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E. Loan

1. Loan

a. CONCEPT

By the contract of loan, one of the parties delivers to another 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, Civil Code)

1) Ownership passes

In simple loan, ownership of the thing loaned passes to the borrower. (Paragraph 4, Art. 1933, Ibid.)

2) Gratuitous or with interest

Simple loan may be gratuitous or with a stipulation to pay interest. (Paragraph 3, Art. 1933, Ibid.)

3) Accepted promise to deliver by way of simple loan

An accepted promise to deliver something by way of simple loan is binding upon parties. (Art. 1934, Ibid.)

2. Commodatum

a. CONCEPT

By the contract of loan, 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 a commodatum. (Art. 1933, Civil Code)

1) Ownership is retained with bailor

In commodatum the bailor retains the ownership of the thing loaned. (Paragraph 4, Art. 1933, Ibid.)

2) Essentially gratuitous

Commodatum is essentially gratuitous. (Paragraph 2, Art. 1933, Ibid.)

If any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (Art. 1935, Ibid.)

3) Accepted promise to deliver by way of simple loan

An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (Art. 1934, Ibid.)

4) Acquires use, but not the fruits

The bailee in commodatum acquires the use of the thing loaned but not its fruits. (Art. 1935, Ibid.)

a) Stipulation to use fruits, allowed

A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (Art. 1940, Ibid.)

5) Consummable goods for exhibition

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, Ibid.)

6) Movable or immovable

Movable or immovable property may be the object of commodatum. (Art. 1937, Ibid.)

7) Bailor need not be the owner

The bailor in commodatum need not be the owner of the thing loaned. (Art. 1938, Ibid.)

8) Purely personal in character

Commodatum is purely personal in character. Consequently:

1) The death of either the bailor or the bailee extinguishes the contract;

2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee’s//borrower’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. (Art. 1939, Ibid.)

b. OBLIGATIONS OF THE BAILEE

1) To pay for ordinary expenses for use and preservation

The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (Art. 1941, Ibid.)

2) To pay for loss of the thing – even if due to a fortuitous event

The bailee is 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 its value, unless there is a stipulation exemption 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. (Art. 1942, Ibid.)

3) To pay for deterioriation of the thing loaned – if due to his fault

The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. (Art. 1943, Ibid.)

4) To avoid retention of thing loaned – if demanded to be returned

The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. (Art. 1944, Ibid.)

5) To be solidarily liable with co-bailees/borrowers

When there are two or more bailees/borrowers to whom a thing is loaned in the same contract, they are liable solidarily. (Art. 1945, Ibid.)

6) To immediately return the thing if bailee commits act of ingratitude

The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. (Art. 1948, Ibid.)

c. OBLIGATIONS OF THE BAILOR

1) To demand return of the thing only after stipulated period or accomplishment of use

The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. (Art. 1946, 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, Art. 1946, Ibid.)

2) To refund extraordinary expenses

The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided 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. (Art. 1949, Ibid.)

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (Paragaraph 2, Art. 1949, Ibid.)

If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement. (Art. 1950, Ibid.)

3) To be liable for damages for failing to inform the bailee of flaws of the thing loaned

The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (Art. 1951, Ibid.)

The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (Art. 1952, Ibid.)

d. PRECARIUM

The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or

2) If the use of the thing is merely tolerated by the owner. (Art. 1947, Ibid.)

3. Simple loan

a. CONCEPT

A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (Art. 1953, Ibid.)  

1) Loan of money

The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. (Art. 1955, Ibid.)

a) Payment in stipulated currency

The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. (Art. 1249, Ibid.)

b) Delivery of promissory notes, etc.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. (Paragraph 2, Art. 1249, Ibid.)

In the meantime, the action derived from the original obligation shall be held in the abeyance. (Paragraph 3, Art. 1249, Ibid.)

c) Extraordinary inflation or deflation

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. (Art. 1250, Ibid.)

2) Fungible thing other than money

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, Art. 1955, Ibid.)

b. BARTER

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. (Art. 1954, Ibid.)

4. Interests on loan

a. Conventional interest

1) Excpressly stipulated in writing

No interest shall be due unless it has been expressly stipulated in writing. (Art. 1956, Ibid.

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. (Art. 1958, Ibid.)

2) If interest is agreed, but no rate is stipulated

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. The effect of Article 1956 of the Civil Code noted that the legal rate of interest is to apply: “In a loan or forbearance of money, according to the Civil Code, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum.” (Sps. Abella v. Sps. Abella, G.R. No. 195166, 08 July 2015)

3) Unconscionable interest

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 an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals. (Sps. Abella v. Sps. Abella, supra.)

The imposition of an unconscionable interest rate is void ab initio for being “contrary to morals, and the law.” (Ibid.)

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors would be wanting. The lowest rates that have previously been considered unconscionable need not be an impenetrable minimum. What is more crucial is a consideration of the parties’ contexts. Moreover, interest rates must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the time it was lent. It is not the default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism for the creditor’s unjust enrichment at the expense of another. (Ibid.)

b. Interest on interest

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. (Art. 1959, Ibid.)

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. (Art. 1960, Ibid.)

c. Compensatory, penalty or indemnity interest

1) Compensatory interest

There are two kinds of interest – monetary and compensatory. (Sun Life of Canada [Philippines], Inc. v. Sandra Tan Kit, G.R. No. 183272, 15 October 2014)

Monetary interest – refers to the compensation set by the parties for the use or forbearance of money. No such interest shall be due unless it has been expressly stipulated in writing. (Ibid.)

Compensatory interest – refers to the penalty or indemnity for damages imposed by law or by the courts.  The interest mentioned in Articles 2209 and 2212 of the Civil Code applies to compensatory interest.  As a form of damages, compensatory interest is due only if the obligor is proven to have failed to comply with his obligation. (Ibid.)

In other words, the right to recover interest arises only either by virtue of a contract (monetary interest) or as damages for the delay or failure to pay the principal loan on which the interest is demanded (compensatory interest). (Odiamar v. Valencia, G.R. No. 213582, 12 September 2018)

Siga-an v. Villanueva, G.R. No. 173227, 20 January 2009

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest. The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded.

Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law.

There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the two instances apply only to compensatory interest and not to monetary interest. (Siga-an v. Villanueva, G.R. No. 173227, 20 January 2009)

2) Penalty or indemnity interest

a) Both penalty/indemnity interest and monetary interest, allowed

The New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each other and may be demanded separately. (Tan v. CA, G.R. No. 116285, 19 October 2001)

b) If no stipulated indemnity for damagaes

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (Article 2209, Ibid.)

b) Interest on penalty/indemnity interest, allowed

Penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest (i.e. interest on the penalty/indemnity interest) is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code. (Tan v. CA, supra.)

3) Jurisprudential guidelines

Nacar v. Gallery Frames, G.R. No. 189871, 13 August 2013

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum – as reflected in the case of [Eastern Shipping Lines, Inc. v. CA (Eastern Shipping Lines) 11 ] and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799- but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July l, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it 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 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

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, Civil Code), but when such certainty cannot be so reasonably 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 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

d. Finance charges

1) Concept

Finance charge – includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may be regulation prescribe. (Section 3[3], R.A. 3765, Truth in Lending Act)

2) Creditor’s responsibility to inform debtor

Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: … (6) the finance charge expressed in terms of pesos and centavos. (Section 4[6], R.A. 3765, Truth in Lending Act)

Under Section 4(6), “finance charge” represents the amount to be paid by the debtor incident to the extension of credit such as interest or discounts, collection fees, credit investigation fees, attorney’s fees, and other service charges. The total finance charge represents the difference between (1) the aggregate consideration (down payment plus installments) on the part of the debtor, and (2) the sum of the cash price and non-finance charges. (Sps. Silos v. PNB, G.R. No. 181045, 02 July 2014)

e. Usury

Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (Art. 1961, Ibid.

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 the laws on usury. (Art. 1957, Ibid.)

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