DON HONORIO VENTURA STATE UNIVERSITY

College of Business Studies

Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
LAW ON CREDIT TRANSACTIONS

I. CREDIT, CONCEPT

- The “credit” of a person means his ability to borrow money by virtue of the
confidence or trust reposed in him by the lender that he will pay what he
promised.
- It is the trust or belief reposed by a person in another, of the latter’s ability to
comply with an obligation.

CREDIT TRANSACTIONS
- Refers to agreements based on the trust or belief of someone on the ability of
another person to comply with his obligations

SIGNIFICANCE OF CREDIT
- By virtue of the use of credit, more exchanges are possible. Persons are able to
enjoy a thing today but pay for it later.

II. SECURITY, CONCEPT

(A) As contracts of security:

(1) Contracts of real security – These are contracts supported by collateral/s

or burdened by an encumbrance on property such as mortgage and
pledge.
(2) Contracts of personal security – These are contracts where performance
by the principal debtor is not supported by collateral/s but only by a
promise to pay or by the personal undertaking or commitment of another
person such as in surety or guaranty. They are unsecured transactions.

(B) As to their existence:

(1) Principal contracts – They can exist alone such as commodatum and
mutuum. Their existence does not depend on the existence of another
contract.
(2) Accessory contracts – They have to depend on another contract, such as
guaranty proper, suretyship, pledge, mortgage, and antichresis. These
accessory contracts depend on the existence of a principal contract of
loan

(C) As to their consideration

(1) Onerous – This is a contract where there is consideration or burden

imposed like interest
(2) Gratuitous – This is a contract where there is no consideration or burden
imposed like commodatum which is essentially for free

III. BAILMENT, DEFINED

-This is the delivery of property of one person to another in trust for a specific
purpose, with a contract, express or implied, that the trust shall be faithfully

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
executed and the property returned or duly accounted for when the special
purpose is accomplished or kept until the bailor reclaims it.

- The delivery of personalty for some particular use, or on mere deposit, upon a
contract, express or implied, that after the purpose has been fulfilled, it shall
be redelivered to the person who delivered it, or otherwise dealt with
according to his directions, or kept until he reclaims it, as the case may be.

- It is different from bail in criminal procedure which is the security given for the
release of a person in custody of the law, furnished by him or a bondsman, to
guarantee his appearance before any court as required under the conditions
specified.

Personalities/Parties in a Contract of Bailment

(1) Bailor – the one who gives or delivers the property bailed
(2) Bailee – the one who receives the things delivered or bailed

IV. CONTRACT OF LOAN

Two Kinds of Contract of Loan

(1) Contract of Commodatum – where one of the parties (bailor) delivers to

another (bailee) something not consumable so that the latter may use the
same for a certain time and thereafter returns it (i.e. identical thing)

(2) Contract of Mutuum – where money or other consumable thing is delivered

by the lender to the borrower subject to the condition that the same amount
of the same kind and quality shall be paid. This is called simple loan.

Consumable and Non-Consumable Things, Concept.

Consumable – when a thing cannot be used in a manner appropriate to its

nature without being consumed

Ex. Food, firewood, gasoline

Non-Consumable Thing – a movable thing which can be used in a manner

appropriate to its nature without being consumed

Ex. Car, television, radio

Fungible and Non-Fungible Things, Concept

Fungible – one where the parties have agreed to allow the substitution of the
thing given or delivered with an equivalent thing

Non-fungible – one where the parties have the intention of having the same
identical thing returned after the intended use.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
*Whether a thing is consumable or not depends upon the NATURE of the thing.
As to whether it is fungible or not, depends upon the INTENTION of the parties.

Kinds of Commodatum

(a) Precarium – where the bailor demand the thing loaned at will under the
conditions set forth in Art. 1947. The use of the thing by the bailee depends
on the pleasure of the bailor;

(b) Ordinary Commodatum – where the bailor cannot just demand the return of
the thing at will because there is a period agreed upon which must be
respected.

V. DISTINCTIONS BETWEEN COMMODATUM AND MUTUUM

Basis Commodatum Mutuum

Subject Matter Non-Consumable thing. Money or consumable
Same thing must be thing. The equivalent
returned amount of same kind and
quality is to be returned.
Nature Essentially gratuitous May be gratuitous or
onerous (as when
interest is agreed upon)
Purpose It is a loan for use or It is a loan for
temporary possession consumption
Kind of property involved Real or personal property Only personal property
Risk of loss Lender or bailor retains Ownership is transmitted
ownership of the property to the borrower or bailee
Time of payment May be returnable at the Not returnable until the
end of the period in case end of the period
of urgent need
Character of the Purely personal in Not personal in character
contract character

DISTINCTIONS BETWEEN LOAN AND DEPOSIT

Basis Loan Deposit

Purpose Lender grants the Safekeeping of the thing
borrower the use of the deposited. Generally, the
thing loaned depositary cannot use
the thing deposited
Time of payment Generally, the borrower Depositor can demand
pays at the end of the the return of the thing
period deposited at any time
Applicability of Compensation of credits Compensation not
compensation applicable applicabe to things
deposited
Juridical relations Relationship is one of Relationship is one of
lender and borrower; or depositor and depositary
creditor and debtor

CREDIT DISTINGUISHED FROM LOAN

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Credit – the ability of an individual to borrow money by virtue of the confidence
or trust reposed by the lender unto him that he will pay what he has promised

Loan – the delivery by one party and the receipt by the other party of a given sum
of money, upon an agreement, express or implied, to repay the sum loaned, with
or without interest.

LOAN DISTINGUISHED FROM DISCOUNT

Discount – to discount a paper is only a mode of loaning money; in a discount,

interest is deducted in advance

Loan – interest is taken at the expiration of a credit

LOAN DISTINGUISHED FROM RENT OR LEASE

Contract of Loan – the thing loaned becomes the property of the obligor

Contract of Rent – the owner of the property does not lose his ownership. He
simply loses his control over the property rented during the period of the
contract.

VI. COMMODATUM AND MUTUUM ARE REAL CONTRACTS; WHEN PERFECTED –

These two contracts cannot be perfected by mere consent because they are not
consensual agreements. They are contracts which require the delivery of the
objects of the obligations. In short, no delivery, no contract.

VII. NATURE OF COMMODATUM –

Characteristics of Commodatum

(1) It is essentially gratuitous. If any compensation is payable for the use of the
thing, it ceases to be a commodatum.

(2) Purpose – to transfer the temporary use of the thing loaned to the bailee.

(3) The use of the thing is for a “certain time.”

(4) It is a real contract because it requires delivery of the object for its
perfection.

(5) It is a principal contract -its existence does not depend upon another
contract.

(6) It is a unilateral contract because after the object had been delivered by the
bailor (lender), it creates obligations to be performed by the bailee alone
(borrower).

(7) It is purely personal because of the trust and belief reposed on the bailee.

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
FRUITS OF THE PROPERTY UNDER COMMODATUM – The fruits of the property
shall pertain to the bailor or owner. The bailee does not enjoy the fruits. Usufruct
will result if the bailee is authorized to enjoy the fruits of the property.

However, under Article 1940, if there is a stipulation in the contract allowing the
bailee to enjoy the fruits of the thing loaned, the stipulation shall be valid (This
just the exception and not the rule).

VIII. SUBJECT OF COMMODATUM – the subject matter of commodatum must be

non-consumable because the thing must be returned. What has been
consumed cannot be returned.

However, consumable goods may be the object of commodatum if the purpose

is not to consume them such as when they were loaned merely for exhibition
purposes. After the affair, the same and identical goods shall be returned to the
lender or bailor.

OBJECT OF COMMODATUM – Both immovable and movable property may be

the subject matter of commodatum

Precarium – if no time was fixed for the use of the land

IX. BAILOR NEED NOT BE THE OWNER – the bailor of the thing in commodatum
need not be the owner thereof. Thus, the lessee may sublease and transfer the
enjoyment of the thing leased to another for a consideration, as long as there is
no prohibition for subleasing in the contract of lease.

X. COMMODATUM A PURELY PERSONAL CONTRACT – Thus, the rights and

obligations arising from commodatum are extinguished by the death of either
the bailor or the bailee.

Being personal to the borrower or bailee, the use of the object cannot be ceded
to a third person. EXCEPTION:

(a) Members of the household of the bailee subject to the following conditions:
- There is no agreement or stipulation to the contrary
- The nature of the object forbids such use

*The members of the household of the bailee are not considered as third
persons.

XI. WHEN BAILEE MAY USE FRUITS OF THING LOANED – General rule: The bailee
is not entitled to the use or enjoyment of the fruits of the thing loaned. The fruits
belong to the owner. However, if there is a stipulation to that effect, the bailee
may make use of the fruits of the thing.

*It is understood that the enjoyment of the fruits must only be incidental to the
use of the thing. It should not be the main cause, otherwise, the contract is not a
commodatum but a USUFRUCT. The stipulation will not impair the essence of
commodatum because the actual cause or consideration therefor is still the
liberality of the bailor (lender).

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale

XII. OBLIGATIONS OF THE BAILEE

(a) Obligation to pay for ordinary expenses – because he is under obligation to

return the identical thing to the bailor. Consequently, it is understood that he
should take good care of the thing with the diligence of a good father of a
family.

*Ordinary – expenses incurred due to the ordinary wear and tear/depreciation

*Extraordinary – expenses incurred when the substance of the thing will
already be affected
-If the expenses incurred by the bailee are extraordinary, the bailor must
reimburse the bailee provided that before incurring them, he first informs the
bailee about it.
- If the extraordinary expenses are incurred during the actual use of the thing,
the bailee and the bailor shall equally bear the expenses unless there is
stipulation to the contrary.

(b) Bailee liable for the loss of the thing, even if it should be through a fortuitous
event:

1. If he devotes the thing to any purpose different from that for which it has
been loaned;

2. If he keeps it longer than the period stipulated, or after the

accomplishment of the use for which the commodatum has been
constituted;

3. If the thing loaned has been delivered with appraisal of the value, unless
there is a stipulation exempting the bailee from responsibility in case of a
fortuitous event;

4. If he lends or leases the thing to a third person, who is not a member of

his household;

5. If being able to save either the thing borrowed or his own thing, he chose
to save the latter.

- This is an exception to the general rule that “no person shall be

responsible for those events which could not be foreseen, or which,
though foreseen, is inevitable (Art. 1174)”

- Rationale: The bailee committee improper conduct in all the six

instances mentioned. To punish him for such act/s of impropriety or bad
faith, he is made liable for the loss even if the acts he had committed are
not the proximate cause of the loss.

First paragraph: He deviated the purpose for which the thing was borrowed

Second paragraph: He is guilty of mora or default

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Third paragraph: The law presumes that the parties, due to the appraisal,
have intended that the bailee (borrower) shall be liable for loss due to the
fortuitous event

Fourth paragraph: The bailee violated the purely personal character of

commodatum

Fifth paragraph: in preferring to save his property than the thing loaned, he
committed an ac tantamount to ingratitude considering that the loan is
gratuitous.

(c) Bailee does not answer for the deterioration of the thing loaned in the
absence of fault - Deterioration is the lowering of value or character of a
thing . It normally occurs by reason of ordinary wear and tear. Such
depreciation is borne by the bailor (lender) being the owner of the thing.
However, if the deterioration is caused by the fault or negligence of the
bailee, he is responsible for it.

(d) Generally, the bailee has no right of retention – As a general rule, the bailee
(borrower) cannot retain the thing loaned to him on the ground that the bailor
owes him something

Exception: Claims for damages which the bailee suffered by reason of the
hidden defects or flaws of the thing loaned, of which he was not warned or
advised by the bailor. However, his right is only to retain the thing until he is
finally reimbursed.

Rationale: Bailment implies a trust that as soon as the time has expired, or
the purpose accomplished, the bailed property must be restored to the bailir,

(e) When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily

Solidary obligation, concept – There is solidary obligation where each one of

the debtors is obliged to pay the entire obligation, and where each one of the
creditors has the right to demand from any of the debtors, the payment of
fulfillment of the entire obligation.

Passive solidarity – solidarity on the part of the debtors

Active solidarity – solidarity on the part of the creditors

*Solidarity is provided to safeguard effectively the rights of the bailor (lender)

over the thing loaned. In case of loss of the thing, he can fully enforce the
right against any one or some of the bailees depending upon his
convenience.

XIII. OBLIGATIONS OF THE BAILOR

(a) When the return of the thing loaned may be demanded

1. After the expiration of the period stipulated

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
2. After the accomplishment of the use for which the commodatum has
been constituted.

Exception: When the bailor in the meantime has an urgent need of the
thing loaned, in which case he may demand its return or its temporary
use. In case of temporary use, the commodatum is not extinguished but
merely suspended while the possession of the thing remains in the bailor
(lender).

After the urgent need of the bailor (lender) has been gratified, he must
return the thing to the bailee (borrower) so its use may resume for the
remainder of the stipulated time or period or until the purpose of the loan
had been accomplished.

3. In PRECARIUM, the bailor may demand the thing loaned at will

PRECARIUM - a specie of commodatum where the bailee (borrower) is

bound to return the thing upon the demand of the bailor (lender) in any of
the following circumstance:

a. If the duration of the contract has not been stipulated

b. If the use to which the thing loaned should be devoted had not been
stipulated
c. If the use of the thing is merely by tolerance of the owner

4. The bailor may demand the immediate return of the thing if the bailee
commits any acts of ingratitude specified in Article 765.

Article 765 speaks of a donee (Donation like commodatum is gratuitous

in nature). There is act of ingratitude:

a. If the bailee should commit some offenses 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 imputes to the bailor any criminal offense, or any act
involving moral turpitude, even though he should prove it, unless the
crime or act has been committed against the bailee himself, or his
wife or children under his authority

c. If the bailee unduly refuses the bailor support when the bailee is
legally or morally bound to give support to the bailor.

5. Rule on Ordinary and Extraordinary Expenses

Ordinary Expenses – shall be paid or shouldered by the bailee or borrower

because he is under the strict obligation of returning the thing at the
proper time and in good condition.

Extraordinary Expenses – shall be borne by the bailor/lender. The bailor

shall fully refund to the bailee the extraordinary expenses incurred by the

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
latter provided the bailor has been notified before the expenses were
incurred (This is to guide the bailor whether or not to agree to the
proposed expenditure).

However, this requirement of notice is dispensed with when there is

urgency in the repair or preservation of the thing loaned which means
delay will cause imminent danger to the property.

- If the extraordinary expenses are incurred by the bailee on occasion of

the actual use of the thing, such expenses shall be divided equally
between the bailor and the bailee.

6. Incurring of Other Expenses – The bailee (borrower) is not entitled to the

refund of other expenses (outside of the ordinary and extraordinary
expenses). This is to prevent the bailee (borrower) from incurring
expenses which are not useful to the bailor (lender).

7. Failure of to advise bailee of the defects or flaws of the thing loaned – If

the bailor (lender) is aware of any defects or flaws of the thing loaned and
omitted to timely advise the bailee, and by reason thereof, the bailee
suffered damages, there is tort or quasi-delict for which the bailor is
liable

If the bailor/lender is not aware of the flaws, he cannot be made liable for
the resulting danger because commodatum is essentially gratuitous and
not onerous. Liberality must be reciprocated with liberality.

-If BOTH the bailor and the bailee are aware of the flaws or defects in the
thing loaned, the bailee (borrower) is deemed to have assumed the risk.
The bailor is not liable for the damages suffered by the bailee by reason
thereof.

8. Abandonment of the thing cannot exempt bailor (lender) from payment of

expenses and damages – The bailor’s liability to pay for the extraordinary
expenses incurred by the bailee for the preservation of the thing loaned,
or for damages suffered by the bailee by reason of the unrevealed flaws or
defects of the thing cannot be excused by merely abandoning the thing to
the bailee.

XIV. SIMPLE LOAN OR MUTUUM

MUTUUM – is a contract whereby one of the parties called the “lender” delivers
to another called the “borrower,” money or other consumable thing with the
condition or agreement that the same amount of the same kind and quality shall
be paid

What is the Cause in the Loan?

(a) As to the borrower – the acquisition of the thing

(b) As to the lender – the right to demand the return of the thing loaned or its
equivalent

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale

OWNERSHIP OVER THE THING IS TRANSFERRED - In a contract of loan, the

borrower becomes the owner of the thing or property delivered to him. What
will be paid therefore is not the same or identical thing delivered. The
borrower is bound to pay (not return) to the lender only the equivalent of the
thing.

“No person shall be imprisoned for non-payment of debt.” – This is because

the debtor in mutuum becomes the owner of the thing delivered to him. If he
consumed or disposed of the thing, that act which is an act of ownership is
not act misappropriation. Hence, there is no basis for criminal prosecution.

MUTUUM DISTINGUISHED FROM RENT

Basis Mutuum Rent or Lease

Ownership Ownership of the Ownership of property
property is transferred is not transferred to
to the borrower lessee. However,
possession is
temporarily
relinquished to lessee
for the period of the
lease contract.
Nature Unilateral Contract Bilateral Contract
Subject Matter Consumable thing Non-consumable
Juridical relations Lender and borrower Lessor and lessee

XV. DEFINITION OF BARTER (Art. 1954)

Barter – a contract where one of the parties binds himself to give one thing to
another in consideration of the latter’s promise to give another thing,

- The transfer of ownership of non-fungible things to a party with the obligation

on his part to give things to a party with obligation on his part to give things of
the same kind, quantity, and quality to another party is considered barter.

Fungible – may be substituted or replaced with another equivalent thing

Non-fungible – irreplaceable

- As a rule, non-fungible things are irreplaceable. They must be returned to the

lender after the purpose of the loan had been accomplished. The present
Article is an exception. The non-fungible things may be replaced by
agreement of the parties. However, the contract ceased to be a loan. It
becomes a barter.

DISTINCTION BETWEEN LOAN AND BARTER

Basis Loan Barter

Subject Matter Money or other fungible Non-fungible things
things
Nature Mutuum may be It is always onerous
gratuitous or onerous

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DON HONORIO VENTURA STATE UNIVERSITY
College of Business Studies
Regulatory Framework and Legal Issues in Business
Atty. Angela Dela Cruz-Lacanlale
Effect While in mutuum, there is It is in effect, a mutual
transfer of ownership, sale, resulting in the
there is no sale transfer of ownership on
both sides
Return of the thing If the loan is a The parties do not return
commodatum, the the things subject of the
borrower returns the exchange.
things after the expiration
of the period agreed upon

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