Buslaw2 - Law On Agency

AGENCY CONTRACT OF AGENCY  By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. (Art. 1868)  Agency is based on the fiduciary relationship. It continues as long as the agent enjoys the trust and confidence of the principal Example: P, owner of land, wants to construct a building on it. He may secure the services of A to supervise and to act for him in all matters connected with the construction work. PARTIES INVOLVED IN AN AGENCY 1. PRINCIPAL  one whom the agent represents and from who he derives his authority  person represented  must be legally competent to act for himself 2. AGENT  One who acts for and represents another  Person acting in a representative capacity  Must be legally competent to enter into any contract(not absolute)  Ordinary intelligence is sufficient qualification  Can be minors, provided that he acts within the scope of his authority 3. THIRD PERSONS  Individuals, partnerships, or corporations CHARACTERISTICS OF A CONTRACT OF AGENCY 1. 2. 3. 4.

CONSENSUAL – it is perfected by mere consent PRINCIPAL – it can stand by itself without the need of another contract NOMINATE – it has its own name BILATERAL – it gives rise to reciprocal rights and obligations; OR UNILATERAL - if it is gratuitous for it creates obligation for only one of the parties 5. PREPARATORY – it is a means for entering into further contracts

6. ONEROUS – generally, it is presumed to be for a compensation, unless there is a proof to the contrary ESSENTIAL ELEMENTS OF AGENCY 1. 2. 3. 4.

There is express or implied consent of the parties to establish the relationship The object is the execution of a juridical act in relation to third persons The agent acts as a representative and not for himself The agent acts within the scope of his authority

ACTS THAT MAY BE DELEGATED TO AGENTS Generally, all acts that a man can do in person can be delegated to the agent. Exceptions: a. Personal acts  Right of Suffrage  Right to attend board meetings (for members of the board of directors)  Making of a will  Statements required to be made under oath personally b. Criminal acts or acts not allowed by law KINDS OF AGENCY (1) As to manner of its creation: a. EXPRESS (By Appointment)  One where the agent has been actually authorized by the principal either orally or in writing  Appointment is done in unequivocal terms  A sale of a piece of land is required to be in writing b. IMPLIED i. Acts of the Principal  If a person knowingly allows another to act as his agent, when in truth and in fact he is not  By his conduct or action that a third person is led to reasonably believe that he is an agent ii. Principal’s Silence or Lack of Action

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Principal’s failure to repudiate the agency knowing that another person is acting on his behalf without authority

(2) As to its character: a. GRATUITOUS  One where the agent receives no compensation for his services b. ONEROUS  One where the agent receives compensation for his services (3) As to extent of business covered: a. GENERAL  One which comprises all the business of the principal b. SPECIAL  One which comprises one or more special transactions (4) As to authority: a. Couched in General Terms  Comprises only acts of administration, even if the principal should state that he withholds no power or that the agent may execute such acts as he may consider appropriate, or even though the agency should authorize a general and unlimited management ACTS OF ADMINISTRATION  Those which do not imply the authority to alienate for the exercise of which an express power is necessary. This includes the acts necessary to the proper operation of the business. The authority of the agent is presumed to include all the necessary and usual means to carry out the agency into effect b. Couched in Specific Terms  One authorizing only the performance of a specific act or acts (5) As to its nature and effects a. REPRESENTATIVE (Ostensible)  One where the agent acts in the name and representation of the principal b. COMMISSION (Simple)

 One where the agent acts for the account of the principal but in his own name An agent is not compelled to accept an agency. He may either accept or decline the agency. In case he accepts, his acceptance may be express or implied. EXPRESS ACCEPTANCE  Done through unequivocal terms like, “I agree” or “I accept” IMPLIED ACCEPTANCE 1. Acts which carry out the agency P appointed A to be his agent to look for a buyer of his car. A did not expressly accept or refused. The next day, A looked for a buyer and found one. A’s acceptance is implied. 2. Silence or Inaction according to the circumstances a. Acceptance between persons who are present  The agent receives a power of attorney from the principal himself personally without any objection Power of Attorney  Written authorization to an agent to perform specified acts in behalf of his principal which acts, when performed, shall have binding effect on the principal b. Acceptance between persons who are absent  If both the principal and the agent are absent OR if the principal is in one place and the agent is in another place, acceptance by the agent is not implied from his silence or inaction, EXCEPT WHEN i. The principal transmits his power of attorney to the agent, who writes a letter acknowledging receipt of the power of attorney and offers no objection ii. The principal entrusts to him by letter or telegram a power of attorney with respect to the business in which he is habitually engaged as an agent, and he did not reply to the letter or telegram iii. The agent begins to act under the authority conferred upon him

After the agency is created, there is need to announce its creation to third persons. Two ways of announcing the agency: 1. By Special Information  The agent is considered as such only with respect to the person specially informed 2. By Public Advertisement  The agent is considered as such with respect to any person. It may be by publication in a newspaper, by radio or TV, posters or billboards The revocation must be in the same manner the agency is announced. KINDS OF PRINCIPALS 1. DISCLOSED PRINCIPAL  If at the time of the transaction contracted by the agent, the other party thereto has notice that the agent is acting for a principal and of the principal’s identity 2. PARTIALLY DISCLOSED PRINCIPAL  If the other party has notice that the agent is or may be acting for a principal but has no notice of the principal’s identity 3. UNDISCLOSED PRINCIPAL  If the other party has no notice that the agent is acting for a principal KINDS OF AGENTS 1. UNIVERSAL AGENT  One authorized to do all acts that the principal may personally do, and which he can lawfully delegate to another the power of doing. 2. GENERAL AGENT  One who is authorized to transact all of his principal’s business of a particular kind or all of his principal’s business at a given place. The agent has the power to perform any act necessary in connection with the particular kind of business entrusted to him.  Given the Genral Power of Attorney by the principal POWER OF ATTORNEY

 Authority given to the agent in writing. GENERAL POWER OF ATTORNEY  Embraces acts of administration SPECIAL POWER OF ATTORNEY  Cases under Art. 1818 3. SPECIAL (PARTICULAR) AGENT  One who is appointed to do some specific acts or to transact certain business affairs  Has limited powers only applicable for a specific purpose  Given the Special Power of Attorney by the principal Cases where Special Powers of Attorney are required (Art. 1878): i. To make such payments as are not usually considered as acts of administration ii. To effect novations which put and to obligations already in existence at the time the agency was constituted iii. To compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the venue of an action or to abandon a prescription already acquired iv. To waive any obligation gratuitously v. To enter into any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration vi. To make gifts, except customary ones for charity or those made to employees in the business managed by the agent vii. To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are under administration viii. To lease any REAL property to another person for more than one year ix. To bind the principal to render some service without compensation x. To bind the principal in a contract of partnership xi. To obligate the principal as a guarantor or surety xii. To create or convey real rights over immovable property

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To accept or repudiate an inheritance To ratify or recognize obligations contracted before agency Any other act of strict dominion

ACT OF STRICT DOMINION  Acts, whether or not involve the alienation or transfer of the ownership, which are not in line with the ordinary course of business entrusted to the agent ACTS OF STRICT DOMINION WHUCH REQUIRE A SPA i. Act of Selling ii. Act of Constituting a Mortgage A special power to sell excludes the power to mortgage, and a special power to mortgage does not include the power to sell iii. iv.

Act of Entering into a Compromise Act of Submitting to Arbitration

COMPROMISE  Both parties give up certain concessions in order to come to final solution  Principal grants agent authority base on the trust and confidence he has in the judgment of the agent ARBITRATION  Involves third persons  Arbitrator does not enjoy the trust and confidence of the principal The special power to compromise does not authorize submission to arbitration 4. COMMISSION (FACTOR) AGENT  One engaged in the purchase or sale for another personal property which is placed in his possession and at his disposal 5. DEL CREDERE (GURANTEE COMMISSION) AGENT

 One who receives an additional or increased commission in consideration of which he bears the risk of collection and guarantees the payment to his principal the proceeds of the sale on the same terms agreed upon with the purchaser AUTHORITY OF AN AGENT  Power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestation of consent to him AUTHORITY Source or cause An act is within authority if it is not a violation of his duty

POWER AS TO EXISTENCE Effect AS BETWEEN AGENT AND An act is within his power PRINCIPAL if he has the legal ability to bind the principal, although it constitutes a violation of duty AS TO THIRD PERSONS An act within the power of the agent is deemed within the scope of his authority even if the agent has exceeded the limits of his authority KINDS OF AUTHORITY 1. ACTUAL  Actually granted  May be express or implied 2. EXPRESS  Conferred by words 3. IMPLIED  Incidental to the transaction  Reasonably necessary to accomplish the purpose of the agency 4. APPARENT OR OSTENSIBLE  Conferred by conduct or silence 5. GENERAL  Refers to all business of the principal 6. SPECIAL  Limited only to one or more specific transactions 7. AUTHORITY BY NECESSITY  It is demanded by virtue of the existence of an emergency

OBLIGATIONS OF THE AGENT TO THE PRINCIPAL 1. TO CARRY OUT THE AGENCY IN ACCORDANCE WITH ITS TERMS  Once the agent accepts the agency, he is bound to carry it out in accordance with its terms in good faith, and following the instruction of the principal 2. TO ANSWER FOR THE DAMAGES WHICH THROUGH HIS NONPERFORMANCE THE PRINCIPAL MAY SUFFER  If the agent fails to perform the agency, he is liable for the damage which the principal may suffer 3. TO FINISH THE BUSINESS ALREADY BEGUN ON THE DEATH OF THE PRINCIPAL, SHOULD DELAY ENTAIL ANY DANGER  The agent has the obligation to conclude the business already begun on the death of the principal, only if there is a delay that will entail danger  The agency shall also remain in full force even after the death of the principal f it has been constituted in the common interest of the principal and the agent, or in the interest of a third person who has accepted the stipulation in his favor 4. TO ACT WITHIN THE SCOPE OF HIS AUTHORITY  5. TO OBSERVE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE CUSTODY AND PRESERVATION OF THE GOODS FORWARDED TO HIM BY THE OWNER IN CASE HE DECLINES AN AGENCY, UNTIL AN AGENT IS APPOINTED  Even when the agent withdraws from the agency for a valid reason he must continue to act until the principal has had reasonable opportunity to take the necessary steps to remedy the situation. The purpose of the law is to prevent damage to the principal  The principal, however, must act as soon as practicable by: (1) appointing a new agent or (2) taking charge of the goods 6. TO ADVANCE THE NECESSARY FUNDS SHOULD THERE BE A STIPULATION TO THAT EFFECT

 As a rule, the principal must advance to the agent, should he request, the sums necessary for the execution of the agency. However, if it is stipulated that the agent shall advance the necessary funds, he shall be bound to do so except when the principal is insolvent  IN THE EVENT that principal fails to reimburse the agent for the funds advance and the damages suffered by the latter for the execution of the agency, the agent may exercise his RIGHT OF RETENTION until the principal effects the reimbursement and pays the indemnity 7. TO ACT IN ACCORDANCE WITH THE INSTRUCTIONS OF THE PRINCIPAL  It is the fundamental duty of the agent to obey all the reasonable and lawful instructions given to him by his principal. If the agent exceeds, violates or fails to act upon such instructions, he will be liable to the principal for any loss or damage resulting therefrom  IN THE ABSENCE OF INSTRUCTION, the agent shall do all that a good father of a family would do as required by the nature of the business.  If the agent acts in good faith and with due care, he is not liable for losses INSTRUCTION  Private orders of the principal as to the method of carrying out the agency  Not binding upon third parties with whom the agent contracts, unless he has personal knowledge of such 8. NOT TO CARRY OUT THE AGENCY IF ITS EXECUTION WOULD MANIFESTLY RESULT IN LOSS OR DAMAGE TO THE PRINICPAL  The duty of the agent is to render service for the benefit of the principal and not to act to his detriment 9. TO ANSWER FOR DAMAGES SHOULD HE PREFER IN CASE OF CONFLICT, HIS OWN INTERESTS TO THOSE OF THE PRINCIPAL  Agency, being a fiduciary relation, the agent is required to observe utmost good faith and loyalty towards his principal.  The agent must look after the principal’s interests as if they were his own.  The agent must prefer the principal’s interest over his.

10. IF THE AGENT HAS BEEN EMPOWERED TO BORROW MONEY, HE MAY HIMSELF BE THE LENDER AT THE CURRENT RATE OF INTEREST. IF HE HAS BEEN AUTHORIZED TO LEND MONEY AT INTEREST, HE CANNOT BORROW IT WITHOUT THE CONSENT OF THE PRINCIPAL  If the agent has been empowered to borrow money, he may be the lender at the current rate of interest for there is no danger of the principal suffering any damage  If the agent has been authorized to lend money at interest, he cannot be the borrower without the consent of the principal because he may prove to be a bad debtor 11. TO RENDER AN ACCOUNT OF HIS TRANSACTIONS AND TO DELIVER TO THE PRINCIPAL WHATEVER HE MAY HAVE RECEIVED BY VIRTUE OF THE AGENCY  It is the duty of the agent to account for and to deliver to the principal all money and property which may have come by virtue of or as a result of the agency  This demotes the unjust enrichment of a person to the expense of the other  Every stipulation exempting the agent from the obligation to render account shall be void. ONLY the stipulation exempting the agent shall be void NOT the agency  Any stipulation entitling the agent whatever excess remains of a particular amount after the accounting is valid 12.TO BE RESPONSIBLE IN CERTAIN CASES FOR THE ACTS OF THE SUBSTITUTE APPOINTED BY HIM  The agent may appoint a subagent or substitute if there is no express prohibition The agent shall be responsible for the acts of the substitute: i. Where the agent appoints a substitute when he was not given the power to do so ii. Where he was given the power to do so, but the person to be appointed was not designated, and the person appointed is notoriously incompetent or insolvent

BUT if the agent designated the person appointed as substitute when he was given the power to do so, he is not liable for the acts of the substitute  The acts of the substitute shall be null and void when the agent appoints a substitute when there is an express prohibition 13.TO PAY INTEREST ON FUNDS  The agent owes interest to the principal when: i. He applied the money of his principal to his own use. Interest is to be computed from the day he did so ii. On the sums lawfully obtained by the agent, but has not yet been paid to the principal after the extinguishment of the agency. Interest is to be computed from the time of default or time of extinguishment 14.TO ANSWER FOR HIS FRAUD OR NEGLIGENCE  In the fulfillment of his obligation, the agent is responsible to the principal not only for fraud committed by him but also for negligence RESPONSIBILITY OF TWO OR MORE AGENTS  General Rule: The agents are jointly responsible to the principal, although the agents may have been appointed simultaneously.  They will be solidarily liable if solidarity has been stipulated.  If solidarity has been agreed upon, each of the agents are solidarily liable for: i.The non-fulfillment of the agency ii.The fault or negligence of his fellow agents provided the latter acted within the scope of his authority. The innocent agent has a right later on to recover from the guilty or negligent agent RESPONSIBILITY OF COMMISSION AGENT 1. He shall be responsible for the goods received by him in the terms and conditions and as described in the consignment , unless upon receiving them he should make a written statement of the damage and deterioration suffered by the same  To avoid liability, he should make a written statement of the damage or deterioration if the goods received by him do not agree with the description in the consignment

2. He may mix the goods of the same kind and mark, which belong to different owners, but shall distinguish them by countermarks, and designate the merchandise respectively belonging to each principal 3. He shall sell only for cash.  He may only sell in credit if there is an express or implied consent form the principal. When the commission agent sell on credit without authority: i.He may require payment in cash, in which case, any interest or benefit from the sale shall belong to the agent since the principal cannot be allowed to enrich himself at the expense of the agent ii.He may ratify the sale on credit in which case it will have all the risks and advantages to him 4. He shall inform the principal with a statement of the names of the buyers if he is authorized to sell on credit  If he fail to do so, the sale shall be deemed to have been made for cash insofar the principal is concerned  The purpose of this provision is to prevent the agent from stating that the sale was on credit when in fact it was made on sale OBLIGATIONS OF A DEL CREDERE AGENT 1. He shall bear the risk of collection 2. He shall pay the principal the proceeds of the sale on the same term agreed upon with the purchaser OBLIGATIONS OF THE PRINCIPAL 1. To comply with all the obligations which the agent may have contracted within the scope of his authority  If the agent acted beyond his power, the principal is not bound except when the latter ratifies it expressly or tacitly 2. To advance to the agent, should the latter so request, the sums necessary for the execution of the agency 3. To reimburse the funds advanced by the agent, with interest from the day on which the advance was made, even if the business or undertaking was not successful, provided the agent is free from fault 4. To indemnify the agent for all the damages which the execution of the agency may have caused the latter without fault or negligence on his part

5. To pay the agent the compensation agreed upon, or if no compensation was specified, the reasonable value of the agent’s services 6. To be solidarily liable with the agent to innocent third persons with whom the agent contracted even though the agent has exceeded his authority, if he allowed the agent to act as though he had full powers (Agency by Estoppel)  Third persons may demand from either principal or agent or both, payment of damages suffered by him  If the agent acted in good faith, he shall be exempt from liability APPARENT AUTHORITY – that which though not actually granted, the principal knowingly permits the agent to exercise or holds him out as possessing AUTHORITY BY ESTOPPEL – arises where the principal by his culpable negligence permits his agent to exercise powers not granted to him, even though the principal may have no notice or knowledge of the conduct of the agent IF THE AGENT is appointed by two or more principals for a common transaction or undertaking, the principals are solidarily liable to the agent for the consequences of the agency. CASES WHER THE PRINCIPAL IS NOT LIABLE FOR THE EXPENSES INCURRED BY THE AGENT: 1. If the agent acted in contravention of the principal’s instructions, unless the latter should wish to avail himself of the benefits derived from the contract 2. When the expenses were due to the fault of the agent 3. When the agent incurred them with knowledge that an unfavorable result would ensue, if the principal was not aware thereof 4. When it was stipulated that the expenses would be borne by the agent, or that the latter would be allowed only a certain sum WHERE PRINCIPAL AND AGENT CONTRACTED WITH DIFFERENT PERSONS OVER THE SAME THING  If the two contracts are incompatible with each other, the one of prior date shall be preferred. However, this is subject to the following rules:

1. If the contract involves service or employment, the contract of an earlier date shall prevail 2. If the agency refers to the sale of personal or movable property, the buyer who in good faith first took possession thereof is entitled thereto 3. If the agency involves the sale of real or immovable property: a. The ownership shall pertain to the buyer who first registers the sale in the Registry of Property in good faith b. In the absence of registration, the buyer who in good faith first took possession of the property shall be entitled thereto c. If there was no registration, no possession, the contract of an earlier date shall prevail provided there is good faith REMEDY OF THIRD PARTY WHOSE CONTRACT IS REJECTED  If the agent acted in good faith and within the scope of his authority, the principal incurs liability to third person who has been prejudiced. If the agent acted in bad faith, he alone shall be responsible to such third person MODES OF EXTINGUISHMENT OF AGENCY 1. BY AGREEMENT: a. By the accomplishment of the object or purpose of the agency b. By the expiration of the period for which the agency was constituted 2. By the subsequent acts of the parties which may be either by the act of both parties or by mutual consent, or by the unilateral act of one of them: a. By its revocation b. By the withdrawal of the agent 3. By operation of law: a. By the death, civil interdiction, insanity or insolvency of the principal or of the agent b. By the dissolution of the firm or corporation which entrusted or accepted the agency OTHER MODES OF EXTINGUISHING AGENCY:  Loss of the thing  Novation  If the required act became illicit

 Conditions not anticipated by parties making impossible the accomplishment of the purpose of the agency REVOCATION OF AGENCY  The principal may revoke the agency at will, and compel the agent to return the document evidencing the agency. It is called RENUNCIATION if done by the agent  The principal is liable for damages by the wrongful discharge of the agent or wrongful revocation before the expiration of the period fixed EXPRESS REVOCATION  Done through spoken words IMPLIED REVOCATION THREE FORMS: 1. When the principal appoints a new agent for the same business or transaction covered by a previous agency  The revocation will take effect only from the day notice of the appointment of new agent is given to him 2. When the principal directly manages the business entrusted to the agent EFFECTS OF DIRECT MANAGEMENT: a. If the desire of the principal is to manage the business with the agent, the agency is revoked b. If the purpose of the principal is to avoid payment of the agent’s commission, the revocation is deemed made in bad faith and cannot be sanctioned without the commission which is due the agent 3. When the principal executes a special power of attorney as regards special matter covered by a general power of attorney  Naturally, a specific power prevails over a general power Example: P appoints A as manager of P’s business through a general power of attorney. The authority of A covers everything that is usual and necessary in the conduct of the business including hiring of employees. If subsequently P, grants a special power of attorney to B to hire personnel for his business, the general power covering the hiring of employees of A is revoked.

ONLY the matters covered by the special power are revoked, the general power remains valid MANNER OF REVOCATION  The agency must be revoked the same manner the agency was constituted  If the agency is created for the purpose of contracting with specific persons, it srevocation will not prejudice such third person unitl notice thereof is given them  In case the agent has general powers, innocent third persons shall not be prejudiced by the revocation before they had knowledge thereof. Notice of the revocation in a newspaper of general circulation is sufficient warning to third persons REVOCATION WHERE THERE ARE TWO OR MORE PRINCIPALS  When two or more principals have granted a power of attorney for a common transaction:  They are solidarily liable for all the consequences of the agency  Any one of them may revoke the same without the consent of the others AGENCIES WHICH ARE NOT REVOCABLE AT WILL: 1. When the agency is constituted as a means of fulfilling an obligation already constituted Example: P owes B $1000. P then appointed A as his agent to collect money from X, debtor of P, so that A can apply the money collected from X to the payment of P’s indebtedness to B. P cannot revoke the agency of A until B is paid. 2. If a bilateral contract depends upon the agency Example: A sells his grocery store to B, provided B appoints A as his agent to manage the store. 3. If a partner is appointed manager of a partnership in the contract of partnership and his removal from the management is unjustifiable  For a partner’s appointment be revocable, it must be based upon a just and lawful cause and the vote of the partners representing the controlling interest

4. If the agency is coupled with an interest  It is necessary that the interest shall be in the subject matter of the power and not in the proceeds which will arise from the exercise of the power AGENCY COUPLED WITH AN INTEREST – where the agent has parted with value or incurred liability at the principal’s request, looking to the exercise of the power as the means of reimbursement or indemnity WITHDRAWAL OF THE AGENT  The agent may withdraw from the agency by giving due notice to the principal WITHDRAWAL WITH JUST CAUSE  Agent withdraws from the agency for a valid reason  Withdrawal is based on the impossibility of continuing with the agency without grave detriment to himself OR due to a fortuitous event  Agent cannot be held liable WITHDRAWAL WITHOUT JUST CAUSE 1. Should the principal suffer damages by reason of such withdrawal, the agent must answer for the losses and damages occasioned by the nonfulfillment DEATH OF THE PRINCIPAL GENERAL RULE: It extinguishes the agency Agency shall remain in full force and effect even after the death of the principal if: 1. The agency is created not only for the interest of the principal but also for the interest of third persons 2. The agency is created for the mutual interest of both the principal and the agent AGENT UNAWARE OF DEATH OF PRINCIPAL  The acts of the agent are still binding provided that: 1. Agent has no knowledge of the principal’s death 2. Third person who contracted with him did so in good faith

However, even after the death of the principal, the agent is required to finish the business already begun, should delay entail any danger. In the case the agent died, his heirs must notify the principal thereof and wrap up the business or continue the agency until the principal has adopted measures as the circumstance demand for his interest. CIVIL INTERDICTION  A form of disqualification which deprives the offender during the period of his sentence of the right to manage and dispose property by any act or conveyance inter vivos DEPOSIT  A real contract whereby a person receives a thing belonging to another, w/ the obligation of safely keeping it and of returning the same.  Movable or immovable property may be the object  Depositor can demand the return of the subject matter at will CHARACTERISTICS OF DEPOSIT 1. REAL – it is perfected by delivery of the object 2. CONSENSUAL – mere agreement to constitute a deposit is binding, but is not perfected until the delivery of the thing 3. PRINCIPAL 4. NOMINATE 5. GENERALLY GRATUITOUS except when (1)there is an agreement to the contrary, (2)where the depositary is engaged in business of storing goods, and (3) where property is saved from destruction w/o knowledge of the owner 6. UNILATERAL – if there is no compensation OR BILATERAL – if there is compensation PARTIES TO A DEPOSIT 1. DEPOSITOR – he delivers the thing to another for safekeeping 2. DEPOSITARY – person to whom the thing is delivered for safekeeping KINDS OF DEPOSIT JUDICIAL (SEQUESTRATION)  Takes place by the order of the court; attachment or seizure of property in litigation is ordered  Purpose is to put the property in custodial egis for the protection of the plaintiff  Onerous  Object may be movable or immovable  Cannot be relieved of his responsibility until the controversy comes to an end, unless the court so orders

EXTRAJUDICIAL  Constituted by will of the parties  Can be either voluntary or necessary  Purpose is for safekeeping of the thing  Generally gratuitous  Only movables may be the object  Depositor may demand the return of the thing deposited even before the specified time for such return has

arrived VOLUNTARY DEPOSIT  That wherein the delivery is made by the will of the depositor  Generally, depositor must own the thing deposited. But it may belong to a third person, for the latter can also be the depositor  If two or more persons each claiming to be entitled to a thing, may deposit the same with a third person who assumes the obligation to return the thing to who really it belongs. Conflict of claims shall be settled through an interpleader

DEPOSITARY…

DEPOSITARY CAPACITATED & DEPOSITOR INCAPACITATED … is subject to all the obligations … must return the property to the legal representative of the depositor or to the depositor himself if he should acquire capacity

DEPOSITARY INCAPACITATED &DEPOSITOR CAPACITATED … does not incur the obligations of the depositary … is liable to return the thing deposited while still in his possession … must pay the depositor the amount w/c he may have benefited himself OR pay its price subject to the right of third persons who acquired the thing in good faith

RIGHTS & OBLIGATIONS OF DEPOSITARY 1. He must take care of the thing deposited with the diligence of a good father, in the absence of stipulation.  He is liable if the loss is caused by his fault or negligence  Presumption is he is at fault when the thing is lost while still in his possession 2. He must return the thing bailed whenever it was claimed even though there a specified time for such return has been stipulated  It must be returned to the depositor, or to his heirs and successors, or to the person designated in the contract  However, the depositary may not return the thing bailed if it was judicially attached while in his possession or there is a notice of opposition from a third person regarding the return of the thing – the depositary must immediately inform the depositor of such attachment or opposition 3. To return the thing deposited w/ all its products, accessories and accessions  If deposit consists of money, he shall be liable for interest if he is in delay or used it w/o permission 4. To return the thing: a. At the place agreed upon by the parties, in w/c case the expenses of transportation shall be borne by the depositor b. If w/o stipulation, at the place where the thing deposited may be, provided there was no malice on the part of the depositary 5. To return the thing deposited if he has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor

 Depositary cannot demand the depositor to prove his ownership over the thing because the latter need not be the owner of the thing deposited  Stolen objects are possible subject matter or the deposit. However, if the depositary discovers that the thing was stolen and who its owner is, he must advise the depositor of the deposit.  The depositary shall be relieved of all responsibility by returning the thing to the depositor if it was not claimed w/in one month despite such information 6. To collect interests due on certificates, bonds, securities or instrument which earn interest  He must also take such steps as may be necessary to preserve its value and the rights corresponding to it 7. To return the thing in the same condition if it was delivered closed and sealed  He shall be liable for damages should the seal or lock be broken through his fault  If the seal or lock is broken w/ or w/o his fault, he must keep the secret of the deposit  However, it shall be presumed that he is authorized to open the thing if the key was delivered to him OR if the opening of the thing is necessary for the execution of the deposit 8. To be liable for the loss of the thing due to a fortuitous event if: a. It is so stipulated b. He uses the thing w/o depositor’s permission c. He delays its return d. He allows others to use it even though he is authorized to use the same 9. To deliver the money or another thing he has received in replacement of the thing deposited w/c he lost by force majure or by government order  He is not liable for the loss if it was caused by force majure or gov’t order 10. To use the thing if it is necessary for its preservation  If there is no express permission, the depositary cannot use it. If he does so, he is liable for damages 11. The depositary may consign the thing in court if the depositor refuses to accept it after the former return it even before the time designated  The former must have justifiable reasons for not keeping the thing deposited 12. The depositary may exercise his right of retention until the full payment of what may be due him by reason of the deposit OBLIGATIONS OF DEPOSITOR 1. He must reimburse the depositary for the expenses the latter may have incurred for the preservation of the thing deposited IF the deposit is gratuitous 2. He shall reimburse the depositary for any loss arising from the character of the thing deposited EXCEPT WHEN AT THE TIME OF THE CONSTITUTION OF THE DEPOSIT: a. The depositor was not aware of the dangerous character of the thing b. The depositor was not expected to know such dangerous character c. The depositor notified the depositary if such dangerous character d. The depositary was aware of it w/o advice from the depositor WHEN THERE ARE TWO OR MORE DEPOSITORS:  Each one cannot demand more than his share, if they are not solidarily liable and the thing admits of division  If there is solidarity or the thing does not admit of division: a. Each one may do whatever may be useful to the others, but not w/c may be prejudicial

b. Depositary may return the thing deposited to any of the depositor BUT if one made a judicial or extrajudicial demand, it must be delivered to him  If there is a stipulation, the thing deposited must be delivered to the person designated in such stipulation IF THE DEPOSITOR LOSES CAPACITY: 1. AT THE TIME OF THE MAKING OF THE DEPOSIT  The depositary must return the property to the depositor’s guardian or administrator 2. DURING THE DEPOSIT  The depositary must return the property to the depositor’s legal representative EXTINGUISHMENT OF DEPOSIT 1. Upon the loss or destruction of the thing deposited 2. Upon the death of either the depositor or depositary if the deposit is gratuitous *IN DEPOSIT FOR COMPENSATION, if the depositor or depository died, the deposit is not extinguished. The respective rights and obligations are transmitted to their respective heirs *Heirs of either party has the right to terminate the deposit even before the expiration of term 3. Other methods of extinguishing an obligation NECESSARY DEPOSIT KINDS OF NECESSARY DEPOSIT 1. DEPOSIT MADE IN COMPLIANCE W/ A LEGAL OBLIGATION: a. Judicial deposit of thing the possession of w/c is being disputed in litigation by two or more persons b. Deposit of a thing pledged when the creditor misuses it or uses it w/o authority c. Those required in the suits provided in the Rules of Court d. Those constituted to guarantee contracts w/ the gov’t 2. DEPOSIT MADE ON THE OCCASION OF CALAMITY  Possession of the property passes from one person to another by accident or by fortuitous event  The person who saved the property w/o the knowledge of the owner must be paid w/ just compensation 3. DEPOSIT OF EFFECTS MADE BY HOTEL AND INN KEEPERS A. Hotel and inn keepers are liable as depositaries if: i. They have been previously informed about the effects brought by guests ii. The guests have taken the precautions prescribed regarding safekeeping B. Hotel and inn keepers are liable if: i. The loss or injury is caused by his servants or employees as well as by strangers ii. The loss is caused by the act of a thief or robber done w/o the use of arms and irresistible force C. Hotel and inn keepers are not liable if: i. The loss or injury is caused by force majure ii. The loss is due to the acts of the guest, his family, servants, or visitors iii. The loss arises from the character of the things brought into the hotel D. The keeper can exercise the right of retention over the things brought in by the guest, to compensate them of the liabilities of the latter *Non-payment of food or accommodation constitutes estafa

*Any stipulation between the keeper and the guest stating that the responsibility of the former shall be suppressed or diminished shall be null and void 4. DEPOSIT MADE BY PASSENGERS W/ COMMON CARRIERS GUARANTY  A person, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so  May secure the performance of voidable, natural, or unenforceable contracts but not void contracts PARTIES INVOLVED 1. Principal debtor 2. Principal creditor 3. Guarantor CHARACTERISTICS OF GUARANTY 1. ACCESSORY – it is dependent on the existence of a principal obligation 2. SUBSIDIARY – takes effect only upon the failure of the principal debtor in his obligation 3. CONSENSUAL – it is perfected by mere consent 4. NOMINATE – has a definite name in the Civil Code 5. UNILATERAL – it only gives rise duty to the guarantor 6. GRATUITOUS – guarantor does not receive any consideration for his guaranty, unless there is a stipulation to the contrary CLASSIFICATIONS OF GUARANTY 1. IN ITS BROAD SENSE: a. PERSONAL – guarantee is the credit given by the person who guarantees the fulfillment of the principal obligation b. REAL – guaranty is property, movable or immovable 2. AS TO ITS ORIGIN a. CONVENTIONAL – one constituted by agreement of the parties b. LEGAL – one imposed by virtue of a provision of law c. JUDICIAL – one required by a court to guarantee the eventual right of one of the parties in the case 3. AS TO CONSIDERATION a. GRATUITOUS – guarantor does not receive any price or remuneration b. ONEROUS – guarantor receives valuable consideration 4. AS TO PERSON GUARANTEED a. SINGLE – one constituted solely to guarantee performance of the principal obligation b. DOUBLE / SUB-GUARANTY – constituted to secure the fulfillment of a prior guaranty 5. AS TO SCOPE & EXTENT a. DEFINITE – guaranty is limited to the principal obligation or part only b. INDEFINITE / SIMPLE – guaranty includes not only the principal obligation but also all its accessories including judicial costs SUB-GUARANTY  Guaranty constituted in favor of another guarantor, with the latter’s consent, or w/o his knowledge, or even over his objection EXTENT OF GUARANTY

1. The guarantor cannot bind himself for more than the principal debtor. If he does, his liability shall be reduced to the limits of that of the debtor 2. The guarantor may bind himself for less than the principal debtor 3. A guaranty may also be given as security to future debts, which amount is not yet known, and conditional obligations. But the creditor cannot claim from the guarantor until the debt is liquidated 4. A guaranty must be express and cannot extend to more than what is stipulated 5. The guaranty shall comprise the principal obligation, accessories and judicial costs (if judicially required) if it is a simple or indefinite guaranty QUALIFICATIONS OF GUARANTOR 1. He possesses integrity 2. He has capacity to bind himself 3. He has sufficient property *Creditor can waive the requirements *Qualifications are needed to be present only at the time of the perfection of the contract. Subsequent loss of the qualifications will not exonerate liabilities on the part of the guarantor, the guaranty will continue. However, the creditor may demand another guarantor w/ proper qualification. *The substitute guarantor need not possess the qualifications, if it was required and stipulated by the creditor MARRIED WOMAN AS GUARANTOR  She can only bind her separate property  She can only bind the conjugal property of the husband consented  She can also bind the conjugal property if it is beneficial for the family SURETYSHIP  An accessory agreement by w/c a person binds himself for another already bound, either in whole or part, as for his debt DISTINCTIONS BETWEEN GUARANTY & SURETY GUARANTY  Obligation is collateral to that of the principal debtor  Subsidiarily liable  Promises to pay only when the principal debtor cannot pay  Governed by Statute of Frauds  Must be in writing  Liable only after the creditor has exhausted the properties of the debtor and resorted to all the remedies

SURETY  Directly and primarily liable for the debt & obligation as if he were the principal  Solidarily liable  Obligation arises at the instant contract is agreed upon  Not governed by Statute of Frauds  Need not be in writing  Liable under the same conditions as if the debts were his from the beginning

EFFECTS OF GUARANTY BETWEEN GUARANTOR AND CREDITOR THE GUARANTOR IS ENTITLED TO BENEFIT OF EXCUSSION OR EXHAUSTION, except when: 1. He has expressly renounced it or waived his right over it

2. He has bound himself solidarily w/ the debtor 3. The debtor becomes insolvent 4. The debtor absconds or cannot be sued locally, except when he left a manager or representative 5. His action of resorting to all legal remedies becomes useless 6. He did not point out to the creditor the available property of the debtor w/in the Philippines that will satisfy the debt AND he did not set up the benefit of excussion against the creditor upon the latter’s demand for payment from him  If the creditor is negligent in the exhaustion, he shall suffer the loss 7. He is a judicial bondsman 8. A pledge or mortgage has been given by him as a special security 9. He fails to interpose it as a defense before judgment is render against him  If judgment rendered was against him, he is still allowed to exercise his right of excussion *THE SUB-GUARANTOR, or the guarantor of the guarantor, shall also enjoy the benefit of excussion not only w/ respect to the principal debtor but also w/ the guarantor IF THERE ARE SEVERAL GUARANTORS FOR THE SAME DEBT AND ONLY ONE DEBTOR: 1. The guarantors are jointly liable, except when solidarity was stipulated  They are not liable to the creditor beyond the shares they are respectively bound to pay 2. Shall be liable for the deficiency of the obligation of the debtor, proportionate to the share of their obligation  Only after the creditor has exhausted the properties of the debtor and has resorted to all the legal remedies COMPROMISE  Contract whereby the parties, by making reciprocal concession, avoid a litigation or put an end to one already commenced *The creditor and the principal debtor can enter into compromise provided that it will not prejudice the guarantor *The guarantor and the creditor can enter into compromise provided that it will not prejudice the principal debtor EFFECTS OF GUARANTY BETWEEN DEBTOR AND GUARANTOR RIGHTS OF THE GUARANTOR who pays for a debtor: 1. To be indemnified for the total amount of debt including: a. Legal interest b. Expenses incurred by the guarantor c. Damages, I due 2. To be subrogated to all the rights w/ the creditor had against the debtor  However, he cannot demand more than he actually paid if a compromise was entered into 3. If he pays w/o notifying the debtor, and the debtor has already paid the creditor, HE IS NOT entitled to reimbursement against the debtor BUT AGAINST THE CREDITOR

 However, the guarantor can run against the debtor if: (a) the creditor becomes insolvent, (b) guarantor was prevented by fortuitous event to advise the debtor of the payment, and (c) guaranty is gratuitous 4. If he pays a debt for a period, he can only be reimbursed upon the expiration of the period or maturity of the debt OR if it was made w/ the consent of the creditor or should the latter ratify the action CASES WHERE THE GUARANTOR MAY PROCEED AGAINST THE PRINICPAL DEBTOR EVEN BEFORE PAYMENT: 1. When he is sued for the payment 2. If the principal debtor becomes insolvent or is in imminent danger of becoming one 3. When a specified period binding him to the guaranty has expired 4. When the debt has become demandable by reason of expiration of the period for payment 5. After the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be natural that it cannot be extinguished except w/in a period longer than 10 years 6. If there are reasonable grounds to fear that the principal debtor intends to abscond *A person who becomes a guarantor for the debt of a third person who is absent, by the request of another, can claim reimbursement from: (1) person who made the request or (2) the debtor EFFECTS OF GUARANTY BETWEEN CO-GUARANTORS *If one of the guarantors has paid the debt, he may demand from the others, the share, w/c is proportionally owing from him, ONLY if a judicial demand has been made or the debtor is insolvent *If any of the guarantors become insolvent, his share shall be borne by the other including the payer, in the same proportion, ONLY if judicial demand has been made or the debtor is insolvent *The co-guarantors may set up against the one who paid, the same defenses w/c would have pertained to the principal debtor against the creditor, and w/c are not purely personal to the debtor *A sub-guarantor is liable to the co-guarantors in the same manner as the guarantor, if the latter whom he is bounded, becomes insolvent CAUSES OF EXTINGUISHMENT OF GUARANTY 1. Usual methods of extinguishing the principal obligation 2. Annulment 3. Rescission 4. Fulfillment of a resolutory condition 5. Prescription 6. Voluntary acceptance of immovable or other property in payment of the debt  The guarantor remains to be released even if the creditor is evicted 7. Release made by the creditor in favor of one of the guarantors  If w/ the consent of other guarantors, they are solidarily liable for the whole debt  If w/o the consent of other guarantor, benefits extend to the share of the guarantor to whim it has been granted 8. Release through extension

 If the creditor grants an extension to the debtor w/o the consent of the guarantor, the latter is discharged 9. When by some act of or by the fault of the creditor, the guarantor cannot be subrogated to the rights, mortgages, and preferences of the creditor BOND

 An undertaking that is sufficiently secured and not for cash or currency

BONDSMAN  Surety offered in virtue of a provision of law or of a judicial order  Must have the qualifications required of a guarantor *If the person required to give a legal or judicial bond should not be able to do so, a pledge or mortgage is sufficient to cover the obligation *Judicial bondsman cannot demand the exhaustion of the property of the principal debtor *Sub-surety cannot demand the exhaustion of the property of the principal debtor and surety CONTRACT OF LOAN  Is a real contract because the delivery of the thing is necessary for the perfection of the contract  Is a unilateral contract because once the subject matter has been delivered, it creates obligation on the part of only one of the parties KINDS OF LOAN 1. COMMODATUM  The bailor delivers to the bailee a non-consumable thing so that the latter may use it for a certain time and return the identical thing BAILOR - lender BAILEE – borrower PRECARIUM – a kind of commodatum where the bailor may demand the thing at will. A contract by w/c the owner of a thing, at the request of another person, gives the latter the thing for use as long as the owner shall please 2. SIMPLE LOAN (MUTUUM)  Lender delivers to the borrower money or consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality DISTINCTIONS BETWEEN COMMODATUM & MUTUUM COMMODATUM MUTUUM  Subject matter involves non-consumables  Subject matter is money or consumables  Ownership of the thing loaned is retained  Ownership is transferred to borrower by the lender  Essentially gratuitous  May be gratuitous or onerous with stipulation to pay interest  Borrower must return the same thing  Borrower need only pay the same amount loaned of the same kind and quality  May involve real or personal property  Involves only real property  A loan for use (including the fruits, unless  A loan for consumption a stipulation to the contrary has been

agreed upon)  Bailor may demand return of the thing  May not demand its return before the loaned before the expiration of the term in lapse of the term agreed upon urgent needs  Loss is suffered by the bailor  Borrower suffers the loss NATURE OF COMMODATUM Commodatum is purely personal in character, thus it has the following effects: a. Death of either the bailor or bailee extinguishes the contract b. Bailee can neither lend nor lease the object of the contract to third persons c. Bailee’s household may use the thing loaned, unless there is a stipulation to the contrary or the nature of the thing forbids such use In Commodatum, the bailor need not be the owner of the thing loaned for what is transferred in the contract is the ‘use’ not the ownership RIGHTS & OBLIGATIONS OF BAILEE 1. To take care of the thing loaned w/ the diligence of a good father 2. To pay for the ordinary expenses for the use and preservation of the thing loaned 3. To be liable for the loss of the thing, even if caused by fortuitous event if: a. He devotes the thing to any purpose different from that for w/c if has been loaned OR IF HE ACTED IN BAD FAITH b. He keeps it longer than the period stipulated, or after the accomplishment of the use for w/c it has been constituted OR WHEN HE INCURS DELAY c. The thing loaned has been delivered w/ appraisal of its value  Bailee will not be liable if there’s a stipulation exempting him from responsibility d. He lends or leases the thing to third persons other than the members of his household e. He chooses to save his own thing rather than what he had borrowed OR IF HE SHOWS INGRATITUDE AFTER THE THING IS GRATUITOUSLY LOANED TO HIM 4. He shall not be liable for the deterioration if he is w/o fault 5. He can only exercise the right of retention with respect to the damages he may incurred for the flaws of the thing loaned w/c the bailor has knowledge of but did not inform him BUT he cannot exercise it for the grounds of non-reimbursement of expenses 6. If there are two or more bailees, their liability or obligation is joint RIGHTS & OBLIGATIONS OF BAILOR 1. To demand the thing at will if: a. There is no stipulation as to the duration of the contract or the use to w/c the thing loaned should be devoted b. The use of the thing is merely tolerated by the owner 2. To demand the immediate return of the thing if the bailee: a. Should commit offenses against the person, honor or property of the bailor, or his wife or children under his parental authority b. Imputes to the bailor any criminal offense or any act involving moral turpitude c. Unduly refuses the bailor support when the former is legally or morally bound to give support 3. Bailor cannot exempt himself from the payment of the expenses or damages by abandoning the thing to the bailee 4. To be liable for damages suffered by the bailee, provided that the following requisites are present: a. There is a hidden flaw or defect in the thing loaned

b. The bailor is aware of such flaw or defect c. He does not advise the bailee of such flaw or defect 5. To refund the bailee of the extraordinary expenses made for the preservation of the thing, provided that the bailee notifies the bailor before incurring such expenses.  In cases of urgent incidences, the bailee need not wait for the reply to the notification to make such expenses if the waiting will entail danger 6. To be solidarily liable with the bailee on extraordinary expenses arising from the actual use of the thing loaned (Ratio = 50:50) EXTINGUISHMENT OF COMMODATUM 1. Expiration of the period or accomplishment of the use as stipulated 2. Death of either the bailor or bailee SIMPLE LOAN OR MUTUUM LOAN OF MONEY  Payment must be made in the currency w/c is legal tender in the Philippines  In case of deflation and deflation, basis of payment shall be the value of the currency at the time of the creation of the obligation LOAN OF FUNGIBLE THING  Borrower is to pay the lender another thing of the same kind, quality and quantity  In case of impossibility, borrower shall pay its value at the time of the perfection of the loan INTEREST  Compensation allowed by law or fixed by the parties for the loan of forbearance of money, goods, or credits KINDS OF INTEREST 1. SIMPLE – that w/c is paid for the principal at a certain rate fixed or stipulated by the parties 2. COMPOUND – that w/c is imposed upon interest due and unpaid. Allowed if there is express stipulation 3. LEGAL – that w/c the law directs to be charged in the absence of any agreement as to the rate between the parties (12%) 4. LAWFUL – that w/c the laws allow; w/in the maximum prescribed by law 5. USURIOUS – that w/c is paid beyond the maximum fixed by law INTEREST IS DUE WHEN: 1. It is expressly stipulated, w/c must be in writing and the rate is lawful 2. The debtor is in delay 3. A judicial demand is made on an obligation INTEREST PAYABLE IN KIND  Its value shall be appraised at the current price of the products or goods at the time and place of payment UNPAID INTEREST WILL EARN INTEREST WHEN: 1. Judicially demanded 2. There is an express stipulation that the interest due and unpaid shall be added to the principal obligation and the resulting total amount shall earn interest

WHERE UNSTIPULATED INTEREST IS PAID… … BY MISTAKE, the debtor can recover the payment … VOLUNTARILY, the debtor cannot recover such payment USURY  Contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods or chattels *Contracts w/c are usurious are null and void PLEDGE  A contract by which the debtor delivers to the creditor or to a third person a movable, or instrument evidencing corporeal rights for the purpose of securing the fulfillment of a principal obligation with the undertaking that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions  It is a REAL contract because it is perfected by the delivery of the thing pledged  It is an ACCESSORY contract because it cannot stand alone  It is a UNILATERAL contract because it creates an obligation only to the creditor to return the thing upon fulfillment of the principal obligation VOLUNTARY/CONVENTIONAL PLEDGE – created by agreement of the parties LEGAL PLEDGE  Created by operation of law  Where parties has the right to exercise the right of retention until reimbursement is made REAL ESTATE MORTGAGE  Contract by which the debtor secures to the creditor the fulfillment of a principal obligation by subjecting to such security real property or rights over real property in case of non-fulfillment of obligation at the time stipulated CHATTEL MORTGAGE  Personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation PLEDGE

ESSENTIAL REQUISITES 1. 2. 3.

PRINCIPAL OBLIGATION  SECURED ALIENATION OF THING  

CHATTEL MORTGAGE

REAL ESTATE MORTGAGE That they be constituted to secure the fulfillment of a principal obligation That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged That the person constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose *Contract is void if pledgor or mortgagor is not the absolute owner *Third persons may be the pledgor or mortgagor Voidable, unenforceable, or natural obligation Pure ,or obligations subject to suspensive or resolutory condition Can be alienated by the pledgor w/ the consent of pledge Ownership is transferred to the vendee but pledgee shall continue in possession

APPROPRIATION

DIVISIBILITY

PROMISE TO CONSTITUTE CRIMINAL RESPONSIBILITY SUBJECT MATTER

MANNER OF CONSTITUTION

 Mortgage credit may be alienated in whole or in part with the required formalities of law in real estate mortgage  Any stipulation forbidding the alienation is void Non-registration of mortgage credit will still render the contract valid among the parties but not binding among third persons  Creditor cannot appropriate to himself the thing held as pledge or under mortgage, nor can he dispose of the same as owner  Creditor is only entitled to have the thing sold with the formalities required by law  A stipulation regarding automatic appropriation is null and void AUTOMATIC APPROPRIATION (Pacto Comisorio) – when the thing pledged automatically becomes the property of the creditor INDIVISIBLE  As long as the entire debt of pledge or mortgage is not fully satisfied, creditor cannot release a proportionate part thereof.  However, if there are several things guaranteeing a determinate portion of credit, the debtor shall have the right to extinguish the pledge or mortgage in proportion of the credit.  Whether the pledge or mortgage is joint or solidary it is still indivisible Gives rise only to a personal right to compel the fulfillment of the promise w/o creating pledge or mortgage, if accepted by creditor Pledgor or mortgagor are criminally liable when: a. He offered things as unencumbered which he knew were subject to some burden b. He misrepresented himself to be the owner of the thing  Movables or personal property w/in the  Immovables commerce of man  Alienable real  Incorporeal rights evidenced by rights over negotiable instruments, bills of lading, immovables shares of stock, bonds and warehouse receipts  Thing pledged must  Personal property  Deed of mortgage be in the possession is recorded in the must be in public of the creditor by chattel mortgage document common agreement register as security  It must be  Actual or physical  The deed must be registered in the delivery is required registered in the Registry of Property chattel mortgage in the province  Symbolic delivery is register and the where the property not sufficient Bureau of Land is located  Pledge must be in Transportation if  Non-registration public document to the object is a would still make take effect against motor vehicle the contract valid third persons  Mortgage will not but not binding be binding against against third third persons if persons there is no Affidavit of Good Faith but contract remains to be valid

EXTENT OF SECURITY

RIGHT OF CREDITOR WHEN OBLIGATION IS DUE

 If the pledge earns interest or income, creditor shall compensate what he receives with those which owe him  If none owe him or the amount exceeded w/c is due, he shall apply it to the principal  The offspring in the pledge of animals shall pertain to the owner but shall be subject to the pledge if there is a stipulation in the contrary  Creditor may proceed for the sale of thing pledged provided that the: (1) debt is due and unpaid, (2) sale must be at a public auction, (3) there must be notice to the pledgor stating the amount due, and (4) sale must be made with the intervention of a notary public  Pledge and pledgor may bid. Pledgor shall be preferred if he offered same terms as the highest bidder.  Pledge cannot acquire it if he is the only bidder  All bids must be for cash

 Covers only the  Extends to the property described natural accessions, improvements,  Extends to the aftergrowing fruits, acquired property rents or income not which is the yet received when renewal or the obligation substitution for the becomes due property mortgaged  All objects permanently attached after the execution of the mortgage  Creates a real right which attaches to the property not the mortgagee UPON DEFAULT OF THE MORTGAGOR:  Mortgagee can foreclose the chattel mortgage  Public auction must be in the municipality where the property is situated or mortgagor resides  Mortgagee may also bid

 Mortgagee may foreclose the mortgage either judicially or extrajudicially JUDICIAL FORECLOSURE – bringing an action in the RTC in the province or city where the real property is EXTRAJUDICIAL FORECLOSURE – a clause is inserted in the contract where the mortgagee has the power to foreclose thru and extrajudicial sale

APPLICATION OF PROCEEDS

REDEMPTION

PROCEEDS SHALL BE APPLY IN THE  Whether or not the proceeds are equal FOLLOWING ORDER: to the amount of the 1. Costs and expenses of the sale principal obligation, 2. Payment of the principal obligation interest and 3. Claims of persons holding subsequent expenses of the mortgages in their order auction, the 4. Balance, if any, shall be paid to the principal obligation mortgagor is extinguished *If there is a deficiency in the proceeds, creditor  Excess belongs to the is entitled to recover such from the debtor. creditor, unless *In case of installment sales of property, seller otherwise stipulated cannot recover the deficiency  in case of deficiency, he cannot recover it even if stipulated REDEMPTION MAY  Any person who has THE FOLLOWING right in or to the MAY REDEEM: BE: thing pledged may 1. Mortgagor 1. Equity of satisfy the principal 2. Person holding a Redemption – obligation subsequent mortgagor can at  Third person who mortgage any time after the pledged his property 3. Subsequent debt has become to secure the attaching creditor due, but before debtor’s obligation extrajudicial  Attaching creditor may redeem the foreclosure, pay who redeems shall thing by paying the the creditor the be subrogated to creditor indebtedness, the rights of the interest and mortgagee expenses. In  Redemption is judicial made by paying or foreclosure, it delivering the must be made amount due and before the the costs and confirmation of expenses incurred the sale of the in such breach court 2. Right of Redemption – mortgagor may redeem w/in a certain period of time after the mortgaged property was sold. In cases of extrajudicial foreclosure, redemption may be at any time w/in the term of one year and after the date of the registration of sale. There is no more redemption in

judicial foreclosure after the judicial confirmation of the sale

The penalty of arresto mayor or a fine amounting to twice the value of the property shall be imposed upon: 1. Anyone who shall knowingly remove any personal property mortgaged under the Chattel Mortgage Law w/o the written consent of the mortgagee, or his executors, administrators or assigns 2. Any mortgagor who shall sell or pledge personal property already pledged under the terms of the Chattel Mortgage Law w/o the consent of the mortgagee written on the back of the mortgage and noted on the record in the Chattel Mortgage Register RIGHTS & LIABILITIES OF PLEDGEE 1. The creditor shall take care of the thing pledged w/ diligence of a good father.  He is entitled to reimbursement of the expenses incurred for its preservation  He is not liable for loss or deterioration due to fortuitous event, however, he is liable if it is due to negligence, fraud or delay 2. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so  He is liable for the acts of his agents or employees with respect to the thing pledged 3. The pledgee cannot use the thing pledged w/o the authority of the owner. It can be only used if it is required for its preservation. 4. The pledgee is bound to advise the pledgor, w/o delay, of any danger to the thing pledged 5. The pledgee may bring the actions w/c pertain to the owner of the thing pledged in order to recover it from, or defend It against third person 6. If two or more things are pledged, pledge may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt 7. After the public auction, pledge shall promptly advise the pledgor or owner of the result thereof 8. If a credit w/c has been pledged becomes due before it is redeemed, pledge may collect and receive the amount due. He shall apply it as payment to his claim and deliver the surplus, if any, to the pledgor 9. If creditor I deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation 10. Pledgee cause the thing to be sold at a public auction, if there is danger of destruction, impairment, or diminution in value of the thing pledged, without his fault

RIGHTS & DUTIES OF PLEDGOR 1. Unless the thing pledged is expropriated, debtor continues to be the owner thereof 2. The owner may ask the thing be deposited if: a. The creditor uses the thing w/o authority b. He misuses the thing in any other way c. The thing is danger of being lost or impaired because of negligence 3. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in the proper case 4. If through the negligence or willful act of the pledgee, the thing pledged is in danger of being lost or impaired, pledgor may require that it be deposited with a third person 5. The pledgor had the right to demand the return of the thing pledged upon offering another thing in pledge provided that the: a. Pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged b. There is no fault on the part of the pledgee c. The thing offered is of the same kind and quality d. Pledgee does not choose to exercise his right to sold the thing at public auction WAYS TO EXTINGUISH PLEDGE 1. If the thing pledged is returned by the pledgee to the pledgor, pledge is extinguished. Any stipulation to the contrary shall be void.  It shall be presumed that the pledge is extinguished if the object pledged is found at the possession of pledgor 2. Written statement by the pledgee renouncing or abandoning the pledge  Pledge becomes a depositary 3. Other ways to extinguish an obligation