Civil Law Review

Special Contracts
Contract of Sale
SPECIAL CONTRACTS

SALES

1. Definition – NCC 1458, 1488

Article 1458. By the contract of sale one of the contracting parties

obligates himself to transfer the ownership and to deliver a
determinate thing, and the other to pay therefor a price certain
in money or its equivalent.

Notes:
a. The essence of the contract involves the exchange of (1) a thing
or right in consideration of (2) payment of a price certain (a) in
money or (b) its equivalent.
b. Article 1488. The expropriation of property for public use is
governed by special laws.

2. Characteristics – NCC 1458, 1475

a. It is consensual in nature from the point of view of perfection.

- Article 1475. The contract of sale is perfected at the moment
there is a meeting of minds upon the thing which is the object of
the contract and upon the price. xxx
- Upon perfection, it creates an obligation to make the delivery of
the thing bought.
b. It creates only a title or obligation to transfer ownership.
- It is not a mode of transferring ownership nor does it affect the
same.
- It is delivery (or tradition), as a consequence of the perfection of
the sale, which transfers ownership.
c. It creates reciprocal obligations.
- Article 1475. xxx From that moment, the parties may reciprocally
demand performance, subject to the provisions of the law
governing the form of contracts.
d. It is ordinarily commutative and onerous.
- Each one of the parties assume a correlative obligation.
e. The contract may become aleatory when the sale is subordinated to
an uncertain event (e.g. emptio spei or sale of hope or expectation).
f. It is a nominate contract.
g. It is a principal contract.
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3. Kinds of Sale – NCC 1458, 1463

Article 1463. The sole owner of a thing may sell an undivided interest
therein.

Absolute Sale Conditional Sale

An absolute sale is devoid of A condition is imposed on the
any condition imposed on the passing of the title of the thing to
passing title of the thing to be be conveyed or on the obligation
conveyed or on the obligation of of a party thereto.
a party thereto.
Title to the property passes to
the vendee upon delivery of the
thing sold.

Contract to Sell Conditional Contract of Sale

Both are subject to a positive suspensive condition of the
buyer’s full payment of the purchase price.
The provisions on conditional The laws on sales apply.
obligations apply.
The transfer of title is not The buyer automatically
automatic. The prospective acquires title to the
seller must convey title to property upon full
the property through a payment of the purchase
deed of absolute sale. price.

The transfer of title is “by

operation of law without any
further act having to be
performed by the seller.”
It is a bilateral contract.
The prospective seller:
a. binds himself to sell the
subject property
exclusively to the
prospective buyer upon
fulfillment of the
condition agreed upon
(i.e. full payment of the
purchase price) while
b. expressly reserving the
ownership of the subject
property despite
delivery thereof.
Ownership is retained by the by the vendor and is not to
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pass to the vendee until full payment of the purchase price.

4. Distinguished from other transactions – NCC 1245, 1466, 1467, 1468

Donation As opposed to sale, donations may be given
out of pure beneficence.
Contract for As opposed to sale, one of the parties
Piece of Work accepts the undertaking on the basis of
some plan, taking into account the work
that will be employed personally or
through another.

To differentiate, one must look into the

intention of the parties.

Notes:
The co ntract is of that a sale if the intention
is not clear and the one who committed to
deliver the thing is habitually engaged in
the business of manufacturing or making
such thing.

However, if not and the thing would never

have existed except for the order of the
person desiring it, the contract is one for a
piece of work.
Dation in In dation in payment, there is a pre-existing
Payment debt. The property of the debtor is alienated
to the creditor in order to satisfy such debt.
Barter Barter is an exchange of certain things for
the other. (?)

Tests
Intention then
Value
Agency to Sell

5. Elements – NCC 1459-1465, 1469-1474, 1489, 1327, 1390, 1403,

1489, 1490, 1491, 1492, 1348, 1347, 1624-1627]

a. Essential Elements
i. [Consent] Consent of the contracting parties as to the object
and price
a. A sale by auction is perfected when the auctioneer
announces its perfection by the fall of the hammer, or in other
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customary manner. (Until then, a bid may be retracted; the

auctioneer may withdraw the goods, unless the auction has
been announced to be without reserve.)
b. In a contract of sale, earnest money shall be considered as
part of the price (if the sale is consummated upon full
payment of the purchase price) and as proof of the perfection
of the contract. (NCC 1482) – This does not apply to a contract
to sell.
c.
Loss of the Thing Prior to Perfection
Things other than The contract is without
goods any effect.
Specific goods (which The buyer may opt to
have perished in part treat the sale either as:
or have wholly or in a 1. avoided; or
material part so 2. valid as to all of
deteriorated) the existing
goods/those
which have not
deteriorated and
binding the buyer
to pay the
agreed price.

d. Capacities of the Parties

ii. [Object] Determinate subject matter (i.e. thing or right) or

anything that has a value that can be assessed in money
Requisites:
Note: Ownership of the thing to be sold by the seller at the
time of perfection is not necessary. If the seller does not
acquire ownership, then there would be a breach of sale. If
despite not acquiring ownership, the seller delivers the thing
to the buyer, the latter does not acquire ownership because
no one can give what one does not have (nemo dat quod non
habet), except when the buyer purchased the same for value
and in good faith.
a. Licit
b. Existing (not necessarily at the time of perfection but at
least at some future time) – if such condition is not fulfilled
or if the thing does not come into existence, the contract
becomes ineffective.
c. Determinate or determinable
1. Determinate – particularly designated or physically
segregated from others of the same class
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2. Determinable – capable of being made determinate

without necessity of a new or further agreement
between the parties [Cause] Reciprocal obligations
3. Determinate or determinable
Essence – transmission of ownership - sale
d.vwithin the commerce of man
pasig rizal 2022 case – lands of the public domain yes
once declared A&D
properties of [ublic dominion v public domabin (altter more
comprehensveive_
roppnggi laurel v gsarcia

Segura
Inherited land; died intestate; EJ partition -> some excluded
Excluded questioning transactions – null and void because exclusion
SC: yes. Thus, The buyer can acquire no more than he can legally transfer.
Thus, the seller could have only sold his own share
BARRED BY PRESCRIPTION
- Validity - y
- Commonality – seller was able to make delibery
- Nemo dat;

Nool v. CA
Facts
Owner mortgaged, foreclosed; unable to redeem
SC: not entitle to right of repurchase because COS is void (as they were not
the owners at the time of delivery); analogous to performance of impossible
service
- R: kung pinagisipan. If not req, allow cos [erfgected; what stage
validity – perf
- Only affect existence of obli – not validity of contract
Twin obli only obli upon operf– delivery for purpose of transfer ownnersehip
Segura, nool – no

Cahayag v commercial credit

Contract to sell
CTS becomes COS? When doas
CTS and COS – not make buyer in BF

Presumption of gf sa unang nag-regi

Nemo dat – during delivery for the purpose of determining validity of

transmission of OWNERSHIP not contract
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Those two only obli; thus only breach

Tama yung cahayag
Nemo dat only exception
Why x? Following torrens mirror doc
Simply ineffective not void – pther can ratify

Tradition/delivery
- Validity
- Perfection
-

a. As to the seller: payment of the price in money its

equivalent
Note: Both the amount and manner of payment of the
price must be agreed upon. – 2 components
Requisites as to the price
1. Real or true (not absolutely simulated)
a. If true, failure to pay the price merely results in a
right to demand the fulfillment or cancellation of the
obligation under an existing valid contract.
b. Contract of sale – was the price agreed upon; is it
true? If it is a falsity because there is no intention to
be bound by the contract; different if consideration is
true; failure to pay the price cannot render the
contract invalid; one of the remedies: collection of
price; demand rescission
2. In money or its equivalent
3. Certain (may be in reference to another thing certain or
such determination is left to the judgment of specified
person(s) – it cannot be left to the discretion of one of
the contracting parties, unless accepted by the other)
a. If unable or unwilling to fix the price, the contract is
inefficacious, unless the parties subsequently agree
upon the price. (NCC 1469)
b. If the third person(s) acted in bad faith or by mistake,
the courts may fix the price. (Id.)
c. Where such third person(s) were prevented from
fixing the price by fault of the seller or buyer, the
party not at fault may have such remedies against
the party in fault as are allowed the seller or the
buyer, as the case may be. (Id.)
d. Gross inadequacy of the price does not affect a
contract of sale. (But it may indicate a defect in the
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consent, or the parties really intended a donation or

some other act or contract.) (NCC 1470)
b. As to the buyer: delivery of the thing sold

Double donation possible? ? n. ncc 744 -contrary to 712 donation no ned fir
del’; itself a mode; tthus legally impossible
Title – juridicalpreparatory act (providds means of transmission) not mode
Is it valid?
Who owner

Wala pa consent to TRANSFER OWNERSHIP in CTS

b. Natural Elements
c. Accidental Elements

6. Perfection of the Contract

Contract of Option
Formalities of Contract of Sale (NCC 1483)

7. Rights and Obligations of the Vendor

8. Rights and Obligations of the Vendee

9. Remedies for Breach of Contract

10. Extinguishment of Sale

EQUITABLE MORTGAGE
X

ASSIGNMENT OF CREDIT

LEASE
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Contract of Lease

Contracts of Loan
1. Commodatum
2. Mutuum

Commodatum
- It is defined as a contract where 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. (NCC 1933)
- In other words, the contract pertains to temporary use. Upon the end
of such contract, the very same thing must be returned.
- The principal purpose of commodatum is to transfer the right of
enjoyment or right to use.

Characteristics
1. Real contract
2. Personal contract (NCC 1939)
a. Right to use – personal to the bailee and maybe family, unless not
allowed, others – relate to 1942, not extinguished, converted into
damages

Parties
1. Bailee – receives, uses, and eventually, returns, the thing
a. As opposed to usufruct, which gives right to enjoy the property as
well as its fruits, commodatum generally only gives right to enjoy
the property itself.
b. However, the bailee may make use of the fruits of the thing loaned
if there is a stipulation providing for the same. (NCC 1940)
2. Bailor – loans and delivers the thing to the bailee
a. The bailor need not be the owner for the commodatum to be valid.
(1938 NCC)
b. However, the bailor must at least have possessory interest over the
subject matter (or right of possession, e.g. usufruct, lease, authority
from the owners, etc.)
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Subject Matter (NCC 1933 in relation to 1937)

1. Movable
a. Generally, non-consumable. (NCC 1933)
b. Exceptionally, consumable goods may be the subject of
commodatum. (NCC1936) However, they must be non-fungible as
the very same thing must be returned and such was merely used for
exhibition. (Id.)
i. This is called commodatum ad postentasionem(?)
ii. In Producers Bank v. CA, G.R. No. 115324 (2003), the Court
ruled that the nature of the contract of loan between the two
parties is commodatum because the money subject of such
contract was merely intended to be “show money”.
a. Atty. Rabuya dissents. Since the money was already
deposited with the bank, the very same bank notes cannot
be returned to the bailor. Likewise, if the obligation of the
borrower is not to return the very same thing borrowed but
merely of the return of the same kind, quality, and
quantity, then it is mutuum.
2. Immovable

Comparison
Commodatum Contract of Lease
Consideration Commodatum is If there is consideration
essentially gratuitous that consists of a price
(NCC 1935). certain in money called
rent, it is a Contract of
Lease.
Relativity It is a personal It is not a purely
contract. personal contract.

It is generally
transmissible (unless
otherwise stipulated in
the contract.)
Perfection It is a real contract. It is a consensual
contract.
Delivery cannot be
compelled since one
cannot compel
perfection of a contract
(this will be against the
principle of freedom of
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contract).

Obligations of the Bailee

1. 1941
2. 1163 NCC
3. X
Pajuyo
- Nature of the contract – not essentially gratuitous, consideration for
the use of the house is the obligation to maintain despite not
charging rentals
- Sir dissents

1942 – exception to rules on loss recall; even with fortuitous event

1944 – gr no right of retention 1951 – ex
1. At the time of perfection, the thing was already suffering
2. The bailor was or should have been aware of such flaw or defect
3. The bailor did not notify the bailee
4. The bailee should not have been aware
5. The bailee suffered injuries

Obligations of the Bailor – equity

1951
Return – 1946, 1947, 1948
Precarium – special kind of commodatum
1947(2) – implied; not entered into expressly
In relation to ejectment suits:
1. Contract ended
2. No contract but merely tolerated (present from the start of the
possession) – technically a contract of precarium

Mutuum
Purpose: consumption of the thing; to use the thing borrowed, which will be
consumed
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Real contract
- Only perfected once the check has been encashed
If object completely delivered – unilateral
X – partial delivery – create reciprocal obli – reciprocal

The subject matter is consumable.

What is to be repaid is the same quantity, if there is no agreement on the
part of the parties with respect to conventional interest.
This may be gratuitous. Same quantity
Onerous – if there is conventional interest
There is a transfer of a ownership, since the purpose is to consume and the
act of consuming is strictly an act of ownership

There is no estafa (by conversion or misappropriation) because the borrower

is not obligated to return the very same thing.
Cash advances by the ER to EE – mutuum
Money market placement –
1980 irregular deposits in banks -

Donation
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.
- Consensual contract
- The only remedy is recovery of damages

Bank and borrower loan 3m

Release of partial 1m
Borrower I will not yet pay amort
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Bank declared the loan in default and foreclosed the real estate mortgage.
The foreclosure is not valid. When the contract of mutuum was perfected
because of the partial release, it will release reciprocal obligations. The
obligation of the bank was to release the entire proceeds of the approved
loan. The bank breached the contract.
The delivery of the balance can be compelled.

Mutuum v barter
1. Barter is a contract of exchange, exchange is simultaneous; different
object
2. Mutuum, not simultaneous exchange, at some future date; same kind,
quality

1955 – legal tender rules apply

1956 – refers only to conventional interest
2 kinds of interest
1. Conventional – agreed upon by the parties (e.g. monetary); only
become demandable if agreed upon
1956 reqs
a. Agreement for the payment must be entered into expressly
b. Agreement must be in writing
if two concurrent – civil obli
Not in writing – natural obli 1960
No agreement at all, gratuitous mutuum – moral?

There is express agreement to pay interest; fail to stipulate rate – civil

obli
In absence of stip as to rate, legal rate – eastern shipping lines, nacar
2. Compensatory/penalty – in the form of penalty; indemnity for damages
- Become payable despite no stipulation
- Payable from the moment delay 1170

2209 – sum of money; interest – compensatory

Rate
Conventional
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1. Monetary interest – cost of using money

2. GR – agreed upon by parties; usury law still suspended
3. Even with suspension court retains power to declare rate as
unconscionable or excessive (contrary to morals) even if willingly or
voluntarily agreed upon by thr parties
4. Effects
5. It will not affect the obligations to pay the principal and the interest
but not at the rate agreed upon
6. Interest first before principal – NCC?; if the interest is void, obli to pay
interest not yet demandable; principal not yet demandable, obligation
not yet demandable
7. So if there was foreclosure made, not valid, debtor not yet in default
8. The rate is void

Rate of interest – violative of the mutuality of contracts

Unilateral increase by the debtor
1. Since void interest, not affect obligation to pay interest; only legal
interest
If the interest rate agreed upon is not a fixed but a floating rate of interest
- Allowed floating rate by BSP
- To become valid, the basis must be an objective market standard
- Reference rate must be rate of treasury bills on a certain date
- Identifiable
- Manila reference rate
- Bank uses premium rate – box spread interest rate – subjective

Compensatory
Rate? Rate agreed upon by the parties -gr unless declared excessive or
unconscionable (lara’s gifts v. midtown?)
1960 – solution indebiti?
a. Solution indebiti – no agreement but then paid
b. Natural – verbal agreement then paid

Deposit
Purpose – safekeeping
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Characteristics
1. Real contract
2. Generally, gratuitous as to consideration
Exceptions:
a. If compensation is expressly agreed upon
b. If not agreed upon, and the depositary is engaged in the business of
storing goods

1. Judicial – pursuant to a court order

2. Extrajudicial – constituted without the participation of the court
a. Voluntary – constituted through the will of the parties (their consent
freely, voluntarily given)
b. Involuntary – the consent is controlled by a superior force

1963 – 2 contracts referred to in the provision

Judicial Extrajudicial
Object Either movable or Corporeal movable
immovable property
Purpose To ensure that the
judgment that will be
issued later on will be
satisfied
Voluintaryu

Any form
Unilateral IF gratuitous – obligation on the part of the depositary
1. What is the effect when the depositor is incapacitated while the
depositary is capacitated? Voidable
2. 1971 – depositary incapacitated – cannot be enforced; only remedy is
recovery of the thing deposited if still in the possession of the
depositary or of a third person acting in bad faith; damages up to the
extent which the depositary has enriched or benefited itself
Bilateral if for compensation
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Deposit
GR The depositor can demand for the return of the thing deposited at any
time

Obligations of the Depositary

1. To safekeep the thing deposited
a. If gratuitous – diligence of a good father of a family
b. If onerous – parties free to agree on the degree of diligence
- Cannot transfer obligation to deposit the thing to a third person unless
stipulated otherwise (expressly)
- If there is stipulation, obligation to choose properly the third person;
manifestly careless or unfit third person chosen > damages
- Thing cannot be used unless otherwise expressly agreed upon
 1978 - Contract ceases to be one of deposit, becomes loan if given
right to use

- In case of loss, depositary remains liable
 1978 -
2. 1980 – depositum irregulare = mutuum ; can happen even if not bank
or similar institutions but 1978 applicable
- Creditor-debtor relationship; compensation applies
- If in relation to foreign exchange demand draft? – only buyer-seller
relationship; thus high degree of diligence not applicable
3. 1985 – apply joint divisible obligation rules; distinct and separate
shares
4. 1985 – solidary – mutual rep
5. 1985 – indivisible 1212-1213 applicable? Contrary to the concept of
joint and indivisible obligation
6. 1984 – The depositary cannot compel the depositor to prove ownership
over the thing deposited
7. GR - Even if the period has been agreed for the return of the thing
deposited, on the part of the depositor, he can demand the thing at
any time (period solely for the benefit of the ?)
a. Upon demand, the depositary obliged to return the thing deposited
b. X 1988 – 1. Judicial attachment of the thing deposited; 2. Depositary
will receive a notice of claim by a third person; 3. Depositary
discovers that the thing is merely stolen and he knows who the
owner is (within 30 day period) > depositary must inform the owner
– 1984 (if not damages – conditions must be satisfied: depositary
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must know for a fact that it is stolen; knows who owner is); 4.
Depositary entitled to dep’s lien 1992 – gratuitous deposit
8. 1992 refers to gratuitous deposit
9. How come there’s
10. 1992-1993 – arise by reason of equity; unilateral pa rin ang
gratuitous dep
11. 1993 to apply: 1. At the time of deposit, thing already of
dangerous char; 2. Depositor aware or should have been aware; 3.
Depositor did not notify; 4. Depositary was not or could not have been
aware; 5. Depositary suffered damages
12. 1994 – depositary’s lien

Oblgiations of the depositary

1. GR – he cannot return the thing deposited if a period has been agreed
upon or in the absence of a demand
2. X
a. 1094 - If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the former
may return the same.
b. Article 1989. Unless the deposit is for a valuable consideration,
(only applies to gratuitous deposit) the depositary who may have
justifiable reasons for not keeping the thing deposited may, even
before the time designated, return it to the depositor; and if the
latter should refuse to receive it, the depositary may secure its
consignation from the court
3. To whom returned? Depositor, heirs, successors, any person
designated I nthe contract entitled to receive
4. 1991 – depositary’s** > only to return the price they received

Necessary deposit
- Consent of the parties not given of their free choice
- 4 types
- 1996
1. 1996. 1 deposit is made in compliance with a legal – provisions of
law establishing it
2. 1996.2 – voluntary deposit applicable
3. Deposit of effects made by travelers in hotels or inns
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i. The hotelkeeper/innkeeper is constituted as a depositary in a

necessary deposit.
ii. Should there be actual delivery of the personal effects to the
hotel? No. If there is actual delivery, then it would be a case of
voluntary deposit.
iii. Who may be considered a hotelkeeper/innkeeper? A person who
accepts compensation in providing lodging to a traveler. There is
no requisite in NCC 1998 that such person be habitually or
regularly or ordinarily engaged in such business.
i. Air BnB – an online platform where owners of houses or
condominium units who are not regularly engaged in the
business of lodging make available such houses or units to
travelers; the host and the traveler(s)
ii. CondoTel – condominium projects operated by hotel
managers in such a way that the latter are allowed to rent
empty condominium units as hotel
iv. Who may be considered a traveler?
i. A person who makes use of a certain place on a regular
basis, the concept of necessary deposit cannot apply.
v. Requisites for liability to attach (NCC 1998; see also 1999, 2000)
i. Notice was given to the employees of the hotel of the
personal effects they brought to the hotel.
ii. The traveler must take the precautions the hotelkeeper or
innkeeper advised relative to the care and vigilance of
those effects.
vi. When not liable
i. Force majeure or fortuitous event
ii. Loss of the thing the fault of the guest, family, or guest
a. For the hotelkeeper to not be liable, he must not be
guilty of contributory fault or negligence
iii. The very nature or character of the personal effects
introduced inside the hotel
vii. Innkeeper’s lien NCC 2004
viii. Durban Apartments
i. Atty. Rabuya dissents. The guests delivered the car to the
hotel for safekeeping. Thus, it is not a necessary deposit.
ii.
4. 1754
a. The provisions of articles 1733 to 1753 shall apply to the
passenger's baggage which is not in his personal custody or in
that of his employee. -
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i. Common carrier applicable thus Extraordinary diligence

required
ii. Check in
b. As to other baggage, the rules in articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers shall be applicable.
i. In custody of passenger or latter’s employee
ii. Hand carry
iii. Common carrier a depositary

Lease v. Deposit
Mamaril – bsp liable for loss of jeepney; bsp merely a lessor; contract of
lease; bsp did not assume the obligation to safekeep the jeepneys
Triple b v filipino merchants
Contract of deposit, no formality required; primary purpose – safekeeping of
the car

Accessory Contracts

Guaranty
1. The meaning of such term is dependent on the context under which it
is used, to wit:
a. In its broadest sense, it means security or collateral. It may be of
two classes:
i. Contracts of personal guaranty or security refer to
contracts where the liability falls upon a promise of a person. In
other words, the collateral is simply the promise or undertaking
of one person to answer the obligation of another.
a. Contract of guaranty proper
b. Contract of suretyship
ii. Contracts of real guaranty refer to contracts where a specific
property of the guarantor answers for the obligation.
a. Contract of real estate mortgage
b. Contract of Antichresis
c. Contract of security covering personal property
b. In its strictest/restrictive sense, it refers to the contract of
guaranty proper. (NCC 2047 par. 1)
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c. The satisfaction of the principal obligation renders the contract

ineffective.
2. It is a consensual accessory/collateral contract. (NCC 2052)
3. The guarantor is a person distinct and separate from the debtor.
4. In the determination of how the term is used, it is not the
nomenclature that will govern but the provisions of the contract.

Guaranty Proper

Definition
By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so. (NCC 2047 par. 1)

Distinctive features
1. It is an accessory obligation. Its existence depends upon the existence
of a valid principal obligation. (NCC 2052 par. 1)
a. The word “valid” is used in contradistinction to a void obligation. In
other words, what cannot be guaranteed is a void obligation. This
springs from the character of a void obligation, which cannot
produce any legal effect.
b. It does not mean “existing” or “current”. (See NCC 2053)
c. NCC 2053 is the basis for a contract of continuing contract of
guaranty (may also be suretyship).
d. May a contract of guaranty secure a past indebtedness? Yes, if the
parties agree upon the same. (However, in the absence of such
stipulation, the operation of the contract is prospective.)
e. A voidable or an unenforceable contract may be guaranteed. (NCC
2052, par. 2)
i. Note that if a voidable contract is subsequently annulled, the
contract of guaranty follows.
ii. As to unenforceable contracts, if yet to be ratified, it follows
that the contract of guaranty likewise cannot be enforced. The
moment it is ratified, the guaranty follows as well.
f. There may be a guaranty of natural obligations.
g. What happens when a natural obligation is made the subject of a
contract of guaranty?
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i. If the debtor is aware of the guaranty and consented to such

guaranty, the natural obligation is converted into a civil one
insofar as the debtor and the guarantor are concerned;
ii. If without the knowledge and consent of the debtor, the
natural obligation is converted into a civil one only as to the
guarantor;
h. Insofar as the guarantor is concerned, the natural obligation will be
converted into a civil obligation. (NCC 2052, last sentence)
i. Note NCC 1425 applied by analogy
ii. hen without the knowledge or against the will of the debtor, a
third person pays a debt which the obligor is not legally bound
to pay because the action thereon has prescribed, but the
debtor later voluntarily reimburses the third person, the
obligor cannot recover what he has paid. (NCC 1425)
iii. In this case, the debtor has no civil obligation to reimburse the
third party payor. Instead, it is a natural obligation.
iv. If natural obligation can be immediately paid by a third
person, it is with more reason that the law will allow a mere
guaranty of a natural obligation. This will give rise to the
obligation of the guarantor to pay the creditor. But the debtor
cannot be made to reimburse.
v. However, if the debtor who proposes the guarantor to the
natural obligation, the debtor has impliedly consented. Thus,
the character of the obligation becomes civil even as to the
debtor.
2. The obligation assumed (liability) by the guarantor is merely subsidiary.
(This distinguishes it from the contract of suretyship.)
3. It is a unilateral contract. The guarantor binds himself to the creditor;
there is none on the part of the creditor.
4. The definition emphasizes that the guarantor must be a distinct person
than that of the principal debtor.

Types of Guaranty
1. From the point of view of the source of guaranty/how it was
constituted, the guaranty may be:
a. Conventional – constituted through the wills of the parties
b. Legal – constituted pursuant to a provision of law
c. Judicial – constituted pursuant to a judicial order

2. From the point of view of consideration, the guaranty may be:

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a. Gratuitous
b. Onerous – only if compensation is expressly stipulated

3. Depending on what obligation is guaranteed by the guarantor, a

guaranty may either be:
a. Simple – that which is guaranteed is the principal obligation of the
debtor
b. Double – that which is guaranteed is the obligation of a first or
anterior guarantor; the parties are the subguarantor and the
creditor

4. Under NCC 2055 par. 2

a. Simple or definite – The guarantor only binds himself to pay only a
portion (“up to”) of the principal.
i. Can the court adjudge that the guarantor pay more than the
portion stipulated? It depends. If the guarantor was in default,
he can be made to pay compensatory interests. Because
liability for compensatory interests are x not by reason of the
contract, but by reason of failure to pay on time (attributable
to the guarantor’s fault)
ii. The guarantor may: (a) bind himself for less or (b) exactly the
liability of the principal detor
iii. Why not more? There would be no principal obligation to
speak of.
b. Indefinite – The guarantor simply binds himself/undertakes to
guarantee the debt of the debtor.
i. The guarantor does not limit his obligation up to a certain
extent. He simply guarantees the performance of the debtor’s
obligation.

Notes:

1. These will prevent a person who assumed a direct liability from

avoiding the same:
a. The existence of a guaranty cannot be presumed. It must be
express and cannot extend to more than what is stipulated therein.
(NCC 2055)
i. In a contract of guaranty, there is also the offer and its
acceptance. The offer is in the form of the undertaking of the
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guarantor to answer for an obligation of another. Such will

require acceptance from the creditor for it to become a
contract of guaranty or suretyship.
ii. What must be made expressly is not the contract itself. The
provision also does not refer to the acceptance by the
creditor.
 The contract of guaranty already presupposes the
meeting of the offer and the acceptance.
 Sometimes the law uses the term “guaranty” as the
offer and not the
 The offer can be accepted impliedly.
b. In order that a guaranty to be proven, the requirements in the
Statute of Frauds must be proven. (NCC 1403, par. 2, subpar. x)
c. It is the undertaking of the guarantor that is required to be
made express. This is also what is required to be in writing
and must bear the signature of the guarantor or surety.
d.

2. The following is a contract of suretyship when, in the contract:

a. The guarantor binds himself solidarily with the principal debtor;
b. The guarantor expressly renounces the benefit of excussion (i.e. the
guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor and resorted to all the
legal remedies against the debtor) – in other words, the guarantor
assures a direct and immediate liability;

3. Generally/basically, a contract of guaranty is gratuitous. (NCC 2048)

But this is not the essence of such contract.
a. However, the parties can stipulate compensation for the
undertaking assumed by the guarantor. (Id.)
b. The aforesaid stipulation is not an integral part of the contract of
guaranty.
c. Thus, whatever consideration supporting the principal contract is
necessarily the same consideration that will be supporting the
contract of guaranty proper (or suretyship.)

4. The contract of guaranty is a contract between a guarantor and the

creditor. The principal debtor is not a party of the contract.
a. Thus, it may be constituted even: (NCC 2050; see consequences
NCC 1236, 1237)
i. Without the knowledge or consent of the debtor; or
ii. Even against the latter’s will (or despite opposition).
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b. Consequences under NCC 1236 and 1237:

i. The guarantor cannot can only demand reimbursement to the
extent that the payment has been beneficial to the debtor.
(NCC 1236)
ii. The guarantor is not entitled to subrogation. (NCC 1237)
c. The consent that a debtor may grant in the contract of guaranty
shall not make him a party to the said contract. Such consent will
only play an important part if, later on, the guarantor pays the
obligation of the debtor.
d. Instances where the debtor necessarily learned or consented to the
contract of guaranty:
i. When the contract of guaranty is onerous (NCC 2048)
ii. When the debtor was obliged to furnish a guarantor as
stipulated in the contract between the debtor and the creditor
(NCC 2056)
a. The special requirements in NCC 2056 as to the
(dis)qualifications shall only apply in this specific situation.
iii. In the same situation as NCC 2056, the creditor has the option
to demand another guarantor (NCC 2057)

5. Generally, there are no (dis)qualifications as to who can be a

guarantor. Thus, the general provisions on contracts apply: the
guarantor must have the requisite capacity to enter into contracts.
a. A married woman may enter into a contract of guaranty without the
husband’s consent. (NCC 2049);
i. A married woman cannot bind the Absolute Community or the
Conjugal Partnership of Gains if the contract of guaranty was
entered into without the consent of the husband or did not
redound to the benefit of the family. (FC as to debts)
ii. Example: If the husband assumed the obligation of being a
guarantor of the loan of a corporation and the proceeds of the
loan went directly to the principal debtor; and the husband is
an officer of the corporation, receiving salaries, allowances,
and expecting a promotion by reason of his being a guarantor
– did the debt redound to the benefit of the family?
 Ayala Investment and Dev. Corp. v. CA – If one of the
spouses acted merely as a guarantor and the proceeds
of the loan went directly to the principal debtor and
none of the proceeds went to the guarantor, this will not
create the legal presumption that the debt redounded to
the benefit of the family. (“Direct benefit from the
proceeds of the loan.”)
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 Security Bank v. Mar Tierra Corp., G.R. No. 143382

(2006):
 Security Bank citing Ayala Investment and Dev. Corp. v.
CA: If it is the spouse him/herself is the principal obligor
in the contract, i.e. the direct recipient of the money
and services used in or for his/her own business or
profession, the transaction falls within the term
“obligations for the benefit of the conjugal
partnership[/community property].” In other words,
where the spouse contracts an obligation on behalf of
the family business, there is a legal presumption that
such obligation redounds to the benefit of the conjugal
partnership/community property.
b. Women of legal age, regardless of civil status, shall have the
capacity to act and enter into contracts which shall in every respect
be equal to that of men under similar circumstances. (Sec. 5, RA
7192 Women in Nation-Building)

6. The contract of guaranty affects three kinds of relationships:

a. Between the guarantor and the creditor – such relationship arises
directly from the contract of guaranty.
b. Between the guarantor and the debtor – such relationship arises
from the fact of payment made by the guarantor of the obligation of
the debtor.
c. Among the guarantors (of the same principal obligations) inter se

Suretyship

1. The provisions of guaranty proper, except excussion, are also

applicable to suretyship.
2. The provisions on solidary obligations are also applicable.

Suretyship Solidary Debtor

Person The surety is a person The person is also a
different from the debtor, meaning there
debtor. is a portion of the debt
that pertains to such
A surety answers for person.
the debt of another.
Thus, there is no Thus, when a solidary
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portion of the debt that debtor pays, s/he is not

pertains to him/her. entitled to entitle to
recovery by way of
When the surety pays, reimbursement the
s/he is entitled to the amount paid.
reimbursement of the
amount s/he paid.

Effects of Guaranty
1. Take into consideration the relationship
a. Guarantor and creditor
i. 2058 – benefit/defense of excussion – not applicable to surety
ii. Liability is only subsidiarily - guarantor
iii. Surety – subsidiary – direct and primary liability; liable in the
same way as the debtor
iv. A creditor has 3 available legal remedies to compel the
satisfaction of an obligation: 1177? 1. Exhaustion of the
properties of the debtor; 2. Accion subrogatoria; 3. After 1 and
2 – accion pauliana – rescission of contracts entered into with
a third person for the purpose of defrauding the creditor –
accion pauliana included in excussion
- in rel to 2058?
v. 2059 – excussion shall NOT take place (memorize)
 Express renunciation – can be made in the contract
itself if the guarantor renounces the benefit of excussion
if however at the time of the default of the debtor, the
guarantor chose not to invoke the defense of excussion;
case: after payment, the guarantor demanded
reimbursement from the debtor, sabi ni debtor why not
invoke excussion? SC – excussion only a benefit of the
defense of the guarantor, it is a personal right which
may or may not be exercised
 Solidary liability – this is not guaranty proper, but it is
surety
 Insolvency of the debtor – declared insolvency by the
court
 Absconding/cannot be sued within the Philippines
(unless left a manager or representative) –
 Execution – no need for declaration of insolvency
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vi. 2060 + 2062

 2062 - Action must be filed first against the person
primarily liable; guarantor to be notified of such action –
guarantor may choose to appear; exception: 2059
Guarantor may choose to appear and interpose
defenses granted by law – voluntary submission to the
jurisdiction of the court
Why is it important? If notified and did not do these,
defenses considered waived: defenses which could have
been invoked by the debtor
If not notified and not appear and above, guarantor
cannot invoke def
However – last sentence: The benefit of excussion
mentioned in article 2058 shall always be unimpaired,
even if judgment should be rendered against the
principal debtor and the guarantor in case of
appearance by the latter.
 2060 = when can the creditor validly demand from the
guarantor? If a judgment was already obtained by the
guarantor against the debtor (minimum requirement);
because we can only talk of exhaustion of the properties
of the debtor IF there was already a judgment and
execution; the creditor cannot take the law into his own
hands; if the creditor goes after the guarantor, the latter
is compelled to invoke excussion if not waived
 Manner of interposing defense of excussion (2060)
Reqs: (1) point out the properties which can be subject
of attachment within the PH (includes credits of debtor
not collected) – so that the creditor can accion
subrogatoria –; (2) inform creditor of he knows contracts
conveying properties entered into by the debtor for the
purpose of defrauding the creditor
 Effect 2061 = the creditor who is negligent in
exhausting the property pointed out shall suffer the
loss, to the extent of said property, for the insolvency of
the debtor resulting from such negligence. – ONE OF
THE WAYS TO EXTINGUISH GUARANTY
 Other ways to extinguish: Accion pauliana and accion
subrogatoria are included in 2061 – in excussion
vii. 2063 – e.g. creditor and debtor agreed to reduce amount of
debt – the guarantor cannot be kept in the dark if there is a
compromise agreement; creditor cannot go after guarantor for
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the excess; follows the principle that the guaranty is merely

accessory (the guarantor cannot bind himself for more than
what the principal debtor is liable); demand for
reimbursement only up to the amount paid as full satisfaction
of the reduced amount
viii. 2064 – double guaranty; subguaranty
ix. 2065 – defense/benefit of division; 1. Several guarantors; 2.
guarantors of only one debtor; 3. Guarantor of the same debt;
4. Not solidarily bound (because division won’t be an issue) –
each of the guarantors are entitled to demand for the division
of the obligation among them; how? Depends, as stipulated in
the contract; in the absence, presumption: equally liable; does
not apply in 2059
x. 2065 examples
A and B are solidary debtors of X in the amount of 1 million. A
got guarantors, 1 and 2. Debtor B has 3 and 4. Creditor
demanded payment of A. A was not able to pay. There are no
more properties of A that can satisfy the judgment. 1 and 2
are demanding for division including 3 and 4. Can 3 and 4 be
made to pay? No. They must be guarantors of the same
person.
A is engaged in the business of trading and gets supplies on
trading. Business usually around 2,000. Supplier required A to
get a guarantor, which is X. Volume increased to 5,000.
Additional guarantor, up to 5k. Y guaranteed in excess of
2,000 but not exceeding 5,000. A was not able to pay 3,500.
Guarantor X paid 2/5 of 3,500 (1,400) because 3,500 should
be divided between him and Y in proportion of the amount
they guaranteed. SC – benefit of division does not apply in this
case. They do not guarantee the same debt.
xi. 2066 -
b. Guarantor and principal debtor – not necessarily by reason of the
contract of guaranty because the same may be entered into without
the knowledge or consent of the principal debtor; relationship is the
consequence of the payment (NCC 2066)
- 2066 par. 1 – construed to be what the guarantor actually paid (see
also 2067)
- Par. 2 – as soon as debtor notified, the latter should pay; interest
accrues
- Par. 3 – e.g. expenses attributable to the fault of the debtor cost of
litigation; plus, compensatory interest; if creditor demanded guarantor,
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prompted creditor to sue – then guarantor cannot recover from debtor

cost of litigation because it is not the fault of the debtor
- Par. 4 – damages
- Provisions on reimbursement and subrogation applicable to surety; not
division and excussion
- 2068 v – 2068 – 2068 > notice to debtor of payment he WILL be
making (prior payment) purpose is for the debtor to interpose defenses
he could interpose against the creditor; 2066 notice – after payment,
for the purpose of demanding reimbursement, reckoning point for
interest
- 2070 – double payment, guarantor first paid; in bad faith, creditor
accepted both payments; remedy of guarantor to recover payment
from creditor; COA – in rem verso on the ground of undue enrichment
because no mistake on the part of guarantor EXCEPTION gratuitous
guarantee, guarantor prevented by fortuitous event from advising
debtor from payment – guarantor can reimburse from debtor and
debtor to recover from debtor
- 2071 – memorize; last par. – remedy of guarantor prior payment – not
to demand payment, remedy is to obtain release or demand security
- To demand release from guarantor – subject to the approval of the
creditor (not within control of debtor)
- To demand security from the debtor – indemnity agreement between
debtor and guarantor
- 2072 – from whom can guarantor demand reimbursement in the
situation that guaranty was acquired through a third person (agent of
debtor, for his benefit) – either from debtor or third person
intermediary
c. Among the guarantor themselves
- 2073 – when benefit of division is applicable; guarantor to demand
reimbursement from fellow guarantors; if one guarantor is insolvent,
his share must be proportionally distributed among all left including
the one who paid – this applies if there is no subguaranty (2075)
- 2074 – guarantor must notify other guarantors of payment they will be
making; 2074 defense

Extinguishment
1. Indirect way – if the principal obligation is extinguished, the contract of
guaranty, an accessory contract, is also extinguished (2076)
2. Direct – only the accessory contract will be extinguished
a. Causes applicable to all contracts, e.g. condonation, compensation,
merger, novation (2076)
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- 1261 – may still be allowed to withdraw the deposit by the debtor; this
will result to release of guarantor/surety
- 2077 – dacion en pago results to extinguishment of debtor’s
obligation ; if later creditor was evicted (third person has superior right,
obtained possession of property from creditor) – this will not revive
obligation of guarantor or surety
- 2078 – when benefit of division applicable; for the benefit of all
- 2079 – extension of time – illicit; without consent of guarantor/surety –
consent can be given in advance in guaranty/surety contract; EXPRESS
extension of time agreed upon by creditor and debtor/ extension of
time only in relation to a single instalment, effect? Release in relation
to entire? Dependent if there is acceleration clause and what kind;
acceleration clause – when one instalment not paid, entire obligation
accelerated; automatic – stated in contract, entire obligation becomes
due and demandable/optional/discretionary upon creditor; IF automatic
– result to extinguishment with respect to entire obligation
- 2080 – Bicol Savings and Loans – 2080 only applicable to guaranty;
problem no explanation… proper view likewise applicable to suretyship
(Rabuya) -Autocorp? : reason?
- 2081 x
b. Applicable only to guaranty, not applicable to other contracts:
1. 2076
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Real Estate Mortgage

Rabuya: NCC 2085 to 2092 were not repealed by the Personal Property
Security Act. These provisions are simply correspondingly modified. The
mention of pledge shall be removed. These provisions shall be read as only
pertaining to Real Estate Mortgage.

Requisites – NCC 2085

First requisite: A real estate mortgage contract is constituted to secure

the fulfillment of a principal obligation.
- NCC 2085 emphasizes that mortgage is merely an accessory
contract. To answer for the principal obligation, there must be non-
performance/payment of the same.

The declaration of an interest rate as void renders the principal obligation

non-demandable, which, in turn, prevents the use of the real property as
collateral. (See no. 3 for elucidation.)

Doctrines on Interest Rates (as of December 2023) – Jurisprudence likewise

emphasizes the accessory character of mortgage.
1. The suspension of the Usury Law does not grant the contracting parties
blanket authority to impose unconscionable and excessive interest
rates. The courts derive their authority to declare such rates as
unconscionable and excessive from NCC 1306 (i.e., contrary to morals
as a limitation on the freedom to contract) in relation to NCC 1409
par. 1.
2. The following stipulations on interest rates are void for being violative
of the principle of mutuality of contracts in NCC 1308:
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a. In cases of fixed interest rates, an agreement of the parties to grant

the creditor unilateral power to adjust the interest rate; and
b. A floating interest rate scheme without an objective and identifiable
reference rate (e.g. bank’s prime rate plus spread).
Note: Generally, floating interest rate schemes are allowed by the
BSP as long as there is an objective and identifiable reference rate
(e.g. treasury bills rate on a certain period), provided that the
interest rate shall not be considered unconscionable or excessive.
3. The agreement for the payment of conventional or monetary interest is
still valid. What may be void is only the interest rate; and when
declared as such, it is substituted by the legal interest rate, which is
6% per annum (even if the nature of the interest is loan or forbearance
of money.)
Effects:
a. The declaration of the monetary interest as void renders the
obligation to pay interest not yet demandable for the debtor was
not given the opportunity to pay at the correct interest rate.
b. Since the obligation to pay interest is not yet demandable, the
obligation to pay the principal is likewise not yet demandable as,
under NCC 1253, the interest shall be paid before the principal.
c. Since the obligation to pay the principal is not yet demandable,
there can be no default. Thus, mortgage, being an accessory
contract, cannot yet be made answerable. In other words, there is
no ground (yet) to foreclose the collateral.

Second Requisite: The mortgagor must be the absolute owner of the

thing mortgaged.

- (This applies to other contracts of real guaranty.)

- This is so because when there is non-payment, the collateral answers
for it by way of sale. Thus, there should be a right to transmit
ownership.

If the mortgagor is not the absolute owner of the property mortgaged:

1. The real estate mortgage contract is void.
2. Thus, the subsequent foreclosure is likewise void.
3. Likewise, the sale to the purchaser in the foreclosure sale is void,
except if the mortgagee-creditor can invoke good faith.
a. General Rule: The buyer/mortgagee can rely on the title (following
the principle on reliance on the Torrens System.)
Civil Law Review

i. For this to apply, the mortgagor must be the registered owner

of the property.
ii. This will not apply if the mortgagor is not the actual possessor
of the property.
iii. The mortgagee must deal with the mortgagor directly.
Otherwise, it is incumbent upon the mortgagee to conduct
inquires and to determine the extent of the authority of the
purported agent of the mortgagor.
b. Exceptions:
i. The general rule does not apply if the buyer had actual notice
of any facts that should have aroused his or her suspicions.
ii. The following cannot simply rely on the title:
 Banks (are required to observe the highest degree of
diligence);
 Investment or financing institutions (e.g. SSS, GSIS,
etc.);
 Natural and juridical persons engaged in the business of
real estate
 Natural and juridical persons habitually engaged in
loans involving real properties as collateral

Third Requisite: The persons constituting the mortgage must have the
free disposal of their property. If not, they should at least be legally
authorized for such purpose.

Can an encumbered property be mortgaged? Yes, as long as:

1. The prior mortgagee consents to the subsequent mortgage; and
2. The subsequent mortgagee is informed of such encumbrance.

NCC 2085, last par. – Third persons who are not parties to the principal
obligation may secure the latter by mortgaging their own property.
- This provision allows for a third party mortgagor or accommodation
mortgagor.
- The liability of a third party mortgagor extends only up to the extent of
the property allowed to be a collateral for the obligation of someone
else. He or she does not become a guarantor or a surety. Thus, if upon
foreclosure, there is still a deficiency, the third party mortgagor is not
liable for the same.
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NCC 2086 in relation to 2052

- A mortgage can secure a natural obligation or a voidable or
unenforceable civil obligation. (See previous discussion on NCC 2052.)
What may not be secured by a mortgage is a void obligation.
- NCC 2052 does not require that, at the time of the execution of the real
estate mortgage, the principal obligation must be existing or current.
For example, the debtor-mortgagor may be required to execute a real
estate mortgage (which shall be registered in the Registry of Property)
prior to the release of a loan.
a. In many cases, the debtor-mortgagee challenges the validity of the
mortgage contract, citing NCC 1409, par. 3, by arguing that at the
time of the execution of such contract the object or the cause did
not exist for the proceeds of the loan was released later (i.e. once
the real estate mortgage is registered.) The main point of such
argument is that there is no principal contract (for there is no
delivery of the object of the contract) of which the accessory
contract of real mortgage is attached.
b. This argument has no merit. Future property may be allowed as a
subject of a contract. What NCC 1409, par. 3 pertains to are things
which have no potential of coming into existence.
c. In this case, there is already a perfected consensual contract to
deliver the proceeds of the loan. Thus, the execution of the real
estate mortgage is conditioned on the delivery of the object of the
contract.

NCC 2088 – This refers to pactum commissorium. It is a void contract for

being expressly prohibited by law.
- The essence of a pactum commisorium is to automatically appropriate
the collateral without foreclosure of the mortgage.
- In relation to this, the principle that one that may not be done directly
cannot be done indirectly applies. (This is a circumvention of the
provision.)
- For example, a pacto de retro sale may be used as a way to circumvent
this provision. It may be possible that the true transaction between the
parties is a contract of loan with real estate mortgage. (Note NCC 1602
provision on equitable mortgage.)
- Another example is the execution of a deed of dacion en pago.
 The real nature of a dacion en pago is the extinguishment of the
obligation. Thus, if it is used merely as a security or collateral,
Civil Law Review

then it is used to circumvent the prohibition on pactum

commisorium.
- Another example is an assignment of property which does not pertain
to an absolute conveyance (e.g. a stipulation to the effect that a
certain sum is to be paid within a certain period, the assignment
becomes null and void; but if such sum is not paid, then the
assignment becomes valid and effective.) This is, in effect, a real
estate mortgage.

NCC 2089 and 2090 – Indivisibility of a Mortgage

- The creditor-mortgage can invoke the defense of indivisibility of the
mortgage. Such is a right expressly provided by law. Since it is a
personal right, it may be waived.
- For example, there are several properties securing a loan. If a debtor
has already partially paid, can he or she request a partial release of the
collateral corresponding to the amount already paid? If the creditor
objects, no.
- Once the mortgage is foreclosed, the mortgage is already
distinguished. As such, the indivisibility of mortgage cannot apply after
foreclosure.

NCC 2093 up to 2123 are expressly repealed by the Personal Property

Security Act.

NCC 2124 – Only real property as defined in NCC 416 may be a subject of a
real estate mortgage contract. But real rights which do not have an
independent existence (such as easement because the latter is inseparable
from the property) cannot be a collateral.

NCC 2125 – Recording in the Registry of Property

- In relation to NCC 1358, the contract of real estate mortgage is a
contract which has for its object real rights over immovable property. It
is required to be a public document.
- The requirement in NCC 1358 is not required for validity or
enforceability. Thus, despite non-compliance of the same, the contract
is still valid and obligatory.
Civil Law Review

- Real estate mortgage contracts orally entered into (e.g. the deed was
handed to the mortgagee) are valid and obligatory as well. There is no
formality required by law. This is also enforceable. Thus, parol evidence
may be used to prove the existence of such contract.
- NCC 2125 merely says that as between the parties, there is no
requirement as to formality. It may be done orally or in a private
instrument. But such cannot bind third persons.
 Insofar as the public is concerned, the property is free and
available (not encumbered.) Thus, if one attached the said real
property, the one attaching will have a superior right as against
the mortgagee.
 Involuntary transactions such as attachment, levy, and notice of
adverse claims or lis pendens can be annotated.
- In order for a contract to bind third persons, there must be a
constructive notice in the form of registration in the registry of
property.
- There are only three transactions affecting real property which can be
covered under the Statute of Frauds:
1. Sale of real property
2. Lease of real property for a period more than 1 year
3. Express trust over an immovable
- What is the effect of a defective notarization of a real estate mortgage
contract? It becomes a private document, depriving it of its public
character. It does not affect the validity or enforceability of the said
contract. It is obligatory as between the contracting parties.
- This is as opposed to a donation of real property. If the notarization is
defective, the donation is void. (NCC 749)
- Situation: The debtor-mortgagor executed a real estate mortgage in a
public instrument. However, the parties agreed that such contract shall
not be registered. Despite such agreement, the creditor-motgagee
registered the same without the knowledge or consent of the debtor-
mortgagor.
a. Can the mortgage be annulled on the ground of fraud? No. If there is
fraud, it is merely incidental. It is not causal and serious as to
authorize the annulment of the contract.
b. Once executed in a public instrument, a debtor-mortgagor
authorizes a creditor-mortgagee to register the real estate
mortgage.
c. What is the remedy of creditor-mortgagee if the mortgage is not in a
public document?
i. The creditor-mortgagee may compel the debtor-mortgagor to
execute the same in a public document. NCC 1357 authorizes
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the contracting parties to compel each other to observe the

formality as required by law, provided that the contract has
been perfected.
ii. A real estate mortgage, from the point of view of perfection, is
a consensual contract. Additionally, it is valid and enforceable
in any form.

NCC 2126
- The right is inseparable from the property itself. Hence, the recording
in the Registry of Property of the mortgage creates real rights.
- A registered real estate mortgage is a real property in itself under NCC
415, no. 10. This is why under NCC 2128, the mortgage credit itself
may be alienated or assigned.
- If it is not registered, the real estate mortgage is merely personal
property.

NCC 2127
- General Rule: When land is mortgaged, the house or building on the
same is included. It need not be expressly stipulated. (This rule
presupposes that the land and its improvements are owned by the
mortgagor. If not, then NCC 2127 cannot apply.)
- Exceptions: The exclusion of the house or building is expressly
stipulated.

NCC 2130 – Pactum non alienando

- The parties cannot prohibit the owner from selling the mortgaged
property during the existence of the mortgage indebtedness.
- Thus, the debtor-mortgagor can sell the encumbered property, if
anyone would buy the same. Such buyer shall be bound by the real
estate mortgage if registered. (NCC 1312) The buyer cannot argue that
he or she is a third party to the mortgage contract.
- Situation: There is a stipulation which does not directly prohibit the
alienation of the property, i.e. the consent of the creditor-mortgagee is
required prior to the sale. This is likewise not a valid stipulation. This is
a circumvention of the said provision.
- However, the law does not prohibit a stipulation requiring the consent
of the creditor-mortgagee if the debtor-mortgagor mortgages the
same property again.
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a. If both mortgages were registered, the first one enjoys preference.

This is the senior mortgage.
b. The junior mortgagee has a right of redemption.

Enforcement of the Mortgage

1. Accessory contracts can only be enforced if there is a breach in the
principal obligation (e.g. default).
2. The alternative remedies available to the creditor-mortgagee are (a)
foreclosure and (b) collection.
a. Foreclosure – Note: Not all mortgages can be foreclosed
extrajudicially. There should be a stipulation in the contract granting
the creditor-mortgagee special power of attorney to undertake an
extrajudicial foreclosure. If there is no such stipulation, foreclosure
can only be made judicially.
The governing law is dependent on the creditor-mortgagee:
1. Banking institution – Sec. 47, General Banking Law
a. Is there a right of redemption? Yes, whether judicial or
extrajudicial. However, the period of the same is
dependent whether the mortgagor is a natural or juridical
person.
b. Period of redemption – This is reckoned from the issuance
of the issuance of the certificate of sale. (UCPB v. BIR)
i. Natural person – 1 year
ii. Juridical person – 3 months reckoned from the
foreclosure sale or until the registration of the
certificate of sale, whichever comes first; note that
once the certificate of sale is registered, the right
of redemption is lost.
c. Redemption price – the amount stated in the mortgage
(such as indebtedness, interest, monetary interest,
penalty interest agreed upon, attorney’s fees, expenses
incurred in the foreclosure)
2. Non-banking institution or natural person
a. If extrajudicial foreclosure – Act 3135
i. Redemption period – 1 year reckoned from
registration of the certificate of sale (whether a
natural or juridical person)
b. If judicial foreclosure – ROC
i. There is no right of redemption if the
foreclosure was made not by a bank. There is
merely equity of redemption. (Even after
foreclosure, the debtor is still allowed to pay the
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obligation. The equity of redemption can be

exercised until confirmation of the sale.)

Recovery of Deficiency – allowed whether judicial or extrajudicial

foreclosure
1. Extrajudicial foreclosure – an ordinary action for collection
must be filed.
2. Judicial foreclosure – since there is a pending proceeding in
court, the deficiency can be recovered by mere motion in
the foreclosure proceedings.
b. Collection – Once chosen, the property mortgaged shall be released.
The lien (i.e. priority right over the property) the creditor shall be
lost. In other words, the property shall be available to other
creditors by way of attachment (free property).
3. Rabuya: The preferred remedy is to foreclose because the mortgaged
property is designated for the satisfaction of the obligation. In the
event that the proceeds of the sale of the mortgaged property cannot
satisfy the entirety of the principal obligation, the creditor is still
entitled to the deficiency. Never choose an action for collection.

Antichresis
Article 2132. By the contract of antichresis the creditor acquires the right to
receive the fruits of an immovable of his debtor, with the obligation to apply
them to the payment of the interest, if owing, and thereafter to the principal
of his credit.

As compared to Real Estate Mortgage

1. In both contracts, the possession of the immovable property is not
what distinguishes the two.
2. In Antichresis, the immovable must be necessarily delivered to the
creditor. The immovable must be in the possession of the creditor. In
RME, it is not necessary for the creditor to take possession of the
immovable.
3. In the absence of stipulation to that effect, the creditor in a mortgage
is not entitled to possession. However, it can be expressly stipulated
that during the existence of the mortgage indebtedness the possession
of the immovable be with the creditor.
4. Thus, the possession of the immovable is not what distinguishes the
two contracts.
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5. The essence of antichresis is the express agreement that the creditor is

authorized to receive the fruits of the immovable property with the
corresponding obligation (purpose) to apply the interest if owing and to
the payment of the principal. In the absence of such agreement, it is
RME. If the creditor is authorized only to receive the fruits, it is still
RME.

Article 2138. The contracting parties may stipulate that the interest upon the
debt be compensated with the fruits of the property which is the object of
the antichresis, provided that if the value of the fruits should exceed the
amount of interest allowed by the laws against usury, the excess shall be
applied to the principal.
Note that the application of the Usury Law is suspended.

Requirement of Formality in relation to the express agreement

Can be entered into orally
The Statute of Frauds does not apply to antichresis

Article 2134. The amount of the principal and of the interest shall be
specified in writing; otherwise, the contract of antichresis shall be void.

The objective of the law is not for the perpetual possession of property.
Thus, the amount of the principal and amount of the interest shall be
specified in writing. It need not be in the antichresis, but should be made in
the contract of loan

Doctrine of Complementary Contracts Construed Together

Accessory contract should be interpreted together with the principal contract
it supports.

As to the perfection – consensual contract

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The delivery of the immovable is not an essential requisite of the contract.

But such delivery is necessary. Thus, the delivery is an obligation which can
be compel led.

Situation – A contract of loan is entered into orally.

1. A contract of loan is a consensual contract that may be entered into
orally. However, it can only create a civil obligation to pay the principal.
(See NCC 1956)
2. If, thereafter, the parties enter also enter into a contract of antichresis,
then it should be made in writing to create a civil obligation to pay the
interest. In effect, the accessory contract includes both the principal
and accessory obligation in one contract.

1. Consensual
2. Not in SF
3. Formality pertaining to amount of loan and amount of interest of the
loan

Article 2135. The creditor, unless there is a stipulation to the contrary, is

obliged to pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its preservation and
repair.
The sums spent for the purposes stated in this article shall be deducted
from the fruits.

Payment of taxes and charges upon the estate – not actually for the account
of the creditor, it comes from the fruits of the property
Article 2136. The debtor cannot reacquire the enjoyment of the immovable
without first having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed
upon him by the preceding article, may always compel the debtor to enter
again upon the enjoyment of the property, except when there is a
stipulation to the contrary.
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The debtor cannot demand for the return of the immomovable property until
the loan is totally paid. Thus, as long as there is a balance, the debtor is not
entitled to the return of the immovable.
Article 2137. The creditor does not acquire the ownership of the real estate
for non-payment of the debt within the period agreed upon.

Every stipulation to the contrary shall be void. But the creditor may petition
the court for the payment of the debt or the sale of the real property. In
this case, the Rules of Court on the foreclosure of mortgages shall apply.

Even in antichresis, the law prohibits pactum commisorium.

How to foreclose antichresis? Judicial foreclosure. There is no right of
redemption. What exists is merely equity of redemption.
Article 2139. The last paragraph of article 2085, and articles 2089 to 2091
are applicable to this contract.

Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.

Article 2089. A pledge or mortgage is indivisible, even though the debt

may be divided among the successors in interest of the debtor or of the
creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for
the proportionate extinguishment of the pledge or mortgage as long as the
debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who
have not been paid.

From these provisions is excepted the case in which, there being several
things given in mortgage or pledge, each one of them guarantees only a
determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the
pledge or mortgage as the portion of the debt for which each thing is
specially answerable is satisfied. (1860)

Article 2090. The indivisibility of a pledge or mortgage is not affected by

the fact that the debtors are not solidarily liable. (n)

Article 2091. The contract of pledge or mortgage may secure all kinds of
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obligations, be they pure or subject to a suspensive or resolutory condition.

There is third party antichresis. The immovable may not be owned by the
principal debtor.

Personal Property Security Act

Prior to RA 11057, if the collateral is a personal property, the NCC and the
Chattel Mortgage Law made a distinction between chattel mortgage and
pledge.
Pledge – requires delivery of collateral to the creditor
Chattel Mortgage – does not require delivery; instead, the collateral is simply
recorded in the Chattel Mortgage Registry of the Registry of Deeds.
The PPSA abolished the distinction.
Simply referred to Contracts of Security Involving Personal Property
Effectivity date – February 9, 2019; IRR – December 3, 2019
i. Prior to February 9, 2019 – Contracts of Pledge and Chattel
Mortgage entered into pursuant to the NCC provisions are
valid and effective.
ii. On or after February 9, 2019 – The perfection of the security
interest must be pursuant to the PPSA law.

the law mandates a nationwide centralized registry of security interest

involving personal properties. - The Law mandates a nationwide
centralized registry of security interest. This registry is to be operated by the
LRA.

Validity
1. Formality – should the security agreement be in writing for the contract
to be valid?
a. There is a dearth of literature on the matter since the law is still
new.
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b. Rabuya: It does not appear that it is a requirement for validity. The

entire purpose of the law is electronic registry. Follow the general
rule in contract law that a contract is obligatory in whatever form it
may have been entered into. However, if the agreement is not in
writing, it will only bind the parties to the agreement. It cannot bind
third persons, causing inconvenience on the part of the creditor.

2. The only requirement is a sufficiently clear description (i.e. sufficient to

identify) of the personal property (e.g. “the collateral will involve all the
inventory”) in the agreement.

3. Third party collateral – still applicable. It is not necessary that the

owner of the collateral be the debtor. However, the one who executed
the security agreement must be the owner of the collateral.
a. The owner of the collateral is called “grantor.”
b. The creditor is called “secured creditor.”

Scope
Section 4. Scope of the Act. — This Act shall apply to all transactions of any
form that secure an obligation with movable collateral, except interests
in aircrafts subject to Republic Act No. 9497, or the "Civil Aviation Authority
Act of 2008", and interests in ships subject to Presidential Decree No. 1521,
or the "Ship Mortgage Decree of 1978".

Section 5. Creation of a Security Interest. — (b) A security agreement may

provide for the creation of a security interest in a future property, but the
security interest in that property is created only when the grantor acquires
rights in it or the power to encumber it.

General Rule: The law covers all personal property, whether tangible or
intangible, (Sec. 4) as well as future property (Sec. 5(b).
Exceptions (Sec. 4):
1. Interest in an aircraft – to be registered with the Civil Aviation Authority
to bind third persons in accordance with RA 9497
2. Interest in a vessel – to be registered with the Office of the Philippine
Coast guard in accordance with PD 1521
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- Such interests cannot be called chattel mortgage as such concept has

already been repealed. Likewise, it cannot be considered pledge.
- In other words, security interests in personal properties shall be
registered in the respective offices pursuant to the governing laws.

Security Interest – a property right in collateral that secures payment or

other performance of an obligation, regardless of whether the parties have
denominated it as a security interest, and regardless of the type of asset,
the status of the grantor or secured creditor, or the nature of the secured
obligation; including the right of a buyer of accounts receivable and a
lessor under an operating lease for not less than 1 year (IRR, Sec. 1.05., jj)

A security interest may be created over any form of personal property.

General Rule: Upon execution of the security agreement involving a

collateral in the form of present property, a security interest is already
created.
Exception: The subject matter of the security agreement may be a future
property. The security interest is created once the future property
comes into existence.

Creation of Security Interest

- It refers to, in ordinary contracts, the “perfection of the contract”,
where the contract will become binding between the parties. At such
point, the contract only binds the contracting parties as well as their
heirs and assigns. It does not yet bind third persons.
- In order to bind third persons to the security interest that was created,
it is necessary that there must be perfection of the security interest.
- The act of binding third persons to the security interest that was
already created is called “perfection of the security interest.” (This is
different from the “perfection of the contract.”)

Creation of Security Perfection of the

Interest (or Perfection Security Interest
of the Contract
involving Personal
Property as Collateral)
Legal Section 5. Creation of a Section 11. Perfection of
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Bases Security Interest. — Security Interest. —

(a) A security interest shall (a) A security interest shall

be created by a security be perfected when it has
agreement, been created and the
secured creditor has taken
(b) A security agreement one of the actions in
may provide for the accordance with Section
creation of a security 12.
interest in a future
property, but the security (b) On perfection, a
interest in that property is security interest becomes
created only when the effective against third
grantor acquires rights in it parties.
or the power to encumber
it. Section 12. Means of
Perfection.— A
security interest may
be perfected by:

(a) Registration of a
notice with the
Registry;

(b) Possession of the

collateral by the
secured creditor; and

(c) Control of
investment property
and deposit account.

A security interest in any

tangible asset may be
perfected by registration or
possession. A security
interest in investment
property and deposit
account may be perfected
by registration or control.
Explanati Security Interest is created Perfection of the Security
on upon execution of a Interest refers act of
security agreement. This is binding third persons to the
binding only to the parties, security interest that was
and their heirs and assigns. created by reason of the
(See NCC 1311.) execution of a security
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agreement.

Perfection of the Security Interest

The security interest must be perfected to bind third persons. How are third
persons bound?
1. Registration in the electronic registry = recording with the proper
register of deeds
a. There is still no centralized electronic registry. Initially, there was a
justifiable reason. When the law took effect, the pandemic plagued
the country.
b. According to the IRR, during the transitional period, registration of
the security agreement with the LRA shall be in accordance with the
Chattel Mortgage Law. (IRR, Sec. 8.08)
Act 1508
Sec. 4. Validity. – A chattel mortgage shall not be valid against any
person except the mortgagor, his executors or administrators,
unless the possession of the property is delivered to and retained
by the mortgagee or unless the mortgage is recorded in the office
of the register of deeds of the province in which the mortgagor
resides at the time of making the same, or, if he resides without
the Philippine Islands, in the province in which the property is
situated: Provided, however, That if the property is situated in a
different province from that in which the mortgagor resides, the
mortgage shall be recorded in the office of the register of deeds of
both the province in which the mortgagor resides and that in
which the property is situated, and for the purposes of this Act the
city of Manila shall be deemed to be a province.

1. The grantor is a resident of the Philippines – recording in the

office of the RD of the province in which the grantor resides
at the time of making the same
2. The grantor resides in a province different than where the
property is situated – recording in the register of deeds of
both (a) the province in which the mortgagor resides and (b)
that which the property is situated
3. The grantor is a resident of a foreign country – recording in
the province in which the property is situated

2. Delivery of the collateral to the secured creditor or the latter’s agent

a. This necessarily involves personal property susceptible to delivery.
b. This is the old concept of pledge.
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3. Entering into a Control Agreement with respect to properties in actual

and effective control of a third party intermediary
a. Some personal properties owned by the grantor may not be in their
actual and effective control, such as:
i. Deposits in bank – with the bank
ii. Money market placements – with the investment houses
iii. Stock certificates – with the stock exchange or stock brokers
b. In order for these to be put up as collateral, the grantor, creditor
and the third party intermediary must enter into a tripartite contract
called a Control Agreement. This results in the transfer of control
over the property to the creditor. Thus, the third party intermediary
will not follow the instructions of the grantor (such as withdrawal of
the funds from the bank) in order to secure the interest of the
creditor.
c. The third party intermediary must consent to such agreement.

Rules on Priority Interest

Enforcement of the Security
Section 49. Right to Dispose of Collateral.—

(a) After default, a secured creditor may sell or otherwise dispose of the
collateral, publicly or privately, in its present condition or following any
commercially reasonable preparation or processing.

(b) The secured creditor may buy the collateral at any public disposition, or
at a private disposition but only if the collateral is of a kind that is
customarily sold on a recognized market or the subject of widely
distributed standard price quotations.

1. Auction sale
2. Public auction sale – the secured creditor can be the buyer
3. Private auction sale – with requirements
Section 54. Retention of Collateral by Secured Creditor.—

(a) After default, the secured creditor may propose to the debtor and
grantor to take all or part of the collateral in total or partial satisfaction of
the secured obligation, and shall send a proposal to:

(1) The debtor and the grantor;

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(2) Any other secured creditor or lien holder who, five (5) days before the
proposal is sent to the debtor and the grantor, perfected its security
interest or lien by registration; and

(3) Any other person with an interest in the collateral who has given a
written notification to the secured creditor before the proposal is sent to
the debtor and the grantor.

(b) The secured creditor may retain the collateral in the case of:

(1) A proposal for the acquisition of the collateral in full satisfaction of the
secured obligation, unless the secured creditor receives an objection in
writing from any person entitled to receive such a proposal within twenty
(20) days after the proposal is sent to that person; or

(2) A proposal for the acquisition of the collateral in partial satisfaction of

the secured obligation, only if the secured creditor receives the
affirmative consent of each addressee of the proposal in writing within
twenty (20) days after the proposal is sent to that person.

Retention – appropriation of the collateral by the creditor without need of

buying it
Not pactum commisorium – not automatic appropriate by default
The collateral is what would be used to pay for the obligation
Appropriate all of the collateral as full satisfaction of the indebtedness of the
debtor
1. Any of the persons did not take objection
Appropriate a portion or part of the collateral
Same procedure but only deemed approved IF they give their assent
2 kinds of approval – full
1. Written affirmative consent – partial app
2. No written objection received

Section 52. Application of Proceeds.—

(a) The proceeds of disposition shall be applied in the following order:

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(1) The reasonable expenses of taking, holding, preparing for disposition,

and disposing of the collateral, including reasonable attorneys’ fees and
legal expenses incurred by the secured creditor;

(2) The satisfaction of the obligation secured by the security interest of the
enforcing secured creditor; and

(3) The satisfaction of obligations secured by any subordinate security

interest or hen in the collateral if a written demand and proof of the
interest are received before distribution of the proceeds is completed.

(b) The secured creditor shall account to the grantor for any surplus, and,
unless otherwise agreed, the debtor is liable for any deficiency.

1. Surplus – must be returned t the grantor

2. Deficiency – parties allowed to stipulate on the deficiency; in the
absence of stipulation, creditor allowed to recover deficiency except
recto law

Section 45. Right of Redemption.—

(a) Any person who is entitled to receive a notification of disposition in

accordance with this Chapter is entitled to redeem the collateral by paying
or otherwise performing the secured obligation in full, including the
reasonable cost of enforcement.

(b) The right of redemption may be exercised, unless:

(1) The person entitled to redeem has not, after the default, waived in
writing the right to redeem;

(2) The collateral is sold or otherwise disposed of, acquired or collected by

the secured creditor or until the conclusion of an agreement by the secured
creditor for that purpose; and

(3) The secured creditor has retained the collateral.

Once the collateral has been sold, the right of redemption is lost –
preemtpion to prevent the sale
Right of redemption – can only be exercised upon default but before the sale
Waiver
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1. Failure to redeem
2. Sale of the collateral
3. Retention of collateral

Concurrence of Credit Preference of Credit

It refers to a situation where the It refers to which of the concurring
same specific properties or all of the credits should be satisfied first
properties of the debtor are
subjected to several claims

According to jurisprudence, the provisions on preference of credit will only

become applicable if there is a pending bankruptcy, insolvency, or judicial
liquidation proceedings.

Three Kinds of Credits

1. Special Preferred Credits – credits which are the first to be satisfied;
they are in the form of liens that will attach to specific properties
2. Ordinary Preferred Credits – credits which are inferior to special
preferred credits but superior to common credits; they do not attach to
specific properties
3. Common Credits – credits which do not attach to specific properties but
are not ordinary preferred credits

Effect of the PPSA on the Provisions on Concurrence and Preference of Credit

Section 66. Repealing Clause.— The following laws, and all laws, decrees,
orders, and issuances or portions thereof, which are inconsistent with the
provisions of this Act, are hereby repealed, amended, or modified
accordingly:

(a) Sections 1 to 16 of Act No. 1508, otherwise known as "The Chattel

Mortgage Law";

(b) Articles 2085-2123, 2127, 2140-2141, 2241, 2243, and 2246-2247 of

Republic Act No. 386, otherwise known as the "Civil Code of the
Philippines";

(c) Section 13 of Republic Act No. 5980, as amended by Republic Act No.
8556, otherwise known as the "Financing Company Act of 1998";

(d) Sections 114-116 of Presidential Decree No. 1529, otherwise known as

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the "Property Registration Decree";

(e) Section 10 of Presidential Decree No. 1529, insofar as the provision

thereof is inconsistent with this Act; and

(f) Section 5(e) of Republic Act No. 4136, otherwise known as the "Land
Transportation and Traffic Code".

Special Preferred Credits

1. The PPSA repealed special preferred credits over moveable or personal
properties. Immovable or real properties are still subject to the
provisions on Concurrence and Preference of Credits.
2. The priority interest that was created prior to the commencement of
the insolvency proceedings is not affected.
Section 22. Effect of the Grantor’s Insolvency on the Priority of a
Security Interest. -Subject to the applicable insolvency law, a security
interest perfected prior to the commencement of insolvency
proceedings in respect of the grantor shall remain perfected and
retain the priority it had before the commencement of the
insolvency proceedings.

Since the PPSA repealed NCC 2243, the preference in NCC 2241 (1) (i.e.
duties, taxes and fees due thereon to the State or any subdivision thereof)
has been abolished. With the repeal of NCC 2243, all the credits in NCC 2242
must now be satisfied pro rate or pari passu, including the claims of the
government for non-payment of taxes.
The discussion in Republic v. Peralta on special preferred credits cannot now
refer to movable property.
Republic v. Peralta
Turning first to special preferred credits under Articles 2241 and 2242, it
should be noted at once that these credits constitute liens or
encumbrances on the specific movable or immovable property to which
they relate. Article 2243 makes clear that these credits "shall be
considered as mortgages or pledges of real or personal property, or liens
within the purview of legal provisions governing insolvency." It should be
emphasized in this connection that "duties, taxes and fees due [on specific
movable property of the insolvent] to the State or any subdivision thereof"
(Article 2241 [1]) and "taxes due upon the [insolvent's] land or building
(2242 [1])"stand first in preference in respect of the particular movable or
immovable property to which the tax liens have attached. Article 2243 is
quite explicit: "[T]axes mentioned in number 1, Article 2241 and number 1,
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Article 2242 shall first be satisfied. " The claims listed in numbers 2 to 13 in
Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in
order of precedence; such claims enjoy their privileged character as liens
and may be paid only to the extent that taxes have been paid from the
proceeds of the specific property involved (or from any other sources) and
only in respect of the remaining balance of such proceeds. What is more,
these other (non-tax) credits, although constituting liens attaching to
particular property, are not preferred one over another inter se. Provided
tax liens shall have been satisfied, non-tax liens or special preferred credits
which subsist in respect of specific movable or immovable property are to
be treated on an equal basis and to be satisfied concurrently and
proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles
2246 to 2249 establish a two-tier order of preference. The first tier includes
only taxes, duties and fees due on specific movable or immovable property.
All other special preferred credits stand on the same second tier to be
satisfied, pari passu and pro rata, out of any residual value of the specific
property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or
non-tax) in turn, take precedence over ordinary preferred credits so far as
concerns the property to which the liens have attached. The specially
preferred credits must be discharged first out of the proceeds of the
property to which they relate, before ordinary preferred creditors may lay
claim to any part of such proceeds.

Ordinary Preferred Credits

The concept of ordinary preferred credit was not affected by the enactment
of the PPSA because they attach to free properties (i.e. no lien, no priority
interest over such properties). The PPSA with respect to ordinary preferred
credit on personal properties was not abolished. We shall follow NCC 2244.
Note that the LC 110 did not create a special preferred credit in favor of
laborers. They remain to be ordinary preferred credit.
Labor Code
ART. 110. Worker preference in case of bankruptcy. - In the event of
bankruptcy or liquidation of an employer's business, his workers shall enjoy
first preference as regards their wages and other monetary claims, any
provisions of law to the contrary notwithstanding.

Quasi-Delict

Damages
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Actual or compensatory
There are two components:
1. Damnun emergens – refers to damages actually suffered
2. Lucrum cessans – refers to profits which the plaintiff failed to obtain
General Rule: The following must be pleaded and proven: (i) the fact of loss;
and (ii) the amount of loss.
Exception: Actual or compensatory damages may be recovered (i) if the law
provides otherwise, or (ii) if the parties stipulate otherwise.

Situation: The fact of loss is proven but not the amount. Under prevailing
jurisprudence, the temperate damages may be recovered if:
1. The amount cannot, from the nature of the case, be proven with
certainty.
2. The amount was not proven due to inadequacy of the evidence
presented.

Article 2205. Damages may be recovered:

(1) For loss or impairment of earning capacity in cases of temporary or

permanent personal injury;
(2) For injury to the plaintiff's business standing or commercial credit.

Such damages cover the loss sustained by the defendant or heirs of the
deceased support they would have received from the deceived had s/he not
died from the negligence act of another. This is not recoverable if the
deceased had no earning capacity on account of permanent disability which
was not caused by the accused.

Formula for computing net earning capacity

(1)Life expectancy = 2/3 x 80 – actual age at the time of death
(2)Earning capacity = 50% of the gross annual income
(3)Net earning capacity = LE x EC

See UCPB v. Leporgo

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Notes:
- 80 refers to 80 years old. The law presumes that 80 years is the normal
lifespan. This is the standard for all industries.
- The other 50% of the gross annual income is what the law presumes to
be the expenses.

Is there a need for documentary evidence to prove gross annul income?

Generally, yes. But there have been cases that the SC has considered
testimonial evidence.

Article 2206. The amount of damages for death caused by a crime or

quasi-delict shall be at least three thousand pesos, even though there
may have been mitigating circumstances. In addition:

(1) The defendant shall be liable for the loss of the earning capacity of the
deceased, and the indemnity shall be paid to the heirs of the latter; such
indemnity shall in every case be assessed and awarded by the court,
unless the deceased on account of permanent physical disability not
caused by the defendant, had no earning capacity at the time of his death;

(2) If the deceased was obliged to give support according to the provisions
of article 291, the recipient who is not an heir called to the decedent's
inheritance by the law of testate or intestate succession, may demand
support from the person causing the death, for a period not exceeding five
years, the exact duration to be fixed by the court;

(3) The spouse, legitimate and illegitimate descendants and ascendants of

the deceased may demand moral damages for mental anguish by reason
of the death of the deceased.
Types – Damages in cases involving Crime or Quasi-Delict
1. In order for damages under NCC 2206 to be recovered, the victim must
be in possession of civil capacity at the time of his/her death. (Geluz v.
CA)
2. Can civil damages be recovered from the death of a mother and her
unborn child? As for the mother, yes. As to the child, no.
At least three thousand pesos, even Civil indemnity for the death of the
though there may have been victim
mitigating circumstances
Recovery of civil indemnity for death
does not need proof of loss. It is
awarded as a matter of right.
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Under prevailing jurisprudence, it is

now P50,000. However, as for
certain crimes:

1. Where the imposable penalty

is death – P100,000
2. 75,000
(1) The defendant shall be liable for Loss of earning capacity
the loss of the earning capacity of
the deceased, and the indemnity Loss of earning capacity may be
shall be paid to the heirs of the recovered in addition to civil
latter; such indemnity shall in every indemnity for death.
case be assessed and awarded by
the court, unless the deceased on
account of permanent physical
disability not caused by the
defendant, had no earning capacity
at the time of his death;
2) If the deceased was obliged to Support
give support according to the
provisions of article 291, the
recipient who is not an heir called to
the decedent's inheritance by the
law of testate or intestate
succession, may demand support
from the person causing the death,
for a period not exceeding five
years, the exact duration to be fixed
by the court;
(3) The spouse, legitimate and Moral damages for mental anguish
illegitimate descendants and
ascendants of the deceased may Note that only the following can
demand moral damages for mental demand moral damages:
anguish by reason of the death of 1. Spouse
the deceased. 2. (Il)legitimate descendant
3. (Il)legitimate ascendant
Siblings are not entitled to moral
damages under NCC 2206.

In the case of Caravan Travel and

Tours, the one who exercises
substitute parental authority
over the victim, even if not a
relative in fact, shall be considered
an ascendant and may recover
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moral damages under NCC 2206.

Temperate or Moderate Damages

Article 2224. Temperate or moderate damages, which are more than
nominal but less than compensatory damages, may be recovered
when the court finds that some pecuniary loss has been suffered
but its amount can not, from the nature of the case, be provided
with certainty.

Article 2225. Temperate damages must be reasonable under the

circumstances.

If, by the nature of the case, the amount of loss can be ascertained, except
that it was not actually proven, can the courts still award temperate or
moderate damages? Yes.
Under prevailing jurisprudence, the temperate damages may be recovered if:
1. Where the court finds that some pecuniary loss has been suffered but
the amount cannot, from the nature of the case, be proven with
certainty.
2. Where the court finds that some pecuniary loss has been suffered but
the amount was not proven due to inadequacy of the evidence
presented.
3. In lieu of loss of earning capacity where earning capacity was plainly
established but no evidence was presented to support the amount (or
gross annual income).

Minimum awarded: P50,000

The court awards P50,000 if there was no proof of funeral and burial
expenses. If the actual damages proven were less than P50,000, the court
still awards P50,000 as temperate damages. (e.g. People v. Jaurigue)

Moral Damages
Requisites:
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1. It must be shown that there was injury (physical, mental, or

psychological sustained by the claimant). – This requisite is not needed
when recovery is on account of death arising from the commission of a
crime or quasi-delict. It is presumed.
2. It must be factually established that the defendant committed a
culpable act or omission.
3. The wrongful act or omission by the defendant is the proximate cause
of the injury sustained by the defendant.
4. The award of damages is predicated on any of the cases enumerated
in NCC 2219 and 2220. (As such, moral damages is not always
allowed.)

Article 2219. Moral damages may be recovered in the following and

analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution; (The SC has held that such prosecution need not
have been filed in court. It may be filed even if the prosecution is merely at
its preliminary investigation stage. There must be no probable cause and
the complainant acted maliciously.)

(9) Acts mentioned in article 309; (The SC clarified that the disrespect of
the dead referred to here must be committed in occasions of mourning or
burial.)

(10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35. (All human relations torts except NCC 20, e.g. breach of promise of
marriage if there was moral seduction and the spouse-to-be backed out
near the date of the wedding in Wassemer v. Velez)

The parents of the female seduced, abducted, raped, or abused, referred to

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in No. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bring
the action mentioned in No. 9 of this article, in the order named.

Article 2220. Willful injury to property may be a legal ground for awarding
moral damages if the court should find that, under the circumstances, such
damages are justly due. The same rule applies to breaches of contract
where the defendant acted fraudulently or in bad faith.

General Rule: Moral damages may not be recovered in cases of breach of

contract.
Exceptions:
1. Breach of contract of common carriage if death results to a passenger
(NCC 1764)
2. Breach of contract of common carriage and the defendant is guilty of
fraud or bad faith

General Rule: A juridical person is not entitled to moral damages.

Exceptions:
1. Libel, slander or any other form of defamation
2. A corporation with a good reputation, which was debased resulting to
social humiliation (Mambulao Lumber as obiter dictum; Simex
International as ratio decidendi)
Note: In Eternal Gardens as obiter, a corporation may be a victim of NCC 21

Exemplary or Corrective Damages

It is intended to be punitive to serve as a deterrent to serious wrongdoings
and to be vindicative due to undue suffering and wanton invasion of rights.

Requisites
1. It may be imposed by way of example but only in addition to
compensatory damages. It cannot be recovered as a matter of right.
2. The claimant must establish his right to moral, temperate or
compensatory damages.
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3. The act must be done in bad faith or done in a wanton, oppressive or

malevolent manner.

Nominal Damages
It is given in order that a right of a plaintiff which has been violated or
invaded by the defendant may be vindicated or recognized and not for the
purpose of indemnification.
A legal right is technically violated and must be vindicated but no actual loss
has been suffered.

Liquidated Damages
It is agreed upon by the parties as a form of penalty in a contract to be paid
in case of breach.
There is no difference between liquidated damages and penalty clause.
It may be reduced by the court if found excessive or unconscionable. Same
principle as that of penalty interest.

Attorney’s Fees
1. Ordinary – agreed upon reasonable compensation for the services of a
lawyer
2. Extraordinary – deemed indemnity for damages by the court in favor of
the winning party; however, it is allowed that attorney’s fees in its
extraordinary sense may also be transferred to the lawyer as agreed
upon

When it may be recovered

Article 2208. In the absence of stipulation, attorney's fees and expenses of
litigation, other than judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

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(4) In case of a clearly unfounded civil action or proceeding against the

plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiff's plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and
skilled workers;

(8) In actions for indemnity under workmen's compensation and

employer's liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that
attorney's fees and expenses of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be

reasonable.

Costs of Suit
These are certain allowances authorized by law to reimburse the successful
party for expenses incurred in prosecuting or defending a case.
It does not partake of the nature of a loan or forbearance of money or
obligation.
It cannot earn interest in whatever form.