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CREDIT TRANSACTIONS All transactions involving the purchase or

loan of goods, services, or money in the present with a promise to pay or deliver in the future

Contracts of securityTypes:1. Secured transactions or contracts of real

security - supported by a collateral or an encumbrance of property

2. Unsecured transactions or contracts of personal security - supported only by a promise or personal commitment of another such as a guarantor or surety

Security Something given, deposited, or serving as

a means to ensure fulfilment or enforcement of an obligation or of protecting some interest in property

Types of Securitya. personal – when an individual

becomes surety or guarantor b. real or property – when a mortgage,

pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss

Bailment The delivery of property of one person to

another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor claims it.

Parties:1. bailor - the giver; one who delivers

property2. bailee- the recipient; one who receives the

custody or possession of the thing thus delivered

LOAN (Articles 1933 – 1961) A contract wherein 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 or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. (Art 1933)

Characteristics:1. Real Contract – delivery of the thing loaned

is necessary for the perfection of the contract

NOTE: An accepted promise to make a future loan is a consensual contract, and therefore binding upon the parties but it is only after

delivery, will the real contract of loan arise. (Art 1934)

2. Unilateral Contract - once the subject matter has been delivered, it creates obligations on the part of only one of the parties (i.e. borrower).

Kinds: 1. Commodatum – when the bailor (lender)

delivers to the bailee (borrower) a non-consumable thing so that the latter may use it for a certain time and return the identical thing. Kinds of commodatum:a. Ordinary Commodatum – use by the

borrower of the thing is for a certain period of time

b. Precarium - one whereby the bailor may demand the thing loaned at will and it exists in the following cases:i. neither the duration nor purpose of

the contract is stipulatedii. the use of the thing is merely

tolerated by the owner

2. Simple loan or mutuum – where the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality.

Commodatum MutuumKey: COPS-LOTR

1. ObjectNon-consumable Consumable

2. CauseGratuitous May or may not be

gratuitous3. Purpose

Use or temporary possession

Consumption

4. Subject MatterReal or personal

propertyOnly personal property

5. Ownership of the thingRetained by the

bailorPasses to the debtor

6. Thing to be returnedExact thing loaned Equal amount of

the same kind and quality

7. Who bears risk of lossBailor Debtor

8. When to returnIn case of urgent need, even before the expiration of the term

Only after the expiration of the term

CREDIT TRANSACTIONS

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Loan CreditDelivery by one party and the receipt of other party of a given sum of money or other consumable thing upon an agreement, express or implied, to repay the same.

Ability of a person to borrow money or things by virtue of the trust or confidence reposed by the lender that he will pay what he promised.

Loan Credit1. Interest taken at the expiration of the credit

Interest is taken in advance

2. Always on a double name paper (two signatures appear with both parties held liable for payment)

Always on a single name paper (i.e. promissory note with no indorse-ment other than the maker)

COMMODATUM (Articles 1935 – 1952) Nature:

1. PURPOSE: Bailee in commodatum acquires the temporary use of the thing but not its fruits (unless stipulated as an incidental part of the contract).(Art 1935) Use must be temporary, otherwise the

contract may be a deposit.

2. CAUSE: Essentially gratuitous; it ceases to be a commodatum if any compensation is to be paid by the borrower who acquires the use, in such case there arises a lease contract. Similar to a donation in that it confers a

benefit to the recipient. The presumption is that the bailor has loaned the thing for having no need therefor.

3. SUBJECT MATTER: Generally non-consumable whether real or personal but if the consumable goods are not for consumption as when they are merely for exhibition, consumable goods may be the subject of the commodatum. (Art 1936)

4. Bailor need not be the owner of the thing owned (Art. 1938) since by the loan, ownership does not pass to the borrower. A mere lessee or usufructuary may

lend but the borrower or bailee himself may not lend nor lease the thing loaned to him to a third person (Art 1932[2])

5. Purely Personal (Art 1939): Death of either party terminates the

contract unless by stipulation, the commodatum is transmitted to the heirs of either or both parties.

Bailee can neither lend nor lease the object of the contract to a third person.

NOTE:Use of the thing loaned may extend to members of the bailee’s household except:

a. contrary stipulation;b. nature of the thing forbids such

use

Obligations of the Bailee: (Arts 1941 – 1945)1. To pay for the ordinary expenses for the

use and preservation of the thing loaned. (Art 1941)

2. To be liable for the loss of the thing even if it should be through a fortuitous event in the following cases: (KLAS D)a. when he keeps it longer than the

period stipulated, or after the accomplishment of its use

b. when he lends or leases it to third persons who are not members of his household

c. when the thing loaned has been delivered with appraisal of its value

d. when, being able to save either of the thing borrowed or his own things, he chose to save the latter; or

e. when the bailee devoted the thing for any purpose different from that for which it has been loaned (Art 1942)

3. To be liable for the deterioration of thing loaned (a) if expressly stipulated; (b) if guilty of fault or negligence; or (c) if he devotes the thing to any purpose different from that for which it has been loaned

4. To pay for extraordinary expenses arising from the actual use of the thing by the bailee, which shall be borne equally by both the bailor and the bailee, even though the bailee acted without fault, unless there is a stipulation to the contrary (Art 1949 par 2)

5. To return the thing loaned The bailee has no right to retain the

thing loaned as security for claims he has against the bailor even for extraordinary expenses except for a claim for damages suffered because of the flaws of the thing loaned.

NOTES: However, the bailee’s right extends

no further than retention of the thing loaned until he is reimbursed for the damages suffered by him.

He cannot lawfully sell the thing to satisfy such damages without court’s approval.

In case there are two or more bailees, their obligation shall be solidary.

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Obligations of the bailor (Art 1946 – Art 1952):1. To respect the duration of the loan

GENERAL RULE: Allow the bailee the use of the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was instituted.EXCEPTIONS:

a. In case of urgent need in which case bailee may demand its return or temporary use;b. The bailor may demand immediate return of the thing if the bailee commits any act of ingratitude specified in Art. 765.

2. To refund to the bailee extraordinary expenses for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.

3. To be liable to the bailee for damages for known hidden flaws. Requisites:a. There is flaw or defect in the thing

loaned;b. The flaw or defect is hidden;c. The bailor is aware thereof;d. He does not advise the bailee of the

same; ande. The bailee suffers damages by reason

of said flaw or defect

NOTES: If the above requisites concur, the

bailee has the right of retention for damages.

The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee.

SIMPLE LOAN OR MUTUUM (Art 1953 – 1961) A contract whereby one party delivers to

another, money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid. (Art. 1953)

NOTES: The mere issuance of the checks does not

result in the perfection of the contract of loan. The Civil Code provides that the delivery of bills of exchange and mercantile documents, such as checks, shall produce the effect of payment only when they have been encashed (Gerales vs. CA 218 SCRA 638). It is only after the checks have produced the effect of

payment that the contract of loan may be deemed perfected.

The obligation is “to pay” and not to return because the consumption of the thing loaned is the distinguishing character of the contract of mutuum from that of commodatum.

No estafa is committed by a person who refuses to pay his debt or denies its existence.

Simple Loan/Mutuum

Rent

1. Delivery of money or some consumable thing with a promise to pay an equivalent of the same kind and quality

Delivery of some non-consumable thing in order that the other may use it during a certain period and return it to the former.

2. There is a transfer of ownership of the thing delivered

There is no transfer of ownership of the thing delivered

3. Relationship between the parties is that of obligor-obligee

Relationship is that of a landlord and tenant

4. Creditor receives payment for his loan

Owner of the property rented receives compensation or price either in money, provisions, chattels, or labor

from the occupant thereof in return for its use (Tolentino vs Gonzales, 50 Phil 558 1927)

Loan Sale

1. Real contract Consensual contract

2. Generally unilateral because only borrower has obligations

Bilateral and reciprocal

NOTE: If the property is “sold”, but the real intent is only to give the object as security for a debt – as when the “price” is comparatively small – there really is a contract of loan with an “equitable mortgage.”

Commodatum/ Mutuum

Barter

1. Subject matter is money or fungible things

Subject matter is non-fungible, (non consumable) things

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2. In commodatum, the bailee is bound to return the identical thing borrowed when the time has expired or purpose served

The thing with equivalent value is given in return for what has been received

3. Mutuum may be gratuitous and commodatum is always gratuitous

Onerous, actually a mutual sale

Form of Payment (Art 1955):1. If the thing loaned is money - payment

must be made in the currency stipulated, if it is possible; otherwise it is payable in the currency which is legal tender in the Philippines and in case of extraordinary inflation or deflation, the basisi of payment shall be the value of the currency at the time of the creation of the obligation

2. If what was loaned is a fungible thing other than money - the borrower is under obligation to pay the lender 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.

Interest The compensation allowed by law or fixed

by the parties for the loan or forbearance of money, goods or credits

Requisites for Demandability: (ELI)1. must be expressly stipulated

Exceptions: a. indemnity for damagesb. interest accruing from unpaid

interest2. must be lawful 3. must be in writing

Compound InterestGENERAL RULE: Unpaid interest shall not earn interest.EXCEPTIONS:

1. when judicially demanded 2. when there is an express stipulation

(must be in writing in view of Art. 1956)

Guidelines for the application of proper interest rates1. If there is stipulation: that rate shall be

applied2. The following are the rules of thumb for the

application/imposition of interest rates: a) When an obligation, regardless of its

source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages.

b) With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: i. When the obligation breached

consists of payment of a sum of money (loan or forbearance of money), the interest shall be that which is stipulated or agreed upon by the parties. In absence of an agreement, the rate shall be the legal rate (i.e. 12% per annum) computed from default. NOTE: The interest due shall itself earn legal interest from the time it is judicially demanded

ii. In other cases, the rate of interest shall be six percent (6%) per annum.NOTE: No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. When the demand cannot be established, the interest shall begin to run only from the date of the judgment of the court is made.

iii. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph i or ii above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. (Eastern Shipping Lines vs. CA, July 12, 1994)

NOTES: Central Bank Circular No. 416 fixing the

rate of interest at 12% per annum deals with loans, forbearance of any money, goods or credits and judgments involving such loans, or forbearance in the absence of express agreement to such rate

Interest as indemnity for damages is payable only in case of default or non-performance of the contract. As they are distinct claims, they may be demanded separately. (Sentinel Insurance Co., Inc. vs CA, 182 SCRA 517)

Central Bank Circular No. 905 (Dec. 10, 1982) removed the Usury Law ceiling on interest rates for secured and unsecured loans, regardless of maturity.

Validity of unconscionable interest rate in a loan

Supreme Court in Sps. Solangon vs. Jose Salazar, G.R. No. 125944, June 29, 2001, said that since the usury law had been repealed by CB Cir. No. 905 there is no more maximum rate of interest and the rate will just

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depend on the mutual agreement of the parties (citing Lim Law vs. Olympic Sawmill Co., 129 SCRA 439). But the Supreme Court said that nothing in said circular grants lenders carta blanche authority to raise interest rates to level which will either enslave their borrowers or lead to a hemorrhaging of their assets (citing Almeda vs. CA, 256 SCRS 292). In Medel vs. CA, 299 SCRA 481, it was ruled that while stipulated interest of 5.5% per month on a loan is usurious pursuant to CB Circular No. 905, the same must be equitably reduced for being iniquitous, unconscionable and exorbitant. It is contrary to morals, (contra bonos mores). It was reduced to 12% per annum in consonant with justice and fair play.

DEPOSIT (Articles 1962 – 2009)

A contract constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same.

Characteristics: 1. Real Contract - contract is perfected by

the delivery of the subject matter.2. Unilateral (gratutitous deposit) - only

the depositary has an obligation. 3. Bilateral (onerous deposit) - gives rise

to obligations on the part of both the depositary and depositor.

Deposit Mutuum1. Purpose

Principal purpose is safekeeping or custody

Principal purpose is consumption

2. When to ReturnDepositor can demand the return of the subject matter at will

The lender must wait until the expiration of the period granted to the debtor

3. Subject MatterSubject matter may be movable or immovable property

Subject matter is only money or other fungible thing

4. RelationshipRelationship is that of lender (creditor) and borrower (debtor).

Relationship is that of depositor and depositary.

5. CompensationThere can be compensation of credits.

NO compensation of things deposited with each other (except by mutual agreement).

Deposit Commodatum

1. Purpose is Safekeeping

1. Purpose is the transfer of the use

2. May be gratuitous

2. Essentially and always gratuitous

3. Movable/corporeal things only in case of extrajudicial deposit

3. Both movable and immovable may be the object

Kinds of Deposit:1. Judicial (Sequestration) –takes place when

an attachment or seizure of property in litigation is ordered.

2. Extra-judicial a. Voluntary – one wherein the delivery is

made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited. (Arts 1968 – 1995)

b. Necessary – one made in compliance with a legal obligation, or on the occasion of any calamity, or by travellers in hotels and inns (Arts 1996 - 2004), or by travellers with common carriers (Art 1734 – 1735).

NOTE: The chief difference between a voluntary deposit and a necessary deposit is that in the former, the depositor has a complete freedom in choosing the depositary, whereas in the latter, there is lack of free choice in the depositor.

Judicial Extra-judicial1. Creation

Will of the court Will of the parties or contract

2. PurposeSecurity or to insure the right of a party to property or to recover in case of favorable judgment

Custody and safekeeping

3. Subject MatterMovables or immovables,but generally immovables

Movables only

4. CauseAlways onerous May be compen-

sated or not, but generally gratuitous

5. When must the thing be returned

Upon order of the court or when litigation is ended

Upon demand of depositor

6. In whose behalf it is heldPerson who has a right

Depositor or third person designated

GENERAL RULE: Contract of deposit is gratuitous (Art 1965)EXCEPTIONS:

1. when there is contrary stipulation2. depositary is engaged in business of

storing goods

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3. property saved from destruction without knowledge of the owner

NOTES: Article 1966 does not embrace incorporeal

property, such as rights and actions, for it follows the person of the owner, wherever he goes.

A contract for the rent of safety deposit boxes is not an ordinary contract of lease of things but a special kind of deposit; hence, it is not to be strictly governed by the provisions on deposit. The relation between a bank and its customer is that of a bailor and bailee. (CA Agro vs CA, 219 SCRA 426)

Obligations of the Depositary (Art 1972 –1991):1. To keep the thing safely (Art 1972)

Exercise over the thing deposited the same diligence as he would exercise over his property

2. To return the thing (Art 1972) Person to whom the thing must be

returned:a. Depositor, to his heirs and successors,

or the person who may have been designated in the contract

b. If the depositary is capacitated - he is subject to all the obligations of a depositary whether or not the depositor is capacitated. If the depositor is incapacitated, the depositary must return the property to the legal representative of the incapacitated or to the depositor himself if he should acquire capacity (Art 1970).

c. If the depositor is capacitated and the depositary is incapacitated - the latter does not incur the obligation of a depositary but he is liable:

i..to return the thing deposited while still in his possession;

ii.to pay the depositor the amount 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 (Art 1971)

Time of return: a. Upon demand even though a specified period or time for such return may have been fixed except when the thing is judicially attached while in the depositary’s possession or should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. (Art 1998)b. If deposit gratuitous, the depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if justifiable reasons exists for its return.

c. If the deposit is for a valuable consideration, the depositary has no right to return the thing deposited before the expiration of the time designated even if he should suffer inconvenience as a consequence.(Art 1989)

What to return: product, accessories, and accessions of the thing deposited (Art 1983)

3. Not to deposit the thing with a third person unless authorized by express stipulation (Art 1973) The depositor is liable for the loss of

the thing deposited under Article 1973 if:a. he transfers the deposit with a third person without authority although there is no negligence on his part and the third person;b. he deposits the thing with a third person who is manifestly careless or unfit although authorized even in the absence of negligence; orc. the thing is lost through the negligence of his employees whether the latter are manifestly careless or not.

4. If the thing deposited should earn interest (Art 1975):a. to collect interest and the capital itself

as it fall dueb. to take steps to preserve its value and

rights corresponding to it5. Not to commingle things deposited if so

stipulated (Art 1976)6. Not to make use of the thing deposited

unless authorized (Art 1977) GENERAL RULE: Deposit is for safekeeping of the subject matter and not for use. The unauthorized use by the depositary would make him liable for damages. EXCEPTIONS:1. When the preservation of the thing

deposited requires its use2. When authorized by the depositor

NOTE: The permission to use is NOT presumed except when such use is necessary for the preservation of the thing deposited.

Effect if permission to use is given (Art 1978):1. If thing deposited is non-consumable,

the contract loses the character of a deposit and acquires that of a commodatum despite the fact that the parties may have denominated it as a deposit, unless safekeeping is still the principal purpose.

2. If thing deposited consists of money/consumable things, the contract

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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 deposits are irregular deposits in nature but governed by law on loans.

7. When the thing deposited is delivered sealed and closed :a. to return the thing deposited in the

same conditionb. to pay for damages should the seal or

lock be broken through his fault, which is presumed unless proved otherwise

c. to keep the secret of the deposit when the seal or lock is broken with or without his fault (Art 1981)NOTE: The depositary is authorized to open the thing deposited which is closed and sealed when (Art 1982):i. there is presumed authority (i.e.

when the key has been delivered to him or the instructions of the depositor cannot be done without opening it)

ii.necessity 8. To change the way of the deposit if under

the circumstances, the depositary may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation, provided, that the former notifies the depositor thereof and wait for his decision, unless delay would cause danger

9. To pay interest on sums converted to personal use if the deposit consists of money (Art 1983)

10. To be liable for loss through fortuitous event (SUDA): (Art 1979): a. if stipulatedb. if he uses the thing without the

depositor's permissionc. if he delays its returnd. if he allows others to use it, even

though he himself may have been authorized to use the same

NOTES: Fixed, savings, and current deposits of

money in banks and similar institutions shall be governed by the provisions concerning simple loan. (Art 1980)

The general rule is that a bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor. In true deposit, compensation is not allowed.

Irregular deposit

Mutuum

1. The consumable thing deposited may be demanded at will by the depositor

1. Lender is bound by the provisions of the contract and cannot demand restitution until the time for payment, as

provided in the contract, has arisen

2. The only benefit is that which accrues to the depositor

2. Essential cause for the transaction is the necessity of the borrower

3. The irregular depositor has a preference over other creditors with respect to the thing deposited

3. Common creditors enjoy no preference in the distribution of the debtor’s property

Rule when there are two or more depositors (Art 1985):1. If 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 thing is not divisible: Rules on active solidarity shall apply, i.e. each one of the solidary depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter, (Art. 1212) and the depositary may return the thing to anyone of the solidary depositors unless a demand, judicial or extrajudicial, for its return has been made by one of them in which case, delivery should be made to him (Art. 1214).

3. Return to one of depositors stipulated. The depositary is bound to return it only to the person designated although he has not made any demand for its return.

NOTES: The depositary may retain the thing in

pledge until full payment of what may be due him by reason of the deposit (Art 1994).

The depositor’s heir who in good faith may have sold the thing which 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 been paid him (Art 1991).

Obligations of the Depositor (Art 1992 – 1995):1. To pay expenses for preservation

a. 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)

b. If the deposit is for valuable consideration, expenses for preservation are borne by the depositary unless there is a contrary stipulation

2. To pay loses incurred by the depositary due to the character of the thing deposited

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GENERAL RULE: The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited.EXCEPTIONS:1. at the time of the deposit, the depositor

was not aware of the dangerous character of the thing

2. when depositor was not expected to know the dangerous character of the thing

3. when the depositor notified the depository of the same

4. the depositary was aware of it without advice from the depositor

Extinguishment of Voluntary Deposit (Art 1995)1. Loss or destruction of the thing deposited2. In case of gratuitous deposit, upon the

death of either the depositor or the depositary

3. Other causes, such as return of the thing, novation, merger, expiration of the term fulfilment of the resolutory condition, etc (Art 1231)

Necessary Deposits1. Made in compliance with a legal obligation2. Made on the occasion of any calamity such

as fire, storm, flood, pillage, shipwreck or other similar events (deposito miserable)

3. Made by travellers in hotels and inns or by travellers with common carrier

Deposit by Travellers in hotels and inns: The keepers of hotels or inns shall be

responsible as depositaries for the deposit of effects made by travellers provided:a. Notice was given to them or to their

employees of the effects brought by the guest; and

b. The guests take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects.

NOTES: Liability extends to vehicles, animals and

articles which have been introduced or placed in the annexes of the hotel.

Liability shall EXCLUDE losses which proceed from force majeure. The act of a thief or robber is not deemed force majeure unless done with the use of arms or irresistible force.

The hotel-keeper cannot free himself from the responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation to such effect shall be void.

Notice is necessary only for suing civil liability but not in criminal liability.

GUARANTY (Articles 2047 – 2084)

A contract whereby a person (guarantor) binds himself to the creditor to fulfil the obligation of the principal debtor in case the latter fail to do so.

Classification of Guaranty: 1. In the Broad sense:

a. Personal - the guaranty is the credit given by the person who guarantees the fulfilment of the principal obligation.

b. Real - the guaranty is the property, movable or immovable.

2. As to its Origina. Conventional - agreed upon by the

parties.b. Legal - one imposed by virtue of a

provision of a law.c. Judicial - one which is required by a

court to guarantee the eventual right of one of the parties in a case.

3. As to Considerationa. Gratuitous - the guarantor does not

receive any price or remuneration for acting as such.

b. Onerous - the guarantor receives valuable consideration.

4. As to the Person guaranteeda. Single - one constituted solely to

guarantee or secure performance by the debtor of the principal obligation.

b. Double or sub-guaranty - one constituted to secure the fulfilment by the guarantor of a prior guaranty.

5. As to Scope and Extenta. Definite - the guaranty is limited to the

principal obligation only, or to a specific portion thereof.

b. Indefinite or simple - one which not only includes the principal obligation but also all its accessories including judicial costs

SURETYSHIP

A contract whereby a person (surety) binds himself solidarily with the principal debtor

A relation which exists where one person (principal) has undertaken an obligation and another person (surety) is also under a direct and primary obligation or other duty to the obligee, who is entitled to but one performance, and as between the two who are bound, the second rather than the first should perform (Agro Conglomerates, Inc. vs. CA, 348 SCRA 450)

NOTES: The reference in Article 2047 to solidary

obligations does not mean that suretyship is withdrawn from the applicable provisions governing guaranty. A surety is almost the same as a solidary debtor,

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except that he himself is a principal debtor.

In suretyship, there is but one contract, and the surety is bound by the same agreement which binds the principal. A surety is usually bound with the principal by the same instrument, executed at the same time and upon the same consideration (Palmares vs CA, 288 SCRA 422)

It is not for the obligee to see to it that the principal debtor pays the debt or fulfill the contract, but for the surety to see to it that the principal debtor pays or performs (Paramount Insurance Corp vs CA, 310 SCRA 377)

Nature of Surety’s undertaking:1. Liability is contractual and accessory but

directNOTE: He directly, primarily and equally binds himself with the principal as original promisor, although he possesses no direct or personal interest over the latter’s obligation, nor does he receive any benefits therefrom. (PNB vs CA, 198 SCRA 767)

2. Liability limited by the terms of the contract.NOTE: It cannot be extended by implication beyond the terms of the contract (PNB vs CA, 198 SCRA 767)

3. Liability arises only if principal debtor is held liable.NOTES: The creditor may sue separately or

together the principal debtor and the surety. Where there are several sureties, the obligee may proceed against any one of them.

In the absence of collusion, the surety is bound by a judgment against the principal even though he was not a party to the proceedings. The nature of its undertaking makes it privy to all proceedings against its principal (Finman General Assurance Corp. vs. Salik, 188 SCRA 740)

4. Surety is not entitled to the benefit of exhaustion NOTE: He assumes a solidary liability for the fulfilment of the principal obligation (Towers Assurance Corp vs. Ororama Supermart, 80 SCRA 262) as an original promissory and debtor from the beginning.

5. Undertaking is to creditor and not to debtor.NOTE: The surety makes no covenant or agreement with the principal that it will fulfil the obligation guaranteed for the benefit of the principal. Such a promise is not implied by law either; and this is true even where under the contract the creditor is given the right to sue the principal, or the latter and the surety at the same time.

(Arranz vs. Manila Fidelity & Surety Co., Inc., 101 Phil. 272)

6. Surety is not entitled to notice of principal’s defaultNOTE: The creditor owes no duty of active diligence to take care of the interest of the surety and the surety is bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect. (Palmares vs CA, 288 SCRA 422)

7. Prior demand by the creditor upon principal is not requiredNOTE: As soon as the principal is in default, the surety likewise is in default.

8. Surety is not exonerated by neglect of creditor to sue principal

Characteristics of Guaranty and Suretyship: 1. Accessory - It is indispensable condition for

its existence that there must be a principal obligation.NOTES: Guaranty may be constituted to

guarantee the performance of a voidable or unenforceable contract. It may also guarantee a natural obligation. (Art 2052)

The guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor.

2. Subsidiary and Conditional - takes effect only in case the principal debtor fails in his obligation.

NOTES: The guarantor cannot bind himself for

more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. But a guarantor may bind himself for less than that of the principal (Art 2054)

A guaranty may be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Art 2053)

3. Unilateral - may be entered even w/o the intervention of the principal debtor, in which case Art. 1236 and 1237 shall apply and it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa.

4. Nominate 5. Consensual 6. It is a contract between the

guarantor/surety and creditor.

NOTES:

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Acceptance of guaranty by creditor and notice thereof to guarantor: In declaring that guaranty must be

express, the law refers solely and exclusively to the obligation of the guarantor because it is he alone who binds himself by his acceptance. With respect to the creditor, no such requirement is needed because he binds himself to nothing.

However, when there is merely an offer of 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 binding until it is accepted and until notice of such acceptance by the creditor is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the condition and intends to act upon the guaranty.

But in any case, the creditor is not precluded from waiving the requirement of notice.

The consideration of the guaranty is the same as the consideration of the principal obligation.

The creditor may proceed against the guarantor although he has no right of action against the principal debtor.

7. Not presumed. It must be expressed and reduced in writing. NOTE: A power of attorney to loan money does not authorize the agent to make the principal liable as a surety for the payment of the debt of a third person. (BPI vs. Coster, 47 Phil. 594)

8. Falls under the Statute of Frauds since it is a “special promise to answer for the debt, default or miscarriage of another”.

9. Strictly interpreted against the creditor and in favor of the guarantor/surety and is not to be extended beyond its terms or specified limits. (Magdalena Estates, Inc. vs Rodriguez, 18 SCRA 967) The rule of strictissimi juris commonly pertains to an accommodation surety because the latter acts without motive of pecuniary gain and hence, should be protected against unjust pecuniary impoverishment by imposing on the principal, duties akin to those of a fiduciary.

NOTES: The rule will apply only after it has

been definitely ascertained that the contract is one of suretyship or guaranty. It cannot be used as an aid in determining whether a party’s undertaking is that of a surety or guarantor. (Palmares vs CA, 288 SCRA 292)

It does not apply in case of compensated sureties.

10. It is a contract which requires that the guarantor must be a person distinct form the debtor because a person cannot be the personal guarantor of himself.NOTE: However, in a real guaranty, like pledge and mortgage, a person may guarantee his own obligation with his personal or real properties.

Guaranty Suretyship

1. Liability depends upon an independent agreement to pay the obligation if primary debtor fails to do so

1. Surety assumes liability as regular party to the undertaking

2. Collateral under-taking

2. Surety is an original promisor

3. Guarantor is secondarily liable

3. Surety is primarily liable

4. Guarantor binds himself to pay if the principal CANNOT PAY

4. Surety undertakes to pay if the principal DOES NOT PAY

5. Insurer of solvency of debtor

5. Insurer of the debt

6. Guarantor can avail of the benefit of excussion and division in case creditor proceeds against him

6. Surety cannot avail of the benefit of excussion and division

Indorsement Guaranty

1. Primarily of transfer

1. Contract of security

2. Unless the note is promptly presented for payment at maturity and due notice of dishonor given to the indorser within a reasonable time he will be discharged abso-lutely from all liability thereon, whether he has suffered any actual damage or not

2. Failure in either or both of these particulars does not generally work as an absolute discharge of a guarantor’s liability, but his is discharged only to the extent of the loss which he may have suffered in consequence thereof

3. Indorser does not warrant the solvency. He is answerable on a strict compliance with the law by the holder, whether the promisor is solvent or not

3. Guarantor warrants the solvency of the promisor

4. Indorser can be 4. Guarantor cannot

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sued as promisor be sued as promisor

Guaranty WarrantyA contract by which a person is bound to another for the fulfilment of a promise or engagement of a third party

An undertaking that the title, quality, or quantity of the subject matter of the contract is what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty

NOTES: A guaranty is gratuitous, unless there is a

stipulation to the contrary. The cause of the contract is the same cause which supports the obligation as to the principal debtor.

The peculiar nature of a guaranty or surety agreement is that is is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either from the principal debtor or from the creditor; a consideration moving to the principal alone will suffice.

It is never necessary that the guarantor or surety should receive any part or benefit, if such there be, accruing to the principal. (Willex Plastic Industries Corp. vs. CA, 256 SCRA 478)

Double or sub-guaranty (Art 2051 2nd par) One constituted to guarantee the

obligation of a guarantor

Continuing guaranty (Art 2053) One which is not limited to a single

transaction but which contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked.

NOTES: Prospective in operation (Diño vs CA, 216

SCRA 9) Construed as continuing when by the

terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved (Diño vs CA, 216 SCRA 9)

“Future debts” may also refer to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time.

Exception to the concept of continuing guaranty is chattel mortgage. A chattel mortgage can only cover obligations existing at the time the mortgage is constituted and not those contracted subsequent to the execution thereof (The Belgian Catholic Missionaries, Inc. vs. Magallanes Press, Inc., 49 Phil 647). An exception to this is in case of stocks in department stores, drug stores, etc. (Torres vs. Limjap, 56 Phil 141).

Extent of Guarantor’s liability: (Art 2055)1. Where the guaranty definite: It is limited in

whole or in part to the principal debt, to the exclusion of accessories.

2. Where guaranty indefinite or simple: It shall comprise 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.

Qualifications of a guarantor: (Arts 2056-2057)1. possesses integrity2. capacity to bind himself3. has sufficient property to answer for

the obligation which he guarantees

NOTES: The qualifications need only be present at

the time of the perfection of the contract. The subsequent loss of the integrity or

property or supervening incapacity of the guarantor would not operate to exonerate the guarantor or the eventual liability he has contracted, and the contract of guaranty continues.

However, the creditor may demand another guarantor with the proper qualifications. But he may waive it if he chooses and hold the guarantor to his bargain.

Benefit of Excussion (Art 2058) The right by which the guarantor cannot

be compelled to pay the creditor unless the latter has exhausted all the properties of the principal debtor, and has resorted to all of the legal remedies against such debtor.

NOTE: Not applicable to a contract of suretyship

(Arts 2047, par. 2; 2059[2]) Cannot even begin to take place before

judgment has been obtained against the debtor (Baylon vs CA, 312 SCRA 502)

When Guarantor is not entitled to the benefit of excussion: (PAIRS)1. If it may be presumed that an execution

on the property of the principal debtor

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would not result in the satisfaction of the obligation Not necessary that the debtor be

judicially declared insolvent or bankrupt

2. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative

3. In case of insolvency of the debtor Must be actual

4. If the guarantor has expressly renounced it5. If he has bound himself solidarily with the

debtor

Other grounds: (BIPS)6. If he is a judicial bondsman or sub-surety7. If he fails to interpose it as a defense

before judgment is rendered against him8. If the guarantor does not set up the benefit

against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property to the debtor within Philippine territory, sufficient to cover the amount of the debt (Art 2060) Demand can be made only after

judgment on the debt Demand must be actual; joining the

guarantor in the suit against the principal debtor is not the demand intended by law

9. Where the pledge or mortgage has been given by him as special security

Benefit of Division (Art 2065) 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.

Liability: Joint

NOTES: The creditor can claim from the guarantors

only the shares they are respectively bound to pay except when solidarity is stipulated or if any of the circumstances enumerated in Article 2059 should take place.

The right of contribution of guarantors who pays requires that the payment must have been made (a) in virtue of a judicial demand, or (b) because the principal debtor is insolvent (Art 2073).

If any of the guarantors should be insolvent, his share shall be borne by the others including the paying guarantor in the same joint proportion following the rule in solidary obligations.

The above rule shall not be applicable unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent.

The right to contribution or reimbursement from his co-guarantors is acquired ipso jure by virtue of said payment without the need of obtaining from the creditor any prior cession of rights to such guarantor.

The co-guarantors may set up against the one who paid, the same defenses which have pertained to the principal debtor against the creditor and which are not purely personal to the debtor. (Art 2074)

Procedure when creditor sues: (Art. 2062) The creditor must sue the principal alone;

the guarantor cannot be sued with his principal, much less alone except in Art. 2059.

1. Notice to guarantor of the action The guarantor must be NOTIFIED so

that he may appear, if he so desires, and set up defenses he may want to offer.

If the guarantor appears, he is still given the benefit of exhaustion even if judgment should be rendered against him and principal debtor. His voluntary appearance does not constitute a renunciation of his right to excussion (see Art. 2059(1)).

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 rendered against the debtor.

2. A guarantor is entitled to be heard before and execution can be issued against him where he is not a party in the case involving his principal (procedural due process).

Guarantor’s Right of Indemnity or Reimbursement (Art 2066)GENERAL RULE: Guaranty is a contract of indemnity. The guarantor who makes payment is entitled to be reimbursed by the principal debtor.

NOTE: The indemnity consists of: (DIED)1. Total amount of the debt – no right to

demand reimbursement until he has actually paid the debt, unless by the terms of the contract, he is given the right before making payment. He cannot collect more than what he has paid.

2. Legal interest thereon from the time the payment was made known (notice of payment in effect a demand so that if the debtor does not pay immediately, he incurs in delay) to the debtor, even though it did not earn interest for the creditor. Guarantor’s right to legal interest is granted by law by virtue of the payment he has made.

3. E xpenses incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor; only those expenses that the guarantor has to satisfy in accordance with law as a consequence of the guaranty (Art. 2055) not those which depend upon his will or own acts

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or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor.

4. D amages if they are due in accordance with law. General rules on damages apply.

EXCEPTIONS:1. Where the guaranty is constituted

without the knowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor (Art. 2050).

2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it (Art. 1238).

3. Waiver of the right to demand reimbursement.

Guarantor’s right to Subrogation (ART.2067) Subrogation transfers to the person

subrogated, the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation.

NOTE: This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Art. 2066. It arises by operation of law upon payment

by the guarantor. It is not necessary that the creditor cede to the guarantor the former’s rights against the debtor.

It is not a contractual right. The right of guarantor who has paid a debt to subrogation does not stand upon contract but upon the principles of natural justice.

The guarantor is subrogated by virtue of the payment to the rights of the creditor, not those of the debtor. Guarantor cannot exercise the right of

redemption of his principal (Urrutia & Co vs Morena and Reyes, 28 Phil 261)

Effect of Payment by Guarantor 1. Without notice to debtor: (Art 2068)

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.

2. Before Maturity (Art 2069) Not entitled to reimbursement unless

the payment was made with the

consent or has been ratified by the debtor

Effect of Repeat Payment by debtor: (Art 2070)GENERAL RULE: Before guarantor pays the creditor, he must first notify the debtor (Art. 2068). 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.

EXCEPTION: The guarantor can still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present: (PIG)

a. guarantor was prevented by fortuitous event to advise the debtor of the payment; and

b. the creditor becomes insolvent; c. the guaranty is gratuitous.

Right of Guarantor to proceed against debtor before paymentGENERAL RULE: Guarantor has no cause of action against debtor until after the former has paid the obligationEXCEPTION: Article 2071

NOTES: Article 2071 is applicable and available to

the surety. (Manila Surety & Fidelity Co., Inc. vs Batu Construction & Co., 101 Phil 494)

Remedy of guarantor: (a) obtain release from the guaranty; or(b) demand a security that shall protect

him from any proceedings by the creditor, and against the danger of insolvency of the debtor

Art. 2066 Art. 2071Provides for the enforcement of the rights of the guarantor/surety against the debtor after he has paid the debt

Provides for his protection before he has paid but after he has become liable

Gives a right of action after payment

Protective remedy before payment.

Substantive right Preliminary remedy

Extinguishment of guaranty: (RA2CE2)1. R elease 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);

2. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if he should afterwards lose the same through eviction or conveyance of property (Art 2077);

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3. 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);

4. For the same causes as all other obligations (Art 1231);

5. When the principal obligation is extinguished;

6. E xtension granted to the debtor by the creditor without the consent of the guarantor (Art 2079)