I.

Definition of Loan
LOAN - a contract by which one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. (Art.1933)

II. Characteristics of a Loan

Real contract 1. delivery is essential for perfection of the contract of loan. 2. An accepted promise to loan, is nevertheless binding on the parties, it being a consensual contract. Unilateral contract 1. creates obligations on only one party, i.e., the borrower 2. In a contract of loan, the cause is, as to the borrower, the acquisition of the thing, and as to the lender, the right to demand its return or its equivalent. (Monte de Piedad v. Javier) A thing is consumable when it is used in a manner appropriate to its purpose or nature. (Art 418) GENERAL RULE: If the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. EXCEPTION: Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (Art.1936) [Producers v. CA, 397 SCRA 651]

III. Kinds of Loan: In General Commodatum Ordinarily involves something not consumable (Art. 1936) Ownership of the thing loaned is retained by lender (Art. 1933) Essentially gratuitous (Art. 1933) Mutuum Involves money or other consumable thing Ownership is transferred to the borrower

Maybe gratuitous or it maybe onerous, i.e. with stipulated interest Borrower must return the same thing loaned Borrower need only pay the same amount of the (Art. 1933) same kind and quality May involve real or personal property (Art. Refers only to personal property 1937) Loan for use or temporary possession (Art. Loan for consumption 1935) Bailor may demand the return of the thing Lender may not demand its return before the loaned before the expiration of the term in lapse of the term agreed upon case of urgent need (Art. 1946) Bailor suffers the loss of the subject matter Borrower suffers the loss even if cause since he is the owner (Art. 1942; Art. 1174) exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay
Not purely personal in character Purely personal in character

IV. Commodatum
2 KINDS OF COMMODATUM 1. Ordinary commodatum - See Art.1933 2. Precarium one whereby the bailor may demand the thing loaned at will; exists in cases where: a. neither the duration of the contract nor the use to which the thing loaned should be devoted has been stipulated b. if the use of the thing is merely tolerated by the owner (Art 1947)

GENERAL RULE: In a commodatum, the right to use is limited to the thing loaned, and not to its fruits EXCEPTION: When there is stipulation to the contrary (Art.1940). In cases where there is such a stipulation, enjoyment of the fruits must be incidental to the use of the thing itself. Otherwise, if the use of the fruits is the main cause, the contract may be one of usufruct. (Art.562) What is the effect of an accepted promise to deliver by way of commodatum or mutuum? It is binding upon the parties, but the contract of loan shall not be perfected until delivery of the contract. (Art.1934) Who may be bailor in commodatum? 1. Anyone. The bailor in commodatum need not be the owner of the thing loaned. (Art.1938) 2. But the bailee himself may not lend nor lease the thing loaned to him to a third person (Art 1939(2)) GENERAL RULE: Commodatum is purely personal in character (Art.1939) such that: 1. Death of either party extinguishes the contract 2. Bailee can neither lend nor lease the thing lent to him to a third person EXCEPTION: Members of the bailees household may make use of the thing loaned EXCEPTION TO EXCEPTION: Bailees household may NOT use it when: 1. There is stipulation to the contrary, or 2. The nature of the thing forbids such use

V. Obligations of the Bailee in Commodatum

OBLIGATIONS OF THE BAILEE 1. Obligation to pay for the ordinary expenses for the use and preservation of the thing loaned (Art.1941) 2. Obligation to take good care of the thing with the diligence of a good father of a family (Art.1163) 3. Liability for loss, even if loss through fortuitous event, in certain circumstances (Art.1942) 4. Liability for deterioration of thing loaned, except under certain circumstances (Art.1943) 5. Obligation to return the thing upon expiration of term or upon demand in case of urgent need 6. Solidary obligation where there are 2 or more bailees to whom a thing was loaned in the same contract (Art.1945) GENERAL RULE: Bailee is not liable for loss or damage due to a fortuitous event (Art.1174), since the bailor retains ownership of the thing EXCEPTION: Bailee is liable even for loss due to a fortuitous event when: (Art 1942) 1. He devotes the thing to any purpose different from that for which it was loaned 2. He keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted 3. The thing loaned has been delivered with appraisal of its value, unless there is stipulation exempting the bailee from responsibility in case of a fortuitous event 4. He lends or leases the thing to a third person who is a not a member of his household 5. Being able to save either the thing borrowed or his own thing, he chose to save the latter GENERAL RULE: Bailee is liable for deterioration of thing loaned. EXCEPTION: The deterioration of the thing is due only to the use thereof and without his fault (Art.1943) GENERAL RULE: Bailee has no right of retention of the thing loaned, on the ground that the bailor owes him something. EXCEPTION: Bailee has a right of retention for damages for known hidden flaws mentioned in Art 1951. (Art.1944) REQUISITES FOR THE APPLICATION OF ART.1951 1. There is a flaw or defect in the thing loaned 2. The flaw or defect is hidden 3. The bailor is aware thereof

4. He does not advise the bailee of the same 5. The bailee suffers damages by reason of said flaw or defect

VI. Obligations of the Bailor in Commodatum

1. To allow the bailee the use of the thing loaned for the duration of period stipulated or until the accomplishment of the purpose for which commodatum was constituted. EXCEPTIONS: a. Urgent need during which time the commodatum is suspended (Art.1946) b. Precarium (Art.1947) If duration of the contract has not been stipulated If use or purpose of the thing has not been stipulated If use of thing is merely tolerated by the bailor c. Bailee commits an act of ingratitude specified in Art. 765 (Art.1948): Commission of offenses against the person, the honor, or the property of the bailor, or of his wife or children under his parental authority Imputing to 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 Undue refusal to give the bailor support when the bailee is legally or morally bound to [NOTE: Article 765 is applicable, because like donation, commodatum is essentially gratuitous. (Art.1933, par.2)] 2. To refund extraordinary expenses for the preservation of the thing loaned provided bailor is notified before the expenses were incurred. (Art.1949) EXCEPTION: Urgent need hence no notice is necessary. 3. To refund 50% of the extraordinary expenses arising from actual use of bailee of the thing loaned (Art.1949) EXCEPTION: Contrary stipulation 4. To pay damages to bailee for known hidden flaws in the thing loaned. [NOTE: Bailor has no right of abandonment; he cannot exempt himself from payment of expenses to bailee by abandoning the thing to the latter. (art. 1952)]

VII.Mutuum or Simple Loan

A mutuum or simple loan is a contract by which a person (creditor) delivers to another (debtor) money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid. (Art.1953) MUTUUM AND COMMODATUM DISTINGUISHED FROM BARTER 1. In mutuum, subject matter is money or any other fungible things; in barter, non-fungible (nonconsumable) things. 2. In commodatum, the bailee is bound to return the identical thing borrowed when the time has expired or the purpose has been served. In barter, the equivalent thing is given in return for what has been received. 3. Mutuum may be gratuitous and commodatum is always gratuitous. Barter on the other hand is an onerous contract. It is really a mutual sale. [NOTE: BARTER contract where by one of the parties binds himself to give one thing in consideration of the others promise to give another thing. (Art.1968)] CONSUMABLE AND FUNGIBLE DISTINGUISHED Whether a thing is consumable or not depends on its nature and whether it is fungible or not depends on the intention of the parties. Example: Wine is consumable by nature, but it may be non-fungible if the intention is merely for display or exhibition. [NOTE: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. (Art.1980)]

VIII. Interests
INTEREST is the compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits KINDS OF INTEREST 1. Simple interest Paid for the principal at a certain rate fixed or stipulated by the parties. 2. Compound Interest that which is imposed upon interest due and unpaid. 3. Legal Interest that which the law directs to be charged in the absence of any agreement as to the rate between the parties. 4. Lawful Interest that which the laws allow or do not prohibit 5. Unlawful or Usurious Interest paid or stipulated to be paid beyond the maximum fixed by law. However, by virtue of CB Circular 905, usury has become legally inexistent. When is compound interest allowed? 1. When there is an express written stipulation to that effect (Art.1959) 2. Upon judicial demand. HOWEVER, debtor is not liable to pay compound interest even after judicial demand when there is no stipulation for payment of interest. (Art.2212) REQUISITES FOR INTEREST TO BE CHARGEABLE 1. Must be expressly stipulated 2. Agreement must be in writing (Art.1956) 3. Must be lawful

EXCEPTIONS TO REQUISITE OF EXPRESS STIPULATION 1. The debtor in delay is liable to pay legal interest (6% or 12%) as indemnity for damages (Art.2209) 2. Interest accruing from unpaid interest Interest demanded shall earn interest from the time it is judicially demanded (Art.2212) or where there is an express stipulation (Art.1959) RULES FOR AWARD OF INTEREST IN THE CONCEPT OF ACTUAL & COMPENSATORY DAMAGES (Eastern Shipping Lines v. CA, 234 SCRA 78) 1. When obligation is breached consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Art.1169. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169) but when such certainty cannot be soreasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.