Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. Prohibition Against pactum commissorium (1)
Stipulation null and void. – = a stipulation whereby the thing pledged or mortgaged or und nder er an anti tich chr res esis is (A (Ar rt. 21 2137 37)) sh shal alll au auto tom mat atiica callly become the property of the creditor in the event of nonpayment of the debt within the term fixed is known as pactu pac tum m com commi miss ssor oriu ium m or pac pacto to co comm mmis isor orio io wh whiich is forbidden by law and declared null and void. (Art. 2088). = by such a stipulation, the creditor would be able to acqu ac quir ire e ow own ner ersh ship ip of th the e pr prop oper erty ty gi give ven n as se secu curi rity ty without need of public sale or foreclosure required by law. = this forfeiture clause has traditionally been outlawed because it is contrary to good morals and public policy. po licy. = the reason for the prohibition is that the amount of the loan is oridinarily much less than the real value of the thing pledged or mortgaged.
(2) Requisites. – = there are two requisites or el ele ements for pa pac ctu tum m commissorium to exist, namely: a. Ther There e should should be a pledge, pledge, mortg mortgage age,, or antichr antichresi esis s of property by way of security for the payment of the principal obligation; and b. There should be a stipulation for an automatic appropriation by the creditor of the property on the even ev entt of no nonp npay ayme ment nt of th the e ob obli liga gati tion on wi with thin in th the e stipulated period.
= it is im imma mate teri rial al th that at th the e quest questio ione ned d st stip ipul ulati ation on wa was s voluntarily and freely entered into, pactum commissorium being void for being prohibited by law. (3) Stipul Stipulati ation on presu presuppo pposes ses exi existen stence ce of sec securi urity ty contra contract. ct. – = pac pactu tum m com commi miss ssor oriu ium m re refer ferre red d to in Ar Arts ts.. 20 2088 88 an and d 2137, therefore, presupposes the existence of mortgage or pledge or antichresis.
Art. 2088. The creditor cannot appropriate the things given by way of of pledge or mortgag mortgage, e, or dispose dispose them. Any stipulation to the contrary is null and void. Art. 2137. The creditor does not acquire the ownership of the real esta es tate te fo for r no nonn-pa paym ymen entt of the de debt bt wi with thin in the period agreed upon. Every stipulation stipulation to the contrary contrary shall shall be void. But the the creditor may petition the court for the payment of the debt debt or the the sale sale of the real real proper property. ty. In this this cas ase, e, th the e Ru Rule les s of Co Cou urt on the fo for rec eclo losu sur re of mortgages shall apply.
= thus it has been held that there was no pactum commis com missor soriu ium m wh where ere pur pursua suant nt to the con contra tract ct of sal sale, e, the sums already paid by the vendee were forfeited for his failure to pay the stipulated installments in due time considering that the person to whom the property was forfeited (vendor) was the real and equitable owner of the same because title would not pass until payment of the last installment. = th ther ere e is al also so no pa pact ctu um co com mmi miss ssor oriu ium m wh wher ere e th the e alienation of the subject property was by way of secutiry
and not by way of satisfying or extinguishing the debt of the debtor.
(4)) Effe (4 Effect ct on se secu curi rity ty con contr trac act. t. – = the vice of nullity which vitiates such a stipulation does not affect substantially the principal contract of pledge, mortgage, or antichresis with regard to its validity and efficacy for the reason that the contract, having been perfected, can subsist although the contracting parties have not agreed as to manner the creditor can recover his credit inasmuch as the law has expressly established the procedure in order that he may recover the same, in case the debtor does not comply with his obligation. ob ligation. = in short, the security contract remains valid; only the prohibited stipulation is void. Illustrative Cases: (1) If the su sum m lo loan aned ed is no nott pai aid, d, pr pro ope pert rty y of the de deb bto torr wo woul uld d be considered as absolutely sold to the creditor for said sum. Facts: D borrowed money from C under the agreement that if, at the expiration of the period stipulated, the sum loaned should not be paid, it would be unde un ders rsttoo ood d th that at th the e ho hou use an and d lo lott ow owne ned d by D, be co cons nsid ider ered ed as absolutely sold to C for for the said sum. No payment was made by D within the time fixed. In view of the refusal of D to deliver the property, C brought action to recover the property and a rents from D.
Issue: Is the contract in question in the nature of pactum commissorium? Held: No. We have in this case a contract of loan and a promise of sale of property, the price of which should be the amount loaned, if within a fixed period of time such amount should not be paid by the debtorvendor (D) of the property to the creditor-vendee (C) of the same. = The fact that the parties have agreed at the same time, in such a manner that the fulfillment fulfillment of the promise promise of sale would would depend upon upon
the nonpayment or return of the amount loaned, has not produced any chang cha nge e in th the e na natu ture re an and d leg legal al co condi nditi tion ons s of eit either her con contr tract act or an any y essential defect which would tend to nullify them. = Pa Pact ctum um co comm mmis isso soriu rium m ind indica icate tes s th the e ex exist istenc ence e of th the e con contr tract act of mortgage, or of pledge, or of antichresis, none of which has coincided in the loan in question. = the property property does not appear appear mortgage mortgaged. d. Said property property could not be be pledge ple dged, d, not bei being ng per perso sonal nal pr prop opert erty, y, an and d not notwit withs hsta tand nding ing th the e sai said d double contract the debtor (D) continued in possession thereof and the said property property had never never been occupied occupied by the creditor creditor (C). (C). Neither was there th ere an any y con contr tract act of an antic tichr hresi esis s by re reaso ason n of sa said id con contr tract act of loa loan n inasmuch as C has never been in possession thereof, nor has he enjoyed the said property nor for one moment ever received its rents. (2) Buy Buyer er executed executed a deed of assignm assignment ent in favor of seller seller of propert property y solld, pursu so suan antt to a judg dgm ment ren end dered in an ac acttio ion n for sp spec ecif ific ic performance filed by the seller.
Facts: B and S agreed on the sale of trucks by the latter (S) to the former (B). When B defaulted in the payment of the second and third installments, S filed an action in court for for specific performance. The trial court rendered judgmentt for S and ordered B to pay the balance of his obligation and in judgmen case of failure to do so, to execute a deed of assignment pursuant to the judgment. judgmen t. Issue: Is the deed of assignment in the nature of pactum commissorium? Held: No. There was no contract of pledge or mortgage entered into by the part pa rties ies;; no norr a cas case e of aut autom omat atic ic app appro ropr priat iatio ion n of th the e pro proper perty ty by S because it took the intervention of the trial court to exact fulfillment of the obligation, by which its very nature is “....anathema to the concept of pacto pact o commisso commissorio rio.” .” And even granti granting ng that the original original agreem agreement ent between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the same fate as it was executed pursuant to a vali lid d judgm gmen entt as can be gl glea ean ned from its ver ery y ter erm ms an and d conditions.
Prohibition Prohib ition refe refers rs to stip stipula ulation tion auth authoriz orizing ing auto automa matic tic appropriation
What is pr What proh ohib ibit ited ed by Art Art.. 20 2088 88 in co conn nnec ecti tion on wi with th pac pacto to commissorio is the automatic appropriation by the creditor of the thing pledged or mortgaged upon failure of the debtor to pay pa y hi his s de debt bt wi with thiin th the e pe per riod ag agre reed ed up upo on by vi vir rtu tue e of authority or right previously given the creditor, thus: (1) A stipulation providing that the mortgaged property “shal “s halll be con consi side dere red d in fu full ll pay payme ment nt wi with thou outt fu furt rthe her r action in court” in case of nonpayment is null and void being in the form of pacto commissorio. (2) A stipulation in a purported pacto de retro sale that the owner that the ownership over the property sold would automatically pass to the vendee in case of no redemption was effected within the period stipulated, is contrary to the nature of a true pacto de retro sale, under which the vendee acquires ownership of the thing sol old d immediat ate ely upo pon n the ex exe ecution of the sal ale, e, subject only to the vendor’s right of redemption. = the said stipulation is a pactum commissorium which enab en able les s th the e mo mor rtg tgag agee ee to ac acqu quir ire e ow owne ners rshi hip p of th the e mortgaged property without need of foreclosure. = it is void. Its insertion in the contract is an avowal of the intention of the mortgage, rather than to sell, the property.
Permissible stipulations (1) Subsequent Subsequent modifi modification cation of original original contrac contract. t. – = the stipulations that are prohibited by Arts. 2088 and 2137 (antichresis) are those executed or made simu si mult ltan aneo eous uslly wi with th th the e or orig igin inal al co cont ntr rac act, t, no nott th thos ose e subsequently entered into. = th the e pr prin inci cipl ple e do does es no nott pr proh ohiibi bitt mo modi difi fica cati tion on of th the e cont co ntra ract ct by su subse bsequ quen entt ag agre reem emen entt su such ch as th the e par parti ties es may see fit to adopt. (2) Subseq Subsequent uent volunt voluntary ary cession of property. property. –
= the prohibition does not include s subsequent voluntary act of the debtor making cession of the property mortgaged in payment of the debt which amounts in its legal effect to a novation of the original contract and to a voluntary sale of the said property for the amount of the debt. (3) Promis Promise e to ass assign ign or sell. sell. – = nei neith ther er is th the e pr proh ohib ibit itio ion n app appli lica cabl ble e to a pr promi omise se to assign or sell said property in payment of the obligation if,, up if upon on its mat atur uriity ty,, it is no nott pa paiid be beca cau use th the e ti titl tle e thereto remains with the debtor. = th the e pr prom omiise is me mer rel ely y a pe pers rson onal al ob obli liga gati tion on of th the e mortgagor and does not in any way bind the property. (a)The mortgagor can validly sell the property to a third person and if there should be any action accruing to the mortg tgag age ee, it would be a pe per rson ona al ac acti tio on for damages against the mortgagor. (b)If the vendee contributed to the breach of the contract by the mortgagor, the former, together with the latter, may also be held liable for damages; or = if the vendee was guilty of fraud which would be a grou gr ound nd fo for r re resc scis issi sion on of th the e sa salle in hi his s fa favo vor, r, th the e mortgagor and not the mortgagee would be the party entitled to bring the action of annulment. Footnote: (1) Page 355 (Dula (Dulay y vs. Aquia Aquiatin tin and and Maximo Maximo,, 47 Phil. Phil. 951; 951; 1925) 1925) =Dissenting opinion, Justice Street said: It is not to be denied that a mortgagor of property may transfer the mortgaged property to the creditor in satisfaction of the mortgage debt afte af terr th the e mo mort rtga gage ge has fa fall llen en du due. e. Bu Butt su such ch tr tran ansf sfer er im impl plie ies s th the e independent exercise of the power vested in the mortgagor, as owner.... = by virtue of this stipulation (to the effect that in case the specified date should arrive and the debtor should be unable to pay the amount due, it should be paid with the property security), the debtor was bound to transfer the property to the creditor in satisfaction of the mortgaged debt, the mortgagor being unable at the time to pay the same.
= said stipulation should be declared invalid, as contrary to the spirit, if not the letter of Art. Of 1859 (now Art. 2088), as well as directly contrary to the general principles of jurisprudence applicable to the relation of mortgagor and mortgagee. = if a stipulation of this kind is valid, every mortgage in which such stipulation is inserted will become self-executing and the debtor, upon making default in the payment of the debt, will be bound to transfer the property in satisfaction of the mortgage, with the result that the right of redemption is lost from the mere fact that the debtor is unable to pay at the date stipulated.
(4) Authority to take possession of property upon foreclosure.= a st stiipu pullat atiion au autthorizing the mor orttgag agee ee,, for the pur pu rpo pos se th ther erei ein n sp spec eciifi fied ed,, to ta tak ke po poss sses essi sion on of th the e mortgag mor tgaged ed pre premis mises es upon for forecl eclosur osure e of a mor mortga tgage ge is not repugnant to either Art. 2088 or Art. 2137. = On the contrary, such a stipulation is in consonance with or analogous to the provisions of Arts. 2132, et seq. regarding antichresis and the provisions of the Rules of Court (Rule 59) regarding the appointment of a receiver as a con conve veni nient ent an and d fe feasi asibl ble e me mean ans s of pr pres eser ervi ving ng and administering the property in litigation. Illustrative cases: (1) Mo Mort rtga gago gor r ap appo poin ints ts mo mort rtga gage gee e in de deed ed of as assi sign gnme ment nt as attorney-in-fact with authority to dispose of mortgage properties in case of default of mortgagor and to apply the proceeds in the payment of loan. Facts: C, a grantee of a Fishpond Lease Agreement from the Gov’t, obtained fro rom m DBP th thre ree e sep epa ara ratte lo loa ans, ea eac ch of whic ich h was covere red d by a promissory note. Simultaneous with the execution of the notes was the execution of “Assignment of Leasehold Rights” by C, as borrower of the mortgaged properties by way of security in the payment of the loans. Condition No. 12 provides for the appointment of DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights in case of default of C and to apply the proceeds to the payment of the loan. Issue:
(1) Whether Whether the condition condition in question constitute constitute pactum pactum commissorium commissorium.. (2) Whether the act of DBP in appropriating to itself C’s leasehold rights without foreclosure proceedings was contrary to Art. 2088 and, therefore, invalid. Held: (1) Element Elements s of pactum pactum commissoriu commissorium m are not present. present.-= Condition No, 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon Cuba’s failure to pay the loan on time. = This provision is standard condition in mortgage contracts and is in conformity with Art. 2087 of the CC, which authorizes the mortgagee to forec fo reclo lose se th the e mo mort rtga gage ge an and d ali aliena enate te th the e mo mort rtga gage ge pr prop opert erty y fo forr th the e payment of the principal obligation. (2) DBP exceeded exceeded the the authority authority vested vested by condition.condition.= However, DBP exceeded the authority vested by condition No. 12 for the Deed of of Assignment. Assignment. As admitted admitted by it during during the pre-trial, pre-trial, it had, witho wit hout ut fo forec reclo losu sure re pro procee ceedin dings, gs, wh whet ethe herr ju judic dicial ial or ext extra raju judic dicial ial.. .... .. appropriated the leasehold rights of Cuba over the fishpond in question. = its contention that it limited itself to mere administration by posing caretakers is further belied by the deed of conditional sale it executed favor of Cuba. The deed stated: “Whereas, the Vendor (DBP) by virtue of a deed of assignment executed in its favor by the herein vendees (Sps. Cuba) the former acquired all the rights and interest of the latter over the above-described property; “The title to the real estate property and all its improvements thereon shall remain in the name of the vendor until after the purchase price, advances and interest shall have been fully paid.” = it is obv bvio ious us fro rom m th the e ab abov ovee-qu quot oted ed pa parrag agra raph phs s th that at DBP ha had d appropriated and taken ownership of Cuba’s leasehold rights merely on the strength of the deed of assignment. =DBP cannot take refuge in Condition No. 12 of the deed of assignment to justify justify its act of appropriat appropriating ing the leasehold leasehold rights. rights. As stated earlier earlier condition No. 12 did not provide that Cuba’s default would operate to vest in DBP ownership of the rights. =Besides, an assignment to guarantee an obligation as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the assignee.”
(1) The lender is given the option to buy at a certain price the property given as collateral in the event the borrower fails to pay. Facts: C (respondent) entered into a loan agreement with B (petitioner) and her late husband, with the following terms and conditions: a. Th The e spous spouses es would would borro borrow w P100K P100K fro from m C, for a period period of two two years counted from Mar. 1, 1987; b. In Inter terest est rat rate e is is 18% 18% per an annu num; m; c. To guaran guaranty ty paym payment ent:: put up as collat collatera erall 70sqm 70sqm port portion ion of of a parcel of land, inclusive of the apartment therein; d. In the event the borrowers fail to pay, C has the option to buy or purchase the mortgaged property for a total consideration of P200K inclusive of the principal and interest. When the loan was about to mature on Mar. 1, 1989, C proposed to buy at th the e pr pree-se sett pr pric ice e of P2 P200 00K K th the e co coll llat ater eral al gi give ven n to gu guar aran ante tee e th the e payment payme nt of the loan, but B refused refused to sell. On Mar. 1, 1989, 1989, B tendered tendered payment of the loan to C which the latter refused to accept, insisting B’s signing sign ing a prepared prepared deed of absolute absolute sale. sale. C consigned consigned the amoun amountt of P47.5K with the trial court with which C filed a complaint for the specific perform perf ormanc ance. e. In arriving arriving at the amount amount deposited deposited,, C con consider sidered ed the principal loan of P100K and 18% interest per annum thereon, which amounted to P52.5K, leaving a balance of P47.5K from the amount of P200 P2 00K. K. On the other other hand hand B fi file led d a pe peti titi tion on for consi consign gnat atio ion n an and d deposited the amount of P153K with the trial court. Issue: Whether the stipulation in the loan contract was valid and enforceable. Held: 1. The stipul stipulatio ation n embrac embraced ed in concep conceptt of pactum pactum com commis missor sorium ium.. = B did not fail fail to pay the loan. loan. When C refused refused to accept accept payment, payment, B consigned the amount with the trial court. = a scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as security for the loan. This is embrac embraced ed in the concept of pactum commisssorium commisssorium,, which is proscribed by law. = the elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation; and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in
case of nonpayment of the principal obligation within the stipulated period. 2. In Inte tent nt to ap app pro ropr pria iatte pr pro ope pert rty y gi giv ven as co coll llat ater eral al ap app pea ears rs to be evident = a significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the words used by the parties to project that intention. = In th this is ca case se,, th the e in inte tent nt to ap appr prop opri riat ate e th the e pr prop oper erty ty gi give ven n as collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed consideration consideration amounting to practically the same amount as the loan. = In effect, the creditor acquires the collateral in the event of nonpayment of the loan an.. This is wit ithi hin n th the e co con ncep eptt of pac acttum commissorium. Such stipulation is void. 3. Dut Duty y of cou court rt to prot protect ect neces necessit sitious ious borr borrowe owers. rs. – = all persons in need of money are liable to enter into contractual relationships whatever the condition if only to alleviate their financial burden albeit temporarily. = hence, courts are duty bound to exercise caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey. Note: Here, the agreement between the parties was not a sale with right to repurchase (pacto de retro sale), but a loan with interest of 18% per annum for a period of 2 years and if B fails to pay, C was given the option to purchase the property given as collateral for P200K. There was no stipulation for automatic appropriation by C of the property in case of non-payment of the loan within the stipulated period.
Risk of loss of property pledged or mortgaged As the pledgee or mortgagee does not become the owner of the th e pr prop oper erty ty an and d th the e ow owner nersh ship ip th ther ereo eoff re remai mains ns wi with th th the e debtor, therefore, under the maxim, res perit domino suo, the debtor-owner bears the loss of the property. = The principal obligation is not extinguished by the loss of the pledged or mortgaged property.
