Regulatory Framework for Business Transactions

RFBT - Sales and Credit Transactions A. Sanchez

Law on Sales may also be the subject of the contract of sale (i.e, X sold one
• Concept - By the contract of sale one of the contracting parties of his cars).
(vendor/seller) obligates himself to transfer the ownership and to deliver 3. The vendor must have a right to transfer the ownership of
a determinate thing, and the other (vendee/buyer) to pay therefor a the object at the time it is delivered.
price certain in money or its equivalent. What can be the object of the contract of sale:
• Absolute sale vs. Conditional sale 1. Existing goods, owned or possessed by the seller. The sole
Absolute sale - when the sale is not subject to any condition whatsoever owner of a thing may also sell an undivided interest therein
and where the title passes to the buyer upon delivery of the thing sold. including fungible goods the quantity of which is still
Conditional sale - when the sale is subject to condition whether undetermined.
resolutory (i.e, pacto de retro sale) or suspensive (obligation to deliver 2. Expectancy or hope (emptio spei) - The sale of a mere hope or
arises after fulfillment of a condition). expectancy is a sale of a present thing.
• Characteristics of the contract of sale: NOTE: Sale of vain hope or expectancy is void except for
1. Nominate collector's item purposes.
2. Consensual 3. Things having potential existence or future thing (emtio rei
3. Principal speratae) - Goods to be manufactured, raised, or acquired by
4. Onerous the seller after the perfection of the contract of sale. There
5. Bilateral may be a contract of sale of goods, whose acquisition by the
6. Commutative seller depends upon a contingency which may or may not
• Elements of the contract of sale: happen. But sale of future inheritance is void as it is contrary
1. Essential elements: to public policy.
a. Consent - The meeting of the minds between the vendor and the 4. Things subject to a resolutory condition (i.e, pacto de retro
vendee. Both parties must be capacitated. If one of the parties is sale or sale with right of repurchase).
incapacitated, the contract is voidable. If both parties are c. Cause/consideration - The price which is certain.
incapacitated, the contract is unenforceable. Rules in cause/consideration:
NOTE: A minor (and other incapacitated) must pay a reasonable 1. To be certain, it shall be sufficient that it be with reference to
price for necessaries (i.e, food) sold and delivered to them. another thing certain, or that the determination thereof be
Absolute incapacity - Those who cannot enter into contract in left to the judgment of a special person or persons. The price
general: shall also be considered certain, when the price fixed is that
▪ Unemancipated minor which the thing sold would have on a definite day, or in a
▪ Insane or demented person (except those entered during particular exchange or market, or when an amount is fixed
lucid interval) above or below the price on such day, or in such exchange or
▪ Deaf-mute who did not know how to write market, provided said amount be certain (i.e, price of pork in
Relative incapacity - The following persons cannot acquire by a particular market or FMV of share in the stock exchange).
purchase, even at a public or judicial auction, either in person or 2. Should such person or persons be unable or unwilling to fix it,
through the mediation of another: the contract shall be inefficacious, unless the parties
1. Between husband and wife, except subsequently agree upon the price. If the third person or
➢ When a separation of property was agreed upon in the persons acted in bad faith or by mistake, the courts may fix
marriage settlements. the price.
➢ When there has been a judicial separation or property. 3. Gross inadequacy of price (lesion) does not affect a contract
2. Between persons living as husband and wife (common law of sale, except if there is defect in the consent (i.e, vitiation of
spouses) and those guilty of adultery and concubinage. consent/voidable contract).
3. The guardian, the property of the person or persons who may 4. If the price is simulated, the sale is void (absolute simulation),
be under his guardianship. but the act may be shown to have been in reality a donation,
4. Executors and administrators, the property of the estate or some other act or contract (relative simulation). A relative
under administration. simulation, when it does not prejudice a third person and is
5. Agents, the property whose administration or sale may have not intended for any purpose contrary to law, morals, good
been entrusted to them, unless the consent of the principal customs, public order or public policy binds the parties to
has been given. their real agreement.
6. Public officers and employees, the property of the State or of 5. Where the price cannot be determined, the contract is
any subdivision thereof, or of any GOCC, or institution, inefficacious or void. However, if the thing or any part thereof
administration of which has been intrusted to them. has been delivered to and appropriated by the buyer he must
7. Justice, judges, prosecuting attorneys, clerks of superior and pay a reasonable price therefor. What is a reasonable price is
inferior courts, and other officers and employees connected a question of fact dependent on the circumstances of each
with the administration of justice, the property and rights in particular case.
litigation or levied upon an execution before the court. 2. Natural elements - Those that are inherent in the contract. They
NOTE: The prohibition in No. 6 and 7 is perpetual. are deemed included in the contract of sale unless agreed
b. Object - The subject matter of the contract of sale. otherwise.
Requisites: a. Warranty against eviction
1. Must be licit (hence objects outside the commerce of men or b. Warranty against hidden defects and encumbrances
against the law, etc. cannot be the object of sale and will 3. Accidental elements - Those that are stipulated by the parties (i.e,
render the contract void). terms, place and time of payment, etc.)
2. Must de determinate or determinable. The thing is • Perfection of the contract of sale and forms required:
determinable if it is capable of being made determinate 1. The contract of sale is perfected at the moment there is a meeting
without the necessity of a new or further agreement between of minds upon the thing which is the object of the contract and
the parties (i.e, X sold certain number of coconut; or A obliged upon the price. From that moment, the parties may reciprocally
himself to sell a four-legged animal to B. Both contracts are demand performance. However, sale of real property or an interest
void because the object is not determinable). Limited generic therein or personal property worth more than P500 in value should
be reduced into writing or some memoranda to be enforceable. To

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 affect 3rd persons, sale of real property or any interest therein shall ▪ New York rule: If the thing already exists, it is a contract
be in public instrument. of sale; if not, contract for a piece of work.
2. The fixing of the price can never be left to the discretion of one of ▪ English rule: If material is more valuable, it is a contract
the contracting parties as it will violate the principle of mutuality of of sale; if skill is more valuable, contract for a piece of
contract. However, if the price fixed by one of the parties is work.
accepted by the other, the sale is perfected. 2. Contract of sale vs. Contract of barter/exchange
3. In the case of a sale by auction: If the consideration of the contract consists partly in money, and
a. Each lot is the subject of a separate contract of sale. partly in another thing:
b. A sale by auction is perfected when the auctioneer announces a. The contract is based on the manifest intention of the parties
its perfection by the fall of the hammer, or in other customary (i.e, the wordings; using the terms “sold”, “seller” or
manner. Until such announcement is made, any bidder may “vendee”).
retract his bid; and the auctioneer may withdraw the goods b. If such intention does not clearly appear,
from the sale unless the auction has been announced to be ▪ Contract of sale - if cash received > value of property
without reserve. received.
c. A right to bid may be reserved expressly by or on behalf of the ▪ Contract of barter - if cash received < value of property
seller, unless otherwise provided by law or by stipulation. received.
NOTE: Puffer or by-bidder refers to a person employed by the 3. Contract of sale vs. Contract to sell
seller to bid, solely for the purpose of stimulating genuine a. Contract of sale - Ownership is transferred to the buyer upon
buyers at an auction sale and raise the price. delivery of the object.
d. Where notice has not been given that a sale by auction is b. Contract to sell - Ownership of title is retained by the seller
subject to a right to bid on behalf of the seller, it may be until the fulfillment of a positive suspensive condition,
treated as fraudulent by the buyer. normally the full payment of the purchase price by the buyer
4. Promise to buy and/or sale even if there is already delivery. Here, there are two
a. Bilateral promise - Takes place when one party promises to contracts: (1) contract to sell - preparatory sale; and absolute
buy and the other party promises to sell a determinate thing sale - executed after full payment.
at the agreed price. This is reciprocally demandable since it is 4. Conditional contract of sale vs. Contract to sell
a form of perfected sale. But to be enforceable, it should a. Conditional contract of sale - Contract of sale is perfected
comply with the requirements of the statute of frauds (i.e, the upon meeting of the minds but the obligation arises only after
promise must be in writing if the amount involved is more the fulfillment of the condition. Once the condition is fulfilled,
than P500.) ownership is automatically transferred to the buyer (assuming
b. Unilateral promise - Takes place when only one party there was already delivery).
promises to buy or to sell a determinate thing at a certain b. Contract to sell - Ownership of title is retained by the seller
price. despite delivery. Once the condition is fulfilled, the seller
1. If not accepted - no legal effect (policitation) needs to execute the deed of absolute sale.
2. If accepted and: 5. Contract of sale of goods by description or by sample - the
▪ Supported by consideration (option) - the promise contract may be rescinded if the bulk of the goods delivered do not
is binding upon the promissor. Meaning the correspond with the description or the sample, and if the contract
promissor cannot withdraw his promise until the be by sample as well as description, it is not sufficient that the bulk
lapse of the option period. The contract of sale is of goods correspond with the sample if they do not also correspond
not yet perfected but another contract, which is with the description. The buyer shall have a reasonable opportunity
the option contract is already perfected. of comparing the bulk with the description or the sample.
▪ Not supported by consideration (Art. 1479, 2nd 6. Contract of sale with return (sale or return) - the ownership passes
Par.) - The promise is not binding upon the to the buyer upon delivery, but he may revest the ownership in the
promissor. Meaning the promissor may still seller by returning or tendering the goods within the time fixed in
withdraw his promise even before the lapse of the the contract, or, if no time has been fixed, within a reasonable
option period. time.
NOTE: Art. 1479 2nd par. is in conflict with Art. 7. Contract of sale on approval or on trial or on satisfaction - the
1324 of NCC. In Art. 1479, the promissor is not ownership therein passes to the buyer:
bound when the promisee accepted the promise if a. When he signifies his approval or acceptance to the seller or
the promise is not supported by a consideration does any other act adopting the transaction (implied
separate and distinct from the price. But in Art. acceptance).
1324, the promissor(offeror) is bound upon the b. If he does not signify his approval or acceptance to the seller,
acceptance by the promissee (offeree) even if the but retains the goods without giving notice of rejection, then
promise is not supported by a consideration if a time has been fixed for the return of the goods, on the
separate and distinct from the price. expiration of such time, and, if no time has been fixed, on the
5. Option Money vs. Earnest Money expiration of a reasonable time.
a. Option contract - A contract granting privilege in one person, 8. Contract of agency to sell vs. Contract of sale
for which he has paid a consideration (option money), which a. Contract of agency to sell (or consignment sale) - Principal
gives him the right (but not the obligation) to buy/sell certain remains the owner (no transfer of ownership) of the thing
property within the option period, at a fixed price. even if delivered to the agent and such agent is not obliged to
b. Earnest money or Arras or Down-payment- Money given as pay for the price. Agent must account for the proceeds of sale
part of the purchase price and as proof of the perfection of or the agent must deliver the price to the principal. Risk of
the contract of sale. loss should be borne by the principal.
b. Contract of sale - There is transfer of ownership upon delivery
• Contract of sale versus other contracts and risk of loss pertains to the vendee.
1. Contract of sale vs. Contract for a piece of work 9. Dation en pago vs. Contract of sale
a. Contract of sale - The vendor in the ordinary course of his a. Dation en pago - Contract where property is alienated to
business manufactures or procures for the general market, extinguish pre-existing debt (cause). Less freedom in fixing
whether the same is on hand at the time or not. price.
b. Contract for a piece of work - If the goods are to be b. Contract of sale - Contract where the cause of the seller is the
manufactured specially for the customer and upon his special price certain in money. There is no pre-existing debt. More
order, and not for the general market. This is actually a freedom in fixing the price.
contract for lease of work. NOTE: Both governed by the law on sales.
Schools of thought: 10. Sale to government by way of expropriation proceeding (power of
▪ Massachusetts rule: If specifically done at the order of eminent domain) - governed by special laws.
another, this is a contract for a piece of work.

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• Obligations of the vendor NOTE: Vendee need not appeal from the decision in order that the
1. To transfer the ownership of the thing - The ownership of the thing vendor may become liable.
sold is acquired by the vendee from the moment it is delivered to 3. Eviction is based on a Right prior to the sale or an act imputable to
him either actual or constructive delivery. the vendor.
2. To deliver the thing. 4. The vendee is Deprived of the whole or of a part of the thing.
a. Actual delivery - The thing sold shall be understood as NOTE: Vendor is liable even if not included in the contract, but the
delivered, when it is placed in the control and possession of parties may increase, diminish, or suppress this legal obligation of the
the vendee. vendor by agreement.
b. Constructive delivery: Other cases where seller is liable for breach of warranty
▪ Legal formalities - When the sale is made through a 1. If the property is sold for nonpayment of taxes due (real property
public instrument, the execution thereof shall be tax) and not made known to the vendee before the sale, the
equivalent to the delivery of the thing which is the vendor is liable for eviction.
object of the contract, if from the deed the contrary 2. The judgment debtor is also responsible for eviction in judicial
does not appear or cannot clearly be inferred. sales, unless it is otherwise decreed in the judgment.
▪ Symbolic delivery/Tradio symbolica/tradio clavium - NOTE: Not liable for implied warranty - sheriff, auctioneer,
With regard to movable property, its delivery may also mortgagee, or pledgee.
be made by the delivery of the keys of the place or Stipulation exempting the vendor from warranty against eviction and
depository where it is stored or kept. waiver of vendee
▪ Tradio longa manu/Delivery by the long hand - The 1. If bad faith (vendor had knowledge of the facts that may give rise of
delivery of movable property made by the mere consent eviction at the time of sale) - Any waiver/stipulation is void. Vendee
or agreement of the contracting parties, if the thing sold may demand from the vendor the following: (VICED)
cannot be transferred to the possession of the vendee a. Value of the thing at the time of eviction (be it greater or less
at the time of the sale (i.e, pointing by finger of the than the price of the sale).
thing to be sold). b. Income or fruits, if he has been ordered to deliver them to the
▪ Tradio brevi manu/Delivery by short hand - There is no party who won the suit against him.
need for actual delivery of the movable property c. Costs of the suit which caused the eviction, and, in a proper
because the vendee is already in possession of the thing case, those of the suit brought against the vendor for the
even before the sale (i.e, vendee held the thing in warranty.
another capacity such as pledgee or depositary). d. Expenses of the contract, if the vendee has paid them.
▪ Traditio constitutum possessorium/Delivery by e. Damages and interests, and ornamental expenses, if the sale
agreement of possessors - Delivery that takes place was made in bad faith.
when the vendor continues in possession of the thing 2. If good faith (vendor had no knowledge of the facts that may give
sold but not as an owner but in some other capacity (i.e, rise of eviction at the time of sale), it may be
as lessee). a. Waiver consciente (vendee made the waiver without
c. Delivery of incorporeal property (quasi-traditio): knowledge of the risks of eviction) - the vendor shall be liable
▪ Execution of public instrument for the value of the thing at the time of eviction; or
▪ Placing of the titles of ownership in the possession of b. Waiver intencionada (vendee made the waiver with
the vendee or the use by the vendee of his rights, with knowledge of the risks of eviction and assumed the
the vendor's consent. consequences - the vendor shall not be liable. (i.e, seller sold
3. To take care of the thing with the DGFF unless another standard of his specific lot which is involved in a law suit, to buyer. Buyer
care was agreed upon. knew of the dispute and assumed the risk of eviction.
4. To warrant the thing. NOTE: The presumption is the waiver was only one in consciente.
• Conditions and Warranties If there was no stipulation exempting the vendor from warranty
Warranty - A statement or representation made by the seller of goods, 1. If bad faith - same liability as in the case of bad faith above
as part of the contract of sale, having reference to the character, quality, 2. If goof faith - same liability as in the case of bad faith above except
or title, of the goods, and by which he promises or undertakes to ensure that the vendor is not liable for damages (letter e)
that certain facts are or shall be as he then represents. Rules in partial eviction:
Effect of breach of warranty Should the vendee lose, by reason of the eviction, a part of the thing
1. Refuse to proceed with the contract sold of such importance, in relation to the whole, that he would not
2. Proceed with the contract; waive the condition have bought it without said part, he may demand either:
NOTE: If the condition is in the nature that it should happen, the non- 1. Rescission of the contract
performance may be treated as breach of warranty. 2. Enforcement of the vendor's liability for eviction
Kind of warranties NOTE: The same rule shall be observed when two or more things have
1. Express warranties - Any affirmation of fact or any promise by the been jointly sold for a lump sum, or for a separate price for each of them,
seller relating to the thing if the natural tendency is to induce the if it should clearly appear that the vendee would not have purchased one
buyer to purchase the same, and if the buyer purchase the thing without the other.
relying thereon. Requisites of warranty against hidden defects: (HEUP)
NOTE: No affirmation of the value of the thing, nor any statement 1. The defect must be Hidden.
purporting to be a statement of the seller's opinion only, shall be 2. The defect must Exist at the time of sale.
construed as a warranty (caveat emptor), unless the seller made 3. The defect must render the thing Unfit for the use for which it is
such affirmation or statement as an expert and it was relied upon intended, or diminish its fitness for such use to such an extent that,
by the buyer. had the vendee been aware thereof, he would not have acquired it
2. Implied warranties - warranties deemed included in all contracts of or would have given a lower price for it.
sale by operation of law. 4. The action to enforce it must be made within the Period covered
a. Warranty against eviction - implied warranty on the part of provided by law.
the seller that he has a right to sell the thing at the time NOTE: Vendor shall not be liable for patent defects (caveat emptor or
when the ownership is to pass, and that the buyer shall from buyer beware principle) or those which may be visible, or for those
that time have and enjoy the legal and peaceful possession of which are not visible if the vendee is an expert who, by reason of his
the thing. trade or profession, should have known them.
b. Warranty against hidden defects - warranty that the thing Implied warranties:
shall be free from any hidden faults or defects, or any charge 1. Warranty for fitness for particular purpose
or encumbrance not declared or known to the buyer. Requisites:
Requisites of warranty against eviction: (NERD) a. When the buyer, makes known to the seller the particular
1. The vendor must have been Notified of the suit for eviction at the purpose for which the goods are acquired.
instance of the vendee. b. The buyer relies on the seller's skill or judgment.
2. Eviction is by a final judgment.

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 NOTE: Sale under its patent or other trade name (brand If the sale is rescinded, the animal shall be returned in
name), there is no warranty as to its fitness for any particular the condition in which it was sold and delivered, the
purpose, unless there is a stipulation to the contrary. vendee being answerable for any injury due to his
2. Warranty for merchantable quality - When the goods are brought negligence, and not arising from the redhibitory fault or
by description from a seller who deals in goods of that description, defect.
there is an implied warranty that the goods shall be of 2. Accion quanti minoris - Demanding a proportionate
merchantable quality or fit for general purpose. reduction of the price, with damages.
3. Warranty for merchantability - In the sale by sample, if the seller is ▪ Period of filing action - Must be brought within forty days
a dealer in goods of that kind, there is an implied warranty that the from the date of their delivery to the vendee.
goods shall be free from any defect rendering them 2. Liability of vendor in case the animal died - If the animal should
unmerchantable which would not be apparent on reasonable die within three days after its purchase, the vendor shall be liable if
examination of the sample. the disease which cause the death existed at the time of the
Responsibility for hidden defects contract.
GR: Vendor is responsible to the vendee for any hidden faults or defects 3. Void sale of animals
in the thing sold, even though he was not aware thereof. a. Sale of animals suffering from contagious diseases.
Exception: Contrary stipulation and the vendor was not aware of the b. Sale of animals if the use or service for which they are
hidden faults or defects in the thing sold. acquired has been stated in the contract, and they are found
Remedies of vendee in case of breach of warranty - The vendee may to be unfit.
elect between: NOTE: The form of sale of large cattle shall be governed by special
1. Accion redhibitoria - Withdrawing from the contract (rescission), laws.
with damages; or • Unpaid Seller
2. Accion quanti minoris - Demanding a proportionate reduction of Concept - is one who has not been paid or tendered the whole of the
the price, with damages price or who has received a bill of exchange or other negotiable
• Liability of vendor in case of loss of the thing with hidden defects instrument as conditional payment, and the condition on which it was
1. The cause of loss is the hidden defect received has been broken by reason of the dishonor of the instrument,
a. If the vendor was aware of the defect: the insolvency of the buyer, or otherwise.
1. Vendor shall bear the loss Rights of unpaid seller: (SRRP)
2. Return the price Notwithstanding that the ownership in the goods may have passed to
3. Refund the expenses of the contract the buyer, the unpaid seller of goods has the following rights:
4. Pay damages 1. Right of Possessory lien - A lien on the goods or right to retain them
b. If the vendor was NOT aware of the defect for the price while he is in possession of them.
1. Return the price 2. Right of Stoppage in transitu - In case of the insolvency of the
2. Pay interest thereon buyer, a right of stopping the goods in transitu after he has parted
3. Refund the expenses of the contract with the possession of them.
2. The cause of loss is fortuitous event or vendee’s fault 3. Right of Resale
a. If the vendor was aware of the defect 4. Right to Rescind
1. Return the price paid less the value of the thing at the NOTE: (1 and 2) or (3 and 4) cannot be exercised at the same time
time of lost Right of possessory lien:
2. Pay damages 1. When available
b. If the vendor was NOT aware of the defect a. When the goods have been sold without any stipulation as to
1. Return the price paid less the value of the thing at the credit.
time of lost b. Where the goods have been sold on credit, but the credit
NOTE: Same rules shall apply in judicial sales, except that the judgment term has expired.
debtor shall not be liable for damages. c. When the buyer is insolvent.
• Period of filing action 2. When not available
The action to withdraw from the contract with damages (accion a. When the seller delivers the goods to a carrier or other bailee
redhibitoria), reduction of the price with damages (accion quanti for the purpose of transmission to the buyer without
minoris), ask for the return of the price with damages, if applicable, in reserving the ownership in the goods or the right to the
case of loss articles shall be barred after six months, from the delivery of possession thereof.
the thing sold. b. When buyer or his agent lawfully obtains possession of the
• Warranty on sale of animals with defects or disease goods.
1. Sale of animal with redhibitory defects c. Waiver by seller.
▪ Concept - Redhibitory defect - defect of such a nature that Right of stoppage the goods in transit
expert knowledge, even after a professional inspection has When available
been made, is not sufficient to discover it. But if the 1. Seller parted the goods
veterinarian, through ignorance or bad faith should fail to 2. Buyer is or becomes insolvent
discover or disclose it, he shall be liable for damages. Effect of exercising right of stoppage
▪ Rules: 1. Goods are no longer in transit.
GR: If two or more animals are sold together, whether for a 2. Contract of carriage ceases.
lump sum or for a separate price for each of them, the 3. Carrier must redeliver the goods according to the instructions of
redhibitory defect of one shall only give rise to its the seller. However, in case of negotiable document of title, the
redhibition, and not that of the others. instrument must be surrendered first to carrier).
Exception: If it should appear that the vendee would not have Right of resale
purchased the sound animal or animals without the defective When available
one. This rule is applicable when a team, yoke pair, or set is 1. Buyer defaulted in the payment
bought, even if a separate price has been fixed for each one 2. Seller has possessory lien or has stopped the goods in transit
of the animals composing the same. 3. Title to the goods has passed on to the buyer
NOTE: The provisions with respect to the sale of animals with 4. The grounds for resale are any of the following
redhibitory defects shall in like manner be applicable to the a. Goods are perishable
sale of other things. b. Seller reserved the right to resell
NOTE: There is no warranty against hidden defects of animals c. Buyer is in default for unreasonable time (in this case, notice
sold at fairs or at public auctions, or of live stock sold as of intention to resell is necessary)
condemned. Effect of resale
▪ Remedies of vendee: Either 1. Seller is not liable to the original buyer about the proceeds and
1. Accion redhibitoria - Withdrawing from the contract profits of resale
(rescission), with damages

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 2. Seller may recover damages from original buyer for any loss b. Partial loss - buyer may choose (1) Rescission or (2) Deliver
suffered by the breach of contract the remaining with proportionate reduction of price
3. The new buyer acquires good title against original buyer 2. Loss after perfection but before delivery
Right to rescind a. Majority view - Seller bears the loss; buyer is not obliged to
When available - same with right of resale pay for the price.
Effect of rescission GR: After perfection but before delivery the owner of the
1. Seller resumes ownership of the goods goods is still the seller hence RES PERIT DOMINO (the thing
2. Seller shall not be liable of the contract of sale perishes with the owner)
3. Seller may recover damages from original buyer for any loss Exceptions: Even if there is no transfer of ownership, the risk
suffered by the breach of contract is shifted to the buyer in the following cases:
• Sale of a person who is not the owner of the thing at the time of a. Agreement of the parties
delivery b. If seller retained the ownership merely to secure
GR: When goods are sold by a person who is not the owner thereof (i.e, performance by the buyer (i.e, contract to sell)
thief), the buyer acquires no better title to the goods than the seller had. c. When actual delivery is delayed due to the fault of buyer
Meaning, the buyer did not acquire ownership. (compensation morae)
Exceptions: b. Minority view - Buyer bears the loss; buyer is obliged to pay
a. The sale is made under authority or w/ the consent of the owner. for the price. Ratio: After perfection but before delivery, the
b. The owner of the goods is by his conduct precluded from denying buyer is entitled to any benefit (i.e, fruits) hence the buyer
the seller's authority to sell. should also assume the risk (i.e, loss).
c. The sale is under the provisions of any factors' act, recording laws, • Obligations of the vendee
or any other provision of law enabling the apparent owner of goods 1. To accept delivery
to dispose of them as if he was the true owner. The buyer is deemed to have accepted the goods:
d. The sale is under statutory power of sale or under the order of a a. When he intimates to the seller that he has accepted them
court of competent jurisdiction. b. When the goods have been delivered to him and examined
e. The purchase is made in a merchant's store, fairs or markets. c. When he does any act in relation to them which is
NOTE: The owner cannot recover in the above cases, even if he offers to inconsistent with the ownership of the seller
reimburse. d. When, after the lapse of a reasonable time, he retains the
• Rules if the owner had lost the property or been unlawfully deprived goods w/out notifying the seller that he has rejected them
The owner may recover even without reimbursement. Delivery of goods in installments:
Exception: If possessor acquired the object in good faith at a public sale GR: The buyer of goods is not bound to accept delivery thereof by
or auction, the owner may still recover but he should reimburse the installments (indivisibility of payment/performance)
purchases. Exception: Stipulation to the contrary.
• Sale of a person with voidable title Right of buyer to examine the goods before accepting
Where the seller of goods has a voidable title thereto, but his title has GR: Buyer has the right to examine the goods before acceptance
not been avoided at the time of the sale, the buyer acquires a good title Exceptions:
to the goods, provided the buyer buys them in a. Stipulation to the contrary
a. Good faith b. In case of agreement of COD (Collect on Delivery), the buyer
b. For value, and is not entitled to examine the goods before the payment of
c. Without notice of the seller's defect of title. the price, in the absence of agreement or usage of trade
• Remedy of buyer in sale of real property with difference in area permitting such examination.
When the seller sold a real estate for a specific area but the actual Effect when buyer refuses to accept delivery
property has greater or lesser area, the following are the rules: 1. If refusal to accept delivery is justified (such as when the
Sale price is per unit of measure (i.e, per square meter) quantity is not complete or the goods being delivered are
a. Actual area is greater than - the buyer may different from those stipulated)
1. Accept the area stated in the contract and reject the excess a. Buyer has no duty to return the goods to the seller
2. Accept the whole area and pay the price at contract rate unless otherwise agreed
b. Actual area is lesser than - the buyer may b. Title to the goods does not pass on to the buyer
1. Ask for proportionate reduction (accion quanti minoris) if the c. He shall not be obliged to pay the price
lack of area is less than 1/10 (10%) of the STATED area in the d. If he constitutes himself as depositary of the goods, he
contract. shall be liable as such
2. Rescind the contract if the lack of area is at least 1/10 of the NOTE: It is sufficient that the buyer notifies the seller that he
STATED area OR the vendee would not have bought the real refuses to accept them.
property had he known of the smaller area (basis is intention 2. If refusal to accept is not justified
and not the quantity). a. Title to the goods passes to the buyer from the moment
Sale price is lump-sum - Seller should deliver the actual real property the goods are placed at his disposal except in the
even if it is different from the area stated in the contract and buyer following cases:
should pay the lump-sum price. 1. Stipulation to the contrary
Remedies of buyer if seller did not deliver the excess area 2. When the seller has reserved the ownership of the
a. Rescission goods as security for the payment of the price.
b. Proportionate reduction of the price b. He shall be obliged to pay the price
2. To pay the price of the thing sold at the time and place stipulated
• Rules of preference in double sale in the contract. If there is no stipulation, at the time and place of
Movable: the delivery of the thing sold.
1. First possessor in good faith (whether actual or constructive) When interest will be paid on the price:
2. Oldest title a. Stipulation of interest
NOTE: 2nd buyer should be in GF b. If the thing sold produces fruits or income
Immovable: c. If vendee is in default (mora)
1. First to register the sale in the Registry of Deeds (NOTE: the sale Suspension of payment of the price by the vendee:
must be in public instrument to affect the RoD) 1. Grounds: Disturbance (or reasonable grounds to fear such
2. First possessor in good faith (whether actual or constructive) disturbance) in the vendee’s possession or ownership of the
3. Oldest title thing
NOTE: In order to have double sale, both sales should be valid and made 2. Duration: Until the vendor has caused the disturbance or
by the same seller. danger cease
• Loss of the thing in the contract of sale 3. When right to suspend not available:
1. Loss before perfection: a. If the vendor gives security for the return of the price
a. Total loss - the sale is void for absence of object

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 b. Stipulation that vendee will pay notwithstanding of the due. If the buyer failed to pay during the GP, the seller may
disturbance cancel the sale after 30 days from the receipt of buyer of
c. If the disturbance is mere trespass notice for rescission by notarial act.
Rescission by the vendor:
Immovable - Even though it may have been stipulated that upon • Actions for breach of contract of sale of goods
failure to pay the price at the time agreed upon the rescission of Remedies of the seller
the contract shall of right take place (automatic rescission without 1. Maintain an action for the price of the goods plus damages when
court intervention), the vendee may still pay, even after the ownership is already transferred to the buyer and he wrongfully
expiration of the period, as long as no demand for rescission of the refused to pay for the goods.
contract has been made upon him either judicially or by a notarial 2. Maintain an action for the price of the goods plus damages when
act. After the demand, the court may not grant him a new term. the price is payable on a certain day, irrespective of the transfer of
Movable - the rescission of the sale shall of right take place in the ownership to the buyer and he wrongfully refused to pay for the
interest of the vendor: goods.
a. If the vendee, upon the expiration of the period fixed for the 3. Although there is no transfer of ownership, if the goods cannot
delivery of the thing, should not have appeared to receive it, readily be resold for a reasonable price, the seller may offer to
or, deliver the goods to the buyer, and, if the buyer refuses to receive
b. Having appeared, he should not have tendered the price at them, may notify the buyer that the goods are thereafter held by
the same time, unless a longer period has been stipulated for the seller as bailee for the buyer. Thereafter the seller may treat
its payment. the goods as the buyer's and may maintain an action for the price
Sale by installment: plus damages.
Movable (Recto Law) - In a contract of sale of personal property 4. When the goods are not yet delivered to the buyer, and the buyer
the price of which is payable in installments, the vendor may has repudiated the contract, or has manifested his inability to
exercise any of the following remedies: perform his obligations or has committed a breach, the seller may
1. Exact fulfillment, should the vendee fail to pay totally rescind the contract of sale by giving notice to the buyer.
2. Cancel (rescind) the sale, should the vendee's failure to pay Remedies of the buyer
cover two or more installments. Buyer will return the thing 1. Bring an action for specific performance without giving the seller
and seller return the price less reasonable rent. the option of retaining the goods on payment of damages.
NOTE: A stipulation that the installments or rents paid shall 2. When there is a breach of warranty by the seller, the buyer may, at
not be returned to the vendee or lessee shall be valid insofar his election:
as the same may not be unconscionable under the a. Accept or keep the goods and set up against the seller, the
circumstances. breach of warranty by way of recoupment in diminution or
3. Foreclose the chattel mortgage on the thing sold, if one has extinction of the price.
been constituted, should the vendee's failure to pay cover b. Accept or keep the goods and maintain an action against the
two or more installments. In this case, he shall have no seller for damages for the breach of warranty.
further action against the purchaser to recover any unpaid c. Refuse to accept the goods, and maintain an action against
balance of the price (exception to the rule on chattel the seller for damages for the breach of warranty.
mortgage). Any agreement to the contrary shall be VOID. d. Rescind the contract of sale and refuse to receive the goods
NOTE: The remedies are alternative. or if the goods have already been received, return them or
NOTE: Recto Law shall also apply to contracts purporting to be offer to return them to the seller and recover the price or any
leases of personal property with option to buy (finance lease), part thereof which has been paid.
when the lessor has deprived the lessee of the possession or NOTE: When the buyer granted a remedy in anyone of these ways,
enjoyment of the thing. no other remedy can be granted. But if specific performance failed,
When deficiency may be recovered the buyer may rescind the contract.
a. In case of straight-term sale/credit sale/charge sale. The buyer cannot rescind the contract when
b. If security foreclosed is other than the chattel mortgage 1. He knew of the breach of warranty when he accepted the goods
constituted over the thing purchased on installment. without protest
c. In case of sale on execution of judgment in favor of judgment- 2. If he fails to notify the seller within a reasonable time of the
seller. election to rescind
Immovable (Maceda Law/RA 6552 Realty Installment Buyer Act 3. If he fails to return or to offer to return the goods to the seller in
and PD 957 Subdivision and Condominium Buyers’ Protective substantially as good condition (due to cases other than breach of
Decree) warranty like buyer’s fault) as they were in at the time the
Transactions covered: Installment purchase of real estate including ownership was transferred to the buyer.
residential and condominium apartments (RA 6552) and Effect of rescission
subdivision lots whether residential, commercial, industrial, 1. The buyer is no longer liable for the price upon returning or
recreational in a subdivision project, or condominium units in any offering to return the goods.
condominium project (PD 957) where the buyer has paid at least 2. If the price is already paid, the seller shall be liable to repay
TWO years of installments. concurrently with the return of the goods, or immediately after an
Rights of the buyer: offer to return the goods in exchange for repayment of the price.
a. If at least 2 years of installment payment: 3. If the seller refuses to accept the goods, the buyer shall be deemed
1. To pay without additional interest during grace period to hold the goods as bailee for the seller, but subject to a lien to
(GP). GP = one month for every year of installments secure payment of the price which has been paid, and with the
paid. The right shall be exercised only once every 5 remedies for the enforcement of such lien allowed to an unpaid
years. seller.
2. To cancel/rescind the sale and receive refund of the
Cash Surrender Value (CSV). CSV = 50%; and after 5 • Extinguishment of contract of sale
years, plus 5% every year (limit of 90%) of the total Causes of extinguishing contract of sale
payments made (includes down-payment, option 1. Same causes as all other obligations (please refer to oblicon)
money, deposits and advances). Example, default in at 2. Those stated in the provisions on the law of sales
the end of 13th year = 50% + (5% x 8 years) (for 6th year a. Rescission in case of personal property sold in installment
to 13th year) = 90% (maximum). b. Foreclosure of chattel mortgage on personal property sold in
NOTE: Rescission shall take place after meeting the twin installment
requirements of (1) full payment of CSV; and (2) lapse of 30 c. Rescission in case of contract of sale by sample/description
days after receipt of buyer of notice for rescission by notarial d. Rescission in case of unpaid seller
act. e. Resale of goods in case of unpaid seller
b. If less than 2 years of installment payment - grace period of f. Sale of real property for lump-sum when seller refused to
not less than 60 days from the date the installment became deliver the excess area

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 g. Rescission by the buyer in case of breach of warranty against consolidated by the mere operation of the law
partial eviction upon failure of the vendor to redeem.
h. Rescission by the buyer in case of breach of warranty against • Enforcement of right of redemption
hidden defects a. Against whom right to repurchase available
i. Rescission by the buyer in case of breach of warranty for sale 1. Vendee a retro
of animals with redhibitory defects 2. Any possessor (3rd person) whose right is
3. By redemption derived from the vendee, even if in the
a. Conventional redemption (sale with right of repurchase or second contract no mention should have
pacto de retro sale) - agreement of parties been made of the right to repurchase
• Concept - Shall take place when the vendor reserves the provided that the pacto de retro sale is
right to repurchase the thing sold, with the obligation to recorded in the Register of Deeds (to affect
return to the vendee the following: 3rd person).
▪ The price of the sale NOTE: Even if not recorded in the Register,
▪ The expenses of the contract and any other the vendor-redemptioner may exercise the
legitimate payments made by reason of the sale redemption if the possessor is aware of the
▪ The necessary and useful expenses made on the repurchase agreement.
thing sold b. Who may enforce the right of redemption
▪ And comply with other stipulations which may 1. The vendor a retro
have been agreed upon 2. A co-owner of an undivided immovable
NOTE: In pacto de reto sale, the vendee is subrogated to which is essentially indivisible sold his share
the vendor's rights and action. with right of repurchase to a 3rd person. The
NOTE: Right to repurchase is different from option to other co-owners also sold their shares to the
buy subsequently executed after the deed of absolute same 3rd person but under absolute sale. In
sale. The right to repurchase must be stipulated at the this case, the 3rd person may compel the co-
time of execution of pacto de retro sale, being an owner vendor a retro to purchase the whole
accidental element. interest (to avoid co-ownership).
• Parties in pacto de retro sale 3. The creditors of the vendor but after they
a. Vendor-redemptioner - He who sold the property have exhausted the property of the vendor
under conditional sale but later will become the (action subrogatoria)
purchaser at the time of redemption. b. Legal redemption - redemption by operation of law.
b. Vendee - The purchaser at the time of sale but will • Concept - The right to be subrogated, upon the same
become the seller at the time of redemption. terms and conditions stipulated in the contract, in the
• Rules regarding fruits at the time of redemption place of one who acquires a thing by purchase or dation
a. If at the time of sale, there are visible or growing in payment, or by any other transaction whereby
fruits, there shall be no reimbursement on the part ownership is transmitted by onerous title.
of the vendor-redemptioner for or prorating of • Instances and rules of application of legal redemption:
those existing at the time of redemption, if no a. Legal redemption by co-owner:
indemnity was paid by the vendee when the sale 1. A co-owner/s sold to THIRD person his/their
was executed. share.
b. If at the time of sale, there are no fruits and some 2. If the price of the alienation is grossly
exist at the time of redemption, they shall be excessive, the redemptioner shall pay only a
prorated between the redemptioner and the reasonable one.
vendee, giving the latter, the part corresponding to 3. If two or more co-owners desire to exercise
the time he possessed the land in the last year, the right, they may do so in proportion to
counted from the anniversary of the date of the their share.
sale. b. Legal redemption by owner of adjoining rural land:
c. The vendor who recovers the thing sold shall 1. A piece of ADJOINING rural land, the area of
receive it free from all charges or mortgages which does not exceed one hectare, was sold
constituted by the vendee, but he shall respect the to other person who already own a rural
leases which the latter may have executed in good land.
faith, and in accordance with the custom of the 2. The adjacent lands should NOT be separated
place where the land is situated. by brooks, drains, ravines, roads and other
• Period of to exercise right of redemption: apparent servitudes.
a. If there is no agreement - 4 years from the date of 3. If two or more adjoining owners desire to
pacto de reto sale. exercise the right of redemption at the same
b. If there is an agreement - should not exceed 10 time, the owner of the adjoining land of
years. Period in excess of 10 years shall be void. smaller area shall be preferred; and should
“At anytime they have the money”, “When he has both lands have the same area, the one who
the means”, “In Mar. of any year” are examples of first requested the redemption.
pacto de retro sale with agreed period but c. Legal redemption by adjoining owner of urban
indefinite, hence, the period should be 10 years. land:
c. In case of civil action (one of the parties contests 1. A piece of urban land which is so small and so
or denies that the true agreement is pacto de situated that a major portion thereof cannot
retro), the vendor may still exercise the right to be used for any practical purpose within a
repurchase within thirty days from the time final reasonable time, having been bought merely
judgment was rendered in a civil action on the for speculation, is about to be re-sold, the
basis that the contract was a true sale with right to owner of any adjoining land has a right of
repurchase. This rule is not applicable to PRE-EMPTION at a reasonable price.
uncontested pacto de reto sale. 2. If the re-sale has been perfected, the owner
• Effect of failure to exercise right of redemption: of the adjoining land shall have a right of
a. Personal property - absolute ownership is REDEMPTION, also at a reasonable price.
consolidated to the vendee 3. When two or more owners of adjoining lands
b. Real property - Judicial order after the vendor has wish to exercise the right of pre-emption or
been duly heard is needed before registering the redemption, the owner whose intended use
consolidation of title. Ownership to the vendee is of the land in question appears best justified
shall be preferred.

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 NOTE: The right of redemption of co-owners 3) Chattel Mortgage
excludes that of adjoining owners. 4) Antichresis
• Period of legal redemption (pre-emption or
redemption) • Bailment - It is the delivery of a personal property for some particular
1. Pre-emption - Within 30 days from written notice use, or on mere deposit, upon a contract, express or implied, that after
by prospective vendor. Pre-emption is applicable the purpose has been fulfilled, it shall be redelivered to the person who
BEFORE the sale. delivered it, or otherwise dealt with according to his directions, or kept
2. Redemption - Within 30 days from written notice until he reclaims it, as the case may be. Generally, no fiduciary
by vendor. Redemption is applicable AFTER the relationship is created by bailment. No trustee-beneficiary relationship is
sale. created.
• Recording of sale in the Registry of Property • Parties in a contract of bailment
The deed of sale shall not be recorded in the Registry of 1. Bailor - the giver; the party who delivers the possession or custody
Property, unless accompanied by an affidavit of the of the thing bailed
vendor that he has given written notice thereof to all 2. Bailee - the recipient; the party who receives the possession or
possible redemptioners. custody of the thing thus delivered
• Contractual bailments with reference to compensation
Equitable Mortgage 1. For the sole benefit of the bailor (gratuitous) e.g. gratuitous deposit
• Concept - One which lacks the proper formalities, form or words or other 2. For the sole benefit of the bailee (gratuitous) e.g. commodatum,
requisites prescribed by law for a mortgage, but shows the intention of mutuum
the parties to make the property subject of the contract as security for a 3. For the benefit of both parties (mutual-benefit bailments) e.g.
debt and contains nothing impossible contrary to law. deposit for compensation, involuntary deposit, pledge and
• Essential requisites: bailments for hire:
1. Parties entered into a contract of sale a. Hire of things - for temporary use of the hirer
2. Their intention was to secure an existing debt by way of a b. Hire of service - for some work or labor upon it by the bailee
mortgage. c. Hire of carriage of goods - for carriage
• Contracts presumed equitable mortgage: (DRI-STAR) d. Hire of custody - for storage
1. In case of Doubt, a contract purporting to be a sale with right
to repurchase shall be construed as an equitable mortgage. Loan
2. When the vendor Remains in possession as lessee or • Concept - By the contract of loan, one of the parties delivers to another,
otherwise. either something not consumable so that the latter may use the same for
3. When the price of a sale with right to repurchase is unusually a certain time and return it, in which case the contract is called a
Inadequate.
COMMODATUM; or money or other consumable thing, upon the
4. Where it may be fairly inferred that the real intention of the
condition that the same amount of the same kind and quality shall be
parties is that the transaction shall Secure the payment of a
debt or the performance of any other obligation. paid, in which case the contract is simply called a LOAN or MUTUUM.
5. When the vendor binds himself to pay the Taxes on the thing NOTE: Loan is a real contract. But a contract to constitute a future loan is
sold. a consensual contract.
6. When upon or after the expiration of the right to repurchase, • Fungible Thing vs. Consumable Thing
Another instrument extending the period of redemption or 1. Fungible thing is one where the parties have agreed to allow the
granting a new period is executed.
substitution of the thing given with an equivalent thing while non-
7. When the purchaser Retains for himself a part of the
purchase price; fungible thing is one where the parties have the intention of having
NOTE: Shall also apply to a contract purporting to be an absolute the same identical thing returned after the intended use.
sale. 2. Consumable thing is one which cannot be used according to its
nature without being consumed while a non-consumable thing is
• Interest one which can be used according to its nature without being
In any of the foregoing cases, any money, fruits, or other benefit to consumed.
be received by the vendee as rent or otherwise shall be considered 3. As to whether a thing is consumable or not, it depends upon the
as interest. nature of the thing. As to whether it is fungible or not, it depends
• Remedy of reformation upon the intention of the parties.
In case of instances above, the vendor a retro may ask for the • Kinds of Loan
reformation of the instrument. 1. Commodatum
2. Simple Loan or Mutuum
Law on Credit Transactions • Parties to a contract of loan
• Credit - refers to the ability of a person (bailee or borrower) to borrow 1. Bailor - the lender
money based on the belief, trust or confidence given by another person 2. Bailee - the borrower
(bailor or lender) that the former will comply with his obligation.
• Credit Transactions - refers to contracts or agreements based on such Commodatum
belief, trust or confidence. It includes all transactions involving the • The bailee in commodatum acquires the right to use of the thing but not
purchase or loan of goods, service, or money in the present with a its fruits.
promise to pay or deliver in the future. NOTE: A stipulation that the bailee may make use of the fruits of the
• Kinds of Credit Transactions thing loaned is valid. But such stipulation shall only be incidental and not
1. Principal Contracts the main purpose otherwise the contract becomes usufruct.
a. Loan • The bailor in commodatum need not be the owner of the thing loaned
1) Commodatum hence a usufructuary or a lessee may enter into a contract of
2) Mutuum/Simple Loan commodatum.
b. Deposit • Consumable goods may be the subject of commodatum if the purpose of
1) Extra-judicial the contract is not the consumption of the object, as when it is merely
a) Voluntary for exhibition. In such case, the consumable thing is non-fungible
b) Necessary because of the intention of the parties. Example is a commodatum
2) Judicial/Sequestration involving a 100-year old wine for exhibit/display purposes only.
2. Accessory Contracts • Characteristics of Commodatum
a. Contracts of Personal Security/Unsecured Transactions 1. Real contract (delivery, whether actual or constructive, is needed
1) Guaranty for the perfection of the contract)
2) Surety 2. Principal Contract
b. Contracts of Real Security/Secured Transactions 3. Involves non-fungible thing, whether personal or real property
1) Pledge 4. Essentially, gratuitous (otherwise the contract becomes some other
2) Real Mortgage contract like lease)
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 5. Purely personal - the death of either the bailor or the bailee 5. The bailor who, knowing the flaws of the thing loaned, does not
extinguishes the contract. Furthermore, the bailee can neither lend advise the bailee of the same, shall be liable to the latter for the
nor lease the object of the contract to a third person. However, the damages which he may suffer by reason thereof.
members of the bailee's household may make use of the thing NOTE: Bailee may exercise right of retention for the recovery of
loaned, unless there is a stipulation to the contrary, or unless the damages only but not on unpaid extra-ordinary expenses.
nature of the thing forbids such use. 6. The bailor cannot exempt himself from the payment of expenses
6. Nominate (extra-ordinary expenses for preservation) or damages by
7. Unilateral abandoning the thing to the bailee.

• Obligations of the Bailee in Commodatum Simple Loan or Mutuum

1. The bailee is obliged to pay for the ordinary expenses for the use • Mutuum - A person who receives a loan of money or any other fungible
and preservation of the thing loaned. thing acquires the ownership thereof and is bound to pay to the creditor
2. The bailee is liable for the loss of the thing, even if it should be an equal amount of the same kind and quality.
through a fortuitous event: NOTE: A contract whereby one person transfers the ownership of non-
a. If he devotes the thing to any purpose different from that for fungible things to another with the obligation on the part of the latter to
which it has been loaned. give things of the same kind, quantity, and quality shall be considered a
b. If he keeps it longer than the period stipulated, or after the BARTER. In such case, there is transfer of ownership, so it cannot be
accomplishment of the use for which the commodatum has Commodatum.
been constituted. NOTE: Abnormal/Irregular/Imperfect usufruct also refers to Mutuum.
c. If the thing loaned has been delivered with appraisal of its • The obligation of a person who borrows money shall be governed by the
value, unless there is a stipulation exempting the bailee from provisions of Articles 1249 and 1250 of the Civil Code.
responsibility in case of a fortuitous event. 1. Art. 1249. The payment of debts in money shall be made in the
d. If he lends or leases the thing to a third person, who is not a currency stipulated, and if it is not possible to deliver such
member of his household. currency, then in the currency which is legal tender in the
e. If, being able to save either the thing borrowed or his own Philippines.
thing, he chose to save the latter.
NOTE: The bailee does not answer for the deterioration of the thing The delivery of promissory notes payable to order, or bills of
loaned due only to the use thereof and without his fault. exchange or other mercantile documents shall produce the effect
3. The bailee cannot retain the thing loaned on the ground that the of payment only when they have been cashed, or when through
bailor owes him something, even though it may be by reason of the fault of the creditor they have been impaired.
expenses. However, the bailee has a right of retention for damages
in case of hidden defects not disclosed by the bailor if he is aware In the meantime, the action derived from the original obligation
of such defect. shall be held in abeyance.
4. When there are two or more bailees to whom a thing is loaned in
the same contract, they are liable solidarily. 2. Art. 1250. In case an extraordinary inflation or deflation of the
• Obligations of the Bailor in Commodatum currency stipulated should supervene, the value of the currency at
1. The bailor cannot demand the return of the thing loaned till after the time of the establishment of the obligation shall be the basis of
the expiration of the period stipulated, or after the payment, unless there is an agreement to the contrary.
accomplishment of the use for which the commodatum has been
constituted. • If what was loaned is a fungible thing other than money, the debtor owes
Exceptions: The bailor may immediately demand the return of the another thing of the same kind, quantity and quality, even if it should
thing: change in value. In case it is impossible to deliver the same kind, its value
a. If the bailor should have urgent need of the thing, he may at the time of the perfection of the loan shall be paid.
demand its return or temporary use. In case of temporary use • Fixed, savings, and current deposits of money in banks and similar
by the bailor, the contract of commodatum is suspended institutions shall be governed by the provisions concerning simple loan.
while the thing is in the possession of the bailor. These are also known as irregular deposit.
b. The bailor may demand the thing at will, and the contractual • No interest shall be due unless it has been expressly stipulated in writing.
relation is called a precarium, in the following cases: • Kinds of Interest
1) If neither the duration of the contract nor the use to 1. Monetary - should be in writing
which the thing loaned should be devoted, has been 2. Compensatory - need not be in writing
stipulated. 3. Simple Interest
2) If the use of the thing is merely tolerated by the owner. 4. Compound Interest
c. If the bailee commits any act of ingratitude similar to 5. Legal Interest
donation. 6. Illegal Interest
2. The bailor shall refund the extraordinary expenses during the • Contracts and stipulations, under any cloak or device whatever, intended
contract for the preservation of the thing loaned, provided the to circumvent the laws against usury shall be void. The borrower may
bailee brings the same to the knowledge of the bailor before recover in accordance with the laws on usury.
incurring them, except when they are so urgent that the reply to NOTE: Due to Central Bank Circular 905, Usury Law is effectively
the notification cannot be awaited without danger. suspended. The debtor and the creditor may stipulate any interest rate
3. If the extraordinary expenses arise on the occasion of the actual based on their mutual agreement. Hence, the creditor cannot
use of the thing by the bailee, even though he acted without fault, unilaterally increase the interest rate.
they shall be borne equally by both the bailor and the bailee, unless • In the determination of the interest, if it is payable in kind, its value shall
there is a stipulation to the contrary. be appraised at the current price of the products or goods at the time
4. If, for the purpose of making use of the thing, the bailee incurs and place of payment.
expenses other than those ordinary and extra-ordinary expenses • Interest due and unpaid shall not earn interest (accrued interest does
referred above, he is not entitled to reimbursement. not earn interest).
NOTE: Summary of expenses: Exceptions:
a. Ordinary expenses, whether for preservation or actual use, 1. Stipulation to capitalize the interest due and unpaid (compounding
are borne by the bailee. of interest)
b. Extra-ordinary expenses for preservation are borne by the 2. In case of judicial demand, accrued interest may earn
bailor. compensatory interest.
c. Extra-ordinary expenses arising from actual use, shall be • If the borrower pays interest when there has been no stipulation, he may
borne equally by the bailor and the bailee. recover it under Solutio Indebiti.
d. Other expenses are borne by the bailee. • If the borrower pays interest based on oral agreement, he is not obliged
to pay interest because such stipulation/agreement is void. But if the
borrower nevertheless paid with the knowledge that he is not obliged to
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 do so, he cannot recover the interest under the rules of Natural thing with a person who is manifestly careless or unfit. The
Obligation. If the borrower paid without such knowledge, he can recover depositary is responsible for the negligence of his employees
under Solutio Indebiti. whether or not such employee is manifestly careless or unfit.
• Usurious contracts shall be governed by the Usury Law and other special 3. The depositary may change the way of the deposit if under the
laws, so far as they are not inconsistent with the Civil Code. circumstances he may reasonably presume that the depositor
would consent to the change if he knew of the facts of the
Deposit situation. However, before the depositary may make such change,
• Concept - A deposit is constituted from the moment a person receives a he shall notify the depositor thereof and wait for his decision,
thing belonging to another, with the obligation of safely keeping it and of unless delay would cause danger. For example, a car was deposited
returning the same. If the safekeeping of the thing delivered is not the in garage “A”. The depositary may store it in a bigger garage “B”
principal purpose of the contract, there is no deposit but some other but the depositary shall notify the depositor first.
contract (i.e, agency, lease, commodatum or usufruct) 4. The depositary holding certificates, bonds, securities or
• Kinds of Deposit instruments which earn interest shall be bound to collect the latter
1. Extrajudicial when it becomes due, and to take such steps as may be necessary
a. Voluntary in order that the securities may preserve their value and the rights
b. Necessary corresponding to them according to law.
2. Judicial NOTE: The above provision shall not apply to contracts for the rent
• Characteristics of Deposit of safety deposit boxes.
1. Real 5. Unless there is a stipulation to the contrary, the depositary may
NOTE: An agreement to constitute a deposit is binding, but the commingle grain or other articles of the same kind and quality, in
deposit itself is not perfected until the delivery of the thing. A which case the various depositors shall own or have a
contract to constitute a future deposit is consensual. proportionate interest in the mass.
2. Generally, gratuitous, except when there is an agreement to the 6. The depositary cannot make use of the thing deposited. Otherwise,
contrary, or unless the depositary is engaged in the business of he shall be liable for damages.
storing goods. Exceptions:
3. Only movable things may be the object of a deposit (referring to a. Express permission of the depositor
extra-judicial deposit because in judicial deposit, the object may be b. When the preservation of the thing deposited requires its use,
movable or immovable). it must be used but only for that purpose.
4. Principal 7. When the depositary has permission to use the thing deposited,
5. Nominate the contract loses the concept of a deposit and becomes a loan or
• Parties in a Deposit commodatum, except where safekeeping is still the principal
1. Depositor - the party who delivered the thing purpose of the contract. The permission shall not be presumed,
2. Depositary - the custodian of the thing and its existence must be proved.
8. The depositary is liable for the loss of the thing through a fortuitous
Voluntary Deposit event:
• Concept - A voluntary deposit is that wherein the delivery is made by the a. If it is so stipulated
will of the depositor. A deposit may also be made by two or more b. If he uses the thing without the depositor's permission
persons each of whom believes himself entitled to the thing deposited c. If he delays its return
with a third person, who shall deliver it in a proper case to the one to d. If he allows others to use it, even though he himself may have
whom it belongs. been authorized to use the thing
• Rules in case of incapacitated depositor 9. Fixed, savings, and current deposits of money in banks and similar
1. Incapacity from inception institutions shall be governed by the provisions concerning simple
The depositary shall be subject to all the obligations of a depositary loan. These are also known as irregular deposit.
under the Civil Code. The depositary may also be compelled to return the 10. When the thing deposited is delivered closed and sealed, the
thing by the depositary must return it in the same condition, and he shall be
a. Guardian of the incapacitated depositor, liable for damages should the seal or lock be broken through his
b. Administrator of the incapacitated depositor fault. Fault on the part of the depositary is presumed, unless there
c. Depositor himself when he acquires/reacquires his capacity is proof to the contrary. As regards the value of the thing
2. Subsequent incapacity deposited, the statement of the depositor shall be accepted, when
If the depositor should lose his capacity to contract after having made the forcible opening is imputable to the depositary, should there be
the deposit, the thing cannot be returned except to the persons who no proof to the contrary. However, the courts may pass upon the
may have the administration of his property and rights. credibility of the depositor with respect to the value claimed by
him. When the seal or lock is broken, with or without the
• Rules in case of incapacitated depositary depositary's fault, he shall keep the secret of the deposit.
The depositor shall only have an action 11. When it becomes necessary to open a locked box or receptacle, the
1. to recover the thing deposited while it is still in the possession of depositary is presumed authorized to do so, if the key has been
the incapacitated depositary, or delivered to him; or when the instructions of the depositor as
2. to compel the incapacitated depositary to pay to the depositor the regards the deposit cannot be executed without opening the box or
amount by which he may have enriched or benefited with the thing receptacle.
or its price. 12. The thing deposited shall be returned with all its products,
NOTE: If a third person who acquired the thing acted in bad faith, the accessories and accessions. Should the deposit consist of money,
depositor may bring an action against him for its recovery. the provisions relative to agents in article 1896 shall be applied to
NOTE: If either the depositor or depositary is incapacitated, the contract the depositary.
of deposit is voidable.
• Obligations of the Depositary Article 1896. The agent owes interest on the sums he has applied to
1. To keep the thing safely and to return it, when required, to the his own use from the day on which he did so, and on those which
depositor, or to his heirs and successors, or to the person who may he still owes after the extinguishment of the agency.
have been designated in the contract. His responsibility, with
regard to the safekeeping and the loss of the thing, shall be 13. The depositary cannot demand that the depositor prove his
governed by the provisions of the Law on Obligations of the Civil ownership of the thing deposited. Nevertheless, should he discover
Code. If the deposit is gratuitous, this fact shall be taken into that the thing has been STOLEN and who its true owner is, he must
account in determining the degree of care that the depositary must advise the latter of the deposit. If the owner, in spite of such
observe. information, does not claim it within the period of one month, the
2. Unless there is a stipulation to the contrary, the depositary cannot depositary shall be relieved of all responsibility by returning the
deposit the thing with a third person. If deposit with a third person thing deposited to the depositor. If the depositary has reasonable
is allowed, the depositary is liable for the loss if he deposited the

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 grounds to believe that the thing has not been lawfully acquired by • Responsibilities of hotels in inns at depositary
the depositor, the former may return the same. 1. The hotel-keeper is liable for the vehicles, animals and articles
14. When there are two or more depositors, if they are not solidary, which have been introduced or placed in the annexes of the hotel.
and the thing admits of division, each one cannot demand more 2. The responsibility referred to in the two preceding articles shall
than his share. include the loss of, or injury to the personal property of the guests
15. When there is solidarity, and if there is a stipulation that the thing caused by the servants or employees of the keepers of hotels or
should be returned to one of the depositors, the depositary shall inns as well as strangers; but not that which may proceed from any
return it only to the person designated. force majeure. The fact that travellers are constrained to rely on
16. If at the time the deposit was made a place was designated for the the vigilance of the keeper of the hotels or inns shall be considered
return of the thing, the depositary must take the thing deposited to in determining the degree of care required of him.
such place; but the expenses for transportation shall be borne by 3. The act of a thief or robber, who has entered the hotel is not
the depositor. deemed force majeure, unless it is done with the use of arms or
17. If no place has been designated for the return, it shall be made through an irresistible force.
where the thing deposited may be, even if it should not be the 4. The hotel-keeper is not liable for compensation if the loss is due to
same place where the deposit was made, provided that there was the acts of the guest, his family, servants or visitors, or if the loss
no malice on the part of the depositary. arises from the character of the things brought into the hotel.
18. The thing deposited must be returned to the depositor upon 5. The hotel-keeper cannot free himself from responsibility by posting
demand, even though a specified period or time for such return notices to the effect that he is not liable for the articles brought by
may have been fixed. This provision shall not apply when the thing the guest. Any stipulation between the hotel-keeper and the guest
is judicially attached while in the depositary's possession, or should whereby the responsibility of the former as set forth in articles
he have been notified of the opposition of a third person to the 1998 to 2001 is suppressed or diminished shall be void.
return or the removal of the thing deposited. In these cases, the 6. The hotel-keeper has a right to retain the things brought into the
depositary must immediately inform the depositor of the hotel by the guest, as a security for credits on account of lodging,
attachment or opposition. and supplies usually furnished to hotel guests.
19. Unless the deposit is for a valuable consideration, the depositary
who may have justifiable reasons for not keeping the thing Sequestration or Judicial Deposit
deposited may, even before the time designated, return it to the • Concept - A judicial deposit or sequestration takes place when an
depositor; and if the latter should refuse to receive it, the attachment or seizure of property in litigation is ordered.
depositary may secure its consignation from the court. • Object - Movable as well as immovable property may be the object of
20. If the depositary by force majeure or government order loses the sequestration.
thing and receives money or another thing in its place, he shall • Duration - The depositary of property or objects sequestrated cannot be
deliver the sum or other thing to the depositor. relieved of his responsibility until the controversy which gave rise
21. The depositor's heir who in good faith may have sold the thing thereto has come to an end, unless the court so orders.
which he did not know was deposited, shall only be bound to • Diligence required - The depositary of property sequestrated is bound to
return the price he may have received or to assign his right of comply, with respect to the same, with all the obligations of a good
action against the buyer in case the price has not been paid him. father of a family.
• Obligations of the Depositor • Governing law - As to matters not provided for in this Code, judicial
1. If the deposit is gratuitous, the depositor is obliged to reimburse sequestration shall be governed by the Rules of Court (RoC). In case of
the depositary for the expenses he may have incurred for the conflict, the provisions of the Civil Code shall prevail over the RoC.
preservation of the thing deposited.
2. The depositor shall reimburse the depositary for any loss arising
from the character of the thing deposited. Commodatum vs. Mutuum vs Deposit
Exceptions: 1. Loan and extra-judicial deposits are created by the will of the parties
a. The depositor was not aware thereof. while judicial deposit is created based on the will of the court.
b. The depositor was not expected to know.
c. The depositor notified the depositary. In voluntary deposit, there is a freedom to choose the depositary but
d. The depositary was aware of it even without advice from the there is no such freedom in necessary deposit.
depositor.
3. The depositary may retain the thing in pledge until the full payment 2. All are real contracts, meaning, the contract shall not be perfected until
of what may be due him by reason of the deposit. the delivery of the object of the contract. But an accepted promise to
• Extinguishment of Contract of Deposit deliver something by way of commodatum or simple loan, or an
A deposit its extinguished: agreement to constitute a deposit is binding upon the parties (Contract
a. Upon the loss or destruction of the thing deposited of future loan/deposit is consensual).
b. In case of a gratuitous deposit, upon the death of either the 3. The object of Commodatum is non-consumable thing (should have been
depositor or the depositary. Gratuitous deposit is personal in non-fungible thing); in Mutuum, consumable thing (should have been
nature. fungible thing); in deposit, either consumable or non-consumable.
c. Other instances that extinguishes a contract. 4. Movable or immovable property may be the object of Commodatum and
Judicial deposit, but only movable property may be the object of
Necessary deposit Mutuum and Extra-judicial deposit.
• Concept - A deposit is necessary: 5. In Commodatun and Deposit, the same property must be returned while
1. When it is made in compliance with a legal obligation. It shall be in Mutuum, only the same amount, kind and quality.
governed by the provisions of the law establishing it, and in case of 6. The bailee in Commodatum acquires the right to use of the thing loaned
its deficiency, by the rules on voluntary deposit. but not its fruits while in Mutuum, the bailee acquires ownership and all
2. When it takes place on the occasion of any calamity, such as fire, attributes of ownership (i.e, rights to use, rights to fruits, etc.).
storm, flood, pillage, shipwreck, or other similar events. It shall be
regulated by the provisions concerning voluntary deposit and by In deposit, the depositary acquires the right to possess but not the rights
Article 2168, Quasi-contract (Negotiourum Gestio). to use and to fruits.
3. The deposit of effects made by the travellers in hotels or inn. The
keepers of hotels or inns shall be responsible for them as The purpose of Commodatum is to transfer use; Mutuum is for
depositaries, provided that notice was given to them, or to their consumption; Extra-judicial Deposit, for custody and safekeeping and
employees, of the effects brought by the guests and that, on the Judicial Deposit for security to ensure the right of the litigants.
part of the latter, they take the precautions which said hotel-
keepers or their substitutes advised relative to the care and 7. Commodatum is essentially gratuitous while Mutuum, may be gratuitous
vigilance of their effects. or with a stipulation to pay interest (onerous).
4. The deposit made by travelers with common carriers.

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 Extra-judicial deposit is generally gratuitous except when there is an 2. Nominate
agreement to the contrary, or unless the depositary is engaged in the 3. Unilateral
business of storing goods. 4. Accessory
5. Generally, gratuitous unless there is stipulation to the contrary
Judicial deposit is always onerous. 6. Subsidiary
• Kinds of Guaranty
8. In commodatum and Deposit, the bailor (or depositor) retains the 1. As to origin
ownership of the thing loaned, while in simple loan, ownership passes to a. Conventional - agreement of the parties.
the bailee. Hence, in Commodatum or Deposit, risk of loss is in the bailor b. Legal - required by law.
(or depositor) while in Mutuum, the risk of loss is in the bailee. c. Judicial - required by the court.
9. The bailor (or depositor) in commodatum (deposit) need not be the 2. As to cause
owner of the thing loaned/deposited but the bailor in Mutuum must be a. Gratuitous - guarantor does not receive compensation.
the owner because he transfers ownership to the bailee. b. Onerous - guarantor receives compensation.
10. Commodatum is purely personal in character: 3. As to person
a. The death of either the bailor or the bailee extinguishes the a. Single - to secure performance of the obligation of the debtor.
contract. b. Sub-guaranty - to secure performance of the obligation of a
b. The bailee can neither lend nor lease the object of the contract to a guarantor.
third person. However, the members of the bailee's household may 4. As to extent
make use of the thing loaned, unless there is a stipulation to the a. Definite - guaranty covers only the principal or a part thereof.
contrary, or unless the nature of the thing forbids such use (i.e, a b. Simple or Indefinite - guaranty covers not only the principal
big speaker cannot be used as a chair). obligation, but also all its accessories, including the judicial
costs, provided with respect to the latter, that the guarantor
Mutuum is not personal hence, the death of either lender or borrower shall only be liable for those costs incurred after he has been
does not extinguish the contract unless stipulated by the parties. judicially required to pay.
Moreover, the borrower, being the owner of thing received in Muttum, • Parties in a Guaranty
is free to lend or lease or otherwise transfer possession and ownership of 1. Guarantor
the thing to another person. 2. Creditor
NOTE: The debtor is not a party to a contract of guaranty.
Gratuitous deposit is personal while onerous deposit is not. NOTE: The debtor and the guarantor cannot be the same person.
• Qualifications of a Guarantor - A person who possesses
11. Generally, the bailor cannot demand the return of the thing loaned 1. Integrity
before the expiration of the term or accomplishment of the purpose. 2. Capacity to bind himself
Exceptions: The bailor may demand the return in the following cases: 3. Sufficient property to answer for the obligation which he
a. Precarium guarantees.
b. Urgent need NOTE: The qualifications need only to be present at time of the
c. If bailee commits any act of ingratitude perfection of the contract.
NOTE: The guarantor shall be subject to the jurisdiction of the court of
In Mutuum, it is generally paid at the end of the period. the place where this obligation is to be complied with.
• If the guarantor should be convicted of a crime involving dishonesty or
In extra-judicial deposit, the thing must be returned upon demand of the should become insolvent, the guaranty will not end, and the creditor
depositor except when there is an opposition of a third person. may demand another who has all the required qualifications except
where the creditor has required and stipulated that a specified person
In judicial deposit, the thing may only be returned upon order of the should be the guarantor.
court or when the litigation is ended. • A married woman may guarantee an obligation with her separate
property but not with conjugal property except
12. In Commodatum and Deposit, the bailee may be held liable for Estafa 1. If with the husband's consent
thru breach of confidence if he misuses the thing borrowed which is not 2. In cases provided by law (i.e, the obligation redounded to the
the case in Mutuum. benefit of the family).
• Rights of a third person (guarantor or surety) who paid the obligation
Guaranty and Suretyship 1. If payment was with knowledge and consent of the debtor
• Concept: (delegacion):
1. Guaranty - By guaranty a person, called the guarantor, binds a. Can recover what he has paid
himself to the creditor to fulfill the obligation of the principal b. Can be subrogated to all the rights of the creditor (i.e,
debtor in case the latter should fail to do so. mortgage, guaranty, penalty, etc)
2. Suretyship - A person binds himself solidarily with the principal 2. If payment was without knowledge or against the will of the debtor
debtor, the provisions of Solidary Obligations in the Civil Code shall (expromission):
be observed. a. Can recover only insofar as payment has been beneficial to
3. A guaranty is not presumed; it must be express and cannot extend the debtor.
to more than what is stipulated therein. b. Right of reimbursement only
4. A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous Extinguishment of Guaranty
nature of the conditions. Should he have bound himself for more, 1. Extinguishment of the principal obligation.
his obligations shall be reduced to the limits of that of the debtor. 2. Same causes as all other obligations.
• Obligations that may be guaranteed 3. If the creditor voluntarily accepts immovable or other property in
1. Valid obligation payment of the debt, even if he should afterwards lose the same through
2. Rescissible obligation eviction, the guarantor is released.
3. Voidable obligation 4. A release made by the creditor in favor of one of the guarantors, without
4. Unenforceable obligation the consent of the others, benefits all to the extent of the share of the
5. Natural obligation - a guaranteed natural obligation became a civil guarantor to whom it has been granted.
obligation. 5. An extension granted to the debtor by the creditor without the consent
6. Conditional obligation - A guaranty may also be given as security for of the guarantor extinguishes the guaranty. The mere failure on the part
future debts, the amount of which is not yet known; there can be of the creditor to demand payment after the debt has become due does
no claim against the guarantor until the debt is liquidated. not of itself constitute any extension of time referred to herein.
• Characteristics of Guaranty 6. The guarantors, even though they be solidary, are released from their
1. Consensual but subject to statute of fraud (i.e, a special promise to obligation whenever by some act of the creditor they cannot be
answer for the debt, default, or miscarriage of another). subrogated to the rights, mortgages, and preference of the latter.

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NOTE: The guarantor may set up against the creditor all the defenses which 2. Constituted to secure fulfillment of a principal obligation.
pertain to the principal debtor and are inherent in the debt; but not those that 3. Pledgor must be the absolute owner of the thing pledged.
are personal to the debtor. 4. Free disposal of the thing or authorized to do so.
5. Thing pledged be placed in the possession of the creditor, or of a
Pledge, Mortgage and Antichresis third person by common agreement. Actual or physical delivery is
needed (real contract).
Common provisions for pledge and mortgage NOTE: Generally, constructive delivery is not sufficient.
• Constituted to secure fulfillment of a valid principal obligation (all kinds • Object of the pledge
including conditional, voidable, unenforceable, and natural obligations 1. Movables within the commerce of men.
but not void obligations). 2. Incorporeal rights - negotiable instruments (must be endorsed),
• Pledgor or mortgagor must be the absolute owner of the thing pledged and non-negotiable instruments such as bills of lading, shares of
or mortgaged. stock, bonds certificate, warehouse receipt (the non-negotiable
1. Pledge or mortgage of future property shall be VOID. instrument must be delivered).
2. Third person may pledge/mortgage their property for the debt of 3. Present thing - because the thing must be delivered. Hence, future
another debtor and may be held liable to the extent of the value of thing cannot be the object of pledge.
the property only unless the mortgagor expressly agreed to assume • Form of pledge
deficiency in foreclosure sale. 1. Real contract - actual delivery is required for its validity.
• The persons constituting the pledge or mortgage have the free disposal 2. Public instrument - description of the thing pledged and the date
of their property, and in the absence thereof, that they be legally of the pledge must appear in a public instrument to affect third
authorized for the purpose. persons.
NOTE: Third persons who are not parties to the principal obligation may • Extent of pledge
secure the latter by pledging or mortgaging their own property. In such 1. The thing pledged.
case, the third person is not liable for the deficiency unless he expressly 2. Fruits/income of the thing - apply to the interest then to the loan.
agreed to be bound solidarily with the principal debtor. 3. Offspring if the thing pledged is animal - pertains to pledgor or
• The thing pledged or mortgaged may be sold in a foreclosure sale for the owner of animals pledged, but shall be subject to the pledge, if
benefit of the pledgee or mortgagee if the pledgor or mortgagor failed to there is no stipulation to the contrary.
pay on maturity or even before maturity, if the debtor loses the benefit • Rights of pledgor
of the period or when there is an acceleration clause. 1. With the consent of the pledgee, the thing pledged may be
• Stipulation of Pactum Commissorium (automatic alienation/ alienated by the pledgor or owner, subject to the pledge. The
appropriation in case of default by the pledgee or mortgagee) shall be ownership of the thing pledged is transmitted to the vendee or
VOID. It is contrary to public policy. transferee as soon as the pledgee consents to the alienation, but
1. The creditor cannot appropriate the things given by way of pledge the latter shall continue in possession.
or mortgage or dispose of them. Any stipulation to the contrary is 2. To ask the thing to be deposited (judicial or extra-judicial) if it is
null and void. used without authority or misused it for a purpose other than its
2. It is also of the essence of these contracts that when the principal preservation.
obligation becomes due, the things in which the pledge or 3. To continue as the owner unless expropriated.
mortgage consists may be alienated for the payment to the 4. To ask the return of the thing pledged after paying the debt and
creditor. The pledgee or mortgagee should move for the sale of the interest with expenses in proper case, or to ask the return with the
property in a foreclosure sale to collect the sum. consent of the creditor.
3. Stipulation that the pledgee or mortgagee may purchase the 5. To ask the thing to de deposited with a third person if through the
property at current FMV is valid. negligence or willful act of the pledgee, it is in danger of being lost
4. Pledgee or mortgagee may also bid during foreclosure sale/public or impaired.
auction. 6. To demand return of the thing, upon offering another thing in
• Allowed stipulations with regard to pactum commissorium: pledge, provided the latter is of the same kind and quality if there
1. Subsequent modification of original contract by agreement of are reasonable grounds to fear the destruction or impairment of
parties. the thing pledged without the fault of the pledgee.
2. Subsequent voluntary act of the debtor making cession of property NOTE: The pledgee is bound to advise the pledgor, without delay,
in payment of the debt. of any danger to the thing pledged.
3. Promise to assign or sell said property in payment of the obligation NOTE: The pledgee in this scenario may sold the thing at public
if, upon its maturity, it is not paid. sale. The proceeds shall be security in the same manner as the
4. Authorizing the mortgagee to take possession of the mortgaged original thing.
premises upon the foreclosure of a mortgage. • Obligations of pledgor
5. If after the first and second auctions, the thing is not sold. 1. To pay the debt and interest with expenses in proper case.
• Indivisibility of pledge or mortgage. 2. To be liable for damages that the pledgee may suffer by reason of
GR: A pledge or mortgage is indivisible, even though the debt may be flaws of the thing, if he was aware but did not advise the pledgee.
divided among the successors in interest of the debtor or of the creditor. • Rights of pledgee
Also applies even if debtors are jointly liable. 1. To retain the thing in his possession or in that of a third person to
Exception: It is divisible if several things are pledged or mortgaged and whom it has been delivered, until the debt is paid.
each of them guarantees only a determinate portion of the debt. The 2. To claim reimbursement of the expenses made for preservation of
debtor, in this case, shall have a right to the extinguishment of the the thing pledged.
pledge or mortgage as the portion of the debt for which each thing is 3. To bring actions which pertain to the owner of the thing pledged in
specially answerable is satisfied. order to recover or defend it from third person.
• A promise to constitute a pledge or mortgage gives rise only to a 4. To use the thing if authorized, or when its use is necessary for
personal action (to demand the constitution of the mortgage) between preservation.
the contracting parties, without prejudice to the criminal responsibility 5. To cause the thing pledged to be sold at public sale if there is a
(estafa) incurred by him who defrauds another, by offering in pledge or danger of destruction, impairment or diminution in value of the
mortgage as unencumbered, things (must be real property) which he thing pledged without his fault. The proceeds of the auction shall
knew were subject to some burden, or by misrepresenting himself to be be a security for the principal obligation in the same manner as the
the owner of the same. thing originally pledged.
6. If he is deceived on the substance or quality of the thing, he may
Pledge a. Claim replacement of the thing.
• Kinds of Pledge b. Demand immediate payment of the principal obligation.
1. Conventional or Voluntary - created by agreement of the parties. 7. To collect and receive the amount due if the thing pledged is a
2. Legal - created by operation of law. credit (i.e, negotiable instrument) which becomes due before it is
• Requisites of conventional pledge redeemed. Apply the proceeds to the debt and deliver the surplus,
1. Consent, object and consideration. if any.

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 8. To sell the thing upon default of the debtor. purchase price, as far as the pledgor or owner is
9. To appropriate the thing pledged if not sold at two public auctions. concerned.
In this case, he shall be obliged to give an acquittance for his entire 4. Effect of sale: (1) the principal obligation shall be
claim. extinguished regardless of the amount of the proceeds;
10. To collect and receive the amount due, if a credit which has been (2) any deficiency cannot be recovered by the pledgee.
pledged becomes due before it is redeemed. He shall apply the Any stipulation to the contrary shall be VOID; (3) any
same to the payment of his claim, and deliver the surplus, to the excess shall belong to the pledgee unless a contrary
pledgor. stipulation is provided; (4) in case of two or more things
• Obligations of the pledgee pledged, the pledgee may choose which he will cause to
1. To take care of the thing pledged with the DGFF. be sold, unless there is contrary stipulation. He may
2. To be liable for the loss or deterioration of the thing pledged due to demand the sale of as many pledged things as necessary
his fault. for the payment of the debt; (5) if after two public
3. Not to deposit the thing pledged with a third person, unless there is auctions, there was no buyer, the thing pledged may be
a stipulation authorizing him to do so. appropriated by the pledgee. In this case he shall be
4. To be responsible for the acts of his agents or employees with obliged to give an acquittance for his entire claim.
respect to the thing pledged. d. Collection of credit - If a credit which has been pledged
5. Not to use the thing pledged except when becomes due before it is redeemed, the pledgee may collect
a. He is authorized by the owner. and receive the amount due. He shall apply the same to the
b. The use is necessary for preservation. payment of his claim, and deliver the surplus, should there be
6. To advise the pledgor, without delay, of any danger to the thing any, to the pledgor.
pledged. NOTE: There is no redemption (equity of redemption and
• Rights of third person who pledges his property on behalf of another right of redemption) in pledge.
DR (in this case pledgor is not equal to DR) - If a third party secures an • Legal pledge (right of retention)
obligation by pledging his own movable property, he shall have the same 1. Instances of legal pledge
rights as a guarantor: a. Article 546 - Possessory lien by a possessor in good faith.
1. To de indemnified by the debtor if he pays the creditor (this is a b. Article 1731 - Possessory lien of laborer.
case of delegacion) - Indemnification consists of the ff: (1) total c. Article 1731 - Possessory lien of worker.
amount of debt; (2) legal interest from the time the payment was d. Article 1914 - Right of agent to retain.
made known to the DR, even though it did not earn interest for the e. Article 1994 - Depositary’s right of retention.
CR; (3) expenses incurred by the pledgor after having notified the f. Article 2004 - Right of hotel-keeper to retain.
debtor that payment had been demanded of him; (4) damages, if 2. Public sale in legal pledge
they are due. a. A thing under a pledge by operation of law may be sold only
2. To be subrogated to all the rights of the CR (in this case, the after demand (because obligation here has no definite period
pledgor is considered as third person interested in the fulfillment of for payment) of the amount for which the thing is retained.
the obligation hence entitled for subrogation. The public auction shall take place within one month after
NOTE: Any third person who has any right in or to the thing such demand.
pledged may satisfy the principal obligation as soon as the latter b. If, without just grounds, the creditor does not cause the
becomes due and demandable. public sale to be held within such period, the debtor may
3. To be released from pledge liability in the following cases: (1) upon require the return of the thing.
full payment by the DR even if later the CR is evicted from the c. The public sale has the effect of extinguishing the principal
property paid by the DR; (2) If an extension was given by the CR to obligation even if the proceeds of the sale do not satisfy the
DR without pledgor’s consent; (3) If through CR’s act, the pledgor whole amount of the obligation.
cannot be subrogated to the rights, mortgages and preferences of d. The excess shall belong to the pledgor.
the original CR. e. If there is deficiency, the pledgee may recover.
• Extinguishment of pledge • Pawnshops and other establishments
1. Indirect cause - when the principal obligation is extinguished, the ➢ With regard to pawnshops and other establishments, which are
pledge, being an accessory contract, is also extinguished. engaged in making loans secured by pledges, the special laws and
2. Direct cause regulations concerning them shall be observed, and subsidiarily,
a. Return of the thing pledged to the pledgor. Any stipulation the provisions of Civil Code on pledge.
that the return will not extinguish the pledge shall be VOID.
NOTE: Prima facie presumption that the pledgee returned the Mortgage
thing pledged: • Kinds of mortgage
1. if subsequent to the perfection of the pledge, the thing 1. Real mortgage - it is a consensual contract in which the mortgagor,
was found in the possession of the pledgor or owner. normally the debtor but in some cases, it may be a third person,
2. If the thing was found in the possession of a third guarantees the performance of an obligation by subjecting a real
person who has received it from the pledgor or owner property as security in favor of the mortgage which said property
after the constitution of the pledge. may or may not be delivered.
b. Renunciation/abandonment/waiver in writing by the pledgee. a. Conventional or voluntary - agreement of the parties.
1. Acceptance of renunciation by pledgor or owner is not b. Legal mortgage - required by law to guarantee performance.
necessary. c. Equitable mortgage - one which reveals an intent to make the
2. Return of the thing pledged is also not necessary, in real property a security for a debt, although it lacks the
such case, the pledgee becomes a depositary. formalities of a real estate mortgage.
c. Sale of the thing pledged 2. Chattel mortgage
1. Formalities of the sale: (1) extra-judicial foreclosure; (2) • Requisites of real estate mortgage
public auction; (3) through a notary public; (4) with 1. Consent, object and consideration.
notice to the debtor and pledgor stating the amount of 2. Constituted to secure fulfillment of a principal obligation.
sale; and (5) After the public auction, the pledgee shall 3. Mortgagor must be the absolute owner of the thing mortgaged.
promptly advise the pledgor or owner of the result 4. Owner must have free disposal of the thing or authorized to do so.
thereof. 5. Registration in the Registry of Deeds - to affect only third persons
NOTE: Private sale is allowed if there is agreement. but not for its validity because mortgage may be entered into
2. Who may bid: (1) the pledgor or debtor (shall be given whatever form (consensual contract).
preference); (2) the pledgee (his offer is not valid if he is • Characteristics of real estate mortgage
the only bidder) and (3) third person. 1. Consensual - perfected by mere consent.
3. Effect of acceptance of bid - All bid shall offer the offer 2. Real right - right that is enforceable against the whole world.
to pay the purchase price at once. If any other bid is 3. Inseparable - may be enforced regardless of the owner or
accepted, the pledgee is deemed to have received the possessor of the thing subject of mortgage.

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 4. Indivisible - mortgage constituted over an undivided real property acquire the property subject to the right of foreclosure of senior
will not be affected despite subsequent partition. mortgagee.
5. Real property - only real property is the proper object of real estate 2. On junior mortgagees - Foreclosure and sale by senior mortgagee
mortgage and the real mortgage right, by itself, is a real property. will extinguish all subsequent mortgages.
6. Accessory - depends on some other contract which is normally a • Redemption - a transaction by which the mortgagor reacquires the
loan. property which may have passed under the mortgage or divests the
• Object of real mortgage property of the lien which the mortgage may have created.
1. Immovable properties: (1) Land, building, roads; (2) trees, plants • Kinds of redemption
and other growing fruits attached to land; (3) everything attached 1. Equity of redemption - right to redeem after default in payment but
to immovables on a fixed manner that it cannot be separated BEFORE the property is sold.
without breaking/deteriorating the object; (4) statutes, reliefs, a. In judicial foreclosure, the mortgagor is given not less than 90
painting or other objects for use or ornamentation permanently days but not more than 120 days from the entry of judgment
attached; (5) machinery, animal houses, fish ponds permanently or BEFORE the sale is confirmed by the court.
attached; (6) docks and other floating structures; (7) fertilizer b. In extra-judicial foreclosure, there is no equity of redemption.
actually used on a piece of land; and (8) contract of public works 2. Right of redemption - right to repurchase the property within
and other real rights over immovable. certain period of time after the sale of the property.
2. Alienable real rights in accordance with laws, imposed upon a. In judicial foreclosure, generally, there is no right of
immovables. redemption. But under the General Banking Act, which
3. GR: Future property cannot be an object of a contract of mortgage. provides that in case the mortgagee is a bank, the mortgagor-
Exception: A stipulation subjecting to the mortgage lien, properties debtor is given the right to redeem the property judicially
and improvements (after-acquired properties) added to a property foreclosed. The period of redemption depends on the type of
already mortgaged which the mortgagor may subsequently acquire, mortgagor.
install, or use, in connection with real property already mortgaged 1. If the mortgagor is a natural person, within one year
belonging to the mortgagor is valid. from the registration of certificate of sale.
2. If the mortgagor is an artificial person, within 3 months
• Form of real estate mortgage from auction sale or until the registration of certificate
1. Consensual contract - perfected by mere consent. of sale, whichever comes first.
2. Public instrument and registration in Registry of Deeds to affect b. In extra-judicial foreclosure, the mortgagor may exercise the
third persons. right within one year from the registration of the certificate
• Extent of mortgage of sale.
1. The thing mortgaged c. Who may exercise right of redemption?
2. Natural accessions Debtor, his successor-in-interest, any judicial creditor of said
3. Improvements debtor or any person having a subsequent lien on the
4. Growing fruits property, to redeem or buy back the property.
5. Rent and income not yet received when the obligation becomes • Amount to be paid in case of redemption
due 1. Judicial foreclosure - Amount due under the mortgage deed, with
6. Indemnity granted or owing to the proprietor from the insurers of interest at the rate specified in the mortgage, and all the costs and
the property mortgaged, or in virtues of expropriations for public expenses incurred by the bank or institution from the sale and
use. custody of said property less the income derived therefrom.
• Alientation of the thing mortgaged 2. Extra-judicial foreclosure - purchase price paid by the buyer and
1. The mortgagor remains to be the owner of thing mortgaged hence any assessments or taxes that the buyer may have paid on the
may alienate the thing. Any stipulation (pactum de non alienado) property after the purchase, with interest of one percent per
forbidding the owner from alienating the thing shall be VOID. month.
2. The mortgagor may contract a second mortgage over the thing
even if without consent of the first morgagee. Comparison of real mortgage and sale with right of repurchase
• Alienation of the mortgage credit Sale with right of
The mortgage credit may be alienated or assigned to a third person, in Real mortgage repurchase
whole or in part, with the formalities required by law. This is because Nature Constituted to secure
fulfillment of a principal Conditional sale
the mortgagee is the owner of said right.
obligation
• From whom the creditor may demand payment Kind of contract Accessory Principal
1. Mortgagor-debtor Transfer of None Yes
2. Mortgagor-third person ownership
3. Buyer of the mortgagor - the buyer shall not be liable for the Kind of property Immovable only Immovable and
deficiency in the absence of contrary stipulation. movable
4. Possessor of mortgaged property - prior demand must have been
made on the debtor, and said debtor failed to pay. Chattel Mortgage
• Foreclosure of real estate mortgage • Concept - By a chattel mortgage, personal property is recorded in the
1. Judicial foreclosure - made thru a petition filed in court. Governed Chattel Mortgage Register as a security for the performance of an
by Rule 68 of RoC. The proceeds of sale shall be applied in the obligation. If the movable, instead of being recorded, is delivered to the
following order: (1) cost of sale; (2) claim of the person foreclosing creditor or a third person, the contract is a pledge and not a chattel
the mortgage; (3) claims of junior mortgagee; (4) balance to the mortgage.
mortgagor unless there is contrary stipulation. If there is deficiency, • Law that will govern
the mortgagor shall be liable for such deficiency unless there is 1. Act No. 1508 - Chattel Mortgage Law
contrary stipulation. 2. Provision of the NCC on pledge, insofar as they are not in conflict
Note: The stipulation of “tipo” or “upset price” or the price which is with the Chattel Mortgage Law.
set by the parties at which the property shall be sold in an auction • Requisites of chattel mortgage
sale shall be VOID because it contravenes the Rules of Court that 1. Consent, object and consideration.
the price shall be paid to the highest bidder. 2. Constituted to secure fulfillment of a principal obligation.
2. Extra-judicial foreclosure - foreclosure without court intervention 3. Mortgagor must be the absolute owner of the thing mortgaged.
when there is stipulation via special power in the contract of 4. Owner must have free disposal of the thing or authorized to do so.
mortgage. Governed by Act No. 3135. Rules in the distribution of 5. Registration of the document in the Chattel Mortgage Register for
proceeds or recovery of deficiency are the same with judicial its VALIDITY.
foreclosure. • Object of chattel mortgage
• Foreclosure sale when there are two or more mortgages 1. Movable property
1. On Senior mortgaee - Foreclosure and sale by junior mortgagee do 2. Real property which by provision of law considered as an object of
not affect the rights of senior mortgagee. The purchaser will chattel mortgage (i.e, growing crops).

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 3. Forces of nature which brought under control of science (i.e, By paying or delivering to the mortgagee the amount due on such
electricity, light, and gas). mortgage and the costs and expenses incurred by such breach of
4. Obligations and actions which have for their objects movables (i.e, condition before the sale thereof. This redemption partakes of an equity
negotiable instruments). of redemption. There is no right of redemption in chattel mortgage. The
5. Shares of stock although they have real estate (i.e, shares of stocks redemption may be exercised by the mortgagor, person holding a
of agricultural and commercial/industrial entities). subsequent mortgage or subsequent attaching creditor.
6. GR: Future property cannot be an object of a contract of chattel
mortgage because the property should be described in the affidavit Antrichresis
of good faith. • By the contract of antichresis the creditor acquires the right to receive
Exceptions: It is valid and binding where the after-acquired the fruits of an immovable of his debtor, with the obligation to apply
property is: (1) In renewal of or in substitution for goods on hand; them to the payment of the interest, if owing, and thereafter to the
or (2) Purchased with the proceeds of the sale of such goods. principal of his credit.
• Form of chattel mortgage • The actual market value of the fruits at the time of the application
1. Solemn or Formal Contract - must observe formalities of law thereof to the interest and principal shall be the measure of such
2. An affidavit of good faith must be appended to the Deed of Chattel application.
Mortgage and recorded with the Chattel Mortgage Register to • Characteristics of Antichresis
affect third persons. Affidavit of GF is a sworn statement attesting 1. Formal - the amount of the principal and of the interest shall be in
to the fact that the mortgage is made for the purpose of securing writing to be valid. Delivery of the immovable is not necessary to
the obligation specified in the conditions thereof, and for no other perfect the contract but for the creditor to receive the fruits.
purposes and that the obligation is a just and valid obligation, and 2. Accessory
one not entered into for the purpose of fraud. 3. Real right
• Foreclosure of chattel mortgage 4. Real property
1. The mortgagee may, after thirty (30) days from the time of the 5. Nominate
default or from the time the condition is violated, cause the 6. Indivisible
mortgaged property to be sold at public auction by a public officer. • Parties to a contract of antichresis
Private auction is allowed if there is stipulation. 1. Antichretic creditor - one who receives the fruits on the immovable
2. The proceeds of foreclosure sale shall be applied in the following property of the debtor.
manner: 2. Antichretic debtor - one who pays his debt through the application
a. Costs and expenses of keeping the property and its sale; of the fruits of his immovable property.
b. Payment of the obligation secured by the mortgage; • Requisites of Antichresis
c. Claims of persons holding subsequent mortgages in their 1. Consent, object and consideration.
order; and 2. Constituted to secure fulfillment of a principal obligation.
d. The balance, if any, shall be paid to the mortgagor or person 3. Debtor must be the absolute owner of the thing.
holding under him. 4. Owner must have free disposal of the thing or authorized to do so.
3. In case of excess of proceeds, the excess shall belong to the 5. The amount of principal and interest must be in writing to be
mortgagor unless there is contrary stipulation. If there is deficiency, VALID.
the mortgagor shall be liable for such deficiency unless there is • Remedy of the creditor in case of nonpayment of his credit
contrary stipulation or unless the property was bought in 1. File an action for specific performance.
installment sales (Recto Law). 2. File a petition for the public sale of the property (foreclosure).
• Redemption in chattel mortgage

Comparison:
Pledge Real Mortgage Chattel Mortgage Antichresis
Kind of property Movable Immovable Movable Immovable
Type of contract Real Consensual Formal Formal
Requisite for validity Actual delivery No required form Registration in Chattel Writing
Mortgage Register
To bind/affect third persons Public instrument Public instrument and Accompanied by Affidavit of Public instrument
Registration in Register of Good Faith
Deeds
Alienation/Appropriation by If not sold after two public Cannot be Cannot be Cannot be
the pledgee or mortgagee auctions
Treatment of excess of Belong to pledgee unless Belong to the mortgagor Belong to the mortgagor Belong to the DR
proceeds there is contrary stipulation
Recovery of deficiency Pledgee cannot recover even Mortgagee can recover Mortgagee can recover except CR can recover
if there is stipulation circumstance of Recto Law
(sale in installment with chattel
mortgage)
Right to fruits Pledgee has the right to fruits Mortgagor has the right to Mortgagor has the right to the Creditor has the right to
with the obligation to apply the fruits fruits fruits with the obligation
to interest and then to to apply to interest and
principal then to principal
May secure future debt? Yes Yes No, because of the description Yes
Continuing security in the affidavit of good faith.
Stipulation that after- Void, because delivery is Valid if there is stipulation No, because of the description Valid if there is
acquired properties shall be needed in the affidavit of good faith. stipulation
included
Sale of the Extra-judicial Judicial Extra-Judicial Judicial.
thing/foreclosure
Public sale. Extra-judicial if the creditor Public sale. Extra-judicial is allowed if
has SPA from the debtor. there is stipulation.
Private sale is allowed if Private sale is allowed if there
there is stipulation. Public sale. is stipulation. Public sale.

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