 2005)

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 GUARANTY

Solidary Guaranty Clause

This is a provision that makes the guarantors solidarily liable. This does not make the
guarantors solidarily liable with the debtor.

The clause "we jointly and severally agree and undertake" refers to the undertaking of the two
(2) parties who are to sign it or to the liability existing between themselves. It does not refer to
the undertaking between either one or both of them on the one hand and the petitioner on the
other with respect to the liability described under the trust receipt. Elsewise stated, their
liability is not divisible as between them, i.e., it can be enforced to its full extent against any one
of them. (Prudential Bank vs. Intermediate Appellate Court, December 8, 1992.)

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 GUARANTY
Right to Protection
A compromise between the creditor and the principal debtor benefits the guarantor but does
not prejudice him. That which is entered into between the guarantor and the creditor benefits
but does not prejudice the principal debtor. (Art. 2063, NCC)

Right to Indemnification – w/ limitations and exceptions

The guarantor who pays for a debtor must be indemnified by the latter. (Art. 2066, NCC)
- In case there is double payment, Art. 2070

Right to Subrogation
The guarantor who pays is subrogated by virtue to all the rights which the creditor had against
the debtor. If the guarantor has compromised with the creditor, he cannot demand of the debtor
more than what he has really paid. (Art. 2067, NCC)

51
 GUARANTY
Effect if Principal Obligation is Solidary

It has been opined that if the guaranty is in favor of all or any of the solidary
debtors, there is subrogation in the rights of the creditor against all the solidary
debtors if the guarantor paid the total obligation. The guarantor may claim
reimbursement from any one of the solidary debtors. However, if the liability of
the debtors is solidary and the guaranty is in favor only of one of the solidary
debtors, the guarantor who paid the total obligation may claim reimbursement
from the solidary debtor in whose behalf he paid the principal obligation. He may
also claim reimbursement from the other solidary debtors but only up to the extent
of the share of each debtor. With respect to the other solidary debtors, he has the
same right of reimbursement as the debtor in whose behalf he paid. (AQUINO,
Essentials of Credit Transactions and Insolvency Law (2021), p. 258)

52
 GUARANTY
Effect of payment by guarantor

1. Without notice to debtor – The debtor may interpose against the guarantor
those defenses which he could have set up against the creditor at the time the
payment was made, e.g., the debtor can set up against the guarantor the defense
of previous extinguishment of the obligation by payment. (Art. 2068, NCC)
2. Before maturity – The guarantor is not entitled to reimbursement unless the
payment was made with the consent or has been ratified by the debtor
(Ratification may be express or implied). (Art. 2069, NCC)

53
 GUARANTY

Notice to the debtor:

GR: Before the guarantor pay the creditor, he must first notify the debtor, otherwise
the latter may set up defenses he could have set up against the creditor (Art. 2068,
NCC). If he fails to give such notice and the debtor repeats payment, the guarantor
can only collect from the creditor and guarantor has no cause of action against the
debtor for the return of the amount paid by guarantor even if the creditor should
become insolvent. (Art. 2070, NCC)
XPNs: The guarantor can still claim reimbursement from the debtor in spite of lack
of notice if the following conditions are present:
1. Guarantor was prevented by fortuitous event to advise the debtor of the
payment;
2. The creditor becomes insolvent; and
3. The guaranty is gratuitous. (Article 2070, NCC)

54
 GUARANTY
When Guarantor May Proceed Against Principal Debtor Even Before Payment
GR: Guarantor has no cause of action against debtor until after the former has paid the obligation.
XPNs: The guarantor, even before having paid, may proceed against the principal debtor:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this
period has expired;
4. When the debt has become demandable, by reason of the expiration of the period for payment;
5. After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it
be of such nature that it cannot be extinguished except within a period longer than ten years;
6. If there are reasonable grounds to fear that the principal debtor intends to abscond;
7. If the principal debtor is in imminent danger of becoming solvent. (Art. 2071, NCC)

In all cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security
that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.
(Art. 2071, NCC) Art. 2071 is applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs.
Batu Construction & Co., G.R. No. L-9353, May 21, 1957)

55
 GUARANTY

Effect of Failure to Pay the Guarantor

The guarantor is not entitled to the release from liability even if the debtor failed to pay the
consideration for acting as a guarantor. The liability to the creditor who has accepted the
guaranty remains subject to his right of reimbursement and payment of the consideration
agreed upon with the debtor. (Aquino, Essentials of Credit Transactions and Insolvency Law,
2021, p. 260)

56
 GUARANTY
Remedies of Guarantor (Alternative remedies)
1. Obtain release from the guaranty (can only be exercised against the principal debtor);
2. Demand a security that shall protect him from any proceedings by the creditor, and against
the danger of insolvency of the debtor. (Art. 2071, NCC)

ART. 2066 ART. 2071

Provides for the enforcement of the rights of Provides for the guarantor’s
the guarantor/surety against the debtor after protection before he has paid but after
he has paid the debt he has become liable

Gives a right of action after payment Protective remedy before payment

Substantive right Preliminary remedy

57
 GUARANTY
Guarantor of 3rd person at request of another may demand payment from:
1. Person who requested him to be a guarantor;
2. Debtor (Art. 2072, NCC)
Right to contribution of co-guarantor who pays – Requirement | Insolvency of co-
guarantor
When there are two or more guarantors of the same debtor and for the same debt, the one
among them who has paid may demand of each of the others the share which proportionally
owing from him. (Art. 2073, NCC)
Defenses
The co-guarantors may set up against the one who paid, the same defenses which would have
pertained to the principal debtor against the creditor, and which are not purely personal to
the debtor. (Art. 2074, NCC)
Liability of sub-guarantor in case of insolvency of guarantor
A sub-guarantor is liable to the co-guarantors in the same manner as the guarantor whom he
guaranteed. (Art. 2075, NCC)

58
Extinguishment of Guaranty
GUARANTY

1. Extinguished at the same time as the obligation of the debtor (Art. 2076, NCC);
2. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he
should afterwards lose the same through eviction (Art. 2077, NCC);
3. Release by the creditor in favor of one of the guarantors, without the consent of the others, benefits all
to the extent of the share of the guarantor to whom it has been granted (Art. 2078, NCC);
4. Whenever by some act of the creditor, the guarantors even though they are solidarily liable cannot be
subrogated to the rights, mortgages and preferences of the former (Art. 2080, NCC);
5. For the same causes as all other obligations under Art. 1231;
6. Extension granted to the debtor by the creditor without the consent of the guarantor. However, the mere
failure on the part of the creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein. (Art. 2079, NCC)

The guarantor may also set up against the creditor all the defenses which pertain to the principal debtor and
are inherent in the debt; but not those that are purely personal to the debtor. (Art. 2081, NCC)

59
 SURETY
A contract of surety is an agreement where a party called the surety guarantees the
performance by another party called the principal or obligor of an obligation or undertaking in
favor of a third party called the obligee. Specifically, suretyship is a contractual relation
resulting from an agreement whereby one person, the surety, engages to be answerable for the
debt, default or miscarriage of another, known as the principal. (Visayan Surety & Insurance
Corp. vs. Court of Appeals, G.R. No. 127261, September 7, 2001)

The Court expounds that a surety’s liability is joint and several, limited to the amount of the
bond, and determined strictly by the terms of contract of suretyship in relation to the principal
contract between the obligor and the obligee. It bears stressing, however, that although the
contract of suretyship is secondary to the principal contract, the surety’s liability to the
obligee is nevertheless direct, primary and absolute. (The Manila Insurance Company, Inc.
vs. Sps. Amurao, G.R. No. 179628, January 16, 2013)

60
 SURETY
Characteristics
1. Accessory
Parties to a contract of suretyship:
2. Principal debtor
3. Obligee
4. Surety
Nature of liability of surety
1. Solidary;
2. Limited to the amount of the bond; and
3. Determined strictly by the terms of the contract of suretyship in relation to the principal
contract between the obligor and the obligee (Sec. 176, Insurance Code of the Philippines
[ICP]). A surety is merely a collateral contract.

61
 SURETY
Obligations Secured
A continuing guaranty or suretyship covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of guaranty until the
expiration or termination thereof.

62
 SURETY
GUARANTY SURETYSHIP
As to existence of liability
Liability depends upon an independent agreement to pay the Surety assumes liability as regular party to the undertaking.
obligation if the primary debtor fails to do so.
As to collateral
Collateral undertaking Original promisor
As to order of liability
Guarantor is secondarily liable. Surety primarily liable.
As to what is protected
Insurer of the insolvency of debtor. Insurer of the debt.
As to availment of the benefit of excussion
Guarantor can avail of benefit of excussion and division in case the Surety cannot avail of such benefit.
creditor proceeds against him.
As to when liable to pay
Guarantor binds himself to pay if the principal CANNOT PAY. Surety undertakes to pay if the principal does not pay.

As to notice requirement
Not bound to take notice of the non-performance of his principal Held to know every default of his principal

As to when discharged
Often discharged by the mere indulgence of the creditor or want of Not discharged by mere indulgence of the creditor or want of
notice of default notice of default.
As to the right to the property/assets of the debtor
Has the right to have all the property of the debtor and legal remedies Not entitled to the benefit of exhaustion of the debtor’s assets
against the debtor first exhausted before he can be compelled to pay
the creditor. 63
 THE LAW ON PLEDGE,
MORTGAGE

Articles 2085 – 2141

Civil Code of the Philippines
 WHAT IS A PLEDGE?

A pledge is an accessory, real and unilateral contract by virtue of

which the debtor or a third person delivers to the creditor or to a
third person movable property as security for the performance of
the principal obligation, upon fulfillment of which the thing pledged
with all its accessories and accessions shall be returned to the debtor
or the third person.

A pledge is not a stand alone contract. It supports and is dependent

on the existence of a principal or main contract. It provides security
to the principal contract.

65
 WHAT IS A CHATTEL MORTGAGE?

A Chattel Mortgage is a contract where personal property is recorded

in the Chattel Mortgage Registry as a security for the performance of
an obligation.

If the principal obligation is not paid, the creditor can foreclose the
chattel mortgage for the purpose of selling the property to satisfy his
credit.

66
 WHAT IS A REAL ESTATE MORTGAGE?

A Real Estate Mortgage is a contract embodied in a public

instrument recorded in the Registry of Property, by which the
owner of an immovable directly and immediately subjects it,
whoever the possessor may be, to the fulfillment of the obligation
for whose security it was constituted.

67
 WHAT ARE THE COMMON REQUIREMENTS
OF A PLEDGE or MORTGAGE?
1. The pledge is constituted to secure the fulfillment of a
principal obligation;
2. The pledgor is the absolute owner of the thing pledged; and
3. The pledgor has the free disposal of his property or that he is
legally authorized to do so.

The principal obligation is usually a contract of loan and the

pledge is given as a security to ensure payment.

No principal obligation, No pledge.

68
 THREE ACCESSORY CONTRACTS

Pledge = involves personal or movable property

Chattel Mortgage = involves personal or movable property

Real Estate Mortgage = involves real or immovable property

69
 TWO PARTIES INVOLVED

CREDITOR or PLEDGEE or MORTGAGEE

(ang nagpautang at pinagsanglaan)

DEBTOR or PLEDGOR or MORTGAGOR

(ang umutang or nagsangla)

70
 WHAT IS PACTUM COMMISSORIUM?

Pactum Commissorium is a contractual stipulation that is deemed

contrary to law or is illegal. It is a stipulation empowering the
creditor to appropriate the thing given as guaranty or security for
the fulfillment of the obligation in the event the obligor fails to live
up to his undertakings, without further formality, such as
foreclosure proceedings and a public sale.

It is an illegal shortcut to extract payment from a debtor.

Ownership of the thing or property is quickly transferred to the
creditor by mere default of the debtor.

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 EXAMPLE OF PACTUM COMMISSORIUM

Val borrowed P3M from Abner. In order to secure the transaction, they
signed a contract of sale where Val sells a piece of land in Quezon City
to Abner in case he is unable to pay the P3M loan in full.

In reality the land is security or collateral to the loan. If Val is not able
to pay Abner, the latter will just go to the Register of Deeds and
transfer the ownership of the QC property to his name.

What should they have done? It is really a Loan with a Real Estate
Mortgage. If Val cannot pay Abner, the latter will have to institute legal
proceedings to foreclose the property. Matagal at magastos. Shortcut
na lang.

Pactum Commissorium = Equitable Mortgage.

72
 INDIVISIBILITY OF PLEDGE OR MORTGAGE

1. A pledge or mortgage is indivisible except when there are several

things given in pledge or mortgage and each one guarantees only a
determinate portion of the credit.

Example, Boyet borrowed P75,000 from Edna and pledged

his Seiko watch to guarantee P50,000 and his diamond ring
to guarantee the P25,000 balance. If Boyet had already paid
Edna P25,000, which item pledged can be used to pay the
balance? The Seiko watch.

May isang utang at may dalawang bagay na naka sangla.

73
 INDIVISIBILITY OF PLEDGE OR MORTGAGE

2. The indivisibility of a pledge or mortgage is not affected by the

fact that the debtors are not solidarily liable.

Example, Brothers Kyle, Kenneth and Kristian borrowed

P300,000 from XYZ Lending as joint debtors. The brothers
surrendered their Toyota Vios as security. Later on, Kyle paid
his P100,000 share of the loan. Can Kyle recover the car
already?

NO. The mortgage is indivisible. The car can be recovered only

upon full payment of the P300,000 obligation.

74
INDIVISIBILITY OF PLEDGE OR MORTGAGE

3. The contract of pledge or mortgage may secure all kinds of

obligations, be they pure or subject to a suspensive or resolutory
condition.

75
 WHAT ITEMS CAN BE PLEDGED?

1. Incorporeal rights
2. Bills of Lading
3. Shares of stocks
4. Bonds
5. Warehouse Receipts
6. Negotiable Instruments
7. Animals

The instrument or document proving the right pledge must be

delivered to the creditor. If it is a negotiable instrument it must be
endorsed.

76
 RIGHTS OF THE DEBTOR OR
PLEDGOR OR MORTGAGOR
1. To ask the pledgee to have the item deposited elsewhere if:
- the pledgee uses the thing without permission;
- the pledgee misuses the thing
- the item pledged is in danger of being lost or destroyed
2. To be reimbursed for expenses needed to preserve the item
pledged;
3. To participate in any auction for the thing pledged;
4. To sell the item provided the creditor agrees;
5. To demand return of the thing pledged when the principal
obligation is fulfilled.

77
 OBLIGATIONS OF THE DEBTOR OR
PLEDGOR OR MORTGAGOR

1. To inform the creditor if there are any known flaws or defect of

the object pledged as collateral;
2. To pay the principal obligation at the proper time;
3. To reimburse the creditor for reasonable expenses incurred
while taking care of the thing pledged

78
 RIGHTS OF THE CREDITOR OR
PLEDGEE OR MORTGAGEE

1. To retain the thing in his possession;

2. To be reimbursed for expenses needed to preserve the item
pledged;
3. To bring actions which may pertain to the real owner of the item
in order to recover or defend it against a third person;
4. To continue his lien on the object even if it is sold;
5. To demand a substitution or the immediate payment of the
obligation in case he was deceived regarding the substance or
quality of the thing pledged;
6. To be a preferred creditor in case of insolvency.

79
 OBLIGATIONS OF THE CREDITOR OR
PLEDGEE OR MORTGAGEE
The creditor shall take care of the thing pledge with the diligence of a good
father of a family. He has the right to the reimbursement of the expenses
made for its preservation and is liable for its loss or deterioration.

Example 1: Kevin borrowed P15,000 from Abigail and pledged his 1-year old
German Shepherd as security or collateral. Abigail took possession of the dog.
While the dog was with Abigail it became sick and Abigail had to bring it to
the veterinarian where she spent P2,500 for consultation, treatment and
medicine.

Abigail can get reimbursed for the P2,500 from Kevin when he pays off the
loan.

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 Legal Pledge

1. Art. 546 - Right of the possessor in good faith to retain the thing until refunded of
necessary expenses.
2. Art. 1707 - Lien on the goods manufactured or work done by a laborer until his
wages had been paid.
3. Art. 1731 - Right to retain of a worker who executed work upon a movable until
he is paid.
4. Art. 1914 - Right of an agent to retain the thing subject of the agency until
reimbursed of his advances and damages (NCC, Arts. 1912 and 1913).
5. Art. 1994 - Right of retention of a depositary until full payment of what is due him
by reason of the deposit.
6. Art. 2004 - Right of the hotel-keeper to retain things of the guest which are
brought into the hotel, until his hotel bills had been paid.

81
 TWO TYPES OF FORECLOSURE
OF REAL ESTATE MORTGAGE

The creditor has the right to foreclose the real estate mortgage if the
principal obligation is not paid. The property covered by the mortgage
will be sold and the proceeds applied to the debt.

1. Judicial Foreclosure under Rule 68 of the Rules of Court - file a

case in court and get a judgment in favor of the creditor. The debtor is
given a period of 90 to 120 days from date of judgment to pay the
debt. If he fails to do so the property will be sold by the sheriff at a
public auction to the highest bidder. The debtor can redeem the
property at any time before the sale is confirmed. After confirmation
the debtor has no right to redeem the property anymore.

82
 TWO TYPES OF FORECLOSURE
OF REAL ESTATE MORTGAGE

2. Extra-judicial Foreclosure - in case of the mortgagor’s default,

the sale of the mortgaged property may be conducted by the sheriff
without the need for court intervention. This is a faster and
cheaper way to get payment for the unpaid obligation.

The right to extrajudicially foreclose the real estate mortgage

must be expressly stated in the Real Estate Mortgage document.

83
Judicial vs Extra-judicial

BASIS JUDICIAL FORECLOSURE EXTRAJUDICIAL FORECLOSURE

Court With court intervention Without court intervention
Intervention
Right of Appeal Decisions are appealable Decisions not appealable;
Immediately executory
Cutting off of Order of the court cuts off all rights of Foreclosure does not cut off the
rights the parties impleaded rights of all parties involved
Right of GR: No right of redemption There is right of redemption
Redemption XPN: If mortgagee is a bank, quasi
bank, or trust entity
Equity of There is equity of redemption No equity of redemption
Redemption
Period of Redemption starts from finality of the Redemption starts from the date of
Redemption judgment until order confirmation (90- registration of the certificate of
120 days) sale(1 year)
Necessity of SPA No need for SPA SPA in favor of mortgagee essential
Governing Rule Rule 68 of Rules of Court Act No. 3135

84
 REDEMPTION OF FORECLOSED PROPERTY
Redemption is the transaction by which the mortgagor reacquires or
buys back the property which may have been purchased by a third
party in a public auction.

No right to redeem in Judicial Foreclosures. Owner has 90 days to

redeem the property but once the sale is confirmed to the buyer his
title can no longer be assailed.

Right to redeem only in Extra-judicial Foreclosures - The

debtor/mortgagor has a period of one year from the date of the
auction sale to redeem the property. The debtor must pay the
purchase price plus 1% interest per month plus costs and expenses

85
 EXAMPLE OF EXTRA-JUDICIAL FORECLOSURE
AND REDEMPTION OF PROPERTY

In 2015 Van loaned P3.5M from Carlo and put up a parcel of land in
Cavite City as collateral. In addition to the Promissory Note, Van
also signed a Real Estate Mortgage over the Cavite City property.
There is a provision in the mortgage that Carlo can extra-judicially
foreclose the mortgage should Van default on the payment of the
principal amount of the loan and the interest thereon.

Van was able to pay only P700,000 and he still owed Carlo P2.8M as
principal and P1.1M in accrued penalties and interest.

86
 EXAMPLE OF EXTRA-JUDICIAL FORECLOSURE
AND REDEMPTION OF PROPERTY

Carlo asked that the Sheriff to sell the Cavite City property at auction.
There were no other bidders for the property except Carlo. He bought
the property on September 25, 2021 for P3.0M. Van has until
September 25, 2022 to pay back Carlo the P3.0M he had paid in
auction plus interest plus expenses.

Unfortunately Van still owes Carlo P900,000 since the total obligation
is P3.9M (P2.8M as principal and P1.1M as interest) and the property
sold for only P3.0M.

PAY YOUR DEBTS ON TIME.

87
 PLEDGE vs. REM vs. CM
BETWEEN PARTIES AGAINST THIRD PERSONS

Pledge No particular form is required Description of the thing and

provided the item pledged is the date of the pledge must be
delivered in a public instrument
(notarized)

Real Estate Mortgage Must be in writing Must be in a public instrument

(notarized) and recorded in
the Registry of Property
Chattel Mortgage Must be in a public instrument There must be an Affidavit in
(notarized) and recorded in Good Faith and registered in
the Chattel Mortgage Registry the Chattel Mortgage Registry

88
 IF THERE IS AN EXCESS OR A DEFICIENCY
AFTER THE AUCTION SALE OF THE
THING PLEDGED OR MORTGAGED

THERE IS AN EXCESS THERE IS A DEFICIENCY

Pledge Excess goes to the mortgagee Mortgagee cannot recover the

deficiency from the mortgagor

Real Estate Mortgage Excess goes to the mortgagor Mortgagee can recover the
deficiency from the mortgagor

Chattel Mortgage Excess goes to the mortgagor Mortgagee can recover the
deficiency from the mortgagor

89