Loans in Credit Transactions

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What constitutes a loan contract – In a loan contract, a contracting party obligates himself to deliver to another: (a) a non-consummable thing so that the latter may use the same for a certain time and return it (commodatum); or (b) money or other consumable thing,“ on the condition that the same amount of the same kind and quality shall be paid (loan or mutuum).[1]

Republic of the Philippines v. Bagtas
G.R. No. L-17474, 25 October 1962 (En Banc)

Respondent Bagtas borrowed 3 bulls for breeding purposes subject to a government charge of breeding fee computed at 10% of the book value of the bulls. When demand was made for the return of the bulls after the expiration of the contract, Bagtas refused and wanted to buy the same. Hence, the Republic filed a complaint for recovery. During the hearing, one of the bulls died due to gunshot wounds inflicted during a Huks raid. Bagtas sought to be relieved from liability.

HELD: Bagtas was liable. “A contract of commodatum is essentially gratuitous.” The parties entered into a contract of lease since Bagtas was made to pay a compensation fee. Under Art. 1671 of the Civil Code, the lessee would be subject to the responsibilities of a possessor in bad faith because he had continued possession of the bull after the expiry of the contract.

Even if the contract be a commodatum, Bagtas was still liable. Despite a fortuitous event, the bailee is liable for the loss of the thing:  (a) if he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; and (2) if the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event. In this case, Bagtas kept and used the bull until after the period of the loan and during the Huk raid when it was killed by stray bullets.

Perfection of loan only after delivery of object – Whether it is a commodatum or a simple loan, the loan is only perfected if the thing loaned is delivered.[2] Notwithstanding, an accepted promise to delivery something by way of commodatum or simple loan is binding upon the parties.[3]

Best Legal Practices

  • Delivery perfects a contract of loan – Considering that the contract of loan is perfected only upon delivery of the thing loaned, the creditor should immediately transfer the same to the debtor in order to perfect the contract and bind the latter. Without delivery, there is no contract of loan. Inspect first thing loaned before accepting – The debtor should inspect first the thing loaned before accepting in order to check whether such is in good condition or in accordance with the terms and conditions agreed upon.

Commodatum gratuitous, simple loan may be gratuitous or for a stipulation with interest – A commodatum is essentially gratuitous.[4] A simple loan may either be gratuitous or with a stipulation to pay interest.[5]

Ownership retained in commodatum, while ownership transfers in simple loan – In a commodatum, the bailor retains ownership of the thing loaned in a commodatum.[6] In a simple loan, the bailor transfers ownership of the thing.[7]

Commodatum

What constitutes a commodatum – In a commodatum, a contracting party obligates himself to deliver to another  a non-consummable thing so that the latter may use the same for a certain time and return it.[8]

Bailor need not be owner – The bailor (granting the loan) does not need to be the owner of the thing loaned.[9]

Bailee acquires use of thing, not fruits – The bailee (receiving the loan) acquires the use of thing loaned but not its fruits.[10] However, the parties may stipulate that the bailee has the right to make use of the fruits of the thing loaned.[11] If the bailee pays compensation when he acquires the use of the property, the contract ceases to be a commodatum.[12]

Consumable goods – If the parties agree that the purpose of the contract is not for the consumption of the consumable goods, then such goods may be the subject of commodatum.[13]

Movable or immovable property – Movable property, as well as immovable ones, may be the object of commodatum.[14]

Commodatum purely personal in character – A commodatum is purely personal in character.[15] Thus, the contract of commodatum extinguishes upon the death of either the bailor or the bailee.[16] In addition, the bailee can neither lend nor lease the object of the contract to a third person.[17]

Obligations of the Bailee

To pay for ordinary expenses – The bailee is required to pay the ordinary expenses for the use and preservation of the thing loaned.[18]

To return thing loaned after expiration of the period – The bailee is required to return the thing loaned after the expiration of the period or when demanded by the bailor in case of a contract of precarium.[19]

Liable for fortuitous events – Even if the loss of the thing is attributable to a fortuitous event, the bailee is liable:[20]

  • If he devotes the thing to any purpose different from that for which it has been loaned;[21]
  • If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted;[22]
  • If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;[23]
  • If he lends or leases the thing to a third person, who is not a member of his household;[24] or
  • If, being able to save either the thing borrowed or his own thing, he chose to save the latter.[25]

To be liable for deterioration of thing – The bailee is not liable for the deterioration of the thing loaned due only to the use thereof and without his fault.[26]

To immediately return if bailee commits acts of ingratitude – If the bailee commits any acts of ingratitude specified in Article 765[27] of the Civil Code, the bailor may demand the immediate return of the thing loaned.[28]

Bailee’s right of retention – The bailee does not have the right to retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses.[29] However, the bailee has a right of retention for damages,[30] including those he may have suffered after the bailor fails to advise the bailee of the flaws of the thing loaned.[31]

Obligations of the bailor

To respect period of loan in commodatum – The bailor is required to respect the commodatum and thus he cannot demand the return of the thing loaned until after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted.[32] Notwithstanding, if the bailor has urgent need of the thing in the meantime, he may demand the return or temporary use of the thing loaned.[33]

Contract of precarium – In a contract of precarium, the parties stipulate that the bailor may demand the thing provided that:[34]

  • Neither the duration of the contract nor the use to which the thing loaned should be devoted has been stipulated;[35] or
  • The use of the thing is merely tolerated by the owner.[36]

Quintos vs. Beck
G.R. No. L-46240, 03 November 1939

Plaintiff Quintos gratuitously granted to defendant Beck the use of three gas heaters and four electric lamps found on the house leased by plaintiff to defendant. When plaintiffs demanded for the said items, defendant refused and returned them only after the expiration of the lease.

HELD:Defendant was liable. He breached the contract of commodatum. Without any reason, he refused to return and deliver all the furniture upon the plaintiff’s demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

To refund extraordinary expenses – The bailor is required to refund the extraordinary expenses which were made for the preservation of the thing loaned during the period of the contract so long as 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.[37] If the extraordinary expense was a result of the actual use of the thing by the bailee and even though he acted without fault, the bailor and the bailee shall equally be liable unless there is a contrary stipulation.[38]

Best Legal Practices

  • Document extraordinary expenses and keep proofs of payment – The bailee should document all extraordinary expenses, as well as keep proofs of payment thereof (e.g. receipts). These are the best evidence to support any claim for reimbursement later on by the bailee.
  • Notify and obtain approval from creditor – When in doubt whether expenses are extraordinary, the bailee may get clearance from the bailor preferably in writing.
  • Demand regular accounting and notice of payments made – The bailor may demand regular accounting from the bailee as to extraordinary expenses made. He may also ask that he be furnished notices of payments made. In case payments are not for extraordinary expenses, he may challenge them and refuse reimbursement.

To be liable for damages if he fails to inform bailee of flaws – If the bailee suffers damages as a result of a flaw of the thing loaned and which was not communicated to him by the bailor who knew of such defect, the latter is liable for the damages to the bailee. [39] The bailor cannot exempt himself from payment of the expenses or damages by abandoning the thing loaned with the bailee.[40]

Simple Loan or Mutuum

What constitutes a mutuum or simple loan – In a mutuum or simple loan, a contracting party obligates himself to deliver to another money or other consumable thing on the condition that the same amount of the same kind and quality shall be paid.[41]

Ownership transferred – In a simple loan, a person who receives a loan of money or any other fungible thing[42] acquires ownership thereof with the corresponding obligation to pay the creditor an equal amount of the same kind and quality.[43]

Interest required to be stipulated in writing – The interest agreed upon by the parties is required to be expressly stipulated in writing in order to become due.[44] Even if not stipulated by the parties, an interest which is due and unpaid earns legal interest reckoned from the time it is judicially demanded.[45] Notwithstanding, the parties may capitalize the interest due and unpaid, resulting in it becoming an added principal that will earn new interest.[46]

Best Legal Practices

  • Stipulate interest in written contract – The creditor should make sure that his claim for interest on the amount loaned is expressly stipulated in writing for it to be due.

[1] CIVIL CODE. Paragraph 1, Article 1933.

[2] Ibid. Article 1934.

[3] Ibid.

[4] CIVIL CODE. Paragraph 2, Article 1933.

[5] Ibid. Paragraph 3, Article 1933.

[6] Ibid. Paragraph 4, Article 1933.

[7] Ibid.

[8] CIVIL CODE. Paragraph 1, Article 1933.

[9] Ibid. Article 1938. The bailor is the person to who entrusts the property to the bailee.

[10] Ibid. Article 1935. The bailee is the person to whom the property is entrusted to by the bailor who delivers such property.

[11] Ibid. Article 1940.

[12] Ibid.. Article 1935.

[13] Ibid. Article 1936. An example if the consumable goods will be used for exhibition (Ibid.).

[14] Ibid. Article 1937.

[15] Ibid. Article 1939.

[16] Ibid. Article 1939 (1).

[17] Ibid. Article 1939 (2). It should be noted that “the members of the bailee’s household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use.” (Ibid.)

[18] Ibid. Article 1941.

[19] Quintos v. Beck, 69 Phil. 108.

[20] CIVIL CODE. Article 1942.

[21] Ibid. Article 1942 (1).

[22] Ibid. Article 1942 (2).

[23] Ibid. Article 1942 (3).

[24] Ibid. Article 1942 (4).

[25] Ibid. Article 1942 (5).

[26] Ibid. Article 1943.

[27] Article 765 in connection with Article 1948 of the Civil Code provides for the following ingratitude acts: (a) if the bailee should commit some offense against the person, the honor or the property of the bailor, or of his wife or children under his parental authority; (b) if the bailee should impute on the bailor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the bailee himself, his wife or children under his authority; or, (c) if the bailee unduly refuses bailor support when the bailee is legally or morally bound to give support to the bailor.

[28] CIVIL CODE. Article 1948.

[29] Ibid. Article 1944.

[30] Ibid.

[31] CIVIL CODE. Article 1944, cf. 1951.

[32] Ibid. Paragraph 1, Article 1946.

[33] Ibid. “In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor.” (Paragraph 2, Article 1946, Civil Code)

[34] CIVIL CODE. Article 1947.

[35] Ibid. Article 1947 (1).

[36] Ibid. Article 1947 (2).

[37] Ibid. Paragraph 1, Article 1949 cf. Article 1950.

[38] Ibid. Paragraph 2, Article 1949.

[39] Ibid. Article 1951.

[40] Ibid. Article 1952.

[41] Ibid. Paragraph 1, Article 1933.

[42] “If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid” (Paragraph 2, Article 1955, Ibid.).

[43] CIVIL CODE. Article 1953. “A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter” (Article 1954, Civil Code).

[44] CIVIL CODE. Article 1956. “In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment” (Article 1958, Ibid.).

[45] Ibid. Article 2212.

[46] Ibid. Article 1959. “If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be” (Article 1960, Civil Code).

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