Commercial Laws 1: Loan — General Provisions (Arts. 1933-1934)

TITLE XI
LOAN

General Provisions

Article 1933. 
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; 

or money or other consumable thing,

upon the condition that the same amount of the same kind and quality shall be paid, 

in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, 

while in simple loan, ownership passes to the borrower.

Article 1934. 

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.

1.0 Definition of contract of loan. 

• 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; 
  or money or other consumable thing,
  upon the condition that the same amount of the same kind and quality shall be paid, 
  in which case the contract is simply called a loan or mutuum.

1.01 Parties. 

• The lender 
• also known as the bailor 
• the person who delivers money or goods, consumable or non consumable, to another.
• The borrower
• also known as the bailee 
• he person who receives something not consumable so that he may use the same for a certain time with the obligation to return the same, or he receives money or consumable so that he may consume it with the obligation to pay the same amount of the same kind and quality.

2. Characteristics.

• The contract of loan is:

1. Real Contract 
• the delivery of the thing loaned is necessary for the perfection of the contract.
2. Unilateral Contract
• once the subject matter has been delivered, it creates obligations on the part of only one of the parties, i.e., the borrower. 
3. Gratuitous Contract
• with respect to commodatum

2.01 Real Contract

• Loan is a real contract because commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.
• Naguiat v. Court of Appeals:
• The objects of the contract are the loan proceeds that the private respondent would enjoy only upon the encashment of the checks signed or indorsed by the petitioner. However, the Court ruled that the loan was not perfected because there was no proof that the checks were encashed or deposited. The Court observed that the petitioner would have certainly presented the corresponding documentary evidence, such as the returned checks and the pertinent bank records if the checks were presented for payment. Since the petitioner presented no such proof, it follows that the checks were not encashed or credited to the private respondent's account.
• The mere issuance of the checks did not result in the perfection of the contract of loan. The Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only when they have been cashed. It is only after the checks have produced the effect of payment that the contract of loan may be deemed perfected.

2.02. Unilateral Contract.

• Since it is a real contract, the delivery of the object is not based on the obligation in the contract of loan itself because the said delivery perfects the latter. 
• There is no contract (of loan) before delivery by the lender; after delivery, the contract is already unilateral because the obligation is only on the part of the borrower to pay. 
• However, delivery may be demandable as an obligation based on a separate contract of accepted promise to extend a loan to another. 
• Development Bank of the Philippines v. Guarina Agricultural and Realty Development Corporation, G.R. No. 160758, January 15, 2014:
• Under the law, a loan requires the delivery of money or any other  onsumable object by one party to another who acquires ownership thereof, on the condition that the same amount or quality shall be paid. Loan is a reciprocal obligation, as it arises from the same cause where one party in a reciprocal obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a loan, the creditor should release the full loan amount and the debtor repays it when it becomes due and demandable
• Comment: Aquino takes the opposite view. It is respectfully submitted that the long-standing view that the contract of loan is a unilateral contract is the better view. The release of the full amount of the loan is not based on the contract of loan itself, which is a real contract. There is still no contract of loan without the release and delivery of the proceeds of the loan. The obligation of the bank to release the loan proceeds may be based on a Contract to Loan but not on the Contract of Loan. In reciprocal obligations, the respective obligations exist by virtue of the same contract. It cannot be said that the delivery of the loan amount is based on an existing contract of loan because there is no such contract before delivery of the amount of the loan. 
• This is not to say, however, that the payment of the loan should be made if the creditor has not yet complied with the promise to deliver the full amount of the loan to the debtor. The payment may, indeed, be conditioned on the total release of the loan. However, this does not make a contract of loan reciprocal. 

2.03 Document.

• Loan is not a formal contract.
• Hence, formalities are not required to make the contract valid.
• Loan may be evidenced by a document entitled loan agreement or by a promissory note.
• A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. 
• A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith. 
• If he reneges on his promise without cause, he forfeits the sympathy and assistance of the Court and deserves instead its sharp repudiation.
• Section 184 of the Negotiable Instruments Law provides that a negotiable promissory note within the meaning of the same Act "is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer."

3. Kinds of Loans

• There are two kinds of contract loan, namely:

1. Commodatum.
• where the bailor (lender) delivers to the bailee (borrower) a non-consumable thing so that the latter may use it for a certain time and return the identical thing; and
2. Simple loan or mutuum. 
• where the lender delivers to the borrower money or other consumable thing upon the condition that the latter shall pay the same amount of the same kind and quality. 
• A thing is consumable when it is consumed when used in a manner appropriate to its purpose or nature, like rice, gasoline, money, fruit, firewood, etc.

4. Accepted Promise to Loan.

• An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties.
• This is a consensual contract as distinguished from the contract of loan itself, which is a real contract. 
• The contract (to loan) is a preparatory contract because it is a binding agreement that compels one party to enter into another contract, meaning to extend a loan, in the future. 
• When an application for a loan with a bank is approved, there is an accepted promise to loan that is legally demandable."
• A credit card agreement can be construed as an accepted promise to loan between the credit card company or bank and the cardholder.

4.01 Discounting.

• It is a mode of loaning money with the agreement that interest is deducted in advance. 
• Thus, the contract is still a loan, particularly mutuum, but there is a difference in the period when interest is paid. 
• Interests accrue daily, hence, they are ordinarily paid on or after they accrue.
• However, the term "discount" may actually refer to reduction of the price. 
• A sale at a discount means that the buyer will pay less than the regular price. 
• In this case, the "discount" is not supposed to be paid.
• If the instrument that serves as evidence of the loan is a negotiable instrument, the discounting can be through:
• negotiation of the instrument or 
• assignment. 

4.02. Revolving Credit.

• Loan, particularly mutuum, can be:
• a fixed-sum credit
• the borrower agrees to take a fixed amount of credit and to repay this with interest or charges and the transaction is terminated upon full payment.
• a revolving credit
• a credit facility whereby a borrower is given a credit limit or credit line which the borrower can draw on as and when he chooses and where each drawing thereby reduces the amount of remaining credit that is available while each repayment pro tanto restores it.
•  A credit line is that amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit and generally agreed to in advance. 
• It is the fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a series of transactions in which case, when the customer's line of credit is nearly exhausted, he is expected to reduce his indebtedness by payments before making any further drawings."
• Thus, a credit line contemplates a promise to loan to the debtor. The amount fixed in the Credit Line Agreement does not represent the amount that was borrowed but the maximum amount that can be borrowed from the creditor.
• Sps. Pio Dato u. Bank of the Philippine Islands: 
• The borrowers were granted a P5.7 million credit line by the bank. The creditors argued that there was no credit line because the borrowers did not execute a promissory note for the P5.7 million. 
• The Court ruled that the agreement does not require the execution of a promissory note for the entire P5.7 million since a credit line is merely a fixed limit of credit. The bank is not obliged to release the amount of P5.7 million to the debtor all at once, in a single transaction. In the said case, the bank allowed the release only of P800,000.00 out of the P5.7 million credit line and precluded any more availments since the borrowers had not yet satisfied their obligation to pay their existing loans. 

Comments from De Leon: 

1. Cause or consideration in a contract of loan. 

• In a contract of loan, the cause is: 

1. as to the borrower, the acquisition of the thing; and 
2. as to the lender, the right to demand its return or its equivalent. 

2. Loans distinguished from credit. 

• The credit of an individual means his ability to borrow money or things by virtue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period. 
•  A loan (mutuum) means the delivery by one party (lender/ creditor), and the receipt by the other party (borrower/debtor) who become the owner, of a given sum of money or other consumable thing upon an agreement, express or implied, to repay the same amount of the same kind and quality, with or without interest. 
•  The concession of a “credit” necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit.”

3. Meaning of credit as opposed to debt. 

• The term “credit,” in its usual meaning, is a sum credited on the books of a company to a person who appears to be entitled to it. 
• It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised payment. 
• It is the correlative to debt or indebtedness, and that which is due to any person as distinguished from that which he owes. 
• It is a debt considered from the creditor’s standpoint. 
• It may consist of money, goods, or services.

4. Loan distinguished from discounting of paper. 

• To discount a paper is a mode of loaning money, with these distinctions: 

1. Interest:
• Discount
• interest is deducted in advance 
• Loan
• interest is usually taken at the expiration of a credit; 
2. Name Paper:
• Discount
• always on a double-name paper
• Double-name paper — one on which two signatures appear with both parties liable for payment
• Loan
• generally, on a single-name paper
• Single-name paper — a promissory note with no indorsement other than the signature of the maker

• Thus, on a loan of P1,000.00 at 16% interest, the borrower would pay P1,160.00 at the end of the year. 
• If the note is discounted, the interest is deducted from the principal in advance. The borrower would receive P840.00 but would pay back P1,000.00 at the end of the year. 
• The P160.00 is called the discount and P840.00 is called the proceeds. 
• Discounting is slightly more expensive for the borrower because interest is calculated on the amount loaned (P1,000.00) and not on the amount actually received.
• In general, discount and interest rates for similar loans are identical. 

5. Commodatum and mutuum (simple loan) distinguished. 

• It is relatively simple to determine whether a given loan is commodatum or mutuum by bearing in mind the following principal points of distinction: COG-RUP-DLP

Commodatum	Mutuum
not consumable while in mutuum	money or other consumable thing
ownership of the thing loaned is retained by the lender	ownership is transferred to the borrower
essentially gratuitous	may be gratuitous or it may be onerous, that is, with stipulation to pay interest
borrower must return the same thing loaned	borrower need only pay the same amount of the same kind and quality
may involve real or personal property	refers only to personal property
loan for use or temporary possession	loan for consumption
bailor may demand the return of the thing loaned before the expiration of the term in case of urgent need	lender may not demand its return before the lapse of the term agreed upon
loss of the subject matter is suffered by the bailor since he is the owner	borrower suffers the loss even if caused exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay
purely personal in character	not purely personal in character

6. Kinds of commodatum.

• Commodatum is divided into:

1. ordinary commodatum
2. precarium
• one whereby the bailor may demand the thing loaned at will. 

7. Delivery essential to perfection of loan. 

• The rule contained in the above article is a necessary consequence of the fact that commodatum and mutuum are real contracts which require the delivery of the subject matter thereof for their perfection.
• Delivery is necessary in view of the purpose of the contract which is to transfer either the use or ownership of the thing loaned. 

8. Binding effect of accepted promise to lend. 

• It does not mean that a promise to lend would be without efficacy and judicial value. 
• An accepted promise to make a future loan is a consensual contract and, therefore, binding upon the parties but it is only after delivery, will the real contract of loan arise. Thus: 

1. Application for loan approved by corporation. 
• Where an application for a loan of money was approved by resolution of the corporation (lender) and the corresponding mortgage was executed and registered, there arises a perfected consensual contract of loan. 
• While a perfect contract of loan can give rise to an action for damages, said contract does not constitute the real contract of loan.
2. Mortgage executed by virtue of loan granted. 
• Where the mortgage deed was executed for and on condition of the loan granted to the mortgagors, the fact that the latter did not collect from the mortgagee bank the consideration of the mortgage on the date it was executed but six (6) days later when the mortgagors and their co-maker signed the promissory note is immaterial. 
• A contract of loan being consensual, it was perfected at the same time that the contract of mortgage was executed, the promissory note being only an evidence of an indebtedness and did not indicate lack of consideration of the mortgage at the time of its execution.
3. Only partial amount released under a loan agreement secured by mortgage. — 
• Where a bank and a borrower undertook reciprocal obligations by entering an P80,000.00 loan agreement on April 28, 1965 when the borrower executed a real estate mortgage, but the bank was able to release only P17,000.00, the bank was held in default for P63,000.00 to the borrower. 
• In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other, and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay. (see Art. 1169.) 
• Here, the promise of the borrower to pay, and he signified his willingness to pay when he executed the real estate mortgage, was the consideration for the obligation of the bank to furnish the P80,000.00 loan. And the mere fact of insolvency of a debtor (bank) is never an excuse for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him.