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Credit trans notes
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Credit a person’s ability to borrow money by virtue of the confidence or trust reposed in him by the
lender that he will pay what he may promise it is the trust or belief reposed by a person in another, of the latter’s ability to comply with an
obligation
Credit Transaction – agreements based on trust or belief of someone on the ability of another person to comply with his obligations
Involves loans of money, goods or services extended to another either gratuitously or onerously
Security – it is something promised or delivered to ensure the fulfillment of an obligation
Kinds of Credit Transactions
a. Contracts of Real Security – contracts supported by collateral or burdened by an encumbrance on property
Example: mortgage and pledge
b. Contracts of personal security – contracts where performance by the principal debtor is supported by a promise to pay or by the personal undertaking or commitment of another person
Example: surety or guaranty
c. Principal Contracts – contracts that exist alone and does not depend on the existence of another contract
d. Accessory Contracts – contracts that depend on another contract (principal contract)Examples: guaranty, suretyship, pledge, mortgage and antichresis
Antichresis – a contract for security between the debtor and his creditor; a transfer of possession of the pledged real property from the debtor to the creditor, including the the fruits or rent income therefrom, in lieu of payments on the loan, including interest, for any such time period as is provided for in the contract.
e. Onerous – a contract where there is a consideration or burden imposedExample: interest
f. Gratuitous – a contract where there is no consideration or burden imposedExample: commodatum
Bailment – the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it
Parties in Bailmenta. Bailor – one who gives or delivers the property bailedb. Bailee – one who receives the thing delivered or bailed
Letter of Credit – Trust Receipt Transaction Arrangement A bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as a
security of loan
Bridge Financing To obtain funds through an interim loan, while the main loan is not yet available
Loan
Kinds of Contract of Loans
a. Contract of Commodatum – where one of the parties (bailor) delivers to another (bailee) something not consumable so that the bailee may use the thing for a certain time and thereafter returns it
b. Contract of Mutuum (Simple Loan) – where money or other consumable thing is delivered by the lender to the borrower subject to the condition that the same amount of the same kind and quality shall be paid
Consumable – when it cannot be used in a manner appropriate to its nature without being consumedExample: food, firewood, gasoline
Non-consumable – a movable thing which can be used in a manner appropriate to its nature without being consumedExample: car, television, radio
Fungible Thing – one where the parties have agreed to allow the substitution of the thing given or delivered with an equivalent thing
Non-fungible Thing – one where the parties have the intention of having the same identical thing returned after the intended use
Kinds of Commodatum
a. Precarium – where the bailor may demand the thing loaned at will; the use of the thing by the bailee depends on the pleasure of the bailor (no time was fixed for the use of the thing)
b. Ordinary Commodatum – where the bailor cannot just demand the return of the thing at will because there is a period agreed upon which must be respected
Distinction between Commodatum and Mutuum
Basis Commodatum MutuumSubject Matter Non-consumable thing
Same thing must be returnedMoney or consumable thing
Equivalent amount of same kind and quality is to be returned
Nature Gratuitous Gratuitous or Onerous (when there is interest)
Purpose Loan for use of temporary possession Loan for consumptionKind of Property Real or Personal Personal
Risk of Loss Lender or Bailor retains ownership Ownership is transmitted to borrower or bailee
Time of Payment Returnable at the end of the period in case of urgent need
Not returnable until the end of the period
Character Personal Not personal
Credit vs Loan
Credit – an individual’s ability to borrow money by virtue of the confidence or trust reposed by the lender unto him that he will pay what he has promised
Loan – the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest
Note: An agreement for a loan with the stipulation that if the loan is not paid, a parcel of land would
be deemed sold to the lender for the amount of the loan is valid (no pacto comisorio)
pacto comisorio – one prohibited, by which the creditor can endorse the thing given as collateral for the debt in case of default
Note: Perfection of Commodatum and Mutuum delivery of the objects of the obligations
o No delivery, no contract The legal effect of promise to deliver is binding upon the promissor and promissee because
contracts are obligatory when all the essential requisites for the validity are presento Non-fulfillment will justify the filing of an action for damages
Commodatum
Characteristics of Commodatum1. Gratuitous2. Transfer the temporary use of the thing loaned to the bailee3. Use of the thing is for a certain time4. Real Contract5. Principal Contract6. Unilateral Contract7. Personal
Subject of Commodatum: non-consumable (the thing must be returned)
Object of Commodatum: immovable and movable property
Note: If any compensation is payable for the use of the thing, it ceases to be a commodatum Usufruct will result of the bailee is authorized to enjoy the fruits of the property It is valid If there is a stipulation in the contract allowing the bailee to enjoy the fruits of the
thing loaned Consumable goods may be the object of commodatum if the purpose is for ad ostentationem or
exhibition Bailor need not be the owner of the thing loaned
o The lessee may sublease and transfer the enjoyment of the thing leased to another for a consideration, as long as there is no prohibition for subleasing in the contract of lease
The rights and obligations arising from commodatum are extinguished by the death of the bailor or bailee
GR: The Bailee cannot lend or lease the object to a third personXPN: The third person is a member of the household of the bailee subject to the following conditions: (1) there is no agreement or stipulation to the contrary, and (2) the nature of the object forbids such use
Note: Members of the household of the bailee are not considered third persons All rights acquired in virtue of an obligation are transmissible
GR: The bailee is not entitled to the use or enjoyment of the fruits of the thing loanedXPN: If there is a stipulation to that effect
Note:The enjoyment of the fruits must be incidental to the use of the thing
Obligations of the Bailee (Borrower)a. To pay for ordinary expenses
Bailee is obliged to return the thing to the bailor Bailee should take good care of the thing with the diligence of a good father of a family
Note:
If the expenses incurred by the bailee are extraordinary, the bailor must reimburse the bailee provided that before incurring them, the bailor has been notified
If extraordinary expenses are incurred during the actual use of the thing, the bailee and bailor shall equally bear the expenses unless there is a stipulation to the contrary
Bailee is not entitled to the refund of other expenses (neither ordinary or extraordinary)
Bailee (Borrower) is liable for the loss of the thing even through a Fortuitous Event1. If bailee used the thing to a different purpose from what is has been loaned2. If bailee keeps the thing longer than the period stipulated or after the accomplishment of the use3. If the thing loaned has been delivered with appraisal of its value, unless stipulated exempting the bailee from responsibility in case of a fortuitous event4, If bailee lends or leases the thing to the third person, who is not a member of bailee’s household5. If being able to save either the thing borrowed or own thing, bailee choose to save his own thing
Note: Bailee has no liability for deterioration of the thing in the absence of fault
GR: The bailee (borrower) cannot retain the thing loaned to him on the ground that the bailor (lender) owes him something including claims for extraordinary expenses incurred by bailee.
XPN: Claims for damages which the bailee suffered by reason of the hidden defects or flaws of the thing loaned, of which he was not warned or advised by the bailor (lender)
Note: The bailee’s right is to retain the thing until he is reimbursed The bailee has no right to sell the thing to satisfy his claim for damages
Solidary Obligation – where each one of the debtors is obliged to pay the entire obligation, and where each one of the creditors has the right to demand from any of the debtors, the payment or fulfillment of the entire obligation
Passive Solidarity – solidarity on the part of the debtorsActive Solidarity – solidarity on the part of the creditors
Obligations of the Bailor (Lender)
When the return of the thing loaned may be demanded by the bailor1. after the expiration of the period stipulated2. after the accomplishment of the use for which the commodatum has been constituted
Note: When the bailor has an urgent need of the thing loaned, he may demand its (a) return, or (b) its
temporary use In case of temporary use, the commodatum is not extinguished but merely suspended while the
possession of the thing loaned remains in the bailor (lender) When loan is for unlawful purposes, the contract is void
Precarium – where the bailee (borrower) is bound to return the thing upon the demand of the bailor (lender) in any of the following circumstances:
1. If the duration of the contract is not stipulated2. If the use of the thing loaned is not stipulated3. If the use of the thing is by tolerance of the owner
GR: The bailor (lender) can always demand the immediate return of the thing at will or at his pleasure
Note:If the bailee has committed acts of ingratitude, the bailor may immediately demand the return of the thing loaned even of the period stipulated has not yet expiredActs of Ingratitude1. if the bailee committed offenses against the person, honor, property of the bailor, or his wife or children2. if the bailee imputes to the bailor any criminal offenses, or act involving moral turpitude3. If the bailee refuses the bailor support when the bailee is legally or morally bound to give support to the bailor
Flaws or Defects of the Thing LoanedThe bailor (lender) is liable if he failed to advise bailee of defects or flaws of the thing loaned (tortious act)The omission constituted negligenceThe gross violation of the contract is a tort or quasi-delictWhen the bailor (lender) is not aware of the flaws of the thing loaned, he is not liable because commodatum is gratuitous and not onerousIf both parties are aware of the flaws or defects, the bailor is not liable for damages suffered by bailee because the bailee (borrower) is deemed to have assume the riskAbandonment of the thing cannot exempt bailor (lender) from payment of expenses and damages
Simple Loan or Mutuum
Mutuum – a contract whereby one of the parties (lender) delivers to another (borrower), money, or other consumable thing with the condition or agreement that the same amount of the same kind and quantity shall be paid
Note:In a contract of loan, the borrower becomes the owner of the thing or property delivered to him
Barter – a contract where one of the parties binds himself to give one thing or another in consideration of latter’s promise to give another thing
Distinction between Loan and Barter
Basis Loan BarterSubject Matter Money or other fungible things Non-fungible things
Nature Gratuitous or onerous onerousEffect There is transfer of ownership, there is
no saleMutual sale resulting in the transfer of
ownership on both sidesReturn of the Thing After the expiration of the period Parties do not return the thing subject
of the exchange
Payment of Loan The value of the thing at the time of its perfection (delivery) shall be the basis
Interest – the compensation agreed to be paid by the borrower for the use of the money lent to him by the lender
Classes of Interest
a. Simple – interest paid for the use of the principal at a certain rate stipulated in writing by the parties
b. Compound – interest imposed upon the accrued interest (due and unpaid)
c. Legal – interest which the law directs to be paid in the absence of any agreement as to the rate (6% per annum)
Note: No liability for interest without written agreement
Right to Interest Arises by the reason of the contract (stipulation in writing) or by reason of delay or failure to pay
principal on which interest is demanded
Note:
The reckoning period for payment of interest on unliquidated claims shall run from the promulgation of judgement of court
Interest on Damages – imposed in a judgment as indemnity for damageso Need not to be in writingo Computed from the time of the finality of the decision
Note: Floating rate of interest is void Interest could not be collected on equitable mortgage because the same is not stipulated in
writing Compound interest is not automatic, there must be a stipulation for payment of interest and
when it is judicially demanded In usurious loans, the entire obligation does not become void – the unpaid principal debt still
stands and remains valid but the stipulation as to the usurious interest is void The amount paid as interest under a usurious agreement is recoverable by the debtor, since the
payment is deemed to have been made under restraint, rather than voluntary To determine the interest, the basis is the current price of the products or goods at the time and
place of payment
GR: Accrued interest shall not earn compound interestXPN: (a) when there is a written stipulation, or (2)when there is judicial demand
Note: In the absence of written stipulation, borrower cannot be compelled to pay interest because no
interest is due If the borrower paid interest by mistake, he can recover what he had paid (solutio indebiti – no
one shall be enriched at the expense of another) If the borrower agreed orally to pay the interest (reasonable interest) but there was no written
agreement, no interest is dueo If the borrower paid the interest as moral obligation, the payment is valid as
performance of a natural obligation The lender cannot unilaterally increase the rate of interest to an iniquitous level
Forbearance – the contractual obligation of the creditor to forebear during a given period to require the debtor, payment of an existing debt then due and payable
Note: Usury Law has been rendered legally inexistent by CB Circular 905 by abolishing the ceilings on
interest A Central Bank Circular cannot repeal a law, only a law can repeal another law CB Circular 905 did not repeal or amend the Usury Law but it suspend its effectivity Back rentals, equivalent to loan or forbearance – 12% interest The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable
Deposit
Deposit – a contract whereby a person (depositor) delivers a thing to another (depositary) for the principal purpose of safekeeping it with the obligation of returning it when demanded
Characteristics of Contract of Deposit1. Real contract – perfected by the delivery of the object2. Object – movable things or personal property3. Principally intended for the safekeeping of the thing deposited4. Gratuitous5. Depository cannot use the thing deposited except with the permission of the depositor or when the preservation of the thing requires its use but only for said purpose
Note: Judicial deposit is provided by law even if the subject matter is land When money is placed in a bank for safekeeping, same money must be returned
Classes of Deposit
a. Judicial Deposit (Sequestration) – one which is brought about by the attachment or seizure of a property by order of the court
Object: either immovable or movable property
Movable Things – tangible things which can be transported from one place to another without being destroyed
o May include intangible or incorporeal things (rights and actions)
b. Extra- Judicial Deposit1. Voluntary – one made by the will of the depositor with the consent of the depositary2. Necessary – one made in compliance with a legal obligation, or on occasion of a calamity
o Object: movable property
Note: Contract to make a future deposit is binding if the offer is accepted For deposit to be perfected, there must be delivery of the object
GR: Deposit is a gratuitous contractXPN: (a) if the parties have agreed that compensation be paid; and (b) the depository is engaged in the business of storing goods
Note: Deposit should be considered as a loan if there is a stipulation for payment of interest
Voluntary Deposit
Voluntary Deposit – a contract of judicial relation where a thing is delivered at the will of depositor to depositary for the purpose of safekeeping by the depositary coupled with the obligation of returning it upon demand
Note: The depositor need not be the owner of the thing The depositary cannot demand that the depositor prove his ownership of the thing deposited
Interpleader – deposit made by 2 or more persons where each one believes that he is the owner of the thing which is deposited with a third person. When the issue of ownership is settled, the depositary shall deliver the thing to the proclaimed owner
Form of the Contract of Deposit – orally or in writing or partly oral and partly in writing
Incapacitated Person – a person which cannot give consent to the contract Minors, insane, demented, deaf-mutes who don’t know how to write Civil interdiction, insolvency
Civil Interdiction - a legal restraint upon a person incapable of managing his estate, because of mental incapacity, from signing any deed or doing any act to his own prejudice, without the consent of his curator or interdictor
Voidable Contract – where one of the parties is incapable of giving consent to a contract
Note: The capacitated person who accepts the deposit made by an incapacitated person shall be
subject to all the obligations of a depositoryo If the depositary refuses to return the thing deposited, he can be compelled to return it
by the legal representative of the incapacitated person or by the incapacitated person if he becomes capacitated
The depositor may recover the thing deposited if it is in the possession of the incapacitated depositary
o If the thing is already disposed of in favor of a third person who acted in good faith, the depositor can collect the amount by which the incapacitated depositary had been enriched or benefited
o If the third person acted in bad faith, the depositor can recover the thing from him with damages
Obligations of the Depositary1. To keep the thing safely2. To return the thing deposited when required, to the depositor or his heirs and successors in interest
Note: The depositary shall observe the diligence of a good father of a family in the performance of his
obligations to protect and preserve the thing deposited The depositary is responsible for the negligence of his employees If the thing is lost, the depositary is liable if the loss is due to his own fault but not when the loss
is due to fortuitous event or force majeure
GR: The depositary is not liable when loss of a thing is due to fortuitous eventXPN:
1. If it is stipulated2. If he uses the thing without the depositor’s permission3. If he delays in return4. If he allows others to use it, even though he himself may have been authorized to use the same
Fortuitous Event – unforeseen happening arising from acts of God Storms, earthquakes, lightning
Note: The owner-depositor bears the loss as long as the depositary is not at fault (Res perit domino)
GR: The depositary is prohibited from depositing the thing with a third personXPN: If there is a stipulation to the contraryXPN to the XPN: If the thing is deposited with a person manifestly careless and unfit
GR: Way or manner of deposit cannot be changed by depositaryXPN: When depositary may reasonably presume that the depositor would agree to the modification if the depositor knew of the facts of the situation
Note: Before any change be made in the way or manner of deposit, notice and decision of the
depositor is required unless time is of the essence to avoid danger If the thing deposited generates interests (bonds, securities), the depositary must collect the
interest as well as the principal when they become due
Rent of Safety Deposit Boxes Not an ordinary contract of lease of things but a special kind of deposit Not strictly governed by the provisions on deposit
GR: The depositary may commingle grains or other items of same kind and quality pertaining to 2 or more depositorsXPN: There is a prohibition
Note: Different depositors shall own a proportionate share in the mass of the things deposited If the grains, etc. are not of the same kind and quality, the depositary must keep them
separately
GR: The depositary is prohibited from using the thing depositedXPN: Expressly allowed by the depositor
Note: If the depositary uses the thing deposited, he will be liable for damages
If the depositary is expressly allowed by the depositor to use the thing deposited, the contract ceases to be a deposit and becomes a loan or commodatum unless the principal reason for the contract is the safekeeping of the property (irregular deposit)
The depositor cannot dispose of the thing deposited for the use of another person The burden of proof to establish that permission to use the thing was granted is on the
depositary When the use of the thing is necessary to preserve it, the depositary may use the same but only
for such purposeo Depositary is not liable for damages
Deposit in banks are considered simple loans because they earn interest – covered by law on loans
Closed and Sealed Deposit Must be returned in the same condition by the depositary If the seal or lock is broken due to the fault of the depositary, he shall be liable for damages If the seal or lock is broken without fault of the depositary, he has the duty to keep secret the
contents thereof If the depositor has instructions which could not be performed by the depositary without
opening the box or receptacle, the depositary is presumed to be authorized to do so If the depositor has left the key to the box or receptacle to the depositary, there is a
presumption of authority to open
Note: If there is a controversy on the value of the thing deposited which is delivered closed and
sealed, the statement of the depositor shall be prima facie evidence of the value if the forcible opening of the box or receptacle is imputable to the depositary
Returning of the Thing Deposited When the depositary returns the thing in deposit, it also includes all its products, accessories
and accessions The money deposited must be returned together with interest for the use If there is an agreement that the thing deposited shall be returned to a particular depositor, the
depositary shall return the thing only to the designated depositor If the depositor loses his capacity to contract after having made the deposit, the depositary
should return the thing to the person who has the administration of the depositor’s property and rights
Place of Returning Place designated in the contract If no place is designated, In the place where the things may be
Note: Expenses for transportation shall be borne by the depositor
Time to Return Thing Deposited GR: Upon demand – whether or not a period is fixed for the return
o The term or period if agreed upon is for the benefit of the depositoro Depositor can always seek the return of the thing at any time
XPN: o When the thing in the possession of the depositary is subject to a writ of attachmento When there is an opposition to the return of the thing to the depositor and the
depositary is duly notifiedo When there is an opposition to the removal of the thing deposited and the depositary is
duly notifiedo When the thing is stolen and the period of 30 days from notice to the true owner to
claim it had not yet lapsed the depositary cannot return the thing to the depositor to protect the true owner
Note: When there is no fixed period for the return of the thing deposited, the depositor may withdraw
the thing at any time even without judicial orders The depositary must immediately notify the depositors of the attachment or opposition so that
he can protect his rights and interests If the depositary return the thing despite the attachment, opposition, non-lapse of 30 day
period, he may be liable for damages
GR: Depositor cannot be required by depositary to prove his ownership There is no transfer of ownership in contract of deposit Bailee is estopped from asserting title to the thing received as against the bailor
Note: When things appears to be unlawfully acquired, the depositary may return the thing to the
depositor to avoid liability
When Thing is a Stolen Property If true owner is identified, the depositary must advise the owner of the deposit so that he may
take necessary precautions or actions to retrieve it If the depositor insists on his ownership as against the true owner, the depositary may file an
interpleader suit against both of them to avoid responsibility If the identity of the true owner cannot be ascertained, the depositary may return the thing to
the depositor If the true owner failed to claim the thing within 30 days from advisement, the depositary shall
be relieved from responsibility by returning the thing to the depositoro The depositary shall wait until the lapse of 30 days but inform the depositor of the legal
reason for the retention
Rights of 2 or more Depositors If joint depositors – each one may only demand the return of his proportionate share in the
divisible things deposited If solidary depositor – and the thing deposited is not capable of division, the depositary may
return the thing to anyone of the solidary depositors
Note:
If the depositor refuses to accept the thing, the depositary may resort to judicial consignation to be relieved from responsibility
The depositary cannot just return the thing until the arrival of the period designated in the contract
The depositary may return the thing if he could not perform his obligations as a depositary
GR: If the thing deposited is lost due to force majeure or confiscated by the government, the depositary is not liable for failure to return the thing upon demand of the depositor
Note: If the depositary had received money or an equivalent thing for the property, he must deliver he
same to the depositor
GR: The depositary’s heir who in good faith sold the thing deposited, the heir must return the purchased price received to the depositor or assigned to the depositor the right of action against the buyer in case the price has not been paid
Note: If the heir is in bad faith, the depositor may sue them for recovery of the price with damages or
may annul the contract of sale on the basis of fraud or file a criminal case of estafa for the appropriation of the thing under deposit
Obligations of the Depositor If the deposit is for compensation, the depositor is not required to pay the depositary for the
depositary’s expenses for the preservation of the property (necessary expenses) If the deposit is gratuitous, the depositor must reimburse the depositary for the depositary’s
expenses for the preservation of the property deposited (necessary expenses) To pay the compensation agreed upon as consideration for the deposit To indemnify the depositary for any loss or damages arising from the character of the thing
deposited The depositor has no obligation to reimburse the depositary for useful or luxurious expenses
GR: The depositor is liable for losses or damages suffered by depositary arising from the character of the thing depositedXPN:
1. The depositor is not aware of such character2. The depositor was not expected to know such dangerous character of the thing3. The depositor has notified the depositary of such character4. The depositary was independently aware of it without need of advice from the depositor
Note: If the depositary has not been paid by the depositor for what may be due to him, the depositary
may retain the thing deposited until he is fully reimbursed If it is for compensation and the agreed consideration has not been paid, the depositary has the
right to retain the thing The right of the depositary is similar to an agent, he could retain the thing in pledge until full
payment is made by reason of deposit
May the depositary sell the thing retained in pledge?Yes, there is no prohibition to sell
When Deposit is Extinguished1. Upon the loss or destruction of the thing deposited2. In case of gratuitous deposit, upon the death of either the depositor or the depositary3. Expiration of the period agreed upon4. Demand at will of the depositor5. Mutual withdrawal from the contract6. Fulfillment of the purpose of thee deposit7. Fulfillment of the resolutory condition agreed upon
Note: If the deposit is for a compensation (onerous), death of either party shall not extinguish the
contract because the rights and liabilities are transmissible to their heirs unless there is a contrary agreement
Necessary Deposit
Necessary Deposit When made in compliance with a legal obligation When it takes place on the occasion of any calamity
o Fire, storm, flood, pillage, shipwreck
Note: When during a fire, flood, storm, or other calamity, property is save from destruction by another
person without the knowledge of the owner, the owner is bound to pay the person who save the property just compensation
Deposit of Traveler’s Effects or Belongings Keepers of Inns or Hotels have the obligations as depositaries provided that they are notified by
the guest and the guests observe precautions prescribed by the inn or hotel keepers as to the care and vigilance over their effects or belongings
Hotel-keeper is liable for the vehicles, animals and articles which have been introduced or placed in the annexes of the hotel
Note: Persons criminally liable, innkeepers, tavern-keepers, and any other persons or corporations
shall be civilly liable for crimes committed in their establishment, in all cases committed by them of their employees
Innkeepers are subsidiarily liable for the restitution of the goods taken by robbery or theft
Responsibility of Hotel-Keepers
Liable for damages arising from the loss of, injury to, the personal effects of hotel guests caused by the negligence of its servants or employees and loss or damages due to strangers
Note: There is no liability when the loss is due to force majeure If the loss of the things of a guest is due to the act of a thief or robber, the hotel-keeper is liable
o If the thief or robber used arms and irresistible force, this act is deemed a force majeure, hotel-keeper is free from liability
Losses Not Chargeable to Hotel-Keepersa. acts of the guestb. acts of the guest’s familyc. acts of the guest’s servants or visitorsd. character of the thing of the guests
Note: Notices posted in the hotel announcing that the hotel-keeper is not liable for article brought by
the guest or traveler cannot free the hotel-keeper from responsibility for losses or damages suffered by the guest or traveler
Any agreement for the suppression or diminution of the responsibility of the hotel-keeper shall be void
If the guest who checked-in has brought things or belongings in to the hotel and does not pay his hotel bills, the hotel-keeper has the right to retain the things or belongings as security for payment
The right to sell the retained things or belongings is debatableo In the nature of pledge created by law allowedo Right to retain does not include right to sell without judicial authorization (filing a
petition in court) not allowed The act of obtaining food or accommodation in a hotel or in without payment is estafa
Guaranty
Guaranty – where a guarantor binds himself to creditor to fulfill the obligation of the principal debtor in case the principal debtor fails to do so
Suretyship – where the guarantor binds himself to be solidarily liable with the principal debtor
Note:
Guaranty cannot exist without valid obligation
Characteristic of Guaranty1. consensual contract2. accessory contract3. conditional contract4. unilateral contract5. subsidiary contract
Distinction between Guarantor and Surety
Basis Guarantor SuretyLiability Depends upon an independent
agreement to pay the obligation of the principal if he fails to do so
As a regular party to the contract
Obligation Secondary PrimaryUndertaking To pay if the principal debtor cannot pay To pay if the principal debtor cannot pay
(obligation is onerous)Role Insurer of the solvency of the principal
debtorInsurer of a debt
Benefit Right to Excussion – the exhaustion of properties of the principal debtor before
he may be held liable
Not entitled to Excussion
Kinds of Guaranty
Personal Guaranty – an individual personally assumes the fulfillment of the principal obligation of the debtor
Real Guaranty – where a property (immovable or movable) is formally committed to answer for the principal obligation of the debtor
Conventional / Voluntary – constituted by agreement of the guarantor and the debtor
Legal – created or required by law
Judicial – ordered by a court in a pending case
Gratuitous – the guarantor receives n valuable consideration because it is entered into for free
Onerous – the guarantor by stipulation is paid a valuable consideration for his guaranty of the obligation of the debtor
Definite – confined or limited to the principal obligation only or over a specific part
Indefinite (Simple) – covers or comprises the principal obligations and its accessories
Requisites for Enforcement of Surety’s Liabilitya. application for damages must be filed before trial or before entry of judgmentb. due notice must be given the other party and his suretyc. proper hearing and the award of damages, if any, must be include in the final judgment
Note: An essential alteration in the terms of a loan agreement without the consent of the surety
extinguishes the surety’s obligation An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty
Guaranty vs WarrantyGuaranty is a contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party, whereas warranty is an undertaking that the title, quality or quantity of the subject matter of a contract is what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty
Note: Guaranty is a gratuitous contract; it becomes onerous when there is a stipulation to the contrary
Wife as Guarantor – Consent of Husband Not Required May guarantee an obligation of another person without the consent of her husband Cannot bind the conjugal partnership or absolute community without the consent of her
husband except in cases allowed by law May administer and dispose of her own exclusive or separate properties If she is appointed sole administratrix of the property of the husband, she may bind th property
of the husband except to sell unless with a court authority
Note: Conjugal Partnership is liable for all debts and obligations contracted during the marriage by the
designated administrator-spouse for the benefit of the conjugal gains, or by both spouses or by one of them with the consent of the other
GR: Guaranty may be constituted without the knowledge or consent of the principal debtor or even against his will
It is for the benefit of the creditor and not the debtor Debtor is not a party to tine contract
Note: The guarantor may recover from the debtor what the guarantor paid to the creditor but only to
the extent of the benefit enjoyed by the debtor The guaranty is not binding until accepted by the creditor
Effects of Guaranty with Consent of Debtor The guarantor is subrogated (substituted) by all the rights which the creditor may have against
the debtor
Effects of Guaranty without Consent of Debtor The guarantor cannot enjoy the right of subrogation
GR: Guaranty may be constituted in favor of another guarantor with or without the guarantor’s consent or even against his opposition or objection
Sub-guarantor – second or subsequent guarantor The sub-guarantors assume the obligation of the guarantors, while the guarantors assume the
obligation of principal debtor
Requisites for Guaranty A valid obligation between a debtor and a creditor
Note: There can be no valid guarantee of a void obligation or contract A guaranty must depend upon the existence of a valid principal obligation
o If the principal obligation is void, the guaranty is also void
Voidable Contract – considered valid until it is annulled in a judicial proceeding
Unenforceable Contract – contract is not void; subject to ratification
Natural Obligation – obligation which is not civil and cannot be enforced in court
Conditional Obligation May be an object of guaranty Not void Valid subject only to the fulfillment of the condition – not demandable at once
Continuing Guaranty – covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty until its expiration or termination
Note: Future debts may be secured by a guarantee even if the exact amount is not yet known The guarantor cannot be sued until the debt is liquidated
Test of Continuing GuarantyWhen by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain periodDebt when considered Liquidated
If the contract fixed the price of the delivery of future goods and the seller manifests its readiness to deliver the said goods within the period stipulated
Note: Contract of suretyship are prospective in effect unless the parties have intended them to be
retrospective If the principal obligation is subject to a suspensive condition, the guarantor shall be liable only
to the creditor after the happening or fulfillment of the condition
If the principal obligation is subject to a resolutory condition, the happening of the condition will extinguish the principal obligation as well as the accessory contract of guaranty
o Creditor has no cause of action against the guarantor If there is any doubt on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety A guaranty anchored on the fulfillment of a condition subsequent will nullify the guaranty if the
condition is not fulfilled
Limit of Surety’s Liability amount of the bond
Limit of Guarantor’s Liability cannot go beyond the obligation of the principal debtor
Note: If the guarantor agreed to pay more than the obligation of the debtor, the obligation is not
rendered void and shall be reduced to the extent or limit of the debtor’s obligation If upon demand, a guarantor or surety fails to pay the obligation, he can be held liable for
interest, even paying will increase the liability more than that in the principal obligationo The increased liability is because of the default and the necessity of judicial collectiono The interest runs from the time the complaint is filed
Form of Contract of Guaranty To be enforceable, it must be expressed and in writing
o Oral guaranty is unenforceable
Note: Guaranty as a contract, requires the expression of the consent of the guarantor in order to be
bound Guaranty cannot extend beyond what is expressly stipulated
Extinguishment of Guaranty or Suretyship Payment by the principal debtor If the principal obligation is mutually changed or modified by the creditor and debtor without
the knowledge or consent of the guarantor or surety Material alternation of the contract which imposes new obligation on the party promising or
takes away some obligation already imposed, changing the effect of the original
Note: Surety is not released by a change in the contract which does not have the effect of making the
obligation more onerous
Qualifications of Guarantora. Person of integrityb. has Full legal capacityc. has sufficient property to answer for the obligation of the debtor
Note:
The creditor may waive the qualifications which are intended for his protection Qualifications must be present at the time of the perfection of the contract If one or more qualifications are impaired due to supervening events, the creditor may demand
for another qualified guarantor
Venue of Action in Guaranty The guarantor shall be subject to the jurisdiction of the court of the place where the obligation
is to be complied with
When Creditor may Demand a Substitute Guarantora. when the original guarantor is convicted of a crime involving dishonestyb. when the original guarantor becomes insolvent
Effect of Guarantor’s Death His heirs are still liable, to the extent of the value of the inheritance because the obligation is
not purely personal, and is therefore transmissible
Effect of Debtor’s Death His obligation will survive His estate will be answerable
o If the estate has no sufficient assets, the guarantor shall be liable
Effects of Guaranty
Benefit of Exhaustion or Excussion – the right of the guarantor to be free from execution of his own properties until the creditor shall have first exhausted all the properties of the principal debtor and has resorted to all legal remedies against the debtor
Note: All the properties of the principal debtor should first be exhausted before the guarantors
properties may be levied upon
Requisites of Benefit of Exhaustion or Excussion1. Guarantor must set up the right of excussion against the creditor upon the creditor’s demand for payment2. Guarantor must point out to the creditor the available property of the debtor found within the Philippine territory and sufficient to cover the amount of the debt
Note: If the guarantor pledged or mortgaged his own property to the creditor to secure the principal
obligation, excussion cannot be invoked for it is not being available to a pledger or mortgagor Excussion is not applicable to Contract of Suretyship
o Surety binds himself solidarily with the principal debtor
May a complaint be filed against the debtor and guarantor simultaneously in one case before the exhaustion of all the properties of the debtor?Yes. There is nothing procedurally objectionable in impleading the guarantor as a co-defendant.
Note: If the creditor obtained a favorable judgment against the debtor and guarantor, the guarantor is
entitled to a deferment of the execution of judgment against him until all the properties of the debtor shall have been exhausted to satisfy he debtor’s obligation
A good proof of the debtor’s inability to pay is an unsatisfied writ of execution
Instances Where Guarantor Cannot Invoke Right of Excussion (RAIDE)1. Renunciation of Right2. Assumption of solidarily liability with the debtor3. Insolvency of the debtor4. Debtor absconded (escaped) or cannot be sued in the Philippines5. Execution against the property of the principal debtor would be fruitless (without value)
Note: The demand from guarantor is made after the judgment has rendered against the principal
debtor and which could not be satisfied
Effect of Creditor’s Negligence He shall suffer the loss to the extent of the value of the pointed property which was not
exhausted by the creditoro The guarantor shall remain liable for the remaining obligation after deducting the value
of the loss caused by the negligence of the creditor
GR: The principal debtor should be sued aloneXPN: If the benefit of excussion is not available to the guarantor, he can be sued jointly with the debtor
Note: If debtor and guarantor lose in the suit, the guarantor is still entitled to the benefit of excussion A surety may be sued independently of the principal debtor without prior exhaustion or
excussion of the debtor’s properties Guarantor must be notified of the complaint filed against the debtor alone so that, if the
guarantor desires to set up defenses he may have the opportunity to do so
Consequences of Guarantors Appearance or non-Appearance in the Debtor’s Case upon Judgment1. Non-Appearance he cannot set up defenses and cannot question the decision2. Appearance he is entitled to the benefit of excussion if he loses the case
Note: There is no waiver of the right of excussion by guarantor’s appearance in the case
Compromise – a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put up and end to one already commenced
Effect of Compromise1. Between Creditor and Principal Debtor
If beneficial to the guarantor, it is valid If not beneficial to the guarantor, it is not binding upon him
2. Between Creditor and Guarantor If beneficial to the principal debtor, it is binding upon him If not beneficial to the principal debtor, it is not binding upon him
Note: The compromise agreement is only between 2 persons – No 3rd person could be a party unless
there is a specific agreement
GR: Sub-Guarantor is entitled to right of excussion
Note: Before the sub-guarantor’s property may be levied upon on execution, the sub-guarantor can
compel the creditor to first exhaust the properties of the debtor and guarantor The sub-guarantor becomes liable when the debtor and guarantor failed to pay the principal
obligation
Benefit of Division – a co-guarantor is entitled to claim of a division of liability among his co-guarantors, and to pay only his aliquot part of the debt when the principal debtor fails to pay the debt
Liability of 2 or more Co-Guarantors Each one is liable only for his individual share in the debt
Note: If several guarantors agreed with the creditor to be liable solidarily, anyone of them may be
compelled by the creditor to pay the entire obligation when the principal debtor fails to pay The benefit of division must be claimed at the time demand for payment is made upon the
guarantors
Pawnshop Regulation Act
Pawnshop – person or entity engaged in the business of lending money on personal property delivered as security for loan
Pawner – borrower from a pawnshop
A pawnshop may be established as a single proprietorship, partnership or corporation Minimum Capital Php 100,000 The amount of loan shall not be less than 30% of appraised value of the security offered for the
loan unless the pawner manifest in writing the desire to borrow a lesser amount In addition to interest charges: maximum service charge of Php 5.00, but does not exceed 1% of
the principal loan Redemption 90 days – payment of the principal debt with interest
o Failure to redeem, the pawnbroker may sell or dispose the article pawned (through public auction) provided the pawner is notified
Computing interest due after maturity of obligation sum of the principal of the obligation and interest earned at the time the obligation matured