G.R. No. 126800, 29 November 1999


Petitioner entered into a loan agreement with the respondent wherein the former as the borrower and the latter as the lender. The loan was secured by a parcel of land of the petitioner as a collateral. In their agreement, it was stated that in the event that if petitioner herein fails to pay, the respondent has the option to buy or purchase the collateral.  When the loan was about to mature, respondents proposed to buy the collateral land on the amount stated in the loan agreement. Petitioner herein refuse to sell and to execute a Deed of Absolute sale. When petitioner tendered payment on the loan, respondent refuse to receive and demand the sale of the land. Rosel filed a complaint in the RTC which rendered a decision denying the prayer for the issuance of the deed sale. However, upon appeal to the Court of Appeals, the said decision was reversed. Hence, this petition.


Whether or not the stipulation in the loan contract was valid and enforceable. 


 No.Contracts have the force of law between the contracting parties and must be complied with in good faith. However, certain exceptions to the rule, specifically Article 1306 of the Civil Code, which provides that “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”

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 embraced in the concept of pactum commissorium, 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 non-payment of the principal obligation within the stipulated period.

In this case, the intent to appropriate the property given 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 amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in the event of non-payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.

WHEREFORE, we GRANT petitioner’s motion for reconsideration and REVERSE the decision of the Court of Appeals.

* Case digest by  Frilin Lomosad, LLB-1, Andres Bonifacio Law School, SY 2017-2018