Commercial Laws 1: Deposit — Chapter 2: Voluntary Deposit

TITLE XII

DEPOSIT

CHAPTER 2
Voluntary Deposit

SECTION 1

General Provisions

Article 1968. 
A voluntary deposit is that wherein 

the delivery is made by the will of the depositor. 

A deposit may also be made by two or more persons 

each of whom believes himself entitled

to the thing deposited with a third person, 

who shall deliver it in a proper case to the one to whom it belongs.

Article 1969. 

A contract of deposit may be entered into orally or in writing.

Article 1970. 

If a person having capacity to contract 

accepts a deposit made by one who is incapacitated,

the former shall be subject to all the obligations of a depositary,

and may be compelled to return the thing 

by the guardian, or administrator, 

of the person who made the deposit, 

or by the latter himself if he should acquire capacity.

Article 1971. 

If the deposit has been made

by a capacitated person with another who is not, 

the depositor shall only have an action to recover the thing deposited 

while it is still in the possession of the depositary, 

or to compel the latter to pay him the amount 

by which he may have enriched or benefited himself 

with the thing or its price. 

However, if a third person who acquired the thing 

acted in bad faith, 

the depositor may bring an action against him for its recovery.

1. Voluntary Deposit

• A voluntary deposit is that wherein the delivery is made by the will of the depositor.
• Ordinarily, there are only two persons involved.
•  Sometimes, however, the depositary may be a third person.
• The chief difference between a voluntary deposit and a necessary deposit is that:
• in the voluntary deposit, the depositor has complete freedom in choosing the depositary;
• in the necessary deposit, there is lack of free choice in the depositor.

2. Formality.

• A contract of deposit may be entered into orally or in writing.
• It should be noted however that the meeting of minds of the parties is not sufficient for the perfection of the contract because the contract of deposit is a real contract.
• Except for the delivery of the thing, there are no formalities required for the existence of the contract. 

3. Capacity.

• A contract entered into between an incapacitated person and a capacitated person is voidable. 
• If both persons are incapacitated, the contract is unenforceable. 
• The same rule applies to the contract of deposit. 
• Equally applicable is the rule that a capacitated person cannot allege the incapacity of those with whom they contract.
•  However, there are special rules on the effect of incapacity of one of the parties provided for under Articles 1970 and 1971. These rules are summarized as follows: 

• The Depositor is Incapacitated while Depositary is Capacitated.
• Depositary's duties remain but the Legal Representative of the depositor may ask for the return of the thing.
• The depositary is subject to all the obligations of a depositary.

• The Depositor is Capacitated while Depositary is Incapacitated.
• Depositor has the right: 
1. to demand the return of the thing while still in depositary's possession; or
2. if the depositary is no longer in possession, to demand from the depositary the amount by which he was benefitted or enriched; or 
3. recover the thing from a third person who acquired the same in bad faith.
• The incapacitated depositary (like a minor or an insane person) does not incur the obligation of a depositary.
• However, he is liable:
1. to return the thing deposited while still in his possession and 
2. to pay the depositor the amount by which he may have benefited himself with the thing or its price subject to the right of any third person who acquired the thing in good faith.

• Example: 
• A deposited a watch with B, a minor who sold it to C. 
• If C acted in bad faith, A may recover the watch from him. 
• But if C acted in good faith, A’s only recourse is against B to compel him to return the price received for the watch or the amount by which he may have benefited himself.

• Incapacity may arise after the deposit is made in which case the applicable provision is Article 1986 which provides that "if the depositor should lose his capacity to contract after having made the deposit, the thing cannot be returned except to the persons who may have the administration of his property and rights."

Depositor need not be owner of thing. 

• General Rule: The depositor must be the owner of the thing deposited. 
• Exception: It may belong to a person other than the depositor.
• ✅ a carrier
• ✅ commission agent
• ✅ lessee
• may deposit goods temporarily in his possession considering that the contract does not involve the transfer of ownership. 
•  As a matter of fact, the depositary cannot dispute the title of the depositor to the thing deposited.
• The depositary is in estoppel. (see Art. 1436.)

Where there are several depositors.

• Two or more persons each claiming to be entitled to a thing may deposit the same with a third person. 
• In such case, the third person assumes the obligation to deliver to the one to whom it belongs. 
• The action to compel the depositors to settle their conflicting claims among themselves would be in the nature of an interpleader. (Sec. 1, Rule 62, Rules of Court.) 
• Here, one of the depositors is not the owner.
• When interpleader proper.— Whenever conflicting claims upon the same subject matter are or may be made against a person who claims no interest whatever in the subject matter, or an interest which in whole or in part is not disputed by the claimants, he may bring an action against the conflicting claimants to compel them to interplead and litigate their several claims among themselves.

SECTION 2

Obligations of the Depositary

Article 1972. 

The depositary is obliged to keep the thing safely and to return it, 

when required, to the depositor, or to his heirs and successors, 

or to the person who may have been designated in the contract. 

His responsibility, with regard to the safekeeping and the loss of the thing,

shall be governed by the provisions of Title I of this Book.

If the deposit is gratuitous, 

this fact shall be taken into account 

in determining the degree of care 

that the depositary must observe.

1.Obligations of the Depositary.

• The principal obligations of the depositary in a contract of deposit are:
1. to hold the thing and keep it safe through the exercise of due diligence and 
2. to return the thing when required to the depositor or the latter's heirs or successors. 
• The thing deposited must be returned to the depositor whenever he claims it, even though a specified term or time for such may have been stipulated in the contract.
• The thing deposited shall be returned with all its products, accessories and accessions.

2. Duty of Care.

• Due care should be exercised by the depositary in the performance of his functions to safekeep the goods. 
• Article 1972 provides that the responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of Book IV of the New Civil Code. 
• Francisco v. Chemical Bulk Carriers Incorporated:
• Generally, to determine the diligence which must be required of all persons, we use as basis the abstract average standard corresponding to a normal orderly person.
• If the depositary will not exercise proper diligence, the depositary may be liable for damages and he is liable even if there was fortuitous event. 
• The second paragraph of Article 1972 provides that if the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe. 
• The implication is that there is a higher degree of care required if the deposit is onerous. 
• The question therefore is whether the diligence required is higher than the diligence of a good father of a family if the deposit is onerous. 
• Summa Insurance Corporation v. CA and Port Service Inc.:
• The Supreme Court imposed a higher degree of diligence on the arrastre operator explaining that: The relationship therefore between the consignee and the arrastre operator must be examined. This relationship is much akin to that existing between the consignee or owner of shipped goods and the common carrier, or that between a depositor and a warehouseman. 
• In the performance of its obligations, an arrastre operator should observe the same degree of diligence as that required of a common carrier and a warehouseman as enunciated under Article 1733 of the Civil Code and Section 3(b) of the Warehouse Receipts Law, respectively. 
• Being the custodian of the goods discharged from a vessel, an arrastre operator's duty is to take good care of the goods and to turn them over to the party entitled to their possession.
• Article 1733 referred to by the Supreme Court provides that common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. 
• On the other hand, Section 3(b) of the Warehouse Receipts law provides that the warehouseman has the obligation to exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonably careful man would exercise in regard to similar goods of his own.

• Ordinarily, the depositary must exercise over the thing deposited the same diligence as he would exercise over his property for two reasons: 
1. because it is an essential requisite of the judicial relation which involves the depositor’s confidence in his good faith and trustworthiness; and 
2. because of the presumption that the depositor, in choosing the depositary, took into account the diligence which the depositary is accustomed with respect to his own property. 
• The depositary cannot excuse himself from liability in the event of loss by claiming that he exercised the same amount of care toward the thing deposited as he would toward his own if such care is less than that required by the circumstances. 
• Ordinary Diligence
• This refers to the care and prudence that a reasonable person in the same situation would exercise. It's a moderate level of care expected in most circumstances.
• Extraordinary Diligence
• This is a much higher standard of care. It requires the utmost degree of vigilance and foresight that a very cautious person would employ. It goes beyond what's ordinary and demands a more proactive approach to safeguarding interests.

• The liability of the depositary for the care and delivery of the thing is governed by the rules on obligations. (Arts. 1163, et seq.) FPC
1.  He is liable if the loss occurs through his fault or negligence, even if the thing was insured.
2. The loss of the thing while in his possession, ordinarily raises a presumption of fault on his part.
3. The required degree of care is greater if the deposit is for compensation than when it is gratuitous.
• This is similar to the rule in agency and common carriers. But even when it is gratuitous, due care must still be exercised.

3. Effect of Stipulation.

• Under the Warehouse Receipts Law, the warehouseman may not insert in a receipt issued by him any terms and conditions that in any wise impair his obligation to exercise the diligence in taking care of the goods.
• As noted earlier, there is a contract of deposit when a restaurant offers free valet parking to its customers; the restaurant company is constituted as depositary. 
• Such being the case, a stipulation in the "Parking Stub" holding the restaurant not liable for any damage—being a contract of adhesion—is void in view of the nature of the transaction.

4. Obligations of the Depositary. 

•  In summary, the obligations of the depositary are as follows: SLL-DCU-D

1. To safekeep the property of the depositor; 
2. To be liable for the loss of the thing through his fault or negligence;
3. Not to deposit the thing with a third person unless allowed through stipulation;
4. Not to change the way of the deposit;
5. Not make use of the thing deposited without the express permission of the depositor.
6. To be liable for the loss of the thing through a fortuitous event in certain cases.
7. For a depositary holding certificates, bonds securities or instruments which earn interest, the depositary is obliged:
1. to collect the latter when it becomes due; and 
2. to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law.

5. Return of the Thing.

• The depositary is supposed to return the thing to the following person/s: 

1. The depositor; 
2. The depositor's heirs and successors; or 
3. The person who may have been designated in the contract. 

• The foregoing makes it clear that the person who can demand the return of the thing from the depositary need not be an original party to the contract of deposit. 
• The contract of deposit may provide for a third party beneficiary. 
• Thus, a warehouse receipt may provide that goods shall be delivered to the order of a person who is not the depositor. 
• For example, if the seller deposits the goods to a warehouseman, the warehouse receipt that may be issued may provide that the goods may be delivered to the buyer or to the order of the buyer.
• It should be noted in this connection that the situation is similar to a third party consignee in a bill of lading, which—just like a warehouse receipt—is another form of document of title. There are instances when the third-party consignee is bound by the agreement between the shipper and the carrier even if the consignee is not the contracting party. 
• Everett Steamship Corporation v. Court of Appeals, et al.:
• The Supreme Court ruled that the consignee is bound by the terms and conditions of the bill of lading where it was established that he accepted the same and is trying to enforce the agreement.
• The Court explained that while the bill of lading is oftentimes drawn up by the shipper/consignor and the carrier without the intervention of the consignee, the latter can still be bound by the stipulations of the bill of lading: 
• "In sum, a consignee, although not a signatory to the contract of carriage between the shipper and the carrier, becomes a party to the contract by reason of either:
1. the relationship of agency between the consignee and the shipper/ consignor; 
2. the unequivocal acceptance of the bill of Jading delivered to the consignee, with full knowledge of its contents; or 
3. availment of the stipulation pour autrui, i.e., when the consignee, a third person, demands before the carrier the fulfillment of the stipulation made by the consignor/shipper in the consignee's favor, specifically the delivery of the goods/cargoes shipped."
• The person who may have been designated in the contract to receive the thing deposited from the depositary need not be named in the Contract. 
• For instance, deposit may be covered by a negotiable document of title, particularly a warehouse receipt, which may provide that the goods are to be delivered to bearer. 
• Any subsequent bearer can be considered a person who is authorized to receive the goods under the contract. 
• Even if warehouse receipts provide that the goods are to be delivered to the order of a specified person, the person authorized to receive the goods from the warehouseman includes the subsequent holder of the warehouse receipt. 

Article 1973. 

Unless there is a stipulation to the contrary,

the depositary cannot deposit the thing with a third person.

If deposit with a third person is allowed, 

the depositary is liable for the loss 

if he deposited the thing with a person 

who is manifestly careless or unfit. 

The depositary is responsible for the negligence of his employees.

1. Deposit to Third Persons

• The thing is delivered to the depositary with due consideration of the characteristics and qualifications of the depositary. 
• Hence, it is not logical to allow the depositary to deposit the thing with a third person — unless allowed through stipulation.

2. When Allowed.

• The depositor may agree to allow the depositary to deliver the thing with a third person. 
• However, the depositary is not relieved from liability because even if deposit to a third person is allowed, the depositary should not deposit it with a person who is manifestly careless or unfit; otherwise, the depositary is still liable in case of loss of or damage to the thing deposited.
• With respect to the negligence of employees and agents of the depositary that caused damage to the thing, the liability of the depositary applies whether or not the employee or agent is unfit or careless. 
• The personality of the employee and agent is but a mere extension of the employer/principal. 
• This is especially true in the case of juridical persons, like a corporation, which have no choice but to act through agents because of the artificial nature of their personality. 
• Hence, it is believed that the employee or agent of the depositary is not a third person as contemplated under Article 1973 of the New Civil Code.
• If the depositary is a partnership, the partners are likewise not third persons as contemplated under Article 1973 considering that the mutual agency rule applies to partnership. 

Obligation not to transfer deposit. 

• Unless authorized by express stipulation, the depositary is not allowed to deposit the thing with a third person because a deposit is founded on trust and confidence and it can be supposed that the depositor, in choosing the depositary, has taken into consideration the latter’s qualification.
• General Rule: Under Article 1973, the depositor is liable for the loss of the thing deposited if: 
• he transfers the deposit with a third person without authority although there is no negligence on his part and the third person; 
• he deposits the thing with a third person who is manifestly careless or unfit although authorized, even in the absence of negligence; or
• the thing is lost through the negligence of his employees whether the latter are manifestly careless or not. 
• Exception: The depositor is not responsible in case the thing is lost:
1. without negligence of the third person with whom he was allowed to deposit the thing,
2. if such third person is not “manifestly careless or unfit.”

Art. 1974. 

The depositary may change the way of the deposit 

if under the circumstances he may reasonably presume 

that the depositor would consent to the change 

if he knew of the facts of the situation. 

However, before the depositary may make such change,

he shall notify the depositor thereof and wait for his decision,

unless delay would cause danger. 

1. Change of the Way of Deposit.

• General Rule: The depositary cannot change the way of the deposit. 
• Thus, the depositary cannot change the place where the property is deposited or substantially change the way the goods are stored.
• Exception: Change can be made if under the circumstances the depositary may reasonably presume that the depositor would consent to the change if he knew of the facts of the situation.
• Thus, a simple rearrangement of the goods in a warehouse may be a change that is contemplated by the parties from the time of perfection of the contract. 

2. Notice. 

• General Rule: Notice to the depositor is necessary before the change can be made by the depositary. 
• Exception: A situation where the goods will be endangered if the change is not immediately made. 
• Example:
• The depositary is not required to give prior notice to the depositor if it is necessary to transfer all the goods to another place because they are in danger of being destroyed by a flash flood. 
• In fact, in this situation, the depositary would be remiss in his or her duty to exercise due diligence if no action will be taken to save the goods.
•  It follows the general rule that the depositary must take good care of the thing with the diligence of a good father of a family.

Article 1975. 

The depositary 

holding certificates, bonds, securities or instruments

which earn interest 

shall be bound to collect the latter 

when it becomes due, 

and to take such steps as may be necessary 

in order that the securities may preserve their value

and the rights corresponding to them according to law.

The above provision shall not apply 

to contracts for the rent of safety deposit boxes. 

Article 1976. 

Unless there is a stipulation to the contrary, 

the depositary may commingle grain or other articles 

of the same kind and quality, 

in which case the various depositors shall own 

or have a proportionate interest in the mass.

1. Deposit of Commercial Documents.

• The provision imposes two obligations on the depositary: 

1. The depositary is bound to collect the interest on the commercial instruments or securities deposited when it becomes due; and 
2. The depositary must take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law.

• Under Article 1975, the depositary is bound to collect not only the interest but also the capital itself when due.
• Examples:
1. A bond certificate that is due on March 1, 2015 was deposited with a depositary on January 5, 2015. Every month, the bond certificate earns interest and the interest can already be collected. There is an underlying obligation on the part of the depositary to collect the interest because in these cases, only the person holding the certificate can collect the interest, as there may be a need to present the certificate.
2. The depositary of a negotiable promissory note which has been dishonored by nonpayment by the maker, must give notice of dishonor to indorsers for under the law, indorsers to whom such notice is not given are discharged from liability. 
• It was noted that there can only be deposit of corporeal properties.
• Under Article 1975, there may be deposit of interest earning certificates, bonds, securities or instruments. 
• The deposit is therefore principally for the safekeeping of the documents. 
• The implication of Article 1975 is that while the deposit involves deposit of the tangible commercial documents, there is an underlying obligation to preserve the intangible property that is the right to collect a demandable sum covered by the document. 
• In the first place, the preservation of the document may also preserve the intangible right because the right to collect may be affected if the document evidencing the right is lost and can no longer be presented to the debtor.
• A contract of deposit involving securities or instruments may be in favor of a beneficiary of the custodianship or depositary agreement.
• Example:
• A custodianship or depositary agreement is established as an integral part of the money market transaction entered into by the parties. One party, the assignor-vendor, may deposit the instrument with another person in order that the thing sold would be placed outside the control of the vendor. The constituting of the depositary or custodianship agreement is equivalent to constructive delivery of the instrument. 
• It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. 
• The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the present case, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract. 
• Accordingly, any stipulation in the contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.

1.01. Safety Deposit Box. 

• As explained earlier, the renting of safety deposit boxes is a special form of deposit hence, it is not to be strictly governed by the provisions on deposit. 
• Article 1975 is not applicable if the bonds or certificates are stored in safety deposit boxes for the simple reason that bank or "lender" (of the box) has no access to the said bond or certificates without the consent or participation of the depositor. 

2. Deposit of Grains.

• The rule embodied in Article 1976 is consistent with the rules on commixtion. 
• Commixtion is governed by Articles 472 and 473 of the New Civil Code.
• Article 472. If by the will of their owners two things of the same or different kinds are mixed, or if the mixture occurs by chance, and in the latter case the things are not separable without injury, each owner shall acquire a right proportional to the part belonging to him, bearing in mind the value of the things mixed or confused. 
• Article 473. If by the will of only one owner, but in good faith, two things of the same or different kinds are mixed or confused, the rights of the owners shall be determined by the provisions of the preceding article.
• In this connection, Section 22 of the WRL provides that a warehouseman "shall keep the goods so far separate from goods of other depositors and from other goods of the same depositor for which a separate receipt has been issued, as to permit at all times the identification and redelivery of the goods deposited." 
• However, Section 23 of the WRL provides that fungible goods may be commingled with other goods of the same kind and grade if authorized by agreement or by custom. "In such case, the various depositors of the mingled goods shall own the entire mass in common and each depositor shall be entitled to such portion thereof as the amount deposited by him bears to the whole." 
• Section 24 further provides that "the warehouseman shall be severally liable to each depositor for the care and redelivery of his share of such mass to the same extent and under the same circumstances as if the goods had been kept separate."

Article 1977. 

The depositary cannot make use of the thing deposited 

without the express permission of the depositor.

Otherwise, he shall be liable for damages.

However, when the preservation of the thing deposited

requires its use, it must be used but only for that purpose.

Article 1978. 

When the depositary has permission to use the thing deposited, 

the contract loses the concept of a deposit 

and becomes a loan or commodatum, 

except where safekeeping is still the principal purpose of the contract.

The permission shall not be presumed, and its existence must be proved.

1. Use of the Thing.

• General Rule: The depositary in a contract of deposit cannot use the thing because the purpose of the contract is only for safekeeping. 
• Exceptions: The use of the thing is allowed in the following cases:
1. The preservation of the thing requires its use;
2. Irregular deposit. 
• Example:
• The depositary may use a radio received in deposit occasionally to prevent the accumulation of moisture.

2. Irregular Deposit.

• In irregular deposit, the depositary has permission to use the thing deposited but safekeeping is still the principal purpose of the contract. 
• Rogers v. Smith, Bell & Co.:
• There are three points of difference between a loan and an irregular deposit. 
• The first difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in a loan the essential cause for the transaction is the necessity of the borrower. 
• The contract in question does not fulfill this requirement of an irregular deposit. It is very apparent that it was not for the sole benefit of Rogers. It, like any other loan of money, was for the benefit of both parties. The benefit which Smith, Bell & Co., received was the use of the money; the benefit which Rogers received was the interest on his money. In the letter in which Smith, Bell & Co., on the 30th of June 1888, notified the plaintiff of the reduction of the interest, they said: "We call your attention to this matter in order that you may if you think best employ your money in some other place." 
• Nor does the contract in question fulfill the third requisite, which is, that in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this documents that the plaintiff' could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment.
• Compania Agricola De Ultramar v. Nepomuceno:
• No irregular deposit in one case where the transaction in question was clearly not for the sole benefit of the debtor and it was evidently for the benefit of both parties. The alleged depositor could not even demand payment until the expiration of the term of three months.
• The distinctions between an irregular deposit and a simple loan are as follows:

1. Simple Loan
1. The use of the thing is principal benefit of the debtor. 
2. A lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen.
3. The essential cause for the transaction is the necessity of the borrower. 
4. Common creditors enjoy no preference in the distribution of the debtor’s property.
2. Irregular Deposit
1. Safekeeping is still the primary purpose of the deposit.
2. In an irregular deposit, the depositor can demand the return of the article at any time. 
3. The only benefit is that which accrues to the depositor.
4. The depositor in an irregular deposit has preference over other creditors with respect to the thing deposited.

• If the thing deposited is money or other consumable thing, the per mission to use it will result in its consumption and converts the contract into a simple loan or mutuum. 
• But if safekeeping is still the principal purpose of the contract, it is still a deposit but an irregular one; hence, it is called an irregular deposit. 
• Bank deposits are in the nature of irregular deposits but they are really loans governed by the law on loans.

• Permission to use not presumed.
• In a deposit, the permission to use is not presumed except when such use is necessary for the preservation of the thing deposited and the burden is on the depositary to prove that permission has been given. 

PROBLEM:

Prior to January 17, 1921, the defendant Pablo David had been engaged in running a rice mill in the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and almost constantly running. On the date, January 17, 1921, a fire occurred that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first of the actions, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action, is his uncle. In the months of March, April, and May 1920, Silvestra Baron placed a quantity of palay in the defendant's mill which amounted to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been received by Silvestre Baron upon account of the palay delivered by Guillermo Baron but the latter received from the defendant Pablo David advancements amounting to P2,800.00; but apart from this he has not been  compensated. Both the plaintiffs claim that the cavans of palay which were delivered by them to the defendant were sold to the defendant; while the defendant, on the other hand, claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire that occurred on January 17, 1921 that destroyed his warehouse. It should be stated that the palay in question was placed by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. Can the defendant invoke loss through fire as a defense against plaintiffs Silvestra and Guillermo Baron?

No. Loss through fire cannot he invoked by the defendant and the latt.er is liable to the plaintiffs. Even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is bound to account for its value. The New Civil Code provides that when the depository has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and by appropriating the thing, the bailee becomes responsible for its value. In this connection, the Court wholly rejected the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January 1921. The Court also stated that the liability of the defendant is not in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it lat.er, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely. Hence, the Court ruled that the defendant should be required to pay for the plaintiffs' palay. (Baron v. David, G.R. Nos. L-26948 and L-26949, October 8, 1927) 

Article 1979.

The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated;

(2) If he uses the thing without the depositor's permission;

(3) If he delays its return;

(4) If he allows others to use it,

even though he himself may have been authorized to use the same. 

1. Fortuitous Event. 

• The basic rule on fortuitous event is embodied in Article 1174 of the New Civil Code which provides that "except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen. or which, though foreseen, were inevitable." 
• Thus, under Article 1174 of the New Civil Code, fortuitous event is an event which could not be f oreseen or which, though foreseen, is inevitable. 
• It is not enough that the events have not been foreseen or anticipated but it must be one impossible to foresee or avoid.
•  For the defense of fortuitous event to be accepted as a justification for non-performance of an obligation, the following must be present:

1. The cause of the unforeseen and unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will;
2. It must be impossible to foresee the event which constitutes the "caso fortuito," or if it can be foreseen, it must be impossible to avoid;
3. The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and 
4. The obligor must be free from any participation in the aggravation of the injury resulting to the creditor.

• Thus, provided that all the above-enumerated requirements are present, a depositary is not liable if the loss of the thing deposited is due to a fortuitous event. 
• Article 1979, however, provides for instances when the depositary would still be liable: SUDA
1. If it is so stipulated;
2. If he uses the thing without the depositor's permission;
3. If he delays its return;
4. If he allows others to use it, even though he himself may have been authorized to use the same. 
• In this connection, it should be noted that negligence on the part of the depositary is not presumed. 
• The presumption is that every person is deemed innocent of a crime or wrong, and that he takes ordinary care of his own concerns
• Palacio v. Sudario:
• The plaintiff deposited 81 heads of cattle, in return for which she had to give 1/2 of the calves that might be born and was to pay the defendant one-half peso for each calf branded. 
• On demand for the whole, 48 heads of cattle were afterwards returned to her and this action was brought to recover the remaining 33. The 33 cows either died of disease or drowned in a flood. The defendant depositary was made liable because exercise of due care was not established.

Article 1980. 

Fixed, savings, and current deposits of money 

in banks and similar institutions 

shall be governed by the provisions concerning simple loan. 

1. Bank Deposit.

• As previously explained, bank deposits are governed by the provisions on simple loan. 
• The depositor is the creditor and the bank is the debtor. 
• The obligation of the bank is to pay the depositor or whomever the depositor may authorize. 
• Payment by the bank may either be by honoring a check drawn on the account or through any other forms of withdrawal. 
• Deposits of money in banks, whether fixed, savings, and current, are really loans to a bank because the bank can use the same for its ordinary transactions and for the banking business in which it is engaged.
• Bank deposits are in the nature of irregular deposits; they are  really loans because they earn interest.
• Hence, such deposits are governed by the provisions on mutuum or simple loan, and the rules on the imposition of legal interest. 
• While the bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited.
• Accordingly, the relation between a depositor and a bank is that of a creditor and a debtor. The depositor (creditor) lends the bank (debtor) money and the bank agrees to pay the depositor on demand. The deposit agreement between the bank and the depositor determines the rights and obligations of the parties. Consequently:
  

1. A bank’s failure to honor a deposit is failure to pay its obligation as debtor and not a breach of trust arising from a depositary’s failure to return the subject matter of the deposit. It will not constitute estafa through misappropriation punishable under Article 315 (par. 1[b].) of the Revised Penal Code.
2. The payment by a bank of the amount of a depositor’s check is not a loan to the latter by the former which may be satisfied by a subsequent deposit; but a payment by the bank as debtor to the depositor as creditor. 
• Such payment extinguishes so much of the obligation of the bank as is represented by the check paid or honored by the bank out of the latter’s deposit. 
3. The general rule is that a bank can compensate or set off the deposit in its hands for the payment of any indebtedness to it on the part of the depositor. 
• In a true deposit, compensation is not allowed.
• The money received is termed a “deposit,” although it is not strictly so, as the depositor does not expect to receive the identical money in return but an equivalent sum.
• The money is mingled with other money, the entire amount forming a single fund from which depositors are paid. 
4.  In the performance of its obligations, the drawee bank is bound by its internal banking rules and regulations and is liable to the depositor for fraud, negligence, or delay. 
• The award of exemplary damages, however, is unjustifi ed in the absence of malice, bad faith or gross negligence. But moral damages may be recovered even if the bank’s negligence may not have been attended with mal ice and bad faith.
5. The bank is engaged in business impressed with public interest, and it is its duty to protect in return its many clients and depositors who transact business with it with the highest degree of care, more than that of a good father of the family or of an ordinary business firm. 
• It is its obligation to see to it that all funds invested with it are properly accounted for and duly posted in its ledger. 
• In every case, the depositor expects the bank to treat his account with utmost fidelity, whether such account consists of only a few hundred pesos or of millions, always having in mind the fiduciary nature of their relationship.
• Like a common carrier whose business is imbued with public interest, a bank should exercise extraordinary diligence to negate its liability to its depositors.
6. It has been held that suspension of a bank which had fallen into a “distressed financial situation” by order of the Central Bank cannot excuse it from its obligations to depositors who had nothing whatever to do with the Central Bank actuations or the events leading to the bank’s distressed state. 
• But the bank may not be liable to pay interest on the deposit during the period of suspension.

Article 1981. 

When the thing deposited is delivered closed and sealed, 

the depositary must return it in the same condition, 

and he shall be liable for damages 

should the seal or lock be broken through his fault.

Fault on the part of the depositary is presumed, 

unless there is proof to the contrary.

As regards the value of the thing deposited,

the statement of the depositor shall be accepted, 

when the forcible opening is imputable to the depositary, 

should there be no proof to the contrary. 

However, the courts may pass upon the credibility 

of the depositor with respect to the value claimed by him.

When the seal or lock is broken, 

with or without the depositary's fault, 

he shall keep the secret of the deposit.

Article 1982.

When it becomes necessary to open a locked box or receptacle, 

the depositary is presumed authorized to do so, 

if the key has been delivered to him; or 

when the instructions of the depositor 

as regards the deposit cannot be executed 

without opening the box or receptacle.

1. Locked Box or Receptacle.

• When the thing deposited is delivered closed and sealed, the evident intent of the depositary is to keep the thing inside the box or receptacle secret. 
• Hence, the depositary:
1. cannot open the box or receptacle and 
2. he must also keep the secret of the deposit even if the seal or lock is broken without his fault.
• In addition, part of the duty of the depositary is to make sure that seal or lock is not broken. 
• Article 1982 provides another case where fault or negligence is presumed under the law. 
• Fault of the depositary is presumed if the seal or lock is broken. 
• Hence, the depositary can prove that he or she exercised due care and that he did not contribute to the damage of the lock or seal. 

1.01 Liability and Proof of Damage.

• The depositary is liable to pay damages if he fails to prove the absence of fault on his part. 
• Part of the damages to be awarded is the actual damages constituting the value of the thing. 
• Article 1982 provides specific rules of evidence with respect to the determination of the value of the thing deposited. The law provides that such value shall be determined as follows: 

1. Evidence according to the Rules of Court; 
2. If there is no proof, the statement of the depositor shall be accepted, as regards the value of the thing deposited subject to the determination by the courts of the credibility of the depositor with respect to the value claimed by him. 

2. Cases When Depository Can Open.

• The depositary can open the thing deposited even if the same was delivered closed and sealed in the following cases:

1. If there is an express agreement that the depositary can open;
2. When it becomes necessary to open a locked box or receptacle, the depositary is expressly or impliedly authorized to open the thing. 

• In the latter case, the authority of the depositary to open the receptacle or box is presumed if:

1. the key has been delivered to the depositary; or
2. when the instructions of the depositor as regards the deposit cannot be executed without opening the box or receptacle. 

• Examples:
• The instruction of the depositor is for the depositary to clean the inside portion of the box. In this case, the instruction of the depositor cannot be implemented without opening the box. 
• So also is the authority presumed if the depositor instructed the depositary to annually secure an appraisal of the value of the thing inside the box from an independent professional appraiser. Necessarily, the value of the thing cannot be determined without opening the box. 

Where thing deposited delivered closed and sealed.

• Obligations of depositary. 
• Under Article 1981, the depositary has the obligation to: RPK
1. return the thing deposited when delivered closed and sealed, in the same condition; 
2. pay for damages should the seal or lock be broken through his fault which is presumed unless proved otherwise; and 
3. keep the secret of the deposit when the seal or lock is broken, with or without his fault. 
• Reason for rule. 
• Without the rule in this article, irresponsible depositaries may violate their trusts with impunity. 
•  The depositor having constituted the deposit in reliance upon the depositary’s fidelity, the most elementary sense of delicacy should move the depositary to respect the secrets which the depositor desires to keep and guard.
• Under paragraph 3, the courts may pass upon the credibility of the depositor with respect to the value of the thing deposited. In other words, the statement of the depositor is prima facie evidence only. 
• This is necessary in view of the natural tendency to exaggerate values. 
•  When depositary justified to open. 
• The depositary is authorized by Article 1982 to open the thing deposited which is closed and sealed when there is 
• presumed authority; or
• necessity.

Art. 1983.

The thing deposited shall be returned

with all its products, accessories and accessions.

Should the deposit consist of money,

the provisions relative to agents in article 1896

shall be applied to the depositary.

1. Obligation to Return.

• The obligation to return is one of the fundamental obligations of the depositary. 
• Article 1988 provides that the thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. 
• In performing this obligation, the depositary must return:
1. the thing deposited;
2. all the fruits of the thing;
3. accessions; and
4. accessories. 
• Example:
• The young of an animal which was deposited shall be returned to the depositor.
• This obligation is consistent with the provisions of Article 1163 because the obligation of the depositary is actually an obligation to deliver a determinate thing. 
• Applying Article 1896, the depositary owes interest on the sums he has applied to his own use from the day on which he did so, and on those which he still owes after the extinguishment of the deposit.
• Delgado v. Bonnevie:
• It was acknowledged that the obligation of the appears arose primarily out of the contract of deposit, but this deposit was later converted into a contract of hire of services. But it is also true that, after the object of the hire of services had been fulfilled, the rice in every way remained as a deposit in the possession of the appellants for them to return to the depositor at any time they might be required to do so, and nothing has relieved them of this obligation.
• Obligation to pay interest on sums converted to personal use.
• If what has been deposited is money, the depositary has no right to make use thereof and, therefore, he is not liable to pay interest. 
• If the depositary be in delay or has used the money without permission, he shall be liable for interest as indemnity. 
• The depositary owes interest on the sums he has applied to his own use from the day on which he did so, and those which he still owes after the extinguishment of the deposit.

Art. 1984. 

The depositary cannot demand 

that the depositor prove his ownership of the thing deposited. 

Nevertheless, should he discover 

that the thing has been stolen and who its true owner is, 

he must advise the latter of the deposit. 

If the owner, In spite of such information,

does not claim it within the period of one month,

the depositary shall be relieved of all responsibility 

by returning the thing deposited to the depositor. 

If the depositary has reasonable grounds to believe 

that the thing has not been lawfully acquired by the 

depositor, the former may return the same.

1. Proof of Ownership.

• The depositary owes a duty of loyalty to the depositor. 
• The depositor delivered the thing to the depositary because of the trust and confidence reposed upon the depositary. 
• This is also the reason why the depositary cannot deposit the thing with a third person. 
• Consistently, the depositary cannot demand that the depositor prove his ownership of the thing.
• It would be breach of loyalty if, after having deposited the thing, the depositary will demand that the depositor prove his ownership, if the depositor is trying to recover the thing deposited.
• To acquire proof of ownership may open the door to fraud and bad faith, for the depositary, on the pretense of requiring proof of ownership, may be able to retain the thing. 
• The rule on estoppel likewise applies. 
• Article 1436 of the New Civil Code provides that a lessee is estopped from asserting title to the thing leased or received, as against the bailor. 
• Another facet of the rule under Article 1984 is the fact that it is also not a requirement of the contract of deposit that the depositor is the owner of the thing. 
• A person who is not the owner but has legal custody of the thing can deposit the same. 
• Hence, the depositary cannot require proof of ownership of the thing deposited by the depositor. 

• Where third person appears to be owner. 
• In such a case, Article 1984 (pars. 2, 3, 4.) states the steps the depositary should take to be relieved of all responsibility with respect to the thing deposited. 
• Paragraphs 2 and 4 are similar except that for the application of paragraph 2, two conditions must exist:
1. the thing deposited must have been stolen; and 
2. the depositary knows who its true owner is. 

2. Stolen Property.

• If it turns out that the thing that was deposited really belongs to another person and that the thing has been stolen, if the depositary discovers its true owner, he must advise the real owner of the deposit. 
• If the owner, in spite of such information, does not claim it within the period of one month, the depositary shall be relieved of all responsibility by returning the thing deposited to the depositor. 
• If the depositary has reasonable grounds to believe that the thing has not been lawfully acquired by the depositor, the former may return the same. 
• Nevertheless, if there is doubt as to the rights of the claimants, a special civil action of Interpleader may be available. 
• Section 1 of Rule 62 of the Revised Rules of Court provides that interpleader can be initiated whenever conflicting claims upon the same subject matter are or may be made against a person who claims no interest whatever in the subject matter, so that the conflicting claimants will interplead and litigate their several claims among themselves. 

Effect of failure of owner to claim within one month. 

• The period of one month provided in paragraph 3 is intended merely for the protection of the depositary. 
• If the thing is returned to the depositor after one month, the true owner of the thing may still recover it through other legal processes.
• In this connection, the following observation has been made: 
•  “It is not enough to declare the depositary exempt from responsibility if the true owner does not claim the property within 30 days. Suppose the depositary discovers the true owner and notifies him, but the maker of the deposit demands its return before the 30 days expire, can the depositary refuse to return the thing deposited if the true owner has made no claim as yet? Such course would be not only contrary to the nature of deposit but also risky, because if for some other reason the owner is precluded from claiming the thing as against the depositor, the depositary who refuses to return will be liable for conversion. Or is it intended that he should not be so liable.” (Justice J.B.L. Reyes, “Observation on the new Civil Code,” XVI L.J. 138 [1951].) 
• Article 1984 is not clear on this point.  

Article 1985. 

When there are two or more depositors, 

if they are not solidary, and the thing admits of division, 

each one cannot demand more than his share.

When there is solidarity

or the thing does not admit of division, 

the provisions of articles 1212 and 1214 shall govern.

However, if there is a stipulation that the thing 

should be returned to one of the depositors, 

the depositary shall return it only to the person designated.

Right of two or more depositors. 

1. Thing deposited divisible and depositors not solidary. 
• If the thing deposited is divisible and there are two or more depositors who are not solidary, each one can demand only his share proportionate thereto. 
• Example:
• If A and B deposited 150 and 300 cavans of rice, respectively, A can demand only 150 cavans. 
2. Obligation solidary or thing deposited not divisible.
• If the obligation is solidary (i.e., the depositary can return the thing deposited to any of the depositors), or if the thing is not divisible, the rules on active solidarity (solidarity among creditors) shall apply, to the effect that:
• each one of the solidary depositors (creditors) may do whatever may be useful to the others but not anything which may be prejudicial to the latter (Art. 1212.), and 
• the depositary (debtor) may return the thing to any one of the solidary depositors (creditors) unless a demand, judicial or extrajudicial, for its return has been made by one of them in which case delivery should be made to him. (Art. 1214.)
3. Return to one of depositors stipulated.
• If by stipulation the thing should be returned to one of the depositors, the depositary is bound to return it only to the person designated although he has not made any demand for its return.
• In the example above, if A and B are solidary or the thing deposited is a car which does not admit of division, the depositor can return to either, in the absence of a contrary stipulation.

Solidary Depositors.

• Article 1210 of the New Civil Code provides that indivisibility of an obligation does not necessarily give rise to solidarity, nor does solidarity of itself imply indivisibility.
•  However, Article 1985 adopts the rules under Articles 1212 and 1214 that if there are two or more depositors and solidarity is expressly provided for or the thing is indivisible, the following rules shall apply: 

1. Each one of the depositors may do whatever may be useful to the others, but not anything which may be prejudicial to the other.
2. The depositary/ies may return the thing to any one of the solidary depositors; but if any demand, judicial or extrajudicial, has been made by one of the depositors, delivery should be made to him.

Article 1986.

If the depositor should lose his capacity to contract 

after having made the deposit, 

the thing cannot be returned except to the persons

who may have the administration of his property and rights.

Person to whom return must be made.

1. The depositary is obliged to return the thing deposited, when required, to the depositor, to his heirs and successors, or to the person who may have been designated in the contract. (Art. 1972.)  
2. If the depositor was incapacitated at the time of making the deposit, the property must be returned to his guardian or administrator or the person who made the deposit or to the depositor himself should he acquire capacity. (Art. 1970.)
3. Even if the depositor had capacity at the time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative. (Art. 1986.)

Article 1987. 

If at the time the deposit was made

a place was designated for the return of the thing,

the depositary must take the thing deposited to such place;

but the expenses for transportation shall be borne by the depositor.

If no place has been designated for the return,

it shall be made where the thing deposited may be, 

even if it should not be the same place

where the deposit was made,

provided that there was no malice on the part of the depositary.

1. Place of Return.

• The depositary must return the thing either: 

1. In the place designated in the contract; or
2. If no place is designated, the place where the thing deposited is presently located.

• If there is no place designated in the contract, the thing must be returned where it is presently being kept by the depositary even if it should not be the same place where the original deposit was made.
• However, the law requires that there is no malice on the part of the depositary. 
• Example:
• If the depositary is expressly authorized to change the way of the deposit but he purposely transfers the thing in the place where the depositor will incur great costs, the depositary may be required to deliver the thing to the depositor. 
• Note that in the first case, the expenses for the transportation shall be borne by the depositor. 
• This is just because the deposit is constituted for the benefit of the depositor and not the depositary who assumes no more than the safekeeping and the return of the thing. 
• The rule in this article is similar to the general rule of law regarding the place of payment. 
• Example:
• Suppose the deposit was made in the residence of A in Manila and A transfers his residence to Pateros, Metro Manila and he has to bring the thing deposited to his new place of residence. 
• In the absence of a contrary stipulation, the place of return is the residence of A in Pateros, Metro Manila, provided there was no malice on the part of A. 

Article 1988.

The thing deposited must be returned

to the depositor upon demand,

even though a specified period or time

for such return may have been fixed.

This provision shall not apply

when the thing is judicially attached

while in the depositary's possession,

or should he have been notified of the opposition of a third person

to the return or the removal of the thing deposited.

In these cases, the depositary must immediately inform

the depositor of the attachment or opposition.

1. Return at Will Upon Demand.

• The general rule is that a period is for the benefit of both parties. 
• However, in the contract of deposit, the period is not presumed to be for the benefit of both parties but generally for the benefit of the depositor. 
• Thus, Article 1988 provides that "the thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed." 
• Thus, the deposit ends at the will of the depositor who may demand the return of the thing at any time.
• The depositary is justified in not returning the thing upon demand in the following cases:
1. when the thing is judicially attached while in the depositary's possession; or
2. should the depositary have been notified of the opposition of a third person to the return or the removal of the thing deposited. 
• In these cases, the depositary must immediately inform the depositor of the attachment or opposition. 
• However, in the second case, the appropriate remedy is to file an action for Interpleader. 

Time of return.

• As a rule, the depositor can demand the return of the thing deposited at will and this is true whether a period has been stipulated or not. 
• In a deposit, whenever a period is agreed to, the same is for the benefit of the depositor, but it may be validly waived by him. 
• But the period is generally binding upon the depositary.
• If the deposit is for a compensation, the depositary is entitled to the compensation corresponding to the entire period. 
• In this case, the period is also for the benefit of the depositary. 
•  The rule in commodatum is different.

When depositary not obliged to return thing deposited. 

• The right to immediate restitution is subject to the two cases provided in the second paragraph. (see also Art. 1984, par. 2.) 

1. Thing is judicially attached while in the depositary's possession 
• If the depositor returns the thing, he would be disobeying the judicial order of attachment. In connection with the second case, the following observation has been made:  
• “To permit the depositary to refuse to return the thing deposited simply because of the opposition of another, is a power very prone to abuse and mischief. If at all, the depositary should only be authorized in case of conflicting claims to consign the thing in court through an action of interpleader.’’
2. The depositary should he have been notified of the opposition of a third person to the return or the removal of the thing deposited. 

• In these cases, the depositary must immediately inform the depositor of the attachment or opposition.

Article 1989. 

Unless the deposit is for a valuable consideration,

the depositary who may have justifiable reasons

for not keeping the thing deposited may,

even before the time designated,

return it to the depositor;

and if the latter should refuse to receive it,

the depositary may secure its consignation from the court.

Right of depositary to return thing deposited.

1. Deposit gratuitous. 
• The depositary may likewise return the thing deposited notwithstanding that a period has been fixed for the deposit if: 
1. the deposit is gratuitous and
2. justifiable reasons (e.g., necessity of his going abroad) exist for its return. 
• In case the depositor refuses to receive the thing, the depositary may deposit the thing at the disposal of judicial authority.
2. Deposit for a valuable consideration.
• If the deposit is for a valuable consideration, the depositary has no right to return the thing deposited before the expiration of the time designated even if he should suffer inconvenience as a consequence. 
• He is bound by the period and restitution before its expiration constitutes a breach of his obligation.

Return at the Instance of the Depositary.

• Under Article 1989, unless the deposit is for a valuable consideration, the depositary, who may have justifiable reasons for not keeping the thing deposited, may, even before the time designated, return the thing to the depositor. 
• This applies therefore to a gratuitous deposit. 
• The implication is that the depositary may not return the thing at will if there is no justifiable reason or if the deposit is for a valuable consideration. 
• The depositary who received consideration is bound to safekeep the thing during the period agreed upon. 
• However, it is not correct to say that there can be no justifiable reason to return the thing if the deposit is onerous. 
• For example, Article 1984 provides that a depositary may return the thing if he or she has reasonable ground to believe that the thing was not lawfully acquired by the depositor. 
• Hence, the justifiable reasons mentioned in Article 1989 do not refer to legal defenses that can be invoked by the depositary who is safekeeping the thing gratuitously to compel the depositor to receive the thing deposited. 
• These reasonable grounds may be in the form of additional burden or damage that will result if the depositary will continue to safekeep the thing. 
• It may be unfair to the gratuitous depositary if he will not be allowed to return the thing. 
• Ordinarily, if the depositary is in the business of safekeeping goods for compensation, the additional burden is just part of the risk of doing business. 

Article 1990.

If the depositary by force majeure or government order 

loses the thing

 and receives money or another thing in its place, 

he shall deliver the sum or other thing to the depositor.

Effect of Replacement in Case of Loss.

• Article 1990 requires the presence of the following: 

1. The depositary lost the thing that he is holding for safekeeping; 
2. The loss is due to force majeure or government order; and 
3. The depositary received money or another thing in place of the thing lost. 

• If all these requisites are present, the depositary shall deliver the sum or other thing received to the depositor. 
• If the loss is due to force majeure but there is concurring fault or negligence of the depositary, then the depositary may also be liable to pay damages to the depositor.

Liability for loss by force majeure or government order. 

• The depositary has the obligation to return the thing deposited.
• But he is not liable for loss of the thing by force majeure or by government order. 
• However, if in place of the thing he receives money or another thing, he has the duty to deliver to the depositor what he has received otherwise, he would   at the expense of the depositor. 

Article 1991. 

The depositor's heir who in good faith

may have sold the thing which he

did not know was deposited, 

shall only be bound to return the price he may have received

or to assign his right of action against the buyer 

in case the price has not been paid him. 

1. Sale of the Thing.

• While Article 1991 refers to the depositor's heir, this is an obvious typographical error because Article 1 778 of the Old Civil Code from which this provision as copied refers to the depositary's heir.
• A depositary cannot sell the thing deposited
• In the first place, he is not the owner of the thing.
• Secondly, the depositary is not the agent of the depositor or the owner hence there is no authority to sell the dung based solely on the contract of deposit. 
• There must be a separate special power of attorney that must be given to the depositary for such purpose. 
• In this latter case, the depositary's responsibility is already that of an agent and not as a depositary. 

2. Depositor's Right to Sell.

• With respect to the depositor, his right to sell would depend on whether or not he is the owner or is authorized to sell the thing deposited. 
• The depositor who is not the owner must also secure the necessary authority to sell from the owner.

3. Depositary's Heir.

• If the depositary dies, the depositary's heirs may take over possession of the thing deposited in the mistaken belief that the thing is part of the inheritance. 
• If the depositary's heir, in good faith, sold the thing which he did not know was deposited, the heir shall only:
• be bound to return the price he may have received or 
• to assign his right of action against the buyer in case the price has not been paid him. 
• In other words, the responsibility of the depositary's heirs in good faith is limited to the extent that he was benefitted.
• However, if the third person purchaser is in bad faith, the thing can be recovered from the said third person. 
• Otherwise, if the third person purchaser is in good faith, only the unpaid price can be recovered.
• The depositary's heir is not even liable even if he destroys the thing deposited in good faith thinking that the thing deposited is useless. 
• The liability is up to the extent that the depositary's heir is benefitted.
• The same rule applies if the depositary's heir uses the thing deposited in good faith.

Alienation in good faith by depositary’s heir.  

• The rule is based on considerations of equity. 
• If the purchaser who acquired the thing acted in bad faith, the depositor may bring an action against him for its recovery.
• If the heir acts in bad faith, he is liable for damages. 
• The sale or appropriation of the thing deposited constitutes estafa. (Art. 315, par. 1[b], Revised Penal Code.) 

• Example:
• Believing in good faith that the thing deposited by A with B, worth P10,000.00 belonged to B, C, heir of B, sold the thing to D who paid him P8,000.00. 
• Under Article 1991, C is bound to return to A P8,000.00, the price he received, and not P10,000.00 or C may assign to A the right to collect from D the P8,000.00 if it has not been paid. 
• If C acted in bad faith, he is liable to pay A P10,000.00 plus damages which A may have suffered. C is also criminally liable for estafa.

SECTION 3

Obligations of the Depositor

Article 1992. 

If the deposit is gratuitous,

the depositor is obliged to reimburse the depositary

for the expenses he may have incurred 

for the preservation of the thing deposited.

Article 1993. 

The depositor shall reimburse the depositary

for any loss arising from the character of the thing deposited,

unless at the time of the constitution of the deposit 

the former was not aware of,

or was not expected to know the dangerous character of the thing, 

or unless he notified the depositary of the same, 

or the latter was aware of it without advice from the depositor.

Article 1994. 

The depositary may retain the thing in pledge

until the full payment of what may be due him by reason of the deposit.

1. Obligations of the Depositor. 

• The obligations of the depositor may be enumerated as follows: 

1. To pay the consideration if the deposit is not gratuitous;
2. If the deposit is gratuitous, to reimburse the depositary for the expenses he may have incurred for the preservation of the thing deposited;
3. To reimburse the depositary for any loss arising from the character of the thing deposited. 

• The obligation to reimburse the depositary for any loss does not apply in the following cases: 

1. If at the time of the constitution of the deposit the former was not aware of, or was not expected to know the dangerous character of the thing; or 
2. If the depositor notified the depositary of the character of the thing; or 
3. If the depositary was aware of the character of the thing without advice from the depositor.

• In this last case where the depositary was already aware of the character of the thing, the depositary is deemed to have assumed the risk of loss.
• The depositary cannot invoke legal compensation. 
• Article 1287 of the New Civil Code provides that compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. 

•  Deposit gratuitous.
• The above article applies only if the deposit is gratuitous.  It rests on equity. 
• The depositor would have incurred them just the same had the thing remained with him. 
• Without the duty of reimbursement imposed by the article, the depositor would be enriching himself at the expense of the depositary. The rule is different in commodatum. (see Art. 1941.) 
• As the law makes no distinction, the right to reimbursement covers all expenses for preservation, whether ordinary or extraordinary. The law refers to necessary expenses. 
• Useful expenses or those for pure luxury or mere pleasure are not covered.
• Deposit for compensation. 
• If the deposit is for a valuable consideration, the expenses of preservation are borne by the depositary because they are deemed included in the compensation. 
• There can, however, be a contrary stipulation.

2. Right of Retention.

• The depositary may retain the thing in pledge until the full payment of what may be due him by reason of the deposit.
• This article gives an example of a pledge created by the operation of law. (see Art. 2121.) 
• The thing retained serves as security for the payment of what may be due to the depositary by reason of the deposit. (see Arts. 1965, 1992, 1993.) 
• The right granted in this article is similar to that granted to the agent. (see Art. 1914.) 
• The rule is different in commodatum. 

Article 1995. A deposit its extinguished:

(1) Upon the loss or destruction of the thing deposited;

(2) In case of a gratuitous deposit, upon the death of either the depositor or the depositary.

1. Grounds for Extinguishment. 

• The contract of deposit is extinguished in the following cases: 
1. Upon the loss or destruction of the thing deposited;
2. In case of a gratuitous deposit, upon the death of either the depositor or the depositary;
3. Upon the return of the thing. 
• The causes mentioned in Article 1995 are not exclusive. 
• There are other causes such as:
• return of the thing
• novation
• merger
• expiration of the term,
• fulfillment of the resolutory condition, etc.

2. Prescription.

• The deposit cannot be extinguished by acquisitive prescription. 
• The possession of the depositary is not adverse against the depositor, who continues to be the owner of the thing deposited. 
• The depositary holds it in the concept of the holder.
• The possession of the depositary can in no way amount to prescription, for the thing received on deposit or for hire of services could not prescribe, since for every prescription of ownership the possession must be in the capacity of an owner, public, peaceful, and uninterrupted and the depositary could not possess the thing deposited in the capacity of owner, taking for granted that the depositor or lessor never could have believed that he had transferred to them ownership of the thing deposited or leased, but merely the care of the thing on deposit and the use or profit thereof. 
• The possession of the depositary or of the lessee is not adverse to that of the depositor or lessor, who continues to be the owner of the thing which is merely held in trust by the depositary or lessee.
• It is believed that the exception under the law on co-ownership and trust can be applied to deposit. 
• The depositary may acquire the property if his possession is already adverse. 
• Possession is deemed to be adverse to the cestui que trust or other co-owners if the following requisites concur: 
1. The co-owner or trustee has performed unequivocal acts of repudiation amounting to ouster of the cestui que trust or other co-owners; 
2. The positive acts of repudiation have been made known to the cestui que trust or other co-owners; and 
3. The evidence thereof must be clear and convincing. 

• Adverse possession, also sometimes referred to as "squatter's rights", is a legal concept that allows someone who occupies a piece of land they don not own to potentially acquire legal ownership of that land under certain circumstances.

3. Effect of death of depositor or depositary. 

• Deposit gratuitous.
• If the deposit is gratuitous, the death of either the depositor or depositary extinguishes the deposit. 
• By the word “extinguished,” the law really means that the depositary is not obliged to continue with the contract of deposit. 
• Deposit for compensation. 
• A deposit for a compensation is not extinguished by the death of either party because, unlike a gratuitous deposit, an onerous deposit is not personal in nature. (see Art. 1411.) 
• Hence, the rights and obligations arising therefrom are transmissible to their respective heirs. (Art. 1178.)
• But the heirs of either party have a right to terminate the deposit even before the expiration of the term.