WEEK 1 (September 24)

Credit and Debt Distinguished

The term “credit,” in its usual meaning, is a sum credited on the books of a company to a person who appears to be entitled to it. It
presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised
payment.

It is the correlative to debt or indebtedness, and that which is due to any person as distinguished from that which he owes. (Republic vs.
First National City Bank of New York, 3 SCRA 851 [1961].) It is a debt considered from the creditor’s standpoint. (Black’s Law
Dictionary, 4th ed., p. 441.) It may consist of money, goods, or services.

Credit Transactions
a. Secured transactions or contracts of real security
Those supported by a collateral or an encumbrance of property.

b. Unsecured transactions or contracts of personal security

Those the fulfillment of which by the principal debtor is secured or supported only by a promise to pay or the personal commitment of
another such as a guarantor or surety.

c. Kinds of Credit transactions

As contracts of security
• Contracts of real security
• Contracts of personal security

As to their existence
• Principal Contracts
• Accessory Contracts

As to their consideration
• Onerous
• Gratuitous

d. Security
The term security is something given, deposited, or serving as a means to ensure the fulfillment or enforcement of an obligation or of
protecting some interest in property.

e. Bailment
It may be defined as the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied,
that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or
kept until the bailor reclaims it.

f. Parties to a bailment
(1) Bailor (Comodatario). — the giver; the party who delivers the possession or custody of the thing bailed; and
(2) Bailee (Comodante). — the recipient; the party who receives the possession or custody of the thing thus delivered.

g. Kinds of Contractual Bailment

i Gratuitous Bailments - In such bailments, there is really no consideration for they are considered more as a favor by one party to the
party benefited; but the law imposes definite obligations upon both the bailor and the bailee.

ii Mandatum - a bailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes
to do some act with respect to the same; as simply to carry it, or keep it, or otherwise to do something with respect to it gratuitously.

iii Mutual-Benefit Bailments - usually results from bailments involving business transactions.

iv Bailments for hire - arises when goods are left with the bailee for some use or service by him and is always for some compensation.

o Hire of things - where goods are delivered for the temporary use of the hirer (i.e., lease, Arts. 1642, 1643.);
o Hire of service - where goods are delivered for the temporary use of the hirer (i.e., lease, Arts. 1642, 1643.);
o Hire for carriage of goods - where goods are delivered either to a common carrier (Art. 1732.) or to a private person for the purpose
of being carried from place to place (see 6 Am. Jur. 180-182.)
o Hire of custody - where goods are delivered either to a common carrier (Art. 1732.) or to a private person for the purpose of being
carried from place to place (see 6 Am. Jur. 180-182.)

 People v. Concepcion, G.R. No. L-19190. November 29, 1922, 44 Phil 126

FACTS
Venancio Concepcion, President of the Philippine National Bank authorized an extension of credit in favor of "Puno y
Concepcion, S. en C." in the amount of P300,000. Pursuant to this authorization, credit aggregating P300,000 was granted the firm of
"Puno y Concepcion, S. en C.," the only security required consisting of six demand notes. The notes, together with the interest, were
taken up and paid by July 17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion contributed P5,000; Clara
Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno, P20,000; and Rosario San Agustin, "casada con Gral.
Venancio Concepcion," P50,000. Member Miguel S. Concepcion was the administrator of the company.

Defendant Concepcion, as President of the Philippine National Bank and as member of the board of directors of this bank, was
charged and found guilty in the Court of First Instance of Cagayan with violation of Section 35 of Act No. 2747, which provides that “The
National Bank shall not, directly or indirectly, grant loans to any of the members of the board of directors of the bank nor to agents of
the branch banks."

ISSUES

1. Whether or not the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by defendant
Concepcion, was a "loan" within the meaning of Section 35 of Act No. 2747;
2. Whether the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by defendant Concepcion,
was a "loan" or a "discount"; and,
3. Whether or not the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by defendant
Concepcion, was an "indirect loan" within the meaning of Section 35 of Act No. 2747

RULING

1. Yes. The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit."
2. It is indeed a loan. To discount a paper is only a mode of loaning money. The demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness.
3. Yes. In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of the
Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of safety against temptation for a director of
the bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve two masters —
that where personal interest clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the
husband is financially interested in the success or failure of his wife's business venture, a loan to partnership of which the wife
of a director is a member, falls within the prohibition.

h. Loan v. Discount
to discount a paper is only a mode of loaning money, with, however, these distinctions: (1) In a discount, interest is deducted in
advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is
generally on single-name paper.

GENERAL PROVISIONS ON LOAN, ARTICLES 1156, 1305, 1306, 1933 AND 1934, CIVIL CODE

Article 1156. An obligation is a juridical necessity to give, to do or not to do.

Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to
the other, to give something or to render some service.

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

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

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.

Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the
contract. 

a. Characteristics of Loan
(1) a real contract because the delivery of the thing loaned is necessary for the perfection of the contract (Art. 1934; see also Art.
1316.); and
 (2) a unilateral contract because once the subject matter has been delivered, it creates obligations on the part of only one of the
parties, i.e., the borrower.

b. Cause or consideration
In a contract of loan, the cause is:
(1) as to the borrower, the acquisition of the thing; and
(2) as to the lender, the right to demand its return or its equivalent.
c. Kinds of Loan

i Commodatum - where 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; and

ii 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.

 Yam v. Malik, G.R. No. L-50550-52 October 31, 1979, 94 SCRA 30

The Court agrees with the petitioners that the facts alleged in the three criminal complaints do not constitute estafa through
misappropriation. In order that a person can be convicted of estafa, it must be proven that he has the obligation to deliver or return the
same money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e., the bills or
coins, which they received from private respondents. This is so because as clearly stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of money that petitioners received were loans. The nature of simple loan is
defined in Articles 1933 and 1953 of the Civil Code.

Art. 1933. — By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other
consumable thing upon the condition that the same amount of the same kind and quality shall be paid, in which case the
contract issimply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a
stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan ownership
passes to the borrower.

Art. 1953. — A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound
to pay to the creditor an equal amount of the same kind and quality.

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to commodatum, the
borrower acquires ownership of the money, goods or personal property borrowed. Being the owner, the borrower can dispose of the
thing borrowed (Article 248, Civil Code) and his act will not be considered misappropriation thereof. In U.S. vs. Ibañez, 19 Phil. 559, 560
(1911), this Court held that it is not estafa for a person to refuse to nay his debt or to deny its existence.

We are of the opinion and so decide that when the relation is purely that of debtor and creditor, the debtor cannot be held
liable for the crime of estafa, under said article, by merely refusing to pay or by denying the indebtedness.

It appears that respondent judge failed to appreciate the distinction between the two types of loan, mutuum and commodatum,
when he performed the questioned acts, He mistook the transaction between petitioners and respondents Rosalinda Amin, Tan Chu
Kao and Augusto Sajor to be commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the duty
to return the same thing to the lender.

Thus, the criminal complaints against petitioners are hereby declared null and void; respondent judge is hereby ordered to
dismiss said criminal cases and to recall the warrants of arrest he had issued in connection therewith.

d. Consumable (Art. 418) - A thing is consumable when it is consumed when used in a manner appropriate to its purpose or nature,
like rice, gasoline, money, fruit, firewood, etc. (see Art. 418.)

Art. 418. Movable property is either consumable or non-consumable. To the first class belong those movables
which cannot be used in a manner appropriate to their nature without their being consumed; to the second class
belong all the others.

e. Kinds of Commodatum

i Ordinary commodatum (Art. 1933)

Art. 1933. – “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”

ii Precarium – (Art. 1947)

Article 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the
following cases:
 (1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been
stipulated; or

(2) If the use of the thing is merely tolerated by the owner. 

 Pajuyo v. CA, G.R. No. 146364 June 3, 2004, 430 SCRA 492

The Court do not subscribe to the CA’s theory that the Kasunduan is one of commodatum.

In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for
a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use
of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should
have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he
can demand the return of the thing at will, in which case the contractual relation is called a precarium. Under the Civil Code, precarium
is a kind of commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan
did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes
the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum.
Case law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant relationship where the
withdrawal of permission would result in the termination of the lease. The tenants withholding of the property would then be unlawful.
This is settled jurisprudence.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as bailee would still have the duty
to turn over possession of the property to Pajuyo, the bailor. The obligation to deliver or to return the thing received attaches to
contracts for safekeeping, or contracts of commission, administration and commodatum. These contracts certainly involve the obligation
to deliver or return the thing received.

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed
out, cannot enter into a contract involving the land they illegally occupy. Guevarra insists that the contract is void.

Guevarra should know that there must be honor even between squatters. Guevarra freely entered into the Kasunduan. Guevarra
cannot now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to physical possession of the
contested property. The Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better right of physical possession.
Guevarra is clearly a possessor in bad faith. The absence of a contract would not yield a different result, as there would still be an
implied promise to vacate.

COMMODATUM, ARTICLES 1935 TO 1952, CIVIL CODE

Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him
who acquires the use, the contract ceases to be a commodatum. (1941a)

Article 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the
object, as when it is merely for exhibition. (n)

Article 1937. Movable or immovable property may be the object of commodatum. (n)

Article 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)

Article 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's
household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing
forbids such use. (n)

Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. 

Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a)

Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:
 (1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been
constituted;

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his household;

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745)

Article 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault.
(1746)

Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by
reason of expenses. However, the bailee has a right of retention for damages mentioned in article 1951. (1747a)

Article 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a)

Article 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need
of the thing, he may demand its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor.
(1749a)

Article 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or

(2) If the use of the thing is merely tolerated by the owner. (1750a)

Article 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in article
765. (n)

Article 1949. The bailor shall refund the extraordinary expenses during the contract 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.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they
shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)

Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in articles 1941 and
1949, he is not entitled to reimbursement. (n)

Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter
for the damages which he may suffer by reason thereof. (1752)

Article 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n)

a. Compensation
Interest may be paid either as compensation for the use of the money (monetary interests) or as damages (compensatory interest).
Art. 1956 refers to interest for use of the money.

b. Purpose in commodatum
The purpose of the contract of commodatum must be the temporary use of the thing loaned. If the bailee is not entitled to the use of the
thing, the contract may be a deposit (see Art. 1962.) not a commodatum.

It is an essential feature of the contract of commodatum that the use of the property of another shall be “for a certain time.” (Art. 1933,
par. 2.)

c. Subject matter
In commodatum, the subject matter is generally non-consumable things, whether real or personal. This but conforms to reality, for the
bailee cannot use and return something which is consumed when used. However, if the purpose of the contract is not the consumption
of the object as when it is merely for exhibition, consumable goods may be the subject of the commodatum as where, L lends to B an
oversized bottle of wine to be used as a sample or for advertisement. If the intention of the parties is to have the consumable goods
loaned returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum.

An example of commodatum involving real property is when a person allowed another to build a warehouse on the former’s land so that
the latter may use the property for a certain period without any payment of rentals. If no time for use of the land is specifi ed, the
contract would be that specie of commodatum called “precarium” expressly recognized in Article 1947. If rental is paid, the contract
would be one of lease. (see Mina vs. Pascual, 25 Phil. 540 [1913].)

d. Death of a party

ART. 1939. “(1) The death of either the bailor or the bailee extinguishes the contract;”

Unlike mutuum, commodatum is a purely personal contract, the lender having in view the character, credit, and conduct of the
borrower. Hence, the death of either party terminates the contract unless by stipulation, the commodatum is transmitted to the heirs of
either or both parties. Such stipulation is valid (see Art. 1306.) for paragraph 1 presupposes the absence of any contrary stipulation. If
there are two or more borrowers, the death of one does not extinguish the contract in the absence of stipulation to the contrary.

Article 1939 constitutes an exception to the general rule that all rights acquired in virtue of an obligation are transmissible. (see Art.
1178.)
e. Use of thing by bailee’s household allowed; exception

ART. 1939. “(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the
members of the bailee’s household may make use of the thing loaned, unless there is a stipulation to the contrary,
or unless the nature of the thing forbids such use.”

Generally, the bailee can neither lend nor lease the object of the contract to a third person, in the absence of some understanding or
agreement to that effect.

However, the use of the thing loaned (e.g., television set) may extend to the members of the bailee’s household (who are not, therefore,
considered third persons) except in two cases: (1) there is a stipulation to the contrary; and (2) the nature of the thing (e.g., dress)
forbids such use.

f. Extent of right of use

ART. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

The bailee is entitled only to the use of the thing loaned and not to its fruits. The right to use a thing is distinct from the right to enjoy the
fruits since, as a rule, the fruits pertain to the owner of the thing producing the fruits. (see Art. 441.) Thus, where an animal is the thing
loaned, its young subsequently born is not included in the contract. However, the parties may stipulate that the bailee may also make
use of the fruits of the thing. Such stipulation cannot be presumed.

The enjoyment of the fruits must only be incidental to the use of the thing itself for if it is the main cause, the contract may be one of
usufruct. (see Art. 562.)

g. When bailee is liable

ART. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing
loaned.

It is logical that the borrower should defray the expenses for the use and preservation of the thing loaned for after all, he acquires the
use of the same, and he is supposed to return the identical thing. (Art. 1933.)

As a rule, the borrower must take good care of the thing with the diligence of a good father of a family. (Art. 1163.) Thus, if B borrows
the car of L, the former must pay for the gasoline, motor oil, washing, greasing and spraying, etc. B cannot demand reimbursement for
the expenses.

As to extraordinary expenses, Article 1949 governs.

h. Effect of adverse possession

(1) The mere failure of the bailee to return the subject matter of commodatum to the bailor does not constitute adverse possession on
the part of the bailee who holds the same in trust.

(2) In a case, the bailee declared the lots in question in its name for taxation purposes. It was held that the action of the bailee by such
adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.6 (Catholic Vicar
Apostolic of the Mt. Province vs. Court of Appeals, 165 SCRA 515 [1988].)

i. Right recognized
The exception in Article 1951 is of evident justice. Note, however, that the bailee’s right extends no further than to the retention of the
thing loaned until he is reimbursed for the damages suffered by him. He cannot lawfully sell the thing to satisfy said damages.

In case of pledge, the creditor has the right to retain the thing pledged until he shall have been fully paid. (Art. 2098.)

j. Obligation to respect duration of loan

ART. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated,
or after the accomplishment of the use for which the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he may demand its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the
possession of the bailor.

The primary obligation of the bailor is to 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 constituted. The reason is that the bailor is bound by the terms of the
contract of commodatum which is “for a certain time.” (see Arts. 1933, 1935.)

However, if he should have an urgent need of the thing (e.g., he needs the car loaned by him to bring a sick member of his household
to a hospital) or if the borrower commits an act of ingratitude (Art. 1948.), he may demand its return or temporary use. This right of the
bailor is based on the fact that commodatum is essentially gratuitous.

k. Precarium

ART. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the
following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been
stipulated; or
(2) If the use of the thing is merely tolerated by the owner.

Precarium is a kind of commodatum where the bailor may demand the thing at will. It has been defined as a “contract by which the
owner of a thing, at the request of another person, gives the latter the thing for use as long as the owner shall please.” (Cyc. Law
Dictionary; see Pajuyo vs. Court of Appeals, 430 SCRA 492 [2004].)

l. Obligation to refund extraordinary expenses

ART. 1949. The bailor shall refund the extraordinary expenses during the contract 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.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he
acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the
contrary.

(1) Extraordinary expenses for the preservation of the thing loaned. — Such expenses shall be borne by the bailor (e.g., expenses
for repairing borrowed house damaged by a typhoon). The reason is that it is the bailor who profits by said expenses. If they are
incurred by the bailee, the bailor must refund them provided the bailee brings the same to the knowledge of the bailor before incurring
them. As a rule, notice is required because it is possible that the bailor may not want to incur the extraordinary expenses at all. He
should be given discretion as to what must be done with his property.

An exception, of course, lies where they are so urgent that the reply to the notification cannot be awaited without danger.

The right of the bailee to reimbursement is subject to the provision of the second paragraph.

(2) Extraordinary expenses arising from actual use of the thing loaned. — Such expenses (caused by fortuitous event) arising on
the occasion of the actual use of the thing loaned (e.g., expenses for repairing a borrowed jeep damaged in a collision) shall be borne
by the bailor and bailee alike on a 50-50 basis.

“The foregoing is an equitable solution. The bailee pays one-half because of the benefit derived from the use of the thing loaned to him
and the bailor pays the other one-half because he is the owner and the thing will be returned to him.’’ (Report of the Code Commission,
p. 151.)

The parties, however, may, by stipulation, provide for a different apportionment of such expenses, or that they shall be borne by the
bailee or bailor only

m. No obligation to assume all other expenses

ART. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to
in Articles 1941 and 1949, he is not entitled to reimbursement.
All expenses other than those referred to in Articles 1941 and 1949 “for the purpose of making use of the thing” (e.g., borrower buys
extra tire to be used as a reserve on a trip) that is, not necessary for the use and preservation of the thing, must be shouldered by the
borrower. This is only proper since he makes use of the thing. Expenses for ostentation are to be borne by the bailee because they are
not necessary for the preservation of thing.

Ordinary expenses incurred for the preservation of the thing are also for the account of the bailee. This can be inferred from the first
paragraph of Article 1949.

n. Liability to pay damages for known hidden flaws

ART. 1951. The bailor, who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suffer by reason thereof.

The bailor is made liable for his bad faith. The bailee is given the right of retention until he is paid damages. (Art. 1944.) The same
responsibility of a bailor in commodatum is imposed on a pledgor. (Art. 2101.)

EXAMPLE:
If L lends to B his car without informing the latter that its brake is not working properly, L will be liable in case B is injured by reason
thereof. The liability imposed by law is a just sanction for the bad faith committed by L.

Of course, if the defect is patent or could have been known to B after inspection or L was not aware of the defect, L is not liable. (see
Art. 1944.)

In the first case, it is presumed that B will adopt the necessary precautions or is willing to take the risk incident to the use of the car. In
the second case, L is not liable for the reason that commodatum is gratuitous.

o. Requisites:

(1) There is flaw or defect in the thing loaned;

(2) The flaw or defect is hidden;
(3) The bailor is aware thereof;
(4) He does not advise the bailee of the same; and
(5) The bailee suffers damages by reason of said flaw or defect.

p. No right of abandonment for expenses and damages

ART. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing
to the bailee.

The reason for the above rule is that the expenses and/or damages may exceed the value of the thing loaned, and it would, therefore,
be unfair to allow the bailor to just abandon the thing instead of paying for said expenses and/or damages.

SIMPLE LOAN, ARTICLES 1953 TO 1955, 1980

ART. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the same kind and quality.

ART. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the
obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a
barter.

ART. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249
and 1250 of this Code. If what was loaned is a fungible thing other than money, the debtor owes another thing of
the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same
kind, its value at the time of the perfection of the loan shall be paid.

ART. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan.

a. Obligation to pay
The law uses the word “pay” and not the word “return” because the consumption of the thing loaned is the distinguishing character of
the contract of mutuum from that of commodatum. This obligation “to pay” may include the accessory duty to pay interest. (see Article
1956.)

The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan. A loan is thus a bilateral
contract.

b. Fungible things
Fungible things, are those which are usually dealt with by number, weight, or measure such as rice, oil, sugar, etc. so that any given
unit or portion is treated as the equivalent of any other unit or portion.

The loss of the mortgaged crops did not extinguish his obligation to pay, because it could still be paid from other
sources aside from the crops. The chattel mortgage simply stood as a security for the fulfillment of his obligation.

c. Distinction between consumability and fungibility

Consumable  Nature of the thing

Fungible  Intention of the parties

Fungible Consumable
May or may not be consumed (e.g. a consumable thing by its
Cannot be used without being consumed
nature but for purposes of exhibition only)

d. Commodatum vs Mutuum v. Barter

Commodatum Mutuum Barter

non-fungible (non-consumable)
things
money or any other non-fungible (non-
Object
fungible things consumable) things
except: if purpose is not
consumption (e.g. exhibition)

equivalent thing as to
Return of the thing identical thing borrowed equivalent value
kind and quality

onerous contract/
Cause always gratuitous may be gratuitous
mutual sale

e. Form of payment

i Loan of money
If the thing loaned is money, payment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is
payable in the currency which is legal tender in the Philippines (Art. 1249.) and in case of extraordinary inflation or deflation, the basis
of payment shall be the value of the currency at the time of the creation of the obligation. (Art. 1250)

EXAMPLE:
D borrowed from C P5,000.00 payable after fi ve years. On the maturity of the obligation, the value of P5,000.00 dropped to P2,500
because of inflation.

In this case, the basis of payment shall be the equivalent value of the currency today five years ago. Hence, D is liable to pay C
P10,000.00 unless there is an agreement to the contrary.

ii Loan of a fungible thing

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.

EXAMPLE:
D borrowed from C two sacks of rice of a certain kind and quality. At the time the loan was perfected, the price of each sack was
P400.00.

D should return to C two sacks of rice of the same kind and quality although at the time of payment, the price had increased to P500.00.
If on the due date of the obligation, the same kind of

 Angel Jose Warehousing Co., Inc. v. Chelda Enterprises, G.R. No. L-25704 April 24, 1968, 23
SCRA 119

Facts: Angel Warehousing Co., Inc. filed a suit against Chelda Enterprises and David Syjueco for the recovery of unpaid loans with
legal interest. The defendants averred that they obtained four loans from the plaintiff in the total amount of P26,500 out of which P5,620
had already been paid, with a balance of P20,880 and that the petitioner charged and deducted from the loan the usurious interest of
2% and 2.5% per month and that therefore, the plaintiff has no cause of action against the defendants and should not be permitted to
recover such under the law.
The trial court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal of the loan or
its balance of P19,247.35.

Issue: Whether or not the illegal terms as to payment of interest likewise renders a nullity the legal terms as to payments of the
principal debt.
Ruling: No. A loan with usurious interest is void only as to the interest.

A contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; the
accessory stipulation is to pay interest thereon.

Article 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the
contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only one that is illegal.

f. Relation between bank and depositor

i Contract of loan
Deposits of money in banks, whether fixed, savings, and current, are really loans to a bank because the bank can use the same for its
ordinary transactions and for the banking business in which it is engaged.

Bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. Hence, such deposits are
governed by the provisions on mutuum or simple loan, and the rules on the imposition of legal interest. While the bank has the
obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited.

ii Creditor-debtor relationship
Accordingly, the relation between a depositor and a bank is that of a creditor and a debtor. The depositor (creditor) lends the bank
(debtor) money and the bank agrees to pay the depositor on demand. The deposit agreement between the bank and the depositor
determines the rights and obligations of the parties.

 Gullas v. PNB, G.R. No. L-43191. November 13, 1935

Facts:
Petitioner Gullas maintains a current account with herein respondent PNB. He together with one Pedro Lopez signed as endorsers of a
Warrant issued by the US Veterans Bureau payable to the order of one Francisco Bacos. PNB cashed the check but was subsequently
dishonored by the Insular Treasurer. PNB then sent notices to petitioner which could not be delivered to him at the time because he
was in Manila. PNB in the letter informed the petitioner the outstanding balance on his account was applied to the part payment of the
dishonored check. Upon petitioner’s return, he received the notice of dishonor and immediately paid the unpaid balance of the warrant.
As a consequence of these, petitioner was inconvenienced when his insurance was not paid due to lack of funds and was publicized
widely at his area to his mortification.
Issue:
Whether or not PNB has the right to apply petitioner’s deposit to his debt to the bank.
Ruling: NO.
As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a
depositor. The Civil Code contains provisions regarding compensation (set off) and deposit. The portions of Philippine law provide that
compensation shall take place when two persons are reciprocally creditor and debtor of each other. In this connection, it has been held
that the relation existing between a depositor and a bank is that of creditor and debtor. [General Rule]
Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set off, we
next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and
without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury
warrant.
Gullas was merely an indorser and had issued in good faith. As to an indorser, the situation is different and notice should actually have
been given him in order that he might protect his interests. We accordingly are of the opinion that the action of the bank was prejudicial
to Gullas.

 Republic v. Bagtas, G.R. No. L-17474. October 25, 1962, 6 SCRA 262\

Facts:
Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls for a period of one year subject to
a government charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked
for a renewal for another period of one year. However, was approved a renewal thereof of only one bull for another year from 8 May 1949 to 7
May 1950 and requested the return of the other two. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. In the Court
of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls
loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with interests, and
costs; and that other just and equitable relief be granted.
Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was
notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of
Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the
plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence,
this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the surrounding barrios of
Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due to force majeure she is relieved from the
duty of returning the bull or paying its value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V.
Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another year as
regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that
the contract was commodatum and that, for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force
majeure.

Issue:
Whether the borrowing of the Bull from the appellee is a commodatum contract and that, for that reason, as the appellee retained ownership or
title to the bull it should suffer its loss due to force majeure?

Held:
No, A contract of commodatum is essentially gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease of
the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because
article 1942 of the Civil Code provides that a bailee in a contract of commodatum is liable for loss of the things, even if it should be through a
fortuitous event:

(1) If he keeps it longer than the period stipulated.

(2) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of
a fortuitous event;