Explanation of Article 386
The loan contract is a contract of ownership, and the principle is that it imposes four obligations on the lender, like other ownership contracts, which are the transfer of ownership of the borrowed money, its delivery, the guarantee of entitlement, and the guarantee of defects. However, since the loan is not concluded until the borrower takes possession of the borrowed money, the lender's obligation to transfer ownership of the borrowed money and deliver it is fulfilled immediately upon conclusion. This article addresses the lender's obligation regarding the guarantee of entitlement and defects. The first paragraph clarifies that the lender does not guarantee the entitlement of the borrowed money, nor does he guarantee its freedom from defects, because the lender is a donor; thus, he cannot combine donation with guarantee. Therefore, he is not obliged to compensate the borrower for the decrease in the value of the borrowed money due to entitlement or defect. However, he is responsible for the damage caused by entitlement or defect to the borrower in two cases: the first case is if the lender deliberately conceals the cause of entitlement or defect from the borrower. The second case is if the lender guarantees the borrower that the borrowed money is free from them. In these two cases, the lender guarantees the damage caused by entitlement or defect to the borrower but does not guarantee the decrease in the borrowed money due to either. The second paragraph explains the effect of entitlement on the borrower's obligations, which is that if the borrowed money turns out to be entitled to another while in the borrower's possession, his obligation to return the loan is nullified; for example, if he borrows a gold or silver ingot and it turns out to be entitled to another, his obligation to return it to the lender is nullified. The third paragraph clarifies that if a defect appears in the borrowed money and the borrower chooses to retain the money despite the defect, he is only obliged to return its value as defective; for example, if he borrows a quantity of dates or wheat and it turns out to be defective, he is only obliged to return its value as defective. The paragraph implies the following: A- The borrower is not compelled, even if he chooses to retain the borrowed money after discovering the defect, to return the equivalent, whether sound or defective; he is not obliged to return it sound because the obligation in the loan is to return the equivalent, and he received it defective, not sound. He is not obliged to return its equivalent defective because equivalence is impossible in this case; he is obliged to return the value. B- The borrower may return the borrowed money as soon as he becomes aware of the defect, even if the term is in favor of the lender; the paragraph gives the choice to the borrower in all cases when the defect appears, because obligating him to the term when the lender guarantees the defect is not applicable here. C- The lender is not compelled to repair the defect or replace the defective with a sound one unless there is an agreement on that. The rules of guarantee of entitlement and defect in the loan contract, like other contracts, are not generally part of public policy, so it is permissible to agree on increasing the guarantee; for example, the contracting parties may agree that the lender's guarantee for entitlement or defect is not limited to the damage caused by either but includes the decrease in the value of the borrowed money due to entitlement or defect or that he is obliged to replace it.
Related To
Article 386
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The lender shall not warrant the ownership of the loaned property nor warrant such property against any defect; he shall, however, be liable for any harm the borrower sustains due to the deliberate concealment of the existence of issues relating to ownership or the existence of defects or due to warranting the absence of such issues or defects.
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If the borrowed property while in the possession of the borrower is established to be owned by a third party, the borrower’s obligation to return to the lender a property of the same kind shall be waived.
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If a defect is found in the borrowed property and the borrower decides to keep said property, he shall only return the value of such property in its defective condition.