CREDIT TRANSACTIONS CREDIT TRANSACTIONS 1.

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 security Types: 1. Secured transactions or
contracts of real security - supported by a collateral or an encumbrance of property
1. Unsecured transactions or contracts of personal security - supported only by a
promise or personal commitment of another such as a guarantor or surety Security
0. Something given, deposited, or serving as a means to ensure fulfilment or
enforcement of an obligation or of protecting some interest in property 0. Types of
Security 1. personal when an individual becomes surety or guarantor 1. 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 1. 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. 1. Parties: 1.
bailor - the giver; one who delivers property 1. bailee- the recipient; one who
receives the custody or possession of the thing thus delivered LOAN (Articles 1933
1961) 1. 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) 1. Unilateral Contract - once the subject matter
has been delivered, it creates obligations on the part of only one of the parties (i.e.
borrower). 1. 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. 1. Kinds of commodatum: 1. Ordinary
Commodatum use by the borrower of the thing is for a certain period of time 1.
Precarium - one whereby the bailor may demand the thing loaned at will and it
exists in the following cases: 1. neither the duration nor purpose of the contract is
stipulated 1. the use of the thing is merely tolerated by the owner 1. 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 Mutuum Key: COPS-LOTR 1. Object Non-consumable
Consumable 2. Cause Gratuitous May or may not be gratuitous 3. Purpose Use or
temporary possession Consumption 4. Subject Matter Real or personal property
Only personal property 5. Ownership of the thing Retained by the bailor Passes to
the debtor 6. Thing to be returned Exact thing loaned Equal amount of the same
kind and quality 7. Who bears risk of loss Bailor Debtor 8. When to return In case of
urgent need, even before the expiration of the term Only after the expiration of the
term Loan Credit Delivery 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 Credit
1. 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 indorsement other than the maker) COMMODATUM (Articles 1935 1952) 1. 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) 0. Use
must be temporary, otherwise the contract may be a deposit. 1. 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. 1. 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. 1. 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) 1. Bailor need not be the owner
of the thing owned (Art. 1938) since by the loan, ownership does not pass to the
borrower. 3. 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]) 1. Purely Personal (Art 1939): 4. Death of either party terminates the
contract unless by stipulation, the commodatum is transmitted to the heirs of either
or both parties. 4. 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
bailees household except: 1. contrary stipulation; 1. 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) 1. To be liable
for the loss of the thing even if it should be through a fortuitous event in the
following cases: (KLAS D) 1. when he keeps it longer than the period stipulated, or
after the accomplishment of its use 1. when he lends or leases it to third persons
who are not members of his household 1. when the thing loaned has been delivered
with appraisal of its value 1. when, being able to save either of the thing borrowed
or his own things, he chose to save the latter; or 1. when the bailee devoted the
thing for any purpose different from that for which it has been loaned (Art 1942) 1.
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 1. 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) 1. To return the thing loaned 4. 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 faws of the thing loaned. NOTES: 0. However, the bailee s right
extends no further than retention of the thing loaned until he is reimbursed for the
damages suffered by him. 0. He cannot lawfully sell the thing to satisfy such

damages without courts approval. 0. In case there are two or more bailees, their
obligation shall be solidary. 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: 4. In case of
urgent need in which case bailee may demand its return or temporary use; 4. The
bailor may demand immediate return of the thing if the bailee commits any act of
ingratitude specified in Art. 765. 1. 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. 1. To be liable to the
bailee for damages for known hidden faws. 2. Requisites: 1. There is faw or defect
in the thing loaned; 1. The faw or defect is hidden; 1. The bailor is aware thereof; 1.
He does not advise the bailee of the same; and 1. The bailee suffers damages by
reason of said faw or defect NOTES: 1. If the above requisites concur, the bailee has
the right of retention for damages. 1. 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) 1. 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: 0. 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. 0. 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. 0. 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 1. 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 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 1.
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
infation or defation, the basisi of payment shall be the value of the currency at the
time of the creation of the obligation 1. 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 1. The compensation
allowed by law or fixed by the parties for the loan or forbearance of money, goods
or credits 1. Requisites for Demandability: (ELI) 1. must be expressly stipulated
Exceptions: 0. indemnity for damages 0. interest accruing from unpaid interest 1.
must be lawful 1. must be in writing Compound Interest GENERAL RULE: Unpaid
interest shall not earn interest. EXCEPTIONS: 1. when judicially demanded 1. when
there is an express stipulation (must be in writing in view of Art. 1956) Guidelines
for the application of proper interest rates 1. If there is stipulation: that rate shall be
applied 2. The following are the rules of thumb for the application/imposition of
interest rates: 0. 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. 0. 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: 1. 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 1. 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: 1. 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 1. 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) 1.
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 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) 1. 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. 1. Unilateral (gratutitous deposit) - only the depositary has an
obligation. 1. Bilateral (onerous deposit) - gives rise to obligations on the part of
both the depositary and depositor. Deposit Mutuum 1. Purpose Principal purpose is
safekeeping or custody Principal purpose is consumption 2. When to Return
Depositor 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 Matter Subject
matter may be movable or immovable property Subject matter is only money or
other fungible thing 4. Relationship Relationship is that of lender (creditor) and
borrower (debtor). Relationship is that of depositor and depositary. 5. Compensation
There 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. 1. Extra-judicial 1. 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) 1. 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-judicial 1. Creation Will of the court Will of the
parties or contract 2. Purpose Security or to insure the right of a party to property or
to recover in case of favorable judgment Custody and safekeeping 3. Subject Matter
Movables or immovables, but generally immovables Movables only 4. Cause Always
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 held Person who has a right Depositor or third
person designated GENERAL RULE: Contract of deposit is gratuitous (Art 1965)
EXCEPTIONS: 1. when there is contrary stipulation 1. depositary is engaged in
business of storing goods 1. property saved from destruction without knowledge of
the owner NOTES: 2. Article 1966 does not embrace incorporeal property, such as
rights and actions, for it follows the person of the owner, wherever he goes. 2. 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) 0. Exercise over the thing
deposited the same diligence as he would exercise over his property 1. To return the
thing (Art 1972) 0. 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). 1. 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) 2. 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. 1. 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) 1. What to return: product, accessories, and accessions of
the thing deposited (Art 1983) 1. Not to deposit the thing with a third person unless
authorized by express stipulation (Art 1973) 1. The depositor is liable for the loss of
the thing deposited under Article 1973 if: 0. he transfers the deposit with a third
person without authority although there is no negligence on his part and the third
person; 0. he deposits the thing with a third person who is manifestly careless or
unfit although authorized even in the absence of negligence; or 0. the thing is lost
through the negligence of his employees whether the latter are manifestly careless
or not. 1. If the thing deposited should earn interest (Art 1975): 1. to collect interest
and the capital itself as it fall due 1. to take steps to preserve its value and rights
corresponding to it 1. Not to commingle things deposited if so stipulated (Art 1976)
1. 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 use 1.
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): 2. If thing deposited is nonconsumable, 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 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. 1. When the thing deposited is delivered sealed and
closed : 1. to return the thing deposited in the same condition 1. to pay for damages
should the seal or lock be broken through his fault, which is presumed unless proved
otherwise 1. 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): 1. 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) 1. necessity 1. 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 1. 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): 0. if stipulated 0. if he uses the thing
without the depositor's permission 0. if he delays its return 0. if he allows others to
use it, even though he himself may have been authorized to use the same NOTES:
1. Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan. (Art 1980) 1. 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
debtors 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. 1. 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). 1. 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: 2. The depositary may retain the thing in pledge until full
payment of what may be due him by reason of the deposit (Art 1994). 2. The
depositors 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 0. 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) 0. If the deposit is for valuable consideration, expenses for preservation are
borne by the depositary unless there is a contrary stipulation 1. To pay loses
incurred by the depositary due to the character of the thing deposited 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 1. when depositor
was not expected to know the dangerous character of the thing 1. when the
depositor notified the depository of the same 1. the depositary was aware of it
without advice from the depositor Extinguishment of Voluntary Deposit (Art 1995) 1.
Loss or destruction of the thing deposited 1. In case of gratuitous deposit, upon the
death of either the depositor or the depositary 1. Other causes, such as return of
the thing, novation, merger, expiration of the term fulfilment of the resolutory
condition, etc (Art 1231) Necessary Deposits 1. Made in compliance with a legal
obligation 1. Made on the occasion of any calamity such as fire, storm, food,
pillage, shipwreck or other similar events (deposito miserable) 1. Made by travellers
in hotels and inns or by travellers with common carrier Deposit by Travellers in
hotels and inns: 2. The keepers of hotels or inns shall be responsible as depositaries
for the deposit of effects made by travellers provided: 1. Notice was given to them
or to their employees of the effects brought by the guest; and 1. The guests take
the precautions which said hotel-keepers or their substitutes advised relative to the
care and vigilance of their effects. NOTES: 1. Liability extends to vehicles, animals
and articles which have been introduced or placed in the annexes of the hotel. 1.
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. 1. 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. 1. Notice is necessary only for
suing civil liability but not in criminal liability. GUARANTY (Articles 2047 2084) 3.
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. 3. Classification of
Guaranty: 1. In the Broad sense: 0. Personal - the guaranty is the credit given by the

person who guarantees the fulfilment of the principal obligation. 0. Real - the
guaranty is the property, movable or immovable. 1. As to its Origin 1. Conventional agreed upon by the parties. 1. Legal - one imposed by virtue of a provision of a law.
1. Judicial - one which is required by a court to guarantee the eventual right of one
of the parties in a case. 1. As to Consideration 2. Gratuitous - the guarantor does
not receive any price or remuneration for acting as such. 2. Onerous - the guarantor
receives valuable consideration. 1. As to the Person guaranteed 3. Single - one
constituted solely to guarantee or secure performance by the debtor of the principal
obligation. 3. Double or sub-guaranty - one constituted to secure the fulfilment by
the guarantor of a prior guaranty. 1. As to Scope and Extent 4. Definite - the
guaranty is limited to the principal obligation only, or to a specific portion thereof. 4.
Indefinite or simple - one which not only includes the principal obligation but also all
its accessories including judicial costs SURETYSHIP 1. A contract whereby a person
(surety) binds himself solidarily with the principal debtor 1. 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: 0. 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, except that he himself is
a principal debtor. 0. 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) 0. 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 Suretys undertaking: 1. Liability is
contractual and accessory but direct NOTE: He directly, primarily and equally binds
himself with the principal as original promisor, although he possesses no direct or
personal interest over the latters obligation, nor does he receive any benefits
therefrom. (PNB vs CA, 198 SCRA 767) 1. 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) 1. Liability arises only if principal debtor is held
liable. NOTES: 1. 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. 1. 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) 1. 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. 1. 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) 1. Surety is not entitled to notice of principal s default NOTE: 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) 1.
Prior demand by the creditor upon principal is not required NOTE: As soon as the
principal is in default, the surety likewise is in default. 1. 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: 0. Guaranty may be constituted to guarantee the
performance of a voidable or unenforceable contract. It may also guarantee a
natural obligation. (Art 2052) 0. 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. 1. Subsidiary and Conditional - takes effect only in case the
principal debtor fails in his obligation. NOTES: 0. 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) 0. 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) 1. 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. 1.
Nominate 1. Consensual 1. It is a contract between the guarantor/surety and
creditor. NOTES: 0. Acceptance of guaranty by creditor and notice thereof to
guarantor: 1. 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. 1. 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. 1. But in
any case, the creditor is not precluded from waiving the requirement of notice. 5.
The consideration of the guaranty is the same as the consideration of the principal
obligation. 5. The creditor may proceed against the guarantor although he has no
right of action against the principal debtor. 0. 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) 0. Falls under the Statute of Frauds since
it is a special promise to answer for the debt, default or miscarriage of
another. 0. 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: 1. 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 partys undertaking is that of a surety or guarantor. (Palmares vs CA,
288 SCRA 292) 1. It does not apply in case of compensated sureties. 0. 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 1. 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 sued as promisor 4. Guarantor cannot be sued as promisor Guaranty Warranty A
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: 1. 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.
1. 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. 1. 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) 2. One constituted to guarantee the obligation of a guarantor
Continuing guaranty (Art 2053) 2. 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: 1. Prospective
in operation (Dio vs CA, 216 SCRA 9) 1. 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 (Dio vs CA, 216
SCRA 9) 1. 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. 1. 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
Guarantors 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. 1. 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) 0.
possesses integrity 0. capacity to bind himself 0. has sufficient property to answer
for the obligation which he guarantees NOTES: 2. The qualifications need only be
present at the time of the perfection of the contract. 2. 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. 2. 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) 2. 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: 1. Not applicable to a contract of
suretyship (Arts 2047, par. 2; 2059[2]) 1. 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 would not result
in the satisfaction of the obligation 1. Not necessary that the debtor be judicially
declared insolvent or bankrupt 1. When he has absconded, or cannot be sued within
the Philippines unless he has left a manager or representative 1. In case of
insolvency of the debtor 1. Must be actual 1. If the guarantor has expressly
renounced it 1. If he has bound himself solidarily with the debtor Other grounds:

(BIPS) 1. If he is a judicial bondsman or sub-surety 1. If he fails to interpose it as a

defense before judgment is rendered against him 1. 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) 1. Demand can be
made only after judgment on the debt 1. Demand must be actual; joining the
guarantor in the suit against the principal debtor is not the demand intended by law
1. Where the pledge or mortgage has been given by him as special security Benefit
of Division (Art 2065) 8. 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. 8.
Liability: Joint NOTES: 1. 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. 1. 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). 1. 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. 1. 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. 1. 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. 1. The coguarantors 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) 5. The
creditor must sue the principal alone; the guarantor cannot be sued with his
principal, much less alone except in Art. 2059. 0. Notice to guarantor of the action
1. The guarantor must be NOTIFIED so that he may appear, if he so desires, and set
up defenses he may want to offer. 1. 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)). 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. 0. 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. 1. 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. Guarantors right to legal interest is granted
by law by virtue of the payment he has made. 1. Expenses 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 or his fault for these are his exclusive personal responsibility and
it is not just that they be shouldered by the debtor. 1. Damages if they are due in
accordance with law. General rules on damages apply. EXCEPTIONS: 3. 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). 3. 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
debtors 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.
Guarantors right to Subrogation (ART.2067) 2. 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. 0. It
arises by operation of law upon payment by the guarantor. It is not necessary that
the creditor cede to the guarantor the formers rights against the debtor. 0. 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. 0. The
guarantor is subrogated by virtue of the payment to the rights of the creditor, not
those of the debtor. 1. Guarantor cannot exercise the right of redemption of his
principal (Urrutia & Co vs Morena and Reyes, 28 Phil 261) Effect of Payment by
Guarantor 0. Without notice to debtor: (Art 2068) 1. 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. 0.
Before Maturity (Art 2069) 1. 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) 0. guarantor was prevented by fortuitous
event to advise the debtor of the payment; and 0. the creditor becomes insolvent;
0. the guaranty is gratuitous. Right of Guarantor to proceed against debtor before
payment GENERAL RULE: Guarantor has no cause of action against debtor until
after the former has paid the obligation EXCEPTION: Article 2071 NOTES: 1. Article
2071 is applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs

Batu Construction & Co., 101 Phil 494) 1. Remedy of guarantor: 1. obtain release
from the guaranty; or 1. 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. 2071 Provides 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. Release 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); 1. 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); 1.
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); 1. For the same causes as all other obligations (Art 1231); 1.
When the principal obligation is extinguished; 1. Extension granted to the debtor by
the creditor without the consent of the guarantor (Art 2079)
X