Enumerations

Question 1

What are the types of security contracts?

Answer 1

1. Secured transactions or contracts of real security - supported by a collateral or an encumbrance of property
2. Unsecured transactions or contracts of personal security - supported only by a promise or personal commitment of another such as a guarantor or surety

Question 2

What are the types of security?

Answer 2

 Types of Security

a. personal – when an individual becomes surety or guarantor
b. real or property – when a mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss

Question 3

Who are the parties to a bailment?

Answer 3

1. bailor - the giver; one who delivers property

2. bailee- the recipient; one who receives the custody or possession of the thing thus delivered

Question 4

What are the characteristics of a loan?

Answer 4

Characteristics:
1. Real Contract – delivery of the thing loaned is necessary for the perfection of the contract
NOTE: An accepted promise to make a future loan is a consensual contract, and therefore binding upon the parties but it is only after delivery, will the real contract of loan arise. (Art 1934)

2. Unilateral Contract - once the subject matter has been delivered, it creates obligations on the part of only one of the parties (i.e. borrower).

Question 5

What are the kinds of bailment?

Answer 5

commodatum, simple loan

Question 6

What are the kinds of comodatum?

Answer 6

a. Ordinary Commodatum – use by the borrower of the thing is for a certain period of time
b. Precarium - one whereby the bailor may demand the thing loaned at will and it exists in the following cases:
i. neither the duration nor purpose of the contract is stipulated
ii. the use of the thing is merely tolerated by the owner

Question 7

Distinguish commodatum and mutuum?

Answer 7

Commodatum	Mutuum
Key: COPS-LOTR
1. Object
Non-consumable	Consumable
2. Cause
Gratuitous	May or may not be gratuitous
3. Purpose
Use or temporary possession	Consumption
4. Subject Matter
Real or personal property	Only personal property
5. Ownership of the thing
Retained by the bailor	Passes to the debtor
6. Thing to be returned
Exact thing loaned	Equal amount of the same kind and quality
7. Who bears risk of loss
Bailor	Debtor 
8. When to return
In case of urgent need, even before the expiration of the term	Only after the expiration of the term

Question 8

Distinguish loan and credit

Answer 8

Loan Credit
Delivery by one party and the receipt of other party of a given sum of money or other consumable thing upon an agreement, express or implied, to repay the same. Ability of a person to borrow money or things by virtue of the trust or confidence reposed by the lender that he will pay what he promised.

Question 9

What are the obligations of a bailee?

Answer 9

Obligations of the Bailee: (Arts 1941 – 1945)
1. To pay for the ordinary expenses for the use and preservation of the thing loaned. (Art 1941)
2. To be liable for the loss of the thing even if it should be through a fortuitous event in the following cases: (KLAS D)
a. when he keeps it longer than the period stipulated, or after the accomplishment of its use
b. when he lends or leases it to third persons who are not members of his household
c. when the thing loaned has been delivered with appraisal of its value
d. when, being able to save either of the thing borrowed or his own things, he chose to save the latter; or
e. when the bailee devoted the thing for any purpose different from that for which it has been loaned (Art 1942)
3. To be liable for the deterioration of thing loaned (a) if expressly stipulated; (b) if guilty of fault or negligence; or (c) if he devotes the thing to any purpose different from that for which it has been loaned
4. To pay for extraordinary expenses arising from the actual use of the thing by the bailee, which shall be borne equally by both the bailor and the bailee, even though the bailee acted without fault, unless there is a stipulation to the contrary (Art 1949 par 2)
5. To return the thing loaned
 The bailee has no right to retain the thing loaned as security for claims he has against the bailor even for extraordinary expenses except for a claim for damages suffered because of the flaws of the thing loaned.

Question 10

What are the obligations of a bailor?

Answer 10

Obligations of the bailor (Art 1946 – Art 1952):
1. To respect the duration of the loan
GENERAL RULE: Allow the bailee the use of the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was instituted.
EXCEPTIONS:
a. In case of urgent need in which case bailee may demand its return or temporary use;
b. The bailor may demand immediate return of the thing if the bailee commits any act of ingratitude specified in Art. 765.

2. To refund to the bailee extraordinary expenses for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.
3. To be liable to the bailee for damages for known hidden flaws.
    Requisites:
   a. There is flaw or defect in the thing loaned;
   b. The flaw or defect is hidden;
   c. The bailor is aware thereof;
   d. He does not advise the bailee of the same; and
   e. The bailee suffers damages by reason of said flaw or defect

Question 11

What are the kinds of deposit?

Answer 11

 Kinds of Deposit:
1. Judicial (Sequestration) –takes place when an attachment or seizure of property in litigation is ordered.

2. Extra-judicial
   a. Voluntary – one wherein the delivery is made by the will of the depositor or by two or more persons each of whom believes himself entitled to the thing deposited. (Arts 1968 – 1995)
   b. Necessary – one made in compliance with a legal obligation, or on the occasion of any calamity, or by travellers in hotels and inns (Arts 1996 - 2004), or by travellers with common carriers (Art 1734 – 1735).
   NOTE: The chief difference between a voluntary deposit and a necessary deposit is that in the former, the depositor has a complete freedom in choosing the depositary, whereas in the latter, there is lack of free choice in the depositor.

Question 12

Contract of deposit is gratuitous except?

Answer 12

GENERAL RULE: Contract of deposit is gratuitous (Art 1965)
EXCEPTIONS:
1. when there is contrary stipulation
2. depositary is engaged in business of storing goods
3. property saved from destruction without knowledge of the owner

NOTES:
 Article 1966 does not embrace incorporeal property, such as rights and actions, for it follows the person of the owner, wherever he goes.
 A contract for the rent of safety deposit boxes is not an ordinary contract of lease of things but a special kind of deposit; hence, it is not to be strictly governed by the provisions on deposit. The relation between a bank and its customer is that of a bailor and bailee. (CA Agro vs CA, 219 SCRA 426)

Question 13

What are the obligations of a depositary?

Answer 13

Obligations of the Depositary (Art 1972 –1991):
1. To keep the thing safely (Art 1972)
 Exercise over the thing deposited the same diligence as he would exercise over his property
2. To return the thing (Art 1972)
 Person to whom the thing must be returned:
a. Depositor, to his heirs and successors, or the person who may have been designated in the contract
b. If the depositary is capacitated - he is subject to all the obligations of a depositary whether or not the depositor is capacitated. If the depositor is incapacitated, the depositary must return the property to the legal representative of the incapacitated or to the depositor himself if he should acquire capacity (Art 1970).
c. If the depositor is capacitated and the depositary is incapacitated - the latter does not incur the obligation of a depositary but he is liable:
i..to return the thing deposited while still in his possession;
ii.to pay the depositor the amount which he may have benefited himself with the thing or its price subject to the right of any third person who acquired the thing in good faith (Art 1971)

 Time of return:

a. Upon demand even though a specified period or time for such return may have been fixed except when the thing is judicially attached while in the depositary’s possession or should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. (Art 1998)
b. If deposit gratuitous, the depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if justifiable reasons exists for its return.
c. If the deposit is for a valuable consideration, the depositary has no right to return the thing deposited before the expiration of the time designated even if he should suffer inconvenience as a consequence.(Art 1989)

 What to return: product, accessories, and accessions of the thing deposited (Art 1983)
3. Not to deposit the thing with a third person unless authorized by express stipulation (Art 1973)
 The depositor is liable for the loss of the thing deposited under Article 1973 if:
a. he transfers the deposit with a third person without authority although there is no negligence on his part and the third person;
b. he deposits the thing with a third person who is manifestly careless or unfit although authorized even in the absence of negligence; or
c. the thing is lost through the negligence of his employees whether the latter are manifestly careless or not.
4. If the thing deposited should earn interest (Art 1975):
a. to collect interest and the capital itself as it fall due
b. to take steps to preserve its value and rights corresponding to it
5. Not to commingle things deposited if so stipulated (Art 1976)
6. Not to make use of the thing deposited unless authorized (Art 1977)
GENERAL RULE: Deposit is for safekeeping of the subject matter and not for use. The unauthorized use by the depositary would make him liable for damages.
EXCEPTIONS:
1. When the preservation of the thing deposited requires its use
2. When authorized by the depositor

NOTE: The permission to use is NOT presumed except when such use is necessary for the preservation of the thing deposited.

Question 14

What is the rule when there are two or more depositors?

Answer 14

Rule when there are two or more depositors (Art 1985):

1. If thing deposited is divisible and depositors are not solidary: Each depositor can demand only his proportionate share thereto.
2. If obligation is solidary or if thing is not divisible: Rules on active solidarity shall apply, i.e. each one of the solidary depositors may do whatever may be useful to the others but not anything which may be prejudicial to the latter, (Art. 1212) and the depositary may return the thing to anyone of the solidary depositors unless a demand, judicial or extrajudicial, for its return has been made by one of them in which case, delivery should be made to him (Art. 1214).
3. Return to one of depositors stipulated. The depositary is bound to return it only to the person designated although he has not made any demand for its return.

Question 15

Obligations of a depositor?

Answer 15

Obligations of the Depositor (Art 1992 – 1995):

1. To pay expenses for preservation
   a. If the deposit is gratuitous, the depositor is obliged to reimburse the depositary for expenses incurred for the preservation of the thing deposited (Art 1992)
   b. If the deposit is for valuable consideration, expenses for preservation are borne by the depositary unless there is a contrary stipulation
2. To pay loses incurred by the depositary due to the character of the thing deposited

Question 16

The general rule is GENERAL RULE: The depositor shall reimburse the depositary for any loss arising from the character of the thing deposited.What are the exceptions?

Answer 16

EXCEPTIONS:

1. at the time of the deposit, the depositor was not aware of the dangerous character of the thing
2. when depositor was not expected to know the dangerous character of the thing
3. when the depositor notified the depository of the same
4. the depositary was aware of it without advice from the depositor

Question 17

How is a voluntary deposit extinguished?

Answer 17

1. Loss or destruction of the thing deposited
2. In case of gratuitous deposit, upon the death of either the depositor or the depositary
3. Other causes, such as return of the thing, novation, merger, expiration of the term fulfilment of the resolutory condition, etc (Art 1231)

Question 18

What is the extent of guarantors liability?

Answer 18

of Guarantor’s liability: (Art 2055)

1. Where the guaranty definite: It is limited in whole or in part to the principal debt, to the exclusion of accessories.
2. Where guaranty indefinite or simple: It shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

Question 19

What are the qualifications of a guarantor?

Answer 19

Qualifications of a guarantor: (Arts 2056-2057)

1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer for the obligation which he guarantees

Question 20

What is the benefit of excussion?

Answer 20

Benefit of Excussion (Art 2058)
 The right by which the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the properties of the principal debtor, and has resorted to all of the legal remedies against such debtor.

Question 21

When Guarantor is not entitled to the benefit of excussion: (PAIRS)

Answer 21

1. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation
    Not necessary that the debtor be judicially declared insolvent or bankrupt
2. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative
3. In case of insolvency of the debtor
    Must be actual
4. If the guarantor has expressly renounced it
5. If he has bound himself solidarily with the debtor

Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before judgment is rendered against him
8. If the guarantor does not set up the benefit against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property to the debtor within Philippine territory, sufficient to cover the amount of the debt (Art 2060)
 Demand can be made only after judgment on the debt
 Demand must be actual; joining the guarantor in the suit against the principal debtor is not the demand intended by law
9. Where the pledge or mortgage has been given by him as special security

Question 22

Guarantor’s Right of Indemnity or Reimbursement (Art 2066)

Answer 22

GENERAL RULE: Guaranty is a contract of indemnity. The guarantor who makes payment is entitled to be reimbursed by the principal debtor.

NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt – no right to demand reimbursement until he has actually paid the debt, unless by the terms of the contract, he is given the right before making payment. He cannot collect more than what he has paid.
2. Legal interest thereon from the time the payment was made known (notice of payment in effect a demand so that if the debtor does not pay immediately, he incurs in delay) to the debtor, even though it did not earn interest for the creditor. Guarantor’s right to legal interest is granted by law by virtue of the payment he has made.
3. Expenses incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor; only those expenses that the guarantor has to satisfy in accordance with law as a consequence of the guaranty (Art. 2055) not those which depend upon his will or own acts or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor.
4. Damages if they are due in accordance
with law. General rules on damages apply.

EXCEPTIONS:

1. Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can recover only insofar as the payment had been beneficial to the debtor (Art. 2050).
2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it (Art. 1238).
3. Waiver of the right to demand reimbursement.

Question 23

What is the right of subrogation of guarantor?

Answer 23

Guarantor’s right to Subrogation (ART.2067)
 Subrogation transfers to the person subrogated, the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation.

Question 24

Effect of Repeat Payment by debtor: (Art 2070)

Answer 24

Effect of Repeat Payment by debtor: (Art 2070)
GENERAL RULE: Before guarantor pays the creditor, he must first notify the debtor (Art. 2068). If he fails to give such notice and the debtor repeats payment, the guarantor can only collect from the creditor and guarantor has no cause of action against the debtor for the return of the amount paid by guarantor even if the creditor should become insolvent.

EXCEPTION: The guarantor can still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present: (PIG)

a. guarantor was prevented by fortuitous event to advise the debtor of the payment; and
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.

Question 25

What is Right of Guarantor to proceed against debtor before payment

Answer 25

GENERAL RULE: Guarantor has no cause of action against debtor until after the former has paid the obligation
EXCEPTION: Article 2071

NOTES:
 Article 2071 is applicable and available to the surety. (Manila Surety & Fidelity Co., Inc. vs Batu Construction & Co., 101 Phil 494)
 Remedy of guarantor:
(a) obtain release from the guaranty; or
(b) demand a security that shall protect him from any proceedings by the creditor, and against the danger of insolvency of the debtor

Question 26

Explain extinguishment of guaranty

Answer 26

Extinguishment of guaranty: (RA2CE2)

1. Release in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted (Art 2078);
2. If the creditor voluntarily accepts immovable or other properties in payment of the debt, even if he should afterwards lose the same through eviction or conveyance of property (Art 2077);
3. Whenever by some act of the creditor, the guarantors even though they are solidarily liable cannot be subrogated to the rights, mortgages and preferences of the former (Art 2080);
4. For the same causes as all other obligations (Art 1231);
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor without the consent of the guarantor (Art 2079)