SIMPLE LOAN OR MUTUUM

Notes in Credit Transaction

DEC. 7, 2016
ART.1953. A PERSON WHO RECEIVES A LOAN OF MONEY OR ANY OTHER
FUNGIBLE THING ACQUIRES THE OWNERSHIP THEREOF, AND IS BOUND TO
PAY THE CREDITOR AN EQUAL AMOUNT OF THE SAME KIND AND QUALITY.
Mutuum- is a contract whereby one of the parties delivers money or other
consumable thing to another who acquires ownership thereof with the undertaking
or on condition that the same amount of the same kind and quality shall be paid.
It involves the return of the equivalent only and not the identical thing because the
borrower acquires ownership thereof.
Simple loan is a loan without interest; however, the Civil Code uses the term
simple loan to cover loans with and without stipulations to pay interest.
Characteristics:
1. A real contract- because the delivery of the thing loaned is necessary for
the perfection of the contract;
2. Unilateral contract- because once the subject matter has been delivered, it
creates obligations on the part of only one of the parties;
3. Nominate contract- because it has been given a specific name by the Civil
code;
4. Principal contract- because its existence is not dependent on another
contract;
5. Informal contract- because no particular form is generally required for the
contract; it is delivery that perfects the contract;
6. Gratuitous contract- if there is no stipulation to pay interest, or an Onerous
contract, if there is a stipulation to pay interest.
Essential requisites of the contract
1. Consent of the contracting parties; consent is manifested by the meeting
of the offer and acceptance upon the thing and the cause which are to
constitute the contract; consent must be given by parties who have capacity
to give consent;
2. Object certain which is the subject matter of the contract; the object
of the contract is money or other consumable thing; the contract may also
cover fungible things, otherwise it is a barter; must be within the commerce
of men; must also be determinate and not impossible; issues with respect to
determinateness and impossibility will arise only in a contract to loan; after
delivery, the issue thereof will be moot.

3. Cause of the obligation which is established; mutuum may be

gratuitous, in a contract of pure beneficence; the cause is the mere liberality
of the benefactor. Mutuum may also be onerous, if there is a stipulation to
pay interest. In general, it is a gratuitous contract, because there is no
obligation to pay interest unless expressly stipulated in writing.
Delivery is also an essential requisite of the contract; it is not perfected by mere
consent of the parties.
Delivery of the thing is essential so that the borrower may able to consume the
thing.
Delivery is the act by which the res or substance thereof is placed within the actual
or constructive possession or control of another.
The borrower and the creditor are the parties to the contract of mutuum. As the
creditor transfers ownership of the thing loaned, the creditor must be the owner of
the thing loaned.
Mutuum as a unilateral contract. The obligations of the borrower under a
mutuum arise ex uno latere and all are imposed on the borrower. After delivery of
the thing borrowed to the borrower, the creditor does not have any obligations.
In instances where the creditor failed to fully release the loan amount, the SC has
characterized the loan as a bilateral contract that imposes reciprocal obligations on
the parties. The SC held that the creditor has the obligation to release the full
amount of the loan and the debtor has the obligation to pay the loan when it
becomes due and demandable.
Contract of loan is a unilateral contract.
Contract to loan is a bilateral contract.
No required form for mutuum.
Since mutuum is a real contract, delivery of the thing perfects the contract. By way
of exception, no interest shall be due unless it has been expressly stipulated in
writing.
An agent needs a special power of attorney from his principal to loan or borrow
money, unless the latter act be urgent and indispensable for the preservation of
things which are under administration.
Obligations of the borrower;
1. Pay to the lender an equal amount of the same kind and quality;
2. Pay interest if expressly stipulated in writing.

The law uses the word pay and not the word return because the consumption of
the thing loaned is the distinguishing character of the contract of mutuum from that
of commodatum. This obligation to pay may include the accessory duty to pay
interest.
Payment should be made in the currency stipulated.
If the agreement is silent on the currency, then payment must be made in the
currency in which the money was delivered, based on the principle that borrower
must pay the same amount of the same kind and quality.
If it is not possible to deliver in the relevant currency, payment must be made in the
currency which is legal tender in the Philippines.
The amount payable may change under certain circumstances, such as when there
is extraordinary inflation or deflation of the currency stipulated.
In case of fungible thing other than money, the borrower must pay the creditor
another thing of the same kind, quality, and quantity.
In case it is impossible to deliver the same kind, its value at the time of the
perfection of the loan shall be paid.
If the parties agreed on a period, then the thing borrowed must be returned upon
the end of the period. If the parties did not agree on a period, ARTICLE 1197 applies.
In this case, the courts may fix a period.
Question: can the creditor demand payment or can the borrower make payment
prior to the maturity date? ARTICLE 1196 and 1197 apply.
Article 1196. Whenever in an obligation a period is designated, it is
presumed to have been established for the benefit of both the creditor
and the debtor, unless from the tenor of the same or other circumstances
it should appear that the period has been established in favor of one or of
the other.
Article 1197. If the obligation does not fix a period, but from its
nature and the circumstances it can be inferred that a period was
intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends
upon the will of the debtor.
In every case, the courts shall determine such period as may under
circumstances have been probably contemplated by the parties. Once
fixed by the courts, the period cannot be changed by them.

If the loan is gratuitous, the borrower may pay before maturity date
because as a general rule, the creditor does not suffer any prejudice with
the return of the money prior to maturity date. On the other hand, if the
loan is with interest, theperiod is established for the benefit of both the
creditor and the borrower.
As a consequence, in loan with interest, the creditor cannot demand payment and
the borrower cannot pay prior to maturity date, unless agreed by the parties.
The payment must be made in the place stipulated. If no place stipulated, the place
of payment will be the domicile of the debtor.
No criminal liability for failure to pay. The borrower, being the owner, can dispose of
the thing borrowed and his act will not be considered misappropriation thereof.
No estafa is committed by a person who refuses to pay his debt or denies its
existence.
Jurisprudence: US vs. CAMARA; a person who buys rice for credit becomes
the owner of it and indebted for its price, but is not guilty of estafa by reason of not
paying it.
YONG CHAN KIM vs. PEOPLE OF THE PHIL. Ownership of the money (cash
advanced) was transferred to the petitioner, no fiduciary relationship was created.
Absent this fiduciary relationship between petitioner and private respondent, which
is an essential element of the crime of estafa by misappropriation or conversion,
petitioner could not have committed estafa.
SIMPLE LOAN vs. CONTRACT OF LEASE
1. CONTRACT OF LOAN signifies the delivery of money or some other
consumable thing to another with a promise to repay an equivalent amount
of the same kind and quality, but not a promise to return the same thing
loaned which becomes the property of the obligor.
The CONTRACT OF LEASE is a contract by which one of the parties delivers to
another a non-consumable thing in order that the latter may use it during a
certain period and return it to the former. In a contract of lease, the owner or
lessor of the property does not lose his ownership. He simply loses his control
over the property rented during the period of the contract;
2. In a contract of loan, the relationship between the parties is that of obligor
and oblige; while in a contract of lease, the relationship is that of landlord and
tenant; and
3. In a contract of loan, the creditor receives the payment for his loan, while in
contract of lease, the owner of the property rented receives compensation
or price either in money, provisions, chattel, or labor from the occupant
thereof in return for its use.

Trust receipt- shall refer to the written or printed document signed by the
entrustee in favor of the entruster containing terms and conditions substantially
complying with the provisions of P.D. No.115 or Trust Receipt Law.
Jurisprudence: The Trust Receipt Law does not seek to enforce payment of the
loan; rather it punishes the dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of another regardless of whether the latter is the
owner.
The practice of banks making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal prosecution should
they be unable to pay it may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign
lest their loan be disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation.
Fungible things are those which are usually dealt with by number, or measure
such as rice, oil, sugar, etc. so that any given unit or portion is treated as the
equivalent of any other unit or portion.
Distinction between fungible and consumable things;
That which cannot be used without being consumed under the Civil Code is
precisely that of consumable things.
Fungibility has been interpreted in the sense of things that are consumed by use
and things that are not consumed by use. Mutuum covers the former while
commodatum covers the latter.
Whether a thing is consumable or not depends upon its nature and whether it is
fungible or not depends upon the intention of the parties.
Extinguishment of the Contract;
1. By reason of confusion, if the debtor succeeds the creditor in the thing
loaned;
2. By condonation of debt;
3. By compensation;
4. By novation
Transfer of ownership.
The borrower acquires ownership of the thing loaned. It involves the transmission of
ownership of the thing loaned; the borrower becomes the owner from the moment
he receives the thing, and it is not because the money or fungible thing loses its
identity and becomes irreplaceable, but because delivery and the nature of the
contract.

Risk of loss and determination.

Risk problems do not arise as both ownership and possession pass on to the
borrower and the contractual obligations do not come into existence without the
delivery taking place. If the borrower loses the money or the goods, this does not
affect his obligation to repay the creditor. This is in accordance with the rule of res
perit domino.
Common loan terminologies;
1. Principal- amount of loan
2. Maturity date- date which the amount becomes due under the loan
agreement must be fully paid
3. Bullet payment or balloon payment- when the principal is due and
payable on the maturity date.
4. Amortization- partial payment of the principal.
5. Fixed interest rate- interest rate that does not change during the term of
the loan.
6. Floating interest rate- changes based on market rates.
7. Interest payment dates- dates on which interest is due and payable.
8. Covenant- obligation of the borrower to do (affirmative covenant) or not do
(negative covenant) something.
9. Right to prepayment- the right given to the borrower in a voluntary
payment clause to prepay the loan.
10.Mandatory prepayment clause- is a stipulation that gives the lender the
right to require prepayment of the loan upon the occurrence of certain
events.
11.Breakage costs- costs incurred by the lender as result of borrowers failure
to prepay under the conditions agreed upon.
12.Payment premium- the fee collected by the lender from the borrower for
prepaying the loan.
13.Cure period or grace period- period of time given to the borrower to
remedy a default under the loan agreement.
14.Default- the breach by the borrower of the loan agreement. If no cure period
was given for that particular default, a default is also an event of default.
15.Event of default- a cure period was given and the borrower was not able to
cure or remedy the breach of contract.
16.Acceleration clause- gives the lender the right to declare the loan
immediately due and payable upon the occurrence of an event of default.
ARTICLE 1954. 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.
By the contract of barter or exchange, one of the parties binds himself to give one
thing in consideration of others promise to give another thing.

The distinction between mutuum and barter lies in the subject matter.
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.
Barter is an onerous contract.
ARTICLE 1955. THE OBLIGATION OF A PERSON WHO BORROWS
MONEY SHALL BE GOVERNED BY THE PROVISIONS OF ARTICLES 1249 AND
1250 OF THIS CODE.
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.
Loan of money- if the thing loaned is money, payment should be made in the
currency stipulated.
A check is not a legal tender and, therefore, cannot constitute valid tender of
payment. The delivery of bills of exchange will produce the effect of payment only
when they have been cashed, or when through the fault of the creditor they have
been impaired.
Requisites if there is an extraordinary inflation or deflation to affect an
obligation;
1. There was an official declaration of extraordinary inflation or deflation from
the Bangko Sentral ng Pilipinas;
2. The obligation was contractual in nature;
3. The parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.
In essence, the creditor generally bears the risk of change in the value of the
currency stipulated. If article 1250 applies, the borrower bears the risk of change in
the value of the currency stipulated.
Article 1250, in case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency at
the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.
Loan of fungible thing- if what was loaned is a fungible thing other than money,
the borrower is under obligation to pay the lender another thing of the same kind,

quantity, and quality. In case it is impossible to do so, the borrower shall pay its
value at the time of the perfection of the loan.
ARTICLE 1956, NO INTEREST SHALL BE DUE UNLESS IT HAS BEEN
EXPRESSLY STIPULATED IN WRITING.
Interest may be paid either as compensation for the use of money (monetary
interest) or imposed by law or by courts as penalty of indemnity for damages
(compensatory interest) for breach of contractual obligations.
Kinds of interest;
1. Simple interest- that which is 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.
The accrued interest is added to the principal sum and the whole is treated as
new principal upon which the interest for the next period is calculated.
3. Legal interest- that which by law directs to be charged in the absence of
any agreement as to the rate between the parties.
a. Rate of interest for the loan or forbearance of any money, goods, or
credit, and the rate allowed in judgments, in the absence of express
contract as to such rate of interest rate, is also 6% per annum,
effective July 1, 2013.
4. Lawful interest- that which the law allows or does not prohibit.
5. Unlawful or usurious interest- that which is paid or stipulated to be paid
beyond the maximum fixed by law.
Requisite for recovery of interest;
1. The payment of interest must be expressly stipulated;
2. The agreement to pay interest must be in writing;
3. The interest must be lawful.
Absence of stipulation to pay interest is void.
Payment of interest must be expressly stipulated in writing applies to monetary
interest, not to compensatory interest.
Estoppel cannot give validity to an act that is prohibited by law or one that is
against public policy.
Existence of stipulation to pay interest;
1. If a particular rate of interest has been expressly stipulated by the parties in
writing, that interest, not the legal rate of interest, shall be applied;
2. If the exact rate of the interest is not mentioned, the legal rate of 6% shall be
payable;

3. No increase of interest shall be due unless such increase has also been
stipulated;
4. Sales invoices or slips stating interests and attorneys fees in the usual
printed forms as terms and conditions, without the signature of the obligor,
do not constitute the express stipulation required by Art.1956;
5. The receipt by the creditor of interest payment up to a certain date on a loan
that has already matured does not ipso facto result in renewal or extension of
maturity period of the loan up to said date. Whether or not a loan may be
renewed does not solely depend on the debtor but more so on the discretion
of the creditor;
6. The vendor and the vendee are legally free to stipulate for the payment of
either cash price of a subdivision lot or its installment price.
Liability for interest even in the absence of stipulation;
Article 1956 is subject to two (2) exceptions:
1. Indemnity for damages- the debtor in delay is liable to pay legal interest (6%)
as indemnity for damages even in the absence of express stipulation for the
payment of interest;
2. Interest accruing from unpaid interest- interest due shall earn interest from
the time it is judicially demanded although the obligation may be silent upon
this point.
If there was no accrued monetary interest, there will be no compensatory interest
on the monetary interest. Where no interest had been stipulated by the parties, no
accrued conventional interest could further earn interest upon judicial demand.
Where the courts judgment which did not provide for the payment of interest has
already become final, no interest may be awarded.
Liability for surcharges and penalties:
Surcharges and penalties agreed to be paid by the debtor in case of default partake
of the nature of liquidated damages.
Liquidated damages, whether intended as indemnity or penalty, shall be equitably
reduced if they are iniquitous and unconscionable. The court must consider the
circumstance of each case.
Interest separate and distinct from surcharges and penalties;
1. In obligations with a penal clause, the penalty will generally substitute for
damages and the payment of interest in case of noncompliance, unless there
is a stipulation to the contract.
2. The charging of interest for loans forms a very essential and fundamental
element of the banking business, which may truly be considered to be at the

very core of its existence or being. It is inconceivable for a bank to grant

loans for which it will not charge any interest at all.
Escalation clause in a loan agreement.
An escalation clause is a stipulation allowing an increase in the interest rate
originally agreed upon by the parties.
De-escalation clause is a stipulation allowing a decrease in the interest rate
originally agreed upon by the parties.
1. Escalation clause generally valid- it is valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of money on longterm contracts. Thus, a stipulation that the interest rate will be increased if
the Bangko Sentral raises its rediscounting rates is vaild.
2. Escalation clause must not be solely postative- an escalation clause
that grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor the right to
assent to an important modification in the agreement is void.
3. Other requirements for validity;
a. As a matter of equity, the escalation clause must be paired with a deescalation clause;
b. So as not to violate the principle of mutuality, the escalation must be
pegged to the prevailing market rates, and not merely makes a
generalized reference to increase or decrease in the interest rate in
the event a law or a Central Bank regulation is passed.
c. Consistent with the nature of contracts, the proposed modification
must be the result of an agreement between the parties.
In another case, the court ruled that the stipulations on interest rate repricing
are valid because;
i. The parties mutually agreed on said stipulations;
ii. Repricing takes effect only upon creditors written notice to the
borrower of the new interest rate; and
iii. The borrower has the option to prepay its loan if the borrower
and the creditor do not agree on the new interest rate.
4. Consequences of invalid escalation clause- being separable from the
other stipulations of the loan agreement, does not affect the validity of the
loan agreement. Hence, the creditor is entitled to the payment of the
principal amount of the loan. However, since the escalation clause is invalid,
the interest rate payable by the borrower should be the original interest rate
agreed upon by the parties.
5. Estoppel on the part of the borrower- if the escalation clause is invalid,
the borrower is not estopped from questioning the validity of the clause or
the interest imposed.

Estoppel cannot be predicated on an illegal act. As between parties to a

contract, validity cannot be given to it by estoppel if it is prohibited by law or
is against public policy.
The minds of all the parties must meet on the proposed modification as this
modification affects an important aspect of the agreement. There can be no
contract in the true sense in the absence of the element of an agreement.

Interest to be based on the prevailing market rate;

Where the clause authorizes the creditor to correspondingly increase the rate of
the interest in the event of changes in prevailing market rates, it cannot be said to
be dependent solely on the will of the creditor as it is also dependent on the
prevailing market rates. Obviously, the fluctuation in the market rates is beyond
control of the creditor.
Borrowers ability to prepay the loan;
If the escalation clause is valid, the borrower does not agree to the increased rate
determined in accordance with the escalation clause, the borrower, should have the
option to prepay the loan.
If the escalation clause is void because it gives the lender the right to unilaterally
determine interest rates, the lender cannot take refuge in the right given to the
borrower to prepay the loan without penalty if the borrower is not agreeable to the
new interest rate.
ARTICLE 1597, CONTRACTS AND STIPULATIONS, UNDER ANY CLOAK
OR DEVICE WHATEVER, INTENDED TO CIRCUMVENT THE LAWS AGAINST
USURY SHALL BE VOID. THE BORROWER MAY RECOVER IN ACCORDANCE
WITH LAWS ON USURY.
Usurious contracts declared void;
1. Contract void only as to interest involved- a usurious contract should not be
considered void in its entirety but only as to interest involved, so that the
loan becomes without stipulation to pay interest. *In simple loan with
stipulation of usurious interest, the prestation of the debtor to pay the
principal debt which is the cause of the contract in not illegal.
2. Form contract not conclusive- the above provision is deemed necessary to
defeat the cunning devices of usurers.
3. Right of debtor- the amount paid as interest under a usurious agreement is
recoverable by him, since the payment is deemed to have been made under
restraint, rather than voluntarily.

Instances of contracts disguised to cover usurious loans;

1.
2.
3.
4.
5.
6.
7.

Credit sale of property at exorbitant price to loan applicant.

Purchase of lenders property at an exorbitant price to be taken from loan.
Price of sale with right to repurchase clearly inadequate.
Pretended lease by borrower at usurious rental.
Rent free by lender of borrowers property in addition to interest loans.
Date for repayment of loan with interest ante-dates actual transaction.
Payment by borrower for lenders services as additional compensation for
loan.

ARTICLE 1958, 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 1959, WITHOUT PREJUDICE TO THE PROVISIONS OF ARTICLE
2212, INTEREST DUE AND UNPAID SHALL NOT EARN INTEREST. HOWEVER,
THE CONTRACTING PARTIES MAY BY STIPULATION CAPITALIZE THE
INTEREST DUE AND UNPAID, WHICH AS ADDED PRINCIPAL, SHALL EARN
NEW INTEREST.
When unpaid interest earns interest; as a general rule, accrued interest
shall not earn interest except in two (2) instances;
1. When judicially demanded
2. When there is an express agreement made by the parties to wit: that the
interest due and unpaid shall be added to the principal obligation and the
resulting total amount shall earn interest, this is called compounding interest.
The parties may stipulate on the imposition of both interest and penalty in case of
default on the part of the borrower.
ARTICLE 1960, IF THE BORROWER PAYS INTEREST WHEN THERE HAS
BEEN NO STIPULATION THEREFOR, THE PROVISION OF THIS CODE
CONCERNING SOLUTIO INDEBITI, OR NATURAL OBLIGATIONS, SHALL BE
APPLIED, AS THE CASE MAY BE.
This article simply means that if unstipulated interest is paid by mistake, the debtor
may recover as this would be a case of solutio indebiti or undue payment.
ARTICLE 1961, USURIOUS CONTRACTS SHALL BE GOVERNED BY
USURY LAW AND UNDER SPECIAL LAWS, SO FAR AS THEY ARE NOT
INCONSISTENT WITH THIS CODE.
Usury now legally non-existent;
1. Rate depends upon agreement- the interest legally chargeable now depends
upon the agreement between the lender and the borrower.

2. Where agreed rate excessive.

3. Reduced rate
4. Loan term not open ended- the interest rate shall be invalidated and shall be
reduced only in cases where the terms of the loans are open ended, and
where the interest rates are applied for an indefinite period.
5. Consequences of clause imposing excessive rates- a clause that imposes
excessive interest rates, being separable from other stipulations of the loan
agreement, does not affect the validity of the loan agreement.
6. Estoppel to question excessive rates- the imposition of an unconscionable
rate of interest on a money debt, even if knowingly and voluntarily assumed
is immoral and unjust. It is tantamount to a repugnant spoliation and
iniquitous deprivation of property, repulsive to the common sense of man.
Voluntariness does not make the stipulation on an unconscionable interest
valid.