The Law on Pactum Commissorium

It was the contention of the mortgagor that the stipulation appointing the mortgagee as the mortgagor's attorney-in-fact, to sell the property (used as security) in case of default in the payment of the loan violates the prohibition on pactum commissorium under the Civil Code. Does the contention hold water?

No, the contention does not hold water. There is no automatic appropriation of the thing mortgaged, which is what the law on pactum commissorium abhors. Instead, the stipulation gives the mortgagee the power to sell it as the mortgagor's attorney in fact..

The following are the elements of pactum commissorium:

[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. (G.R. No. 118342)
Villar's purchased of the subject property did not violate the prohibition on pactum commissorium. The power of attorney provision did not provide that the ownership over the subject property would automatically pass to Villar upon Galas's failure to pay the loan on time. What it granted was the mere appointment of Villar as attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and to apply the proceeds to the payment of the loan. This provision is customary in mortgage contracts, and is in conformity with Article 2087 of the Civil Code, which reads:

Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.

Galas' decision to eventually sell the subject property to Villar for an additional P1,500,000.00 was well within the scope of her rights as the owner of the subject property. The subject property was transferred to Villar by virtue of another and separate contract, which is the Deed of Sale. Garcia never alleged that the transfer of the subject property to Villar was automatic upon Galas's failure to discharge her debt, or that the sale was simulated to cover up such automatic transfer. (G.R. No. 158891)