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ATENEOCENTRALBAROPERATIONS 2007

Civil LawSUMMER REVIEWER

Adviser:Dean Cynthia Roxas-Del Castillo; Heads:Joy Marie Ponsaran, Eleanor Mateo; Understudies:Joy StephanieTajan, John Paul Lim;Subject Head:Sarah Lopez; Pledgee:Aiza Constantino

2 TYPES OF CREDIT TRANSACTIONS:1. secured transactions those supported by

a collateral or an encumbrance of property2. unsecured transactions those supported

only by a promise to pay or the personalcommitment of another such as a guarantoror surety

SECURITY is something given, deposited or servingas a means to ensure the fulfillment or enforcement

of an obligation or of protecting some interest in theproperty

2 TYPES OF SECURITY:1. personal when an individual becomes a

surety or a guarantor2. real or property when an emcumbrance is

made on property

BAILMENTis the delivery of property of one personto another in trust for a specific purpose, with acontract, express or implied, that the trust shall befaithfully executed and the property returned or duly

accounted for when a special purpose isaccomplished or kept until the bailor reclaims it.

PARTIES IN BAILMENT1. bailor the giver, the party who delivers

possession/custody of the thing bailed2. bailee the recipient, the party who receives

the possession/custody of the thing delivered

KINDS OF CONTRACTUAL BAILMENT W/REFERENCE TO COMPENSATION

1. for the sole benefit of the bailor (gratuitous)e.g. gratuitous deposit, mandatum (do someact w/ respect to a thing)

2. for the sole benefit of the bailee (gratuitous)e.g. commodatum, gratuitous simple loan ormutuum

3. for the benefit of both parties e.g. deposit forcompensation, involuntary deposit, pledgeand bailments for hire:

a. hire of things temporary useb. hire of service for work or laborc. hire of carriage of goods for carriaged. hire of custody for storage

LOAN

CHARACTERISTICS1. real contract delivery is essential for

perfection of the loan (BUT a promise tolend, being consensual, is binding upon theparties)

2. unilateral contract - only the borrower hasthe obligation

KINDS1. commodatum where the bailor delivers to

the bailee a non-consumable thing so thatthe latter may use it for a certain time and

return the identical thingkinds of commodatum:a. ordinary commodatum use by the

bailee of the thing is for a certainperiod of time

b. precarium one whereby the bailormay demand the thing loaned at will;exists in cases where:

i. neither the duration of thecontract nor the use to whichthe thing loaned should bedevoted has been stipulated

ii. if the use of the thing is merely

tolerated by the owner2. mutuum or simple loan - where the lenderdelivers to the borrower money or otherconsumable thing upon the condition that thelatter will pay the same amount of the samekind and quality (when it is consumed in amanner appropriate to its purpose)

LOAN CREDIT

1. delivery by one partyand the receipt bythe other party of agiven sum of money

or other consumablething upon anagreement, expressor implied

2. to repay the sameamount of the samekind and quality, w/or w/o interest

The ability of anindividual to borrowmoney or things by virtueof the confidence or trust

reposed by a lender thathe will pay what he maypromise w/in a specifiedperiod

CREDIT TRANSACTIONS include all transactionsinvolving the purchase or loan of goods, services or

money in the present with a promise to pay or deliverin the future (contract of security)


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LOAN DISCOUNTING PAPER

Interest is usually takenat the expiration of acredit

Interest is deducted inadvance

Always on single-namepaper

Double name paper

More expensive for theborrower becauseinterest is calculated onthe amount loaned andnot the amount actuallyreceived

COMMODATUM MUTUUM(SIMPLE LOAN)

Object Ordinarily non-consumable

Money or otherconsumable thing

Ownershipof the thing Ownership isretained by thelender

Ownership istransferred to theborrower

Cause Essentiallygratuitous

Gratuitous oronerous (w/stipulation to payinterest)

Thing to bereturned

Borrower mustreturn the samething loaned

Borrower needonly pay the sameamount of thesame kind andquality

Subject

Matter

May involve real

or personalproperty

Only personal

property

Purpose Loan for use ortemporarypossession

Loan forconsumption

When toreturn

Bailor maydemand thereturn of thething loanedbefore theexpiration of theterm in case ofurgent need

Lender may notdemand its returnbefore the lapse ofthe term agreedupon

Who bearsrisk of loss

Loss of thesubject matter issuffered by thebailor since he isthe owner

Borrower suffersthe loss (even ifcaused exclusivelyby a fortuitousevent and he isnot thereforedischarged fromhis duty to pay)

Nature Purely personal Not purelypersonal

COMMODATUM(Articles 1935-1952)

1. cause: essentially gratuitous (otherwise, ifthere Is compensation, it might be lease)

2. purpose: temporary use of the thing loanedbut not its fruits, unless stipulated or isincidental (otherwise, if the bailee is notentitled to the use of the thing, it might bedeposit)

3. subject matter: generally non-consumablegoods but if the consumable goods are notfor consumption, such may be the subject ofthe commodatum, as when merely forexhibition (Art. 1936)

4. bailor need not be the owner of the thing

loaned(Art 1938) it is sufficient that he has a possessory

interest a mere lessee or usufructuary may lend

but the borrower or bailee himself maynot lend not lease the thing loaned to himto a third person (Art. 1932[2])

5. purely personala. death of either party terminates thecontract UNLESS there is stipulation to thecontraryb. generally, bailee can neither lend norlease the object to a 3rd person in theabsence of some agreement to that effectc. use of the thing loaned may extend to thebailees household (who are not considered3rdpersons) except:

1. when there is a contrary stipulation2. nature of the thing forbids such use

6. enjoyment of fruits a stipulation to makeuse of fruits is valid, but it is never presumed.The enjoyment of the fruits must only beincidental to the use of the thing itself, for if itis the main cause, the contract may be oneof usufruct.

OBLIGATIONS OF THE BAILEE (Arts 1941-1945)(COOLRD2)

1. To pay for the ordinary expenses for the useand preservation of the thing loaned (Art.1941)

2. To pay for all other expenses other than thosereferred to in Art. 1941 and 1949 (refund ofextraordinary expenses either in full or in half)(Art . 1950)REASON: Bailee makes use of the thing.Expenses for ostentation are to borne by the


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bailee because they are not necessary for thepreservation of the thing

3. To take good care of the thing with thediligence of a good father of a family (Art.1163)

4. To be liable for loss even if due to a fortuitousevent:GR:the bailee is not liable for loss or damage

due to a fortuitous event (Art . 1174)Reason: the bailor retains the ownership of thething loanedExceptions: (Art. 1942 punishes the bailee

for his improper acts although theymay not be the proximate cause ofthe loss)

a. Bad faith if the bailee devotes the thing toany purpose different from that for which ithas been loaned

b. Delay - he keeps it longer than the periodstipulated or after the accomplishment of theuse for which the commodatum has beenconstituted

c. Has been delivered with appraisal -the thingloaned has been delivered with appraisal ofits value, UNLESS there is a stipulationexempting the bailee from responsibility incase of a fortuitous event

d. Lends the subject matter to a 3rdperson - helends or leases the thing to a third personwho is not a member of his household

e. Ingratitude - being able to save the thingborrowed or his own thing, he chose to save

the latter5. The bailee has NO RIGHT to retain the thing

loaned as security for claims he has againstthe bailor, even though they may be by reasonof extraordinary expenses(Art . 1944)Reasons:a. Ownership remains in bailor the bailee

acquires only the use of thing, the ownershipof which remains w/ the bailor

b. Only temporary use given to bailee thebailee would be violating the bailors trust inhim to return the thing as soon as the periodstipulated expires or the purpose has been

accomplishedException: Claim for damages sufferedbecause the bailor doesnt advise bailee ofthe flaws known to him (Art. 1951)

6. A bailee doesnt answer for the deterioration ofthe thing loaned due only to the use thereofand without his fault

7. Liability when there are 2 or more bailees: Thepresumption is that they are solidarily liable(Art . 1945)

Reason for the presumption: to safeguardeffectively the right of the bailor. The lawpresumes that the bailor takes into account thepersonal integrity and responsibility of all thebailees and that, therefore, he would not have

constituted the commodatum if there were onlyone bailee

OBLIGATIONS OF THE BAILOR(AD-READ-HA)1.Primary obligation of the bailor:

GR: To allow the bailee the use of the thing loanedfor the duration of the period stipulated or until theaccomplishment of the purpose for w/c thecommodatum was constitutedExceptions: the bailor may demand the return orits temporary use upon:

a. bailor has an urgent need for the thing (Art.1946) the contract is suspended Reason: the right of the bailor is based on

the fact that commodatum is essentiallygratuitous

b. bailee commits an act of ingratitude (Art.1948) if the bailee should commit an offense

against the person, the honor or theproperty of the bailor, or of the wife orchildren under his parental authority

if the bailee imputes to the bailor anycriminal offense, or any act involvingmoral turpitude, even though he shouldprove it, unless the crime or the act has

been committed against the baileehimself, his wife, or children under hisauthority; and

if the bailee unduly refuses the bailorsupport when the bailee is legally ormorally bound to give support to thebailor

Reason: the person who commits any ofthe acts of ingratitude makes himselfunworthy of the trust reposed upon himby the bailor.

2. May demand the thing at will when the contract is

precarium PRECARIUM a kind of commodatum

where the bailor may demand the thing atwill. It has been defined as a contract bywhich the owner of a thing, at the request ofanother person, gives the latter the thing foruse as long as the owner shall please

3. To refund the extraordinary expenses (Art . 1949)


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GR on reimbursement: Notice should be given bythe bailee to the bailor regarding such extraordinaryexpensesReason for the rule: notice is required because it ispossible that the bailor may not want to incur the

extraordinary expense at all.Exception: where the extraordinary expenses areso urgent that the reply to the notification cannot beawaited w/o danger.

4.if the extraordinary expenses arise from the actualuse of the thing and even though bailee actedw/o fault, the expenses will be borne equally byboth the bailor and the bailee (50-50)(Art. 1949,2

ndpar.)

Reasons:a. the bailee pays because of the benefit

derived from the use of the thing loanedto him;

b. the bailor pays the other because he isthe owner and the thing will be returnedto him

Exception:Stipulation to the contrary that providefor a different apportionment of such expenses orthat they shall be borne by the bailee or bailoralone

5.all other expenses which are not necessary for theuse and preservation of the thing must beshouldered by the borrower (bailee)

6. the depreciation caused by the reasonable and

natural use of the thing is borne by the bailor(Art.1943)Reason:The parties to the contract know that thething borrowed cannot be used withoutdeterioration due to ordinary wear and tear.Exceptions:

a. when there is a stipulation to thecontrary;

b. when the bailee is guilty of fault ornegligence;

c. if he devotes the thing to any purposedifferent from that for which has beenloaned

7. To pay damages for known hidden flaws (Art.1951)

Requisites:(the following must concur)a. there is a flaw or defect in the thing

loanedb. the flaw or defect is hiddenc. the bailor is aware thereofd. he does not advise the bailee of the

same

e. the bailee suffers damages by reason ofthe flaw or defect

Exception: when the defect is not known to thebailor, he is not liable because commodatum isgratuitous.

8. The bailor has no right of abandonment forexpenses and damages(Art . 1952)

Reason: The expense and/or damages mayexceed the value of the thing loaned

SIMPLE LOAN OR MUTUUM

SIMPLE LOAN OR MUTUUM contract wherebyone of the parties delivers to another money or otherfungible thing w/ the understanding that the sameamount of the same kind and quality shall be paid.(Art. 1933)

SIMPLE LOAN RENT/LEASE

Signifies the delivery ofmoney or some otherconsumable thing toanother w/ a promise torepay an equivalentamount of the same kindand quality

One party delivers toanother some non-consumable thing in orderthat the latter may use itduring a certain periodand return it to the former

There is a transfer of

ownership of the thingdelivered

The owner of the lessee

or the lessor of theproperty does not lose hisownership. He simplyloses control over theproperty rented during theperiod of the contract

The relation betweenparties is that of obligorand oblige

The relation is betweenlandlord and tenant

The creditor receivespayment for his loan

The owner of the propertyreceives compensationor price either in money,provisions, chattels, or

labor from the occupantthereof in return for itsuse

Basis ofcomparison

MUTUUM COMMODATUM BARTER

Subjectmatter

Money orany otherfungiblethings/

Personal orreal property(generally non-consumable)

Non-fungible ornon-consumabl


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personalproperty

e things

Obligationof bailee

Pay ordeliver thesame kind

or qualityloaned tothe bailee

Return theidentical thingborrowed when

the time hasexpired or thepurpose hasbeen served

Theequivalentthing is

given inreturn forwhat hasbeenreceived

Nature ofcontract

May begratuitous

Alwaysgratuitous

Onerous

NATURE OF MUTUUMa. bilateral - borrower promise to pay is the

consideration for the lenders obligation tofurnish the loan

b. no criminal liability upon failure to pay

SUBJECT MATTERa. fungible or consumable-depending on the

intent of the parties, that the return of the thingis equivalent only and not the identical thing

b. moneyc. if the transfer of ownership is on a non-

fungible thing, with the obligation of the otherto give things of the same kind, quantity andquality, it is a barter

INTERESTGR: Interest must be expressly stipulated in writing,and it must be lawful (Art. 1956)Exceptions:

1. Indemnity for damages the debtor in delayis liable to pay legal interest (6%/12%) asindemnity for damages even in the absence ofa stipulation for the payment of interest.Interest as indemnity for damages is payableonly in case of default or non-performance ofcontract.

Basis for computation for indemnity:a. Central Bank Circular 416 12% p.a. incases of:

Loans Forbearance of money, goods or

credits Judgments involving such loans or

forbearance, in the absence of theexpress agreement as to such rateof interest

During the interim period from thedate judgment until actual payment

b. Art. 2209 of the Civil Code 6% p.a. incases of:

Other sources (e.g. sale) Damages arising from injury to

persons Loss of property which does not

involve a loan

2. Interest accruing from unpaid interest- interestdue shall earn interest from the time it is judiciallydemanded although the obligation may be silentupon this point.

DETERMINATION OF INTEREST PAYABLE INKIND:Its value shall be appraised at the current price of theproducts or goods at the time and place of payment.(Art. 1958)Purpose: to make usury harder to perpetrate

COMPOUNDING INTEREST (Art . 1959)GR: accrued interest (interest due and unpaid) shallnot earn interestExceptions:

When judicially demanded When there is an express stipulation made

by the parties to wit: that the interest due andunpaid shall be added to the principalobligation and the resulting total amount shallearn interest

Compounding interest may be availed of only whenthere is a written stipulation in the contract for thepayment of interest.

BARTER

BARTER -A contract whereby one person transfersthe ownership of non-fungible things to another withthe obligation on the part of the latter to give things ofthe same kind, quantity and quality.

DEPOSIT

DEPOSIT -A deposit is constituted from the moment

a person receives a thing belong to another, with theobligation of safely keeping it and of returning thesame.

If the safekeeping of the thing delivered is not theprincipal purpose of the contract, there is no depositbut some other contract.NOTE: it is essential that the depository is not theowner of the thing deposited


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apressorture.

Exceptions: It may belong to another person thanthe depositor.

a. when two or more persons claiming to beentitled to a thing may deposit the same witha third person. In such case, the third person

assumes the obligation to deliver to the oneto whom it belongs.b. Interpleader the action to compel the

depositors to settle their conflicting claims.Here one of the depositors is not the owner.

FORM OF CONTRACT OF DEPOSIT:GR: A contract of deposit may be entered into orallyor in writing.(Art . 1969)Exception: Delivery of the thing deposited. (It is areal contract, hence, delivery is required forperfection.)

Depositary -capacitatedDepositor -incapacitated

Depositary -incapacitatedDepositor -capacitated

Depositary is subject toALL the obligations of adepositary

Depositary does notincur the obligations of adepositary

Depositary must return theproperty either to:a) the legal representativeof the incapacitated, ORb) the depositor himself ifhe should acquirecapacity

Depositary, however isliable to:a) return the thingdeposited while still in hispossession; ANDb) pay the depositor theamount by which he mayhave benefited himselfwith the thing or its pricesubject to the right of any3rd person who acquiresthe thing in good faith

Basis ofComparison

Irregulardeposit

Mutuum

Demandability Demandable atwill of theirregulardepositor forwhose benefit

the deposit hasbeen constituted

Lender isbound by theprovisions ofthe contractand cannot

seek restitutionuntil the time ofpayment asprovided in thecontract hasarisen

Benefit Benefit accruesto the depositor

Necessity ofthe borrower

Preference ofcredit

Depositor haspreference overother creditors

Enjoy nopreference inthe distribution

with respect tothe thingdeposited

of the debtorsproperty.

OBLIGATIONS OF THE DEPOSITARY (SRT-CCC-

ULC-RITT-RPT-TL-HR)1. Two primary obl igations (Art. 1972)a. safekeeping of the object;b. Return of the thing when required even

though a specified term or time for such mayhave been stipulated in the contract. Degree of Care same diligence as he

would exercise over his property. Reasons:

i. Essential requisite of judicial relationwhich involves the depositorsconfidence in his good faith andtrustworthiness;

ii. The presumption that the depositortook into account the diligence whichthe depositary is accustomed withrespect to his own property.

The depositary cannot excuse himself fromliability in the event of loss by claiming thathe exercised the same amount of caretoward the thing deposited as he wouldtowards his own if such care is less than thatrequired by the circumstances.

2. Obligation not to transfer deposit (Art. 1973)GR: the depositary is not allowed to depositthe thing with a third person.

Reason: A deposit is founded on trust andconfidence and it can be supposed that thedepositor, in choosing the depositary, hastaken into consideration the lattersqualification.Exception: The depositary is authorized byexpress stipulation.Liabilities:Depositary is liable for loss of thething deposited when:a. He transfers the deposit with a third

person without authority although there isno negligence on his part and the thirdperson;

b. He deposits the thing with a third personwho is manifestly careless or unfitalthough authorized, even in the absenceof negligence; or

c. The thing is lost through the negligenceof his employees whether the latter aremanifestly careless or not.

Exemption from liability: The thing is lostwithout the negligence of the third personwith whom he was allowed to deposit the


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thing if such third person is not manifestlycareless or unfit.

3. Obligation not to change the way of deposit(Art . 1974)

GR: Depositary may not change the way ofthe depositException: If there are circumstancesindicating that the depositor would consent tothe change. This is a situation wherein thedepositary would reasonably presume thatthe depositor would agree to the change if heknows of the facts of the situation.Requisites :a. The depositary must notify the depositor

of such change andb. Must wait for the reply of the depositor to

such change.Exception: If the delay of the reply wouldcause danger.

4. Obligation to collect on the choses in actiondeposited (Art . 1975)

If the thing deposited should earn interest,the depositary is under the obligation to:a. Collect the interest as it becomes due;b. Take such steps as may be necessary to

preserve its value and the rightcorresponding to it.

The depositary is bound to collect the capital,as well as the interest, when due.

Contract of rent of safety deposit boxes(Art . 1975)

A contract for the rent of safety deposit boxesis not an ordinary contract of lease of things,but a special kind of deposit; hence, it is notto be strictly governed by the provisions ondeposit. The prevailing rule in the US is thatthe relation between a bank renting outsafety deposit boxes and its customer withrespect to the contents of the box is that ofbailor and bailee.

5. Obligation not to comming le things if so

stipulated (Art. 1976)GR: The depositary is permitted tocommingle grain or other articles of the samekind and quality.Effects:a. The various depositors of the mingled

goods shall own the entire mass incommon.

b. Each depositor shall be entitled to suchportion of the entire as the amountdeposited by him bears the whole.

Exception: When there is a stipulation to thecontrary.

6. Obligation not to make use of the thingsdeposited (Art . 1977)

GR: Deposit is for safekeeping of the subjectmatter and not for its use.Exceptions:a. Expressly authorized by the depositor;b. Such use is necessary for its

preservation but limited for the purposeonly.

Effect of unauthorized use: Liability fordamages

Effects of authorized use: (Art. 1978)a. If the thing deposited is non-consumable:

GR: The contract loses the character of adeposit and acquires that of acommodatum despite the fact that theparties may have denominated it as adeposit.Exception: Safekeeping is still theprincipal purpose of the contract.

b. If the thing deposited is money or otherconsumable thing:GR: Converts the contract into a simpleloan or mutuum.Exception: Safekeeping is still theprincipal purpose of the contract, but itbecomes an irregular deposit. Bankdeposits are in the nature of irregulardeposits but they are really loans

governed by the law on loans.

7. Liability for loss through fortuitous event (Art.1979)

GR: The depositary is not liable for lossthrough fortuitous event without his fault.Exceptions:a. If it is so stipulated;b. If he uses the thing without the

depositors permissionc. If he delays in its return;d. If he allows others to use it, even though

he himself may have been authorized to

use the same.Note: Liability for loss without fortuitous event:

Depositary presumed at fault (Art. 1265)- in possession

8. Relation between bank and depositor (Art.1980)

Fixed, savings, and current deposits ofmoney in banks and similar institutions shallbe governed by the provisions concerningsimple loan.


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a. Contract of loan deposits in banks arereally loans because the bank can usethe same for its ordinary transactions

b. Relation of creditor and debtor therelation between a depositor and a bank

is that of a creditor and a debtor.

9. Obligation when the thing deposited is closedand sealed (Art. 1981)

The depositary has the obligation to:a. return the thing deposited when delivered

closed and sealed in the same condition;b. pay for damages should the seal or lock

be broken through his fault, which ispresumed unless proven otherwise;

c. Keep the secret of the deposit when theseal or lock is broken, with or without hisfault.

10. When depositary justified in opening closedand sealed subject matter (Art. 1982)

a. The depositary is presumed authorizedto do so if the key has been delivered tohim;

b. When the instructions of the depositor asregards the deposit cannot be executedwithout opening the box or receptacle.(Necessity)

11. Obligation to return products, accessoriesand accessions (Art. 1983)

12. Obligation to pay interest on sums convertedfor personal use (Art. 1983)

13. The depositary who receives the th ing indeposit cannot require that the depositorprove his ownership over the thing (Art. 1984)

14. Where third person appears to be the owner(Art . 1984)

The depositary may be relieved from liabilitywhen:a. He advised the true owner of the thing of

the deposit.

b. If the owner, is spite of such information,does not claim it within the period of onemonth (30 days)

15. Obligation of the depositary when there aretwo or more depositors. (Art. 1985)

a. Divisible thing and joint depositors each one of the depositors can demandonly his share proportionate thereto.

b. Indivisible thing and solidary depositors rules on active solidarity

GR: Each one of the depositors maydo whatever may be useful to theothers. (Art. 1212)Exception: Anything which may beprejudicial to the other depositors.

GR: The depositary may return thething to any one of the solidarydepositorsException: When a demand, judicialor extrajudicial, for its return hasbeen made by one of them in whichcase delivery should be made to him.

c. Return to one of the depositors stipulated if by stipulation, the thing should bereturned to one of the depositors, thedepositary is bound to return it only to theperson designated although he has notmade any demand for its return.

16. Obligation to return to the person to whomreturn must be made. (Art. 1986)

a. The depositary is obliged to return thething deposited, when required, to:

The depositor; To his heirs or successors; or To the person who may have

been designated in the contract.b. If the depositor was incapacitated at the

time of making the deposit, the propertymust be returned to:

His guardian or administrator; To the person who made the

deposit; To the depositor himself should

he acquire capacity.c. Even if the depositor had capacity at the

time of making the deposit but hesubsequently loses his capacity duringthe deposit, the thing must be returned tohis legal representative.

17. Obligation to return at the place of return (Art.1987) same as the general rule of lawregarding the place of payment. (Art. 1251)

GR: At the place agreed upon by the parties,

transportation expenses shall be borne bythe depositor.Exception: In the absence of stipulation, atthe place where the thing deposited might beeven if it should not be the same place wherethe original deposit was made.

18. Obligation to return upon the time of return.(Art . 1988)


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Purpose: To maintain the status quo during thependency of the litigation or to insure the right of theparties to the property in case of a favorable

judgment.

Depositary of sequestered property: personappointed by the court. (Art. 2007)Obligations:a. To take care of the property with the diligence of

a good father of the family. (Art. 2008)b. He may not be relieved of his responsibility until

the litigation is ended or the court so orders. (Art.2007)

Applicable law: The law on judicial deposit isremedial or procedural in nature. Hence, the Rules ofCourt are applicable. (Art. 2009)

Basis ofComparison

JudicialDeposit

Extra-judicialDeposit

Cause ororigin

By will of thecourts

By will of theparties. Hence,there is acontract

Purpose Security;Secure theright of a partyto recover incase offavorable

judgment.

Custody;Safekeeping ofthe thing

Subject Matter Either movable

or immovableproperty butgenerally,immovable

Only movable

property

Remuneration Alwaysremunerated(onerous)

Generallygratuitous, butmay becompensated

In whosebehalf it is held

In behalf of theperson who, bythe judgment,has a right

In behalf of thedepositor orthird persondesignated

WAREHOUSE RECEIPTS LAW

Scope: all warehouses, whether public or private,bonded or not

Application: applies to warehouse receipts issued bya warehouseman as defined in Sec. 58(a),while the Civil Code, to other cases wherereceipts are not issued by awarehouseman.

The Issue of Warehouse Receipts

WHO MAY ISSUE?1. a warehouseman - a person lawfully

engaged in the business of storing goodsfor profit

2. a duly authorized officer or agent of awarehouseman

NOTE: receipts not issued by awarehouseman although in the form ofwarehouse receipts are not warehousereceipts

FORM AND CONTENTS: need not be in particularform, but certain essential terms must be present:

1. Location of warehouse -because thewarehouseman may have other warehouses

2. Date of issue and receipt - indicates primafacie the date when the contract of deposit isperfected and when the storage chargesshall begin

3. Consecutive number of receipt - to identifyeach receipt with the goods for which it wasissued

4. Person to whom goods are deliverable -determines the person or persons who shallprima facie be entitled lawfully to thepossession of the goods deposited

5. Rate of storage charges - consideration forthe contract from the view of thewarehouseman

6. Description of goods or packages - foridentification

7. Signature of warehouseman - best evidenceof the fact that the warehouseman hasreceived the goods and has bound himself toassume all obligations in connectiontherewith

8. Warehousemans ownership of or interest inthe goods - purpose is to prevent abuses inthe past when warehouseman issued receipton their goods

9. Statement of advances made and liabilitiesincurred (if present) - purpose is to preserve

the lien of the warehouseman over the goodsstores or the proceeds thereof in his hands

NOTE: Effect of omission of any of theessential terms:a. validity and negotiability of receipt is NOT

affectedb. warehouseman will be liable for damagesc. the contract will be converted to an

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WHAT TERMS MAY BE INSERTED?ANY other terms or condition

EXCEPT:a. those contrary to this Act (e.g. exemption

from liability for misdelivery in Sec. 10,

not giving statutory notice in case of saleof goods in Sec. 33 and 34)b. an exemption from liability and

negligencec. those contrary to law, morals, good

customs, public order or public policy

DEFINITIONSa. negotiable receipt - receipt in which it is

stated that the goods received will bedelivered to the bearer or to the order ofany person named in such receipt

b. non-negotiable receipt - receipt in whichit is stated that the goods received will bedelivered to the depositor or to any otherspecified person

NOTE:1. a provision in a negotiable receipt that it is non-

negotiable is VOID2. a negotiable warehouse receipt is not a

negotiable instrument in the same sense as inthe NIL.

Duplicate receipts (applies ONLY) to negotiablewarehouse receipts.

Whenever more than one negotiable receiptis issued for the same goods, the word

DUPLICATE shall be placed on the face ofthe receipt except the one 1

stissued.

Effect: the warehouseman shall be liable fordamages for failing to do this to anyone whopurchased the subsequent receipt (1) forvalue, and (2) supposing it to be an original;even though the purchase be after delivery ofthe goods by the warehouseman to theholder of the original receipt.

Failure to make non-negotiable (applies only tonon-negotiable warehouse receipts)

a. A non-negotiable receipt must contain

the word: non-negotiableb. Effect of failure to do so will give a holder

who purchased it for value supposing itto be negotiable, the option treat it asnegotiable

CONSTRUCTION OF WAREHOUSE RECEIPTS: Liberal construction of the law in favor of bona fideholders. This has no application to actions againstany party other than a warehouseman.

OBLIGATION AND RIGHTS OF AWAREHOUSEMAN UPON THEIR RECEIPTS

PRINCIPAL OBLIGATIONS WAREHOUSEMAN:1. To take care of the goods, and be liable for failure

to exercise careBUT he is not liable for loss or injury which could

not have been avoidedUNLESS there is a stipulation to the contrary

2. To deliver the goods to the holder of the receipt orthe depositor upon DEMAND accompanied with:a. an offer to satisfy the warehousemans lien-

because a warehouseman may refusedelivery until his lien is satisfied

b. an offer to surrender the receipt- for theprotection of the warehouseman and toavoid criminal liability; this is subject towaiver

c. an offer to sign when the goods aredelivered, an acknowledgment that theyhave been delivered

BUT a warehouseman may still refusedelivery on the grounds of some lawfulexcuse like:1. Sec. 10

a. He has been requested by theperson lawfully entitled to thegoods not to make delivery

b. He has information that thedelivery about to be made wasnot to one lawfully entitled to thegoods

2. Sec. 16: He has acquired title to thegoods which was delivered from:

a. Transfer made by the depositorat the time of the deposit forstorage or subsequent thereto

b. The warehousemans lien3. Sec. 18: If there are several claimants to

the goods4. Sec. 21: If goods were lost and he had

no fault5. Sec. 36: He has already lawfully sold the

goods

PERSONS TO WHOM THE GOODS MUST BEDELIVERED1. Persons lawfully entitled to the possession of the

goods or its agent2. Persons entitled to deliver under:

a. a non-negotiable receipt; orb. with written authority

3. person in possession of a negotiable receipt(which was lawfully negotiated)


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NOTE: a warehouseman does NOT have acause of action against a person to whom hemisdelivered the thing UNLESS the depositorsues him.

ACTS FOR WHICH A WAREHOUSEMAN ISLIABLE:

1. Failure to stamp duplicate on copies of anegotiable receipt (Sec. 6 and 15)

When more than one negotiable receipts areissued for the same goods, the wordduplicate must be plainly placed by thewarehouseman upon the face of every suchreceipt except the 1st. In such case, thewarehouseman warrants:a. that the duplicate is an accurate copy of

the original receiptb. such original receipt is uncancelled at the

date of the issue of the duplicate NOTE: The duplicate imposes no other

liability upon the warehouseman.

2. Failure to place non-negotiable on a non-negotiable receipt (Sec. 7)

3. Misdelivery of the goods (Sec. 10)

To one not lawfully entitled to possession:Liable for conversion (unauthorizedassumption and exercise of the right ofownership over goods belonging to anotherthrough alteration or the exclusion of the

owners right) To a person entitled to delivery under a non-

negotiable receipt or written authorization ORperson in possession of a negotiable receiptStill liable for conversion if:a. prior to delivery, he had been requested

NOT to make such deliveryb. he had received notice of the adverse

claim or title of a 3rd

person

4. Failure to effect cancellation of a negotiablereceipt upon delivery of the goods (Sec. 11)

This is applicable ONLY to negotiable receipts

but NOT to a situation where there was a validsale in accordance with Sec. 36a. When the goods are delivered already:

Failure to cancel will make him liable toany one who purchased for value in goodfaith such receipt

b. When only some of the goods weredelivered: Failure to cancel or to stateplainly in the receipt that some goodswere delivered will make him liable to

any one who purchased for value in goodfaith such receipt

5. Issuing receipt for non-existing goods ormisdescribed goods (Sec. 20):

GR: a warehouseman is under obligationto deliver the identical property storedwith him and if he fails to do so, he isliable.

Exception: if the description consistsmerely of marks or labels upon the goodsor upon the packages containing them,etc., the warehouseman is NOT liableeven if the goods are not of the kind asindicated in the marks or labels

6. In case of lost or destroyed receipts (Sec. 14)

Remember that a warehouseman must deliverto the one who has the receipt but if such waslost, a competent court may order the deliveryof the goods only:a. upon proof of the loss or destruction of

the receipt; ANDb. upon giving of a bond with sufficient

securities NOTE: the warehouseman is still liable to

a holder of the receipt for value withoutnotice since the warehouseman cansecure himself in the bond given.

7. Failure to take care of the goods (Sec. 12)

8. Failure to give notice in case of sales ofgoods to satisfy his lien (Sec. 33) or becausethe goods are perishable and hazardous (Sec.34)

EFFECTS OF ALTERED RECEIPTS:1. Al teration immaterial: whether fraudulent or

not, authorized or not, the warehouseman isliable on the altered receipt according to itsoriginal tenor;

2. Al teration material: but it was authorized,the warehouseman is liable according to theterms of the receipts as altered;

3. Material alteration innocently made:though unauthorized, the warehouseman isliable on the altered receipt according to itsoriginal term;

4. Material alteration fraudulently made:warehouseman is liable according to theoriginal tenor to a:

a. purchaser of the receipt for valuewithout notice; and

b. to the alterer and subsequentpurchasers with notice ( BUT his


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liability is limited only to delivery ashe is excused from any other liability)

* Even a fraudulent alteration cannot divest the title ofthe owner of stored goods and the warehouseman is

liable to return them to the owner. BUT a bona fideholder acquires no right to the goods under anegotiable receipt which has been stolen or lost orwhich the indorsement has been forged.

WITH REGARD TO OWNERSHIP1. Ownership is not a defense for refusal to deliver

The warehouseman cannot refuse to deliverthe goods on the ground that he hasacquired title or right to the possession of itunless such is derived:

a. directly or indirectly from a transfer made bythe depositor at the time of the deposit forstorage or subsequent thereto;

b. from the warehousemans lien2. Adverse title of a 3

rdperson is not a defense for

refusal to deliver by a warehouseman to hisbailor on demand EXCEPT:a. To persons to whom the goods must be

livered (Sec. 9)b. To the person who wins in the interpleader

case (Sec. 17)c. To the person he finds to be entitled to the

possession after investigation (Sec. 18)d. To the buyer in case there was a valid sale of

the goods (Sec. 36)

DUTY OF WAREHOUSEMAN WHEN THERE ARESEVERAL CLAIMANTSThe warehouseman may either:

1. Investigate and determine within areasonable time the validity of the claims,and deliver to the person whom he finds isentitled to the possession of the goodsEffect: He is NOT excused from liability incase he makes a mistake

2. He may bring a complaint in interpleaderEffect:

a. he will be relieved from liability indelivering the goods to the person whom thecourt finds to have better right;b. he is liable for refusal to deliver to therightful claimant when it is required to havean interpleader;

3. He may not do (a) and (b)Effect: He will be liable after a lapse of areasonable time, of conversion as of the dateof the original demand for the goods.

NOTE:This does NOT apply to cases where thewarehouseman himself makes a claim to thegoods.

COMMINGLING OF DEPOSITED GOODS

GR:A warehouseman may not mingle goodsbelonging to different depositors.Exception: In case of fungible goods of thesame kind and grade provided:

a. he is authorized by agreementb. he is authorized by custom

Effects:a. each depositor shall own the entire mass in

common and entitled to his portionb. warehouseman is severally liable to each

depositor for the care and redelivery oftheir portion as if the goods had been keptseparate

ATTACHMENT OR LEVY OF NEGOTIABLERECEIPTS

A warehouseman has the obligation to holdthe goods for the owner or for the person towhom the negotiable receipt has been dulynegotiated. Therefore, the goods cannot beattached or levied upon under an executionUNLESS:

a. the document be first surrendered; orb. the negotiation is enjoined, orc. the document is impounded by the

court The warehouseman cannot be compelled to

deliver the goods until:a. the receipt is surrendered to him;b. it is impounded by the court

NOTE: This provision does NOT apply if theperson depositing is NOT the owner of the goodsor one who has not the right to convey title to thegoods binding upon the owner.

REMEDY OF CREDITOR WHOSE DEBTOR OWNSA NEGOTIABLE RECEIPTAttachment of the negotiable receipt (NOT the goods)NOTE: the goods themselves cannot readily beattached or levied upon by ordinary legal process

EXTENT OF WAREHOUSEMANS L IEN1. lawful charges for

a. storage, andb. preservation of the goods

2. lawful claims fora. money advancedb. laborc. interestd. weighinge. insurance


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f. cooperatingg. transportation

3. other charges and expenses in relation tosuch goods

4. reasonable charges and expenses for notice

and advertisements of sale5. sale of the goods where defaults has beenmade in satisfying the lien

EXTENT OF THE LIEN WHEN A NEGOTIABLERECEIPT HAS BEEN ISSUED

1. charges for storage and preservation of thegoods

2. other charges expressly enumerated (from b,c, d and e above) although the amount isNOT stated

NOTE: For claims not specified, thewarehouseman shares pro rata with the othercreditors of the depositor the balance of theproceeds of the sale for the satisfaction of theclaims.

GOODS SUBJECT TO LIEN1. goods of the depositor who is liable to the

warehouseman as debtor wherever suchgoods are deposited;

2. goods of other persons stored by thedepositor who is liable to the warehousemanas debtor with authority to make a validpledge

NOTE: A warehouseman has NO lien on goodsbelonging to another and stored by a stranger in

fraud of the true owners right.

THE LIEN MAY BE LOST THROUGH:1. voluntarily surrendering possession of

goods - constitutes a waiver orabandonment

A warehouseman may NOT claim alien on other goods of the samedepositor for unpaid charges on thegoods surrendered if the goods weredelivered to him under differentreceipts.

2. wrongfu lly refusing to deliver the goods

to a person who holds the receipt or thedepositor upon DEMAND accompaniedwith:a. an offer to satisfy the warehousemans

lien (because a warehouseman mayrefuse delivery until his lien is satisfied)

b. an offer to surrender the receipti. for the protection of the warehouseman

and to avoid criminal liabilityii. this is subject to waiver

3. an offer to sign when the goods aredelivered, an acknowledgment that theyhave been delivered

REMEDIES FOR A WAREHOUSEMAN

1. Even if without lien, all remedies allowed bylaw to a creditor against his debtor forcollection of charges;

2. By refusing to deliver the goods until his lien issatisfied;

3. All remedies allowed by law for theenforcement of a lien against personal propertyand recovery of any deficiency in case it existsafter the sale of the property;

4. By causing the extrajudicial sale of the propertyand applying the proceeds to the value of thelien

PROCESS OF EXTRAJUDICIAL SALE:

1. Written notice to the person on whose accountthe goods are held or to persons who claim aninterest in the goods containing:

a. itemized statement of warehousemanslien showing the sum due and when itbecame due

b. brief description of the goodsc. a demand that a claim be paid on or

before a day mentioned, not less than 10days from:

1. delivery of notice if personallydelivered

2. time when notice should reach its

destination if sent by maild. statement that if the claim is not paid, the

goods will be advertised for sale and thensold at a specified time and place

2. After the time for payment of the claim if thenotice has elapsed, the sale will be advertisedstating:

a. a description of the goods to be soldb. the name of the owner or person on

whose account the goods were heldc. time and place of the sale

3. Publication:a. if there is a newspaper published in the

place of sale: once a week for 2consecutive weeks and the sale not heldless than 15 days from the time of the 1stpublication

b. if there is no newspaper: posted at least10 days before the sale in not less than 6conspicuous places in the place of sale

4. Sale itself in:a. place where the lien was acquiredb. if such place is manifestly unsuitable forthe purpose, at the nearest suitable place


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5. From the proceeds of the sale:a. the warehouseman shall satisfy his lienb. including the reasonable charges of notice,

advertisement and salec. the balance shall be held by the

warehouseman and delivered on demandto the person to whom he should deliver it6. Any time before the goods are sold, any person

may pay the warehouseman for his lien and theother expenses. The warehouseman shall deliverthe goods to that person if he is entitled under this

Act, to the possession of the goods on payment ofthe charges. Otherwise, the warehouseman shallretain ownership of the goods.

With regard to perishable and hazardousgoodsWarehouseman will give notice to owner or

person in whose name the goods are stored:a. to satisfy his lienb. to remove the goodsc. failure to do a &b will give the

warehouseman authority to sell thegoods without advertising

d. if sale is not possible, he maydispose of the goods in any lawfulmanner without liability

Proceeds of the sale shall be disposed of inaccordance with the PROCESS in the sale ofthe goods.

Effects of sale

a. warehouseman is NOT liable for non-delivery even if the receipt was given forthe goods when they were deposited benegotiated

b. when the sale was made without thepublication required and before the timespecified by law, such sale is void and thepurchaser of the goods acquires no title inthem

NEGOTIATION AND TRANSFER OF RECEIPTSNegotiable receipts negotiable by delivery

1. if the goods are deliverable to the bearer;

or2. when indorsed in blank; or3. person to whose order the goods are

delivered or by a subsequent indorseeindorsed it to bearer

GUARANTY AND SURETYSHIP

GUARANTY (2047) - By guaranty, a person calledthe guarantor, binds himself to the creditor, to fulfillthe obligation of the principal debtor in case the lattershould fail to do so. It is a contract between theguarantor and the creditor.

CHARACTERISTICS OF THE CONTRACT

1. Accessory dependent for its existenceupon the principal obligation guaranteed byit;

2. Subsidiary and conditional takes effectonly when the principal debtor fails in hisobligation subject to limitation

3. Unilateral a. It gives rise only to a duty on the part of

the guarantor in relation to the creditorand not vice versa

b. It may be entered into even without theintervention of the principal debtor.

4. Guarantor must be a person distinct fromthe debtor a person cannot be thepersonal guarantor of himself

CLASSIFICATION OF GUARANTY

1. Guaranty in the broad sense:a. Personal guaranty is the credit

given by the person who guaranteesthe fulfillment of the principalobligation; or

b. Real guaranty is property,movable, or immovable

i. Real mortgage (2124) orantichresis (2132) guaranty isimmovable

ii. Chattel mortgage (2140) orpledge (2093) guaranty ismovable

2. As to its origin: a. Conventional constituted by

agreement of the parties (2051[1])b. Legal imposed by virtue of a

provision of law

c. Judicial required by a court toguarantee the eventual right of oneof the parties in a case.

3. As to considerat ion: a. Gratuitous guarantor does not

receive any price or remuneration foracting as such (2048)

b. Onerous one where the guarantorreceives valuable consideration forhis guaranty

4. As to person guaranteed:


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a. Single constituted solely toguarantee or secure performance bythe debtor of the principal obligation;

b. Double or sub-guaranty constituted to secure the fulfillment

by the guarantor of a prior guaranty5. As to its scope and extent: a. Definite where the guaranty is

limited to the principal obligationonly, or to a specific portion thereof;

b. Indefinite or simple where theguaranty included all the accessoryobligations of the principal, e.g.costs, including judicial costs.

GUARANTY GENERALLY GRATUITOUS (2048)

GR: Guaranty is gratuitous

Exception: When there is a stipulation to thecontrary

Cause of con tract of guaranty

1. Presence of cause which supportsprincipal obligation: Cause of thecontract is the same cause whichsupports the obligation as to the principaldebtor. The consideration which supportsthe obligation as to the principal debtor isa sufficient consideration to support theobligation of a guarantor or surety.

2. Absence of di rect considerat ion or

benefit to guarantor:Guaranty or suretyagreement is regarded valid despite theabsence of any direct considerationreceived by the guarantor or surety, suchconsideration need not pass directly tothe guarantor or surety; a considerationmoving to the principal will suffice.

MARRIED WOMAN AS GUARANTOR (2049)

GR: Married woman binds only her separate property

Exceptions:

1. With her husbands consent, bind thecommunity or conjugal partnership property

2. Without husbands consent, in casesprovided by law, such as when the guarantyhas redounded to the benefit of the family.

GUARANTY UNDERTAKEN WITHOUTKNOWLEDGE OF DEBTOR (2050)

1. Guaranty is unilateral exists for thebenefit of the creditor and not for the benefitof the principal debtor

2. Creditor has every right to take allpossible measures to secure payment of

his credit guaranty can be constitutedeven against the will of the principal debtor

Rights of third persons who pay:

1. Payment without the knowledge oragainst the will of the debtor:

a. Guarantor can recover only insofaras the payment has been beneficialto the debtor

b. Guarantor cannot compel thecreditor to subrogate him in his rights

2. Payment with knowledge or consent ofthe debtor: Subrogated to all the rightswhich the creditor had against the debtor

GUARANTY BY REASON OF ORIGIN (2051[1])

1. Conventional;2. Judicial;3. Legal

DOUBLE OR SUB-GUARANTY (2051[2])

One constituted to guarantee the obligation of aguarantor. It should not be confounded with guarantywherein several guarantors concur.

NECESSITY OF VALID PRINCIPAL OBLIGATION(2052[1])

Guaranty is an accessory contract: It is anindispensable condition for its existence that theremust be a principal obligation. Hence, if theprincipal obligation is void, it is also void.

GUARANTY OF VOIDABLE, UNENFORCEABLE,AND NATURAL OBLIGATIONS (2052[2])

A guaranty may secure the performance of a:

1. Voidable contract such contract isbinging, unless it is annulled by a propercourt action

2. Unenforceable contract because suchcontract is not void

3. Natural obligation the creditor mayproceed against the guarantor although hehas not right of action against the principal


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principal, the latters liability being governedby the obligations he assumed under hiscontract.

GUARANTY NOT PRESUMED (2055)Guaranty requires the expression of consent on thepart of the guarantor to be bound. It cannot bepresumed because of the existence of a contract orprincipal obligation.

Reasons:

1. There be assurance that the guarantor hadthe true intention to bind himself;

2. To make certain that on making it, theguarantor proceeded with consciousness ofwhat he was doing.

GUARANTY COVERED BY THE STATUTE OFFRAUDS

Guaranty must not only be expressed butmust so be reduced into writing.

Hence, it shall be unenforceable by action,unless the same or some note ormemorandum thereof be in writing, andsubscribed by the party charged, or by hisagent; evidence, therefore, of the agreementcannot be received without the writing, or asecondary evidence of its contents.

It need not appear in a public document.

GUARANTY STRICTLY CONSTRUED

Strictly construed against the creditor in favor of theguarantor and is not be extended beyond its terms orspecified limits.

If there is any doubt on the terms and conditions ofthe guaranty or surety agreements, the doubt shouldbe resolved in favor of the guarantor or surety.

1. Liability for obligation stipulated guarantor is liable only for the obligation ofthe debtor stipulated upon, and not to

obligations assumed previous to theexecution of the guaranty unless an intent tobe so liable is clearly indicated.

2. Liability of surety limited to a fixed period the surety must only be bound in themanner and to the extent, and under thecircumstances which are set forth or whichmay be inferred from the contract of guarantyor suretyship, and no farther.

3. Liability of surety to expire on maturity ofprincipal obligation such stipulation is

unfair and unreasonable for it practicallynullifies the nature of the undertaking it hadassumed.Reason: The liability of the surety attachesas soon as the principal debtor defaults, and

notice thereof is given the surety within areasonable time to enable it to take steps toprotect its interest.

Remedy of surety: Foreclose the counterbond putup by the principal debtor (if there is any)

GUARANTY DISTINGUISHED FROM WARRANTY

GUARANTY WARRANTY

Contract by which aperson is bound toanother for the

fulfillment of apromise orengagement of a thirdparty

An undertaking that the title,quality, or quantity of thesubject matter of a contract

is what it has beenrepresented to be, andrelates to some agreementmade ordinarily by the partywho makes the warranty

GUARANTY DISTINGUISHED FROM SURETYSHIP

GUARANTY SURETYSHIP

Liability depends uponan independentagreement to pay the

obligation if the primarydebtor fails to do so

Assumes liability as aregular party to theundertaking

Engagement is acollateral undertaking

Charged as an originalpromisor

Secondarily liable hecontracts to pay if, bythe use of duediligence, the dentcannot be paid

Primarily liable undertakes directly forthe payment withoutreference to the solvencyof the principal, and is soresponsible at once thelatter makes default,without any demand by

the creditor upon theprincipal whatsoever orany notice of default

Only binds himself topay if the principalcannot or unable to pay

Undertakes to pay if theprincipal does not pay,without regard to hisability to do so

Insurer of the solvency Insurer of the debt


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of the debtor

Does not contract thatthe principal will pay,but simply that he isable to do so

Pay the creditor withoutqualification if theprincipal debtor does notpay. Hence, theresponsibility orobligation assumed bythe surety is greater ormore onerous than thatof a guarantor

QUALIFICATIONS OF GUARANTOR (2056-2057)

1. He possesses integrity; 2. He has capacity to bind himself;3. He has sufficient property to answer for

the obligation which he guarantees.

Exception:The creditor waives the requirements

Effect of Subsequent Loss of RequiredQualifications: The qualifications need only bepresent at the time of the perfection of thecontract. The subsequent loss of integrity or propertyor supervening incapacity of the guarantor would notoperate to exonerate the guarantor of the eventualliability he has contracted, and the contract ofguaranty continues.

Remedy of creditor: Demand another guarantorwith the proper qualifications

Exception: Creditor may waive it if he chooses andhold the guarantor to his bargain.

Article 2057:

1. Requires conviction in the first instance of acrime involving dishonesty to have the rightto demand another.

2. Judicial declaration of insolvency is notnecessary in order for the creditor to have aright to demand another guarantor.

SELECTION OF GUARANTOR:

1. Specified person stipulated as guarantor:Substitution of guarantor may not bedemandedReason: The selection of the guarantor is:

a. Term of the agreement;b. As a party, the creditor is, therefore,

bound thereby.2. Guarantor selected by the principal

debtor: Debtor answers for the integrity,capacity, and solvency of the guarantor.

3. Guarantor personally designated by thecreditor: Responsibility of the selectionshould fall upon the creditor because heconsidered the guarantor to have thequalifications for the purpose.

RIGHT OF GUARANTOR TO BENEFIT OFEXCUSSION OR EXHAUSTION (2058)

Reasons:

1. Guarantor only secondarily liable theguarantor binds himself to the creditor tofulfill the obligation of the principal debtoronly in case the latter should fail to do so. Ifthe principal debtor fulfills the obligationguaranteed, the guarantor is discharged fromany responsibility.

2. Al l legal remedies against the debtor to be

first exhausted to warrant recourseagainst the guarantor for payment, it may notbe sufficient that the debtor appearsinsolvent. Such insolvency may be simulated.

Right of Creditor to Secure Judgment againstGuarantor prio r to Exhaustion

GR: An ordinary personal guarantor (NOT a pledgoror mortgagor), may demand exhaustion of all theproperty of the debtor before he can be compelled topay.

Exception:The creditor may, prior thereto, secure ajudgment against the guarantor, who shall be entitled,

however, to a deferment of the execution of saidjudgment against him, until after the properties of theprincipal debtor shall have been exhausted, to satisfythe latters obligation.

EXCEPTIONS TO THE BENEFIT OF EXCUSSION(2059)

The guarantor is not entitled to the benefit ofexcussion:

1. As provided in Art. 2059:a. If the guarantor has expressly

renounced it Waiveri. Waiver is valid but it must be made

in express terms.b. If he has bound himself solidarily with

the debtor liability assumed that of asuretyi. Guarantor becomes primary liable

as a solidary co-debtor. In effect, herenounces in the contract itself thebenefit of exhaustion.

c. In case of insolvency of the debtor guarantor guarantees the solvency ofthe debtor


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i. If the debtor becomes insolvent, theliability of the guarantor as thedebtor cannot fulfill his obligation

d. When he (debtor) has absconded, orcannot be sued within the Philippines

the creditor is not required to go after adebtor who is hiding or cannot be suedin our courts, and to incur the delaysand expenses incident thereto.

Exception: Debtor has left amanager or representative;

e. If it may be presumed that an executionon the property of the principal debtorwould not result in the satisfaction of theobligation if such judicial actionincluding execution would not satisfy theobligation, the guarantor can no longerrequire the creditor to resort to all such

remedies against the debtor as thesame would be but a useless formality.It is not necessary that the debtor be

judicially declared insolvent.2. If he does not comply with Art. 2060: In

order that the guarantor may make use of thebenefit of excussion, he must:a. Set it up against the creditor upon the

latters demand for payment from him;b. Point out to the creditor:

i. Available property of the debtor the guarantor should facilitate therealization of the excussion since he

is the most interested in its benefit.ii. Within the Philippine territory excussion of property locatedabroad would be a lengthy andextremely difficult proceeding andwould not conform with the purposeof the guaranty to provide thecreditor with the means of obtainingthe fulfillment of the obligation.

iii. Sufficient to cover the amount of thedebt.

3. If he is a judicial bondsman and sub-surety (2084)

4. Where a pledge or mortgage has been

given by h im as a special security.5. If he fails to interpose it as a defense

before judgment is rendered against him.

DUTY OF CREDITOR TO MAKE PRIOR DEMANDFOR PAYMENT FROM GUARANTOR (2060)

1. When demand to be made only afterjudgment on the debt for obviously the

exhaustion of the principals property cannoteven begin to take place before judgmenthas been obtained.

2. Actual demand to be made joining theguarantor in the suit against the principal

debtor is not the demand intended by law

DUTY OF THE GUARANTOR TO SET UP BENEFITOF EXCUSSION (2060)

As soon as he is required to pay, guarantor must alsopoint out to the creditor available property (not inlitigation or encumbered) of the debtor within thePhilippines.

DUTY OF THE CREDITOR TO RESORT TO ALLLEGAL REMEDIES (2061)

1. After the guarantor has fulfilled the conditionsrequired for making use of the benefit ofexhaustion, it becomes the duty of thecreditor to:

2. Exhaust all the property of the debtor pointedout by the guarantor;

3. If he fails to do so, he shall suffer the loss butonly to the extent of the value of the saidproperty, for the insolvency of the debtor.

JOINDER OF GUARANTOR AND PRINCIPAL ASPARTIES DEFENDANT

GR: The guarantor, not being a joint contractor with

his principal, cannot be sued with his principal.

Exception: Where it would serve merely to delay theultimate accounting of the guarantor or if no differentresult would be attained if the plaintiff were forced toinstitute separate actions against the principal andthe guarantors.

PROCEDURE WHEN CREDITOR SUES (2062)

1. Sent against the principal as a rule, thecreditor may hold the guarantor only after

judgment has been obtained against the

principal debtor and the latter is unable topay.

2. Notice to guarantor of the action guarantor must be notified so that he mayappear, if he so desires, and set up defenseshe may want to offera. Guaranty appears voluntary

appearance does not constitute arenunciation of his right to excussion.

b. Guaranty does not appear


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i. He cannot set up the defenseswhich, by appearing are allowed tohim by law; and

ii. It may no longer be possible for himto question the validity of the

judgment rendered against thedebtor3. Hearing before execution can be issued

against the guarantor a guarantor isentitled to be heard before an execution canbe issued against him where he is not a partyin the case involving his principal.

EFFECTS OF COMPROMISE (2063)

Compromise a contract whereby the parties, bymaking reciprocal concessions, avoid a litigation orput an end to one already commenced.

1. Compromise between creditor and principaldebtor benefits the guarantor but does notprejudice him.

2. Compromise between guarantor and thecreditor benefits but does not prejudice theprincipal debtor.

SUB-GUARANTORS RIGHT TO EXCUSSION(2064)

Sub-guarantor enjoys the benefit of excussionwith respect to:

1. Principal debtor; and

2. GuarantorReason: He stands with respect to the guarantoron the same footing as the latter does withrespect to the principal debtor

BENEFIT OF DIVISION AMONG SEVERALGUARANTORS (2065)

1. In whose favor appli cable a. Several guarantors;b. Only one debtor;c. For the same debt

Cannot be availed of if there are:b. Two or more debtors of one debt, even

if they be bound solidarily, each withdifferent guarantors; or

c. Two or more guarantors of the samedebtor but not only for the same debt

d. If any of the circumstances enumeratedin Art. 2059 should take place, as wouldthe benefit of exhaustion of the debtorsproperty.

2. Extent of liability of several guarantors jo int obligat ion: the obligation to answer forthe debt is divided among all of them. Theguarantors are not liable to the creditorbeyond the shares which they are

respectively bound to pay.Exceptions: When solidarily has beenexpressly stipulated

BENEFIT OF EXCUSSION AMONG SEVERALGUARANTORS:

In order that the guarantor may be entitled to thebenefit of division, it is not required that he point outthe property of his co-guarantors.

Reason: Obligation of the guarantor with respect tohis co-guarantors is not subsidiary but direct anddoes not depend as to its origin on the solvency orinsolvency of the latter.

GUARANTORS RIGHT TO SUBROGATION (2067)

SUBROGATION transfers to the personsubrogated, the credit with all the rights theretoappertaining either against the debtor or against thirdpersons, be they guarantors or possessors ofmortgages, subject to stipulation in conventionalsubrogation.

1. Accrual , basis, and nature of right rightof subrogation is necessary to enable the

guarantor to enforce the indemnity given inArt. 2066

a. Arises by operation of law uponpayment by the guarantor

b. It is not a contractual rightc. The guarantor is subrogated, by

virtue of the payment, to the right ofthe creditor, not those of the debtor.

2. When right not available sincesubrogation is the means of effectuating theright of the guarantor to be reimbursed. Itcannot therefore be invoked in thosecases where the guarantor has no right to

be reimbursed.

EFFECT OF PAYMENT BY GUARANTORWITHOUT NOTICE TO DEBTOR (2068)

If the debtor has already paid the creditor, when theguarantor pays, the debtor can set up against theguarantor the defense of previous extinguishments ofthe obligation by payment. Hence, guarantor mustnotify the debtor before making payment.


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Reason: The guarantor cannot be allowed, throughhis own fault or negligence to prejudice or impair therights or interests of the debtor.

EFFECT OF PAYMENT BY GUARANTOR BEFOREMATURITY (2069)

Debtors obligation with a period demandableonly when the day fixed comes.

1. The guarantor who pays before maturity isnot entitled to reimbursement since there isno necessity for accelerating payment.

2. A contract of guaranty being subsidiary incharacter, the guarantor is not liable for thedebt before it becomes due.

Exception: The debtor will be liable if thepayment was made:

a. With his consent; orb. Subsequently ratified by him (ratification

may be express or implied)

RIGHT OF GUARANTOR TO PROCEED AGAINSTDEBTOR BEFORE PAYMENT (2071)

GR: Guarantor has no cause of action against thedebtor until after the former has paid the obligation.

Exceptions: 2071 enumerates instances when theguarantor may proceed against the debtor evenbefore the payment.

1. When he is sued for the payment;2. In case of insolvency of the principal debtor;3. When the debtor has bound himself to relieve

him from the guaranty within a specifiedperiod, and this period has expired;

4. When the debt has become demandable, byreason of the expiration of the period forpayment;

5. After the lapse of 10 years, when theprincipal obligation has no fixed period for itsmaturity, unless it be of such nature that itcannot be extinguished except within aperiod longer than 10 years;

6. If there are reasonable grounds to fear thatthe principal debtor intends to abscond;

7. If the principal debtor is in imminent dangerof becoming insolvent.

Purpose: To enable the guarantor to take measuresfor the protection of his interest in view of theprobability that he would be called upon to pay thedebt.

REMEDY TO WHICH THE GUARANTORENTITLED

GR: The guarantor cannot demand reimbursementfor indemnity because he has not paid the obligation.

Exceptional remedies:1. To obtain release from the guaranty; or2. To demand security that shall protect him

from:a. Any proceedings by the creditor; andb. Against the insolvency of the debtor.

Guarantors remedies are alternative. He has theright to choose the action to bring.

SUIT BY GUARANTOR AGAINST CREDITORBEFORE PAYMENT

The guarantys or suretys action for release can onlybe exercised against the principal debtor and notagainst the creditor.

Reason: Release of the guarantor imports anextinction in the obligation to the creditor; it connotestherefore, either a remission or novation bysubrogation, and either operation requires thecreditors assent for its validity.

2066 AND 2071 DISTINGUISHED

2066

(Right of Guarantor toReimbursement after

Payment)

2071

(Right o f Guarantor toProceed against Debtoreven before payment)

Provides for theenforcement of the rightsof the guarantor againstthe debtor after he haspaid the debt gives aright of action afterpayment

Provides for theprotection before he haspaid but after he hasbecome liable gives aprotective remedy beforepayment

Substantive right Preliminary remedy

Gives a right of action,which, without theprovisions of the othermight be worthless

Remedy given seeks toobtain from the guarantorrelease from theguaranty or to demand asecurity that shall protecthim from any proceedingsby the creditor and fromthe danger of insolvencyof the debtor.


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TIFFar

RECOVERY OF SURETY AGAINST INDEMNITOREVEN BEFORE PAYMENT

1. Indemnity agreement for the benefit ofsurety indemnity agreement is not for thebenefit of the creditor but for the benefit of

the surety.2. Indemnity agreement may be against

actual loss as well as liability suchagreement is enforceable and not violative ofany public policya. Indemnity against loss indemnitor

will not be liable until the person to beindemnified makes payment or sustainsloss;

b. Indemnity against liability indemnitors liability arises as soon asthe liability of the person to beindemnified has arisen without regard to

whether or not he has suffered actualloss.

Where the principal debtors aresimultaneously the same persons whoexecuted the indemnity agreement, theposition occupied by them is that of aprincipal debtor and indemnitor at the same,and their liability being joint and several.

GUARANTOR OF A THIRD PERSON AT REQUESTOF ANOTHER (2072)

The guarantor who guarantees the debt of an

absentee at the request of another has a right toclaim reimbursement, after satisfying the debt from:

1. The person who requested him to be aguarantor;

2. The debtor

BETWEEN CO-GUARANTORSRIGHT TO CONTRIBUTION OF GUARANTORWHO PAYS (2073)

Presumption of joint liability of severalguarantors when there are:

1. Two or more guarantors;2. Same debtor;3. Same debt

Effect: Each is bound to pay only his proportionateshare.

When Art. 2073 Applicable:

1. When one guarantor has paid the debt to thecreditor;

2. Payment by such guarantor must have beenmade:

a. By virtue of a judicial demand; orb. Because the principal debtor is

insolvent;3. Guarantor who paid is seeking

reimbursement from each of his co-

guarantors the share which is proportionatelyowing him.

Effect of Insolvency of Any Guarantor:

Follows the rule on solidary obligations :Theshare of the insolvent guarantor shall be borne by theothers including the paying guarantor in the same

joint proportion.

Accrual and Basis of Right :

The right of reimbursement is acquired ipso jurewithout need of any prior cession from the creditor bythe guarantor.

DEFENSES AVAILABLE TO CO-GUARANTORS(2074)

GR: All defenses which the debtor would haveinterposed against the creditor.

Exception: Those which cannot be transmitted forbeing purely personal to the debtor.

LIABILITY OF SUB-GUARANTOR IN CASE OFINSOLVENCY OF GUARANTOR (2075)

Sub-guarantor is liable to the co-guarantors in thesame manner as the guarantor whom he guaranteed

in case of the insolvency of the guarantor for whomhe bound himself as sub-guarantor.

CAUSES OF EXTINGUISHMENT OF GUARANTY(2076)(PL3CN-ARFP)

GR: Guaranty being accessory, it is extinguishedwhen principal obligation is extinguished, the causesof which are:

1. Payment or performance;2. Loss of the thing due;3. Condonation or remission of the debt;4. Confusion or merger of the rights of the

creditor and debtor;

5. Compensation; and6. Novation7. Other causes:

a. Annulment;b. Rescission;c. Fulfillment of a resolutory condition;d. Prescription

Exception: The guaranty itself may be directlyextinguished although the principal obligation stillremains such as in the case of the release of theguarantor made by the creditor.


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Material Alteration of Principal Contract anyagreement between the creditor and the principaldebtor which essentially varies the terms of theprincipal contract without the consent of the surety,will release the surety from liability.

Such material alteration would constitute a novationor change of the principal contract, which isconsequently extinguished. Upon suchextinguishments, the accessory contract to guarantyis also terminator and the guarantor cannot be heldliable on the new contract to which he has not givenhis consent.

When Alteration Material where such change willhave the effect of making the obligation moreonerous.

Imposes a new obligation or added burden on theparty promising; or

1. Takes away some obligation alreadyimposed, changing the legal effect of theoriginal contract and not merely the formthereof.

RELEASE BY CONVEYANCE OF PROPERTY(2077)

GR: Payment is made in money.

Exception: Any substitute paid in lieu of moneywhich is accepted by the creditor extinguishes theobligation and in consequence, the guaranty.

In case of eviction: Eviction revives the principalobligation but not the guaranty.

Reason: The creditors action against the debtor isfor eviction and this is different from what theguarantor guaranteed.

RELEASE OF GUARANTOR WITHOUT CONSENTOF OTHERS (2078)

Effect: The release benefits all to the extent of theshare of the guarantor released.

Reason: A release made by the creditor in favor ofone of the guarantors without the consent of theothers may prejudice the others should a guarantorbecome insolvent.

RELEASE BY EXTENSION OF TERM GRANTEDBY CREDITOR TO DEBTOR (2079)

Release Without Consent of Guarantor: Creditorgrants an extension of time to the debtor without theconsent of the guarantor.

Effect: Guarantor is discharged from his undertaking.

Reason: Necessity of avoiding of prejudice to theguarantor. The debtor may become insolvent duringthe extension, thus depriving the guarantor of hisright to reimbursement.

It is unimportant whether the extension given hasactually proved prejudicial or not to the guarantor orsurety. Nor does it matter for how short a period thetime of payment has been extended.

Extension must be based on some new agreementbetween the creditor and the principal debtor byvirtue of which the creditor deprives him of his claim.

1. Where obligation payable in installments:where a guarantor is liable for differentpayments:GR:An extension of time to one or more willnot affect the liability of the surety for theothers.

Exception: When the unpaid balance hasbecome automatically due by virtue of anacceleration clause for failure to pay aninstallment.

Effect of exception: The act of the creditorextending the payment of said installment,without the guarantors consent, dischargesthe guarantor.

Reason: The extension constitutes anextension of the payment of the whole

amount of the indebtedness2. Where consent to an extension is waived

in advance by the guarantor: Such waiveris not contrary to law, nor to public policyEffect:Amounts to the suretys consent to allthe extensions granted.

RELEASE WHEN GUARANTOR CANNOT BESUBROGATED (2080)

If there can be no subrogation because of the fault ofthe creditor, the guarantors are thereby released,even if the guarantors are solidary.

Reason: The act of one cannot prejudice another. Italso avoids collusion between the creditor and thedebtor or a third person.

DEFENSES AVAILABLE TO GUARANTORAGAINST CREDITOR (2081)

GR: All defenses, which pertain to the principaldebtor and are inherent in the debt.


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TI

IMPORTANT POINTS1. debtor -owner bears the risk of loss of the

property2. pledge or mortgage is indivisible

EXCEPTIONSto the rule of indivisibility:

a. where each one of several thingsguarantees determinate portion ofcredit

b. where only portion of loan wasreleased

c. where there was failure ofconsideration

3. rule that real property, consisting of severallots should be sold separately, applies tosales in execution, and not to foreclosure ofmortgages

4. the mere embodiment of a real estatemortgage and a chattel mortgage in onedocument does not have the effect of fusingboth securities into an indivisible whole

5. contract of pledge or mortgage may secureall kinds of obligation, be they pure or subjectto a suspensive or resolutory condition

6. a promise to constitute pledge or mortgagecreates no real right, only a personal rightbiding upon the parties, only right of action tocompel the fulfillment of the promise butthere is no pledge or mortgage yet

7. under RPC, estafa is committed by a personwho, pretending to be the owner of any realproperty, shall convey, sell, encumber ormortgage the same knowing that the real

property is encumbered shall dispose of thesame as unencumbered. It is essential thatfraud or deceit be practiced upon the vendeeat the time of the sale.

PLEDGE:A contract by virtue of which the debtordelivers to the creditor or to a third person a movableor document evidencing incorporeal rights for thepurpose of securing the fulfillment of a principalobligation with the understanding that when theobligation is fulfilled, the thing delivered shall bereturned with all its fruits and accessions.

KINDS OF PLEDGE:1. Voluntary or conventional- created by

agreement of the parties2. Legal-created by operation of law

CHARACTERISTICS OF PLEDGE:1. real- perfected by delivery2. accessory-has no independent existence of

its own

3. unilateral- creates obligation solely on thepart of the creditor to return the thing subjectupon the fulfillment of the principal obligation

4. subsidiary- obligation incurred does notarise until the fulfillment of the principal

obligation

CAUSE OR CONSIDERATION IN PLEDGE1. principal obligation in so far as the

pledgor is concerned2. compensation stipulated for the pledge or

mere liberality of the pledgor- if pledgor isnot the debtor

PROVISIONS APPLICABLE ONLY TO PLEDGE1. transfer of possession to the creditor or to

third person by common agreement isessential in pledge

- ACTUAL DELIVERY is important- CONSTRUCTIVE delivery or

symbolic delivery of the key to thewarehouse is sufficient to show thatthe depositary appointed by commonconsent of the parties was legallyplaced in possession.

2. all movables within commerce of men maybe pledged as long as susceptible ofpossession

3. incorporeal right may be pledged. Theinstruments pledged shall be delivered to thecreditor and if negotiable, must be indorsed.

4. pledge shall take effect against 3rd persons

only if the ff appears in a public instrument:a. description of the thing pledgedb. date of the pledge

5. thing pledged may be alienated by thepledgor or owner only if with the consent ofthe pledgee. Ownership of the thing pledgedis transmitted to the vendee or transferee assoon as the pledgee consents to thealienation, butt he latter shall continue inpossession

6. contract of pledge gives right to the creditorto retain the thing in his possession or in thatof a third person to whim it has been

delivered, until the debt is paid7. creditor :a. shall take care of the thing pledged

with the diligence of a good father ofa family

b. has the right to the reimbursement ofthe expenses made for itspreservation is liable for its loss ordeterioration by reason of fraud,negligence, delay or violation of the


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terms of the contract, and not due tofortuitous event

c. may bring the actions which pertain tothe owner of the thing in order torecover it from, or defend it against a

3

rd

persond. cannot use the thing without theauthority of the owner, and if heshould do so, or misuse the thing, theowner may ask that it be judicially orextrajudicially deposited

e. may use the thing if it is necessary

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