SECURITY TRANSACTIONS
DISTINGUISHED FROM SECURITIZATION
I. The Concept of Security
A. GENERAL CONCEPTS
CONTRACT OF SECURITY (Security Transaction)
The means by which the parties to a principal obligation ensure its
enforcement, protect an interest in property, or ensure that the person
to be made secure (secured creditor) can be compensated for loss
It is an accessory obligation that mitigates the risk that the debtor will
default on a principal obligation
If the principal obligation is ensured by a contract of security =
secured obligation
If the principal obligation is NOT ensured by a contract of security =
unsecured obligation
1. DISTINGUISHED FROM SECURITIES
RA 8799, Sec. 3 Definition of Terms - 3.1. "Securities" are shares,
participation or interests in a corporation or in a commercial
enterprise or profit-making venture and evidenced by a certificate,
contract, instruments, whether written or electronic in character. It
includes:
(a) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a
profit sharing agreement, certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates
corporations; and
(g) Other instruments as may in the future be determined by the
Commission.
SECURITIES
From the Securities Regulation Code (SRC) (RA 8799)
Sec. 3.1 Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making venture
and evidenced by a certificate, contract, instrument, whether written
or electronic in character
It includes bonds, debentures, notes, evidences of indebtedness, asset-
backed securities
Bonds, notes, and debentures are evidences of indebtedness and are
the common commercial forms that contracts of loan take BUT in the
SRC, these contracts of simple loan or mutuum are securities, whether
secured or unsecured
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2.
SECURITIZATION
Process by which loans and other debts with an expected cash
payment stream (interest on simple loans) are sold on a without
recourse basis by a seller to a special purpose entity (the issuer) which
in turn issues securities (bond or other instrument) that depend, for
their repayment, on the expected cash payment stream
To securitize is to convert assets into securities for resale in the
financial market
It is a process of distributing the risk of default or non-payment of
loans and other debts by aggregating these debts and then issuing new
securities backed by the aggregated debt
Securities issued by the special purpose entity (issuer) are called asset-
backed securities
Contracts of loan and expected principal and interest payments, sold
by the original creditors to a special purpose entity, are aggregated
into tranches based on risk and packaged as new securities
Securities with higher risks provide higher yields
Unlike a security transaction that mitigates risk, securitization
distributes the risk of default or non-payment to those willing to
assume it
B. EVENTS OF DEFAULT
Essential condition of a security transaction: if the principal obligation
is duly complied with, then, proceeding from its accessory character,
the security is automatically extinguished
Once the principal obligation is complied with, the security
transaction becomes, ipso facto, null and void
If the principal obligation becomes due and the debtor defaults, the
creditor may elect:
To bring an ordinary action for specific performance of the
principal obligation; or
As a secured creditor, elect to enforce the security
in Enforcement of the security is proper in case of mora solvendi
(debtors default) or in case of delay in the fulfillment of the principal
obligation by a cause imputable to the debtor
REQUISITES FOR DEFAULT:
1. Principal obligation is demandable and liquidated
Demandable enforceable in Court
Liquidated existence and amount are determined or
determinable
2. Debtor delays performance
3. Creditor judicially or extrajudicially requires the debtors
performance
In credit transactions, it is customary for parties to define other events
of default (for the principal obligation) such as, but not limited to,
failure to submit required reports, maintain and file appropriate tax
returns, and maintain and preserve the security
In the event of a default that occurs and is continuing, then the
creditor is given the right to declare, or accelerate, all outstanding
obligations as immediately due and payable
Acceleration clause is valid and binding on the parties and the
creditor is justified in invoking it to declare the entire principal
obligation immediately due and payable, and to enforce the security
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C. KINDS OF SECURITY TRANSACTIONS
1. PERSONAL SECURITY TRANSACTIONS
Contractual obligation for the repayment of a debt binding a person,
as distinguished from property
It is an obligation of a person, natural or juridical, other than the
principal debtor to ensure the fulfillment of a principal obligation
Example: guaranty, where the faithful performance of the obligation
by the principal debtor is secured by the personal commitment of
another
2. REAL SECURITY TRANSACTIONS
Encumbrance of property (collateral) given to guarantee the fulfillment
of an obligation, especially the assurance that a creditor will be repaid
with money or credit extended to a debtor, usually with interest
Example: mortgage (Latin: dead security), where the creditor acquires
a security interest in the collateral for purposes of securing the
fulfillment of the principal obligation
SEC. 4(LL) CLASSIFIES CREDITORS:
o Secured party: secured creditor or agent or representative of
such secured creditor
o Secured creditor: creditor with a secured claim
o Secured claim: claim that is secured by a lien
o Unsecured creditor: creditor with an unsecured claim
o Unsecured claim: claim that is not secured by a lien
o Lien: statutory or contractual claim or judicial charge on real
or personal property that legally entitles a creditor to resort to
said property for payment of the claim or debt secured
IN THE CONTEXT OF INSOLVENCY:
A secured creditor is a creditor that has in its favor a real security
transaction, that is, a claim secured by a statutory, contractual or
judicial charge on real or personal property (collateral) that legally
entitles a creditor to resort to the property for payment of its claim
An unsecured creditor is a creditor who only has in its favor a
personal security transaction

Security interest is a property interest created by agreement or by

operation of law to secure the performance of an obligation

According to PD 115, Sec. 3(h): it is a property interest in goods,

documents or instruments to secure performance of an obligation and
includes title, whether or not expressed to be absolute, whenever such
title is in substance taken or retained for security only

3. IN THE CONTEXT OF INSOLVENCY

RA 10142, Sec. 4 Definition of Terms - As used in this Act, the term:

(p) Insolvent shall refer to the financial condition of a debtor that is

generally unable to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are greater than its or
his assets.

(jj) Secured claim shall refer to a claim that is secured by a lien.

(kk) Secured creditor shall refer to a creditor with a secured claim.

(ll) Secured party shall refer to a secured creditor or the agent or

representative of such secured creditor.

(pp) Unsecured claim shall refer to a claim that is not secured by a

lien.

(qq) Unsecured creditor shall refer to a creditor with an unsecured

claim.

(t) Lien shall refer to a statutory or contractual claim or judicial charge

on real or personal property that legality entities a creditor to resort to
said property for payment of the claim or debt secured by such lien.

FINANCIAL REHABILITATION AND INSOLVENCY ACT (FRIA)

OF 2010
Sec. 4(p): Condition of being INSOLVENT is the financial condition of
a debtor that is generally unable to pay its or his liabilities as they fall
due in the ordinary course of business or has liabilities that are greater
than its or his assets

Liabilities refers to monetary claims against the debtor

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II. Letters of Credit
A. GENERAL CONCEPTS
CoC, Art. 567 Letters of credit are those issued by one merchant to
another, or for purpose of attending to a commercial transaction.
CoC, Art. 568 The essential conditions of letters of credit shall be:
1. To be issued in favor of a determined person and not to order.
2. To be limited to a fixed and specified amount, or to one or more
indeterminate amounts, but all included in a maximum sum the limit
of which must be exactly stated.
Letters of credit which do not have one of these conditions shall be
considered simply as letters of recommendation.
CoC, Art. 2 Commercial transactions, be they performed by merchants
or not, whether they are specified in this Code or not, shall be
governed by the provisions contained in the same; in the absence of
such provisions, by the commercial customs generally observed in
each place; and in the absence of both, by those of the common law.
LET05cd
Commercial transactions shall be considered those enumerated in this
Code and any others of a similar character.
A letter of credit is an instrument that involves three parties: the issuer
(usually a bank), the applicant, and the beneficiary
Under this instrument, the issuer, at the applicants request, agrees to
honor a draft or other demand for payment made by the beneficiary,
provided that the draft or demand by the beneficiary complies with the
specified conditions under the letter.
The issuer shall honor the draft or demand regardless of whether any
underlying obligation between the applicant and beneficiary is
satisfied.
Our Code of Commerce, under Art. 567, further defines it as an
instrument issued by one merchant to another, or for attending to a
commercial transaction.
Its effect, as a security transaction, is to substitute the financial
strength of the issuer (usually a bank) for that of the applicant, in order
to convince the beneficiary to transact with the latter.
Having such letter of credit, the beneficiary is assured that he/she may
call upon such instrument as security, in case the applicant fails to
perform his obligation.
Transfield Phils. v. Luzon Hydro Corp., et al (2004) Tinga, J.
Petitioner: Transfield Philippines, Inc. (TPI)
Respondent: Luzon Hydro Corp (LHC), Australia & New Zealand
Banking Grp. Ltd. (ANZ), and Security Bank Corp. (SBC)
Concept: Security Transactions; Letters of Credit; General Concepts
Brief Facts: TPI and LHC entered into a turnkey contract wherein TPI
is obligated to build a power plant. To secure the obligation, TPI
executed two letters of credit in favor of LHC, which the former
opened in two banks (one letter each). When TPI failed to complete
the project on the target date, LHC attempted to draw upon the funds
under the letter of credit. There still being ongoing proceedings on the
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issue of whether TPI was in delay, TPI sought to retrain LHC from
drawing upon the letters of credit.
Doctrine: The independence principle of letters of credit means that
(1) assures the beneficiary of prompt payment, notwithstanding any
breach of the main contract and (2) precludes the bank from
determining whether the main contract (sales or non-sale) is actually
accomplished or not. Both the bank and beneficiary may invoke this
principle to their benefit.
B. KINDS OF LETTERS OF CREDIT
1. COMMERCIAL LETTERS OF CREDIT
This kind of letter of credit, also known as a commercial letter of
credit or, simply, commercial credit, is utilized in a contract of sale
of goods between the applicant (buyer) and the beneficiary (seller).
The Court, in Transfield Phils v. Luzon Hydro, explained that this kind
of letter of credit was developed by merchants as a convenient and
relatively safe mode of dealing with the sale of goods to satisfy the
seemingly irreconcilable interests of a seller-beneficiary who refuses
to part with its goods before it is paid, and that of a buyer-applicant
who wants to have control of the goods before paying.
Commercial credits, being involved in a contract of sale of goods,
becomes payable only upon the presentation by the seller-beneficiary
of documents that show it has taken affirmative steps to comply with
the contract of sale.
2. STANDBY LETTERS OF CREDIT
This kind of letter of credit, also known as a standby letter of credit,
or, simply, standby credit, is used as a guarantee or security for either
a monetary or non-monetary obligation.
In a standby credit arrangement, the issuer agrees to pay the creditor-
beneficiary if the debtor-applicant defaults or fails to perform the
obligation.
The standby credit becomes payable upon certification of the debtor-
applicants default or failure to perform the obligation.
C. RULE OF STRICT COMPLIANCE
Under this rule, the documents tendered by the beneficiary must
strictly conform to the terms of the letter of credit.
The tender of documents must include all the documents required by
the letter.
Should the honoring entity accept the tender by the beneficiary, but
such tender does not comply with what is required (i.e., a faulty
tender), then the issuer acts on its own risk and may not thereafter
recover from the applicant or the issuer, as the case may be, the
money it paid to the beneficiary.
An honoring entity deals only with the documents; it is not in a
position to determine whether the documents required by the letter of
credit is important or superfluous to the applicant.
As a rule, the honoring entity should assume that the document is of
vital importance to the applicant by the mere fact that it was specified
as a required document under the letter of credit.
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D. INDEPENDENCE PRINCIPLE
The independence principle is a rule on letters of credit that:
o Assures the beneficiary of prompt payment, independent of
any breach of the principal obligation, the reason by which
the letter of credit was procured
o Precludes the issuer from making a determination whether
the principal obligation is actually accomplished or not.

Under this principle, the letter of credit is a separate and distinct

obligation with respect to the principal obligation for which the letter
of credit was constituted.

The settlement of a dispute between the parties is not a pre-requisite

for the release of funds under a letter of credit.

The independence principle only admits of one exception: the fraud

exception rule.

Under this exception, the falsity of a certificate accompanying the

demand for payment under a letter of credit may qualify as fraud,
sufficient to support an injunction against the payment, upon showing
of three requisites.

GR: The issuer of the letter of credit shall make payment upon the
tender of documents required by the beneficiary, and it shall assume
NO liability or responsibility:
o For the form, sufficiency, accuracy, genuineness,
falsification, or legal effect of any documents, or for the
general or particular conditions stipulated in the documents
or superimposed thereon
o For the description, quantity, weight, quality, condition,
packing, delivery, value, or existence of the goods
represented by any documents
o For the food faith, or acts, or omission, solvency,
performance, or standing of the consignor, the carriers, or
the insurers of the goods, or any other persons.

EX: Fraud Exception Rule; an injunction against the payment will be

granted upon the showing of all of the following requisites:
o Clear proof of fraud
o Such fraud constitutes a fraudulent abuse of the independent
purpose of the letter of credit, and not only fraud under the
principal obligation
o A showing that irreparable injury might follow if injunction
is not granted, or that recovery of damages would be
seriously affected.

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III. Guaranty from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of

A. GENERAL CONCEPTS another;

Art. 2047 By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
Art. 2048 A guaranty is gratuitous, unless there is a stipulation to the
contrary.
Art. 2051 A guaranty may be conventional, legal or judicial,
gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal debtor,
but also in favor of the other guarantor, with the latter's consent, or
without his knowledge, or even over his objection.
GUARANTY
A promise to answer for the payment of some debt or the performance
of some duty, in case of the failure of another who is liable in the first
instance.
(c) An agreement made in consideration of marriage, other than a
mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a
price not less than five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement of the leasing for a longer period than one year, or
for the sale of real property or of an interest therein;
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a
contract.
Guaranty: a special promise to answer for debt, default, or miscarriage
of another.

A personal security transaction that involves the conditional obligation It is covered by the Statute of Frauds.
of a person (guarantor) to fulfill a principal obligation in favor of a
creditor, in case the debtor fails to do so. It is an accessory contract.

Obligation of the guarantor always a rise as a consequence of a The obligation of the guarantor must be express and not presumed and
contract it cannot extend to more than what is stipulated.

It may be conventional, legal, or judicial. Simple or indefinite guaranty: that which extends to the principal
obligation as well as accessories and judicial costs.

Definite guaranty: that which extends only to a specified amount.

B. FORM OF GUARANTY If the guaranty specifies a fixed amount but nevertheless also provides
for liability for interest and expenses, the guarantor will be liable for
Art. 2055 A guaranty is not presumed; it must be express and cannot the latter amounts even if these exceed the specified fixed amount.
extend to more than what is stipulated therein.

If it be simple or indefinite, it shall compromise not only the principal

obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required to
pay.

Art. 1403 The following contracts are unenforceable, unless they are
ratified:

(1) Those entered into in the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in
this number. In the following cases an agreement hereafter made shall
be unenforceable by action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot
be received without the writing, or a secondary evidence of its
contents:

(a) An agreement that by its terms is not to be performed within a year

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C. OBLIGATIONS SECURED
Art. 2052.A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may also
guarantee a natural obligation.
Art. 2053 A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against
the guarantor until the debt is liquidated. A conditional obligation may
also be secured.
Art. 2054 A guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the onerous
nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
Guaranty cannot exist if the principal obligation is void, but it can
exist even if the contract is voidable or unenforceable.
It can also secure future debt, even if the amount due is not yet
known. In this case, the guarantor will not be liable until the amount is
known. It can also secure a future obligation.
Article 2053 is the basis for continuing guaranty, i.e., one which
governs a course of dealing for an indefinite time or by a succession of
credits. It is not limited to a single transaction but contemplates a
prospective or future course of dealing, covering a series of
transactions, which are within the stipulations of the contract of
guaranty, until the expiration or termination thereof.
The object of a continuing guaranty is to grant to the principal debtor
a standing credit to be used from time to time either indefinitely or
until a certain period.
Terms used for continuing guaranty: any debt, any indebtedness, any
sum, any transaction, money to be furnished the principal debtor from
time to time, at any time, on such time
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D. PARTIES TO A GUARANTY
Art. 2056 One who is obliged to furnish a guarantor shall present a
person who possesses integrity, capacity to bind himself, and sufficient
property to answer for the obligation which he guarantees. The
guarantor shall be subject to the jurisdiction of the court of the place
where this obligation is to be complied with.
Art. 2057 If the guarantor should be convicted in first instance of a
crime involving dishonesty or should become insolvent, the creditor
may demand another who has all the qualifications required in the
preceding article. The case is excepted where the creditor has required
and stipulated that a specified person should be the guarantor.
Art. 2049 A married woman may guarantee an obligation without the
husband's consent, but shall not thereby bind the conjugal
partnership, except in cases provided by law.
Art. 2064 The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal
debtor.
Art. 2065 Should there be several guarantors of only one debtor and
for the same debt, the obligation to answer for the same is divided
among all. The creditor cannot claim from the guarantors except the
shares which they are respectively bound to pay, unless solidarity has
been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same
cases and for the same reasons as the benefit of excussion against the
principal debtor.
THERE ARE AT LEAST THREE PARTIES TO A GUARANTY
o The creditor
o The debtor of the principal obligation
o The guarantor
A sub-guarantor is a guarantor of a guarantor
A co-guarantor is one of several guarantors of only one debtor for the
same debt
QUALIFICATIONS OF A GUARANTOR
A guarantor must possess integrity, capacity to contract and sufficient
property for the guaranteed obligation. Loss of these qualifications
gives the creditor the right to demand a new guarantor unless the
creditor had stipulated a specified person to act as guarantor.
A married woman requires the consent of her husband to bind
conjugal property.
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E. BENEFIT OF EXCUSSION
Art. 2058 The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has
resorted to all the legal remedies against the debtor.
Art. 2059 The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
shall always be unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of
appearance by the latter.
4. In order that the guarantor may make use of the benefit of
excussion, it must:
o Set it up against the creditor upon demand for payment,
AND
o Point out to the creditor available property of the debtor
within Philippine territory, sufficient to cover the amount of
the debt.
Tupaz IV & Tupaz v. CA and BPI (2005)
Petitioners: Jose C. Tupaz IV and Petronila C. Tupax
Respondents: CA and Bank of the Philippine Islands
Concept: Security Transactions; Guaranty

(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the obligation.
Art. 2060 In order that the guarantor may make use of the benefit of
exclusion, he must set it up against the creditor upon the latter's
demand for payment from him, and point out to the creditor
available property of the debtor within Philippine territory, sufficient
to cover the amount of the debt.
Art. 2061 The guarantor having fulfilled all the conditions required
in the preceding article, the creditor who is negligent in exhausting
the property pointed out shall suffer the loss, to the extent of said
property, for the insolvency of the debtor resulting from such
negligence.
Art. 2062 In every action by the creditor, which must be against the
principal debtor alone, except in the cases mentioned in Article
2059, the former shall ask the court to notify the guarantor of the
action. The guarantor may appear so that he may, if he so desire, set
up such defenses as are granted him by law. The benefit of
excussion mentioned in Article 2058 shall always be unimpaired,
even if judgment should be rendered against the principal debtor
and the guarantor in case of appearance by the latter.
Brief Facts: Jose and Petronila, corporate officers of El Oro
Corporation, obtained letters of credit from BPI to finance the
purchase of raw materials for the manufacture of survival bolos. To
secure the debt, two trust receipts were signed. The first was signed by
Jose alone, in his personal capacity. The second was signed by Jose
and Petronila, in their capacity as corporate officers. In the trust
receipts, the signatories bound themselves jointly and severally to
pay the debt of El Oro Corporation. El Oro defaulted in its obligation,
prompting BPI to file a case for estafa against Jose and Petronila. The
two were acquitted of the criminal charge but were ordered to pay the
corresponding amounts due under their obligation as sureties of El
Oro.
Doctrine: A corporate officer who signs a trust receipt containing a
solidary guaranty clause merely binds himself as a guarantor and not a
surety. The solidary liability is not with the principal debtor, but with
other guarantors who sign the trust receipt. Nonetheless, when the
trust receipt contains a waiver of excussion, the guarantor can no
longer demand for the assets of the principal debtor to be exhausted
before payment by the former can be had.

Art. 2063 A compromise between the creditor and the principal

debtor benefits the guarantor but does not prejudice him. That
which is entered into between the guarantor and the creditor
benefits but does not prejudice the principal debtor.

Art. 2064 The guarantor of a guarantor shall enjoy the benefit of

excussion, both with respect to the guarantor and to the principal
debtor.

The benefit of excussion (or exhaustion or exclusion) is the right of the

guarantor to demand that the creditor first:
1. Exhaust all of the properties of the principal debtor, AND
2. Resort to all legal remedies against the principal
debtorbefore the guarantor is liable to fulfill the obligation
of the principal debtor. It is the distinguishing mark of
guaranty.

For the creditor to enforce the guaranty:

1. The creditor must bring an action against the principal debtor
alone, except in the cases mentioned in Art. 2059.
2. The creditor shall ask the court to notify the guarantor of the
action.
3. The guarantor may appear so that it may, if it so desires, set up
such defenses as are granted by law. The benefit of excussion
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F. RIGHT TO PROTECTION
Art. 2071 The guarantor, even before having paid, may proceed
against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it cannot
be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor
intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain release
from the guaranty, or to demand a security that shall protect him
from any proceedings by the creditor and from the danger of
insolvency of the debtor.
Right to Protection: right of the guarantor as against the principal
debtor to:
1. Obtain release from guaranty, or
2. Demand security
Purpose: for guarantor to protect itself from
1. Any proceeding by the creditor
2. The danger of insolvency of the debtor
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G. RIGHT TO INDEMNIFICATION
Art. 2066 The guarantor who pays for a debtor must be indemnified
by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn
interest for the creditor;
(3) The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of
him;
(4) Damages, if they are due.
Art. 2050 If a guaranty is entered into without the knowledge or
consent, or against the will of the principal debtor, the provisions of
Articles 1236 and 1237 shall apply.
Art. 1236 The creditor is not bound to accept payment or
performance by a third person who has no interest in the fulfillment
of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the will
of the debtor, he can recover only insofar as the payment has been
beneficial to the debtor.
Art. 2069 If the debt was for a period and the guarantor paid it
before it became due, he cannot demand reimbursement of the
debtor until the expiration of the period unless the payment has
been ratified by the debtor.
Art. 2070 If the guarantor has paid without notifying the debtor, and
the latter not being aware of the payment, repeats the payment, the
former has no remedy whatever against the debtor, but only against
the creditor. Nevertheless, in case of a gratuitous guaranty, if the
guarantor was prevented by a fortuitous event from advising the
debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid.
Art. 2072 If one, at the request of another, becomes a guarantor for
the debt of a third person who is not present, the guarantor who
satisfies the debt may sue either the person so requesting or the
debtor for reimbursement.
In guaranty, there is also a legal tie created between the guarantor and
principal debtor to which the principal creditor is not privy
Right to indemnification is the substantive right of action of the
guarantor, after it has paid the principal debt, as against the principal
debtor, to recover:
1. the totality of the debt
2. the legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn
interest from the creditor
3. the expenses incurred by the guarantor after having notified
the debtor that payment had been demanded of it, and
4. damages, if they are due
the right to indemnification is more than a real right to reimbursement
of what was paid
but for the right to exist in favor of the guarantor, contract of guaranty
must have been entered into with the knowledge and consent of the
principal debtor
8
H. RIGHT TO SUBROGATION
Art. 2067 The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
Art. 2050 If a guaranty is entered into without the knowledge or
consent, or against the will of the principal debtor, the provisions of
Articles 1236 and 1237 shall apply.
Art. 1237 Whoever pays on behalf of the debtor without the
knowledge or against the will of the latter, cannot compel the
creditor to subrogate him in his rights, such as those arising from a
mortgage, guaranty, or penalty.
Art. 2068 If the guarantor should pay without notifying the debtor,
the latter may enforce against him all the defenses which he could
have set up against the creditor at the time the payment was made.
Art. 2080 The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages, and preference of the
latter.
Right of subrogation is the right of the guarantor who pays, as against
the principal debtor, to be substituted to all the rights and remedies
and securities that the creditor had against the principal debtor
Contract of guaranty must have been entered into with the knowledge
and consent of the principal debtor
The benefit of division against the co-guarantors ceases in the same
cases and for the same reasons as the benefit of excussion against the
principal debtor.
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I. RIGHTS OF CO-GUARANTORS
1. BENEFIT OF DIVISION
Art. 2065 Should there be several guarantors of only one debtor and
for the same debt, the obligation to answer for the same is divided
among all. The creditor cannot claim from the guarantors except the
shares which they are respectively bound to pay, unless solidarity
has been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same
cases and for the same reasons as the benefit of excussion against
the principal debtor.
Art. 2078 A release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all to the
extent of the share of the guarantor to whom it has been granted.
There is co-guaranty when two or more persons answer for the same
debt of the same debtor
Among co-guarantors, the benefit of division is the right of a co-
guarantor, as against a creditor, to pay only the divided share that it is
bound to pay
The benefit of division will cease and the creditor may claim the entire
amount from the co-guarantor if:
a. The co-guarantor against whom the creditor is making the
claim has expressly renounced the benefit of division
b. The co-guarantor has bound itself solidarily with the co-
guarantor
c. In case of insolvency of the co-guarantor
d. When a co-guarantor has absconded, or cannot be sued
within the Philippines unless it has left a manager or
representative
e. If it may be presumed that an execution on the property of
the co-guarantor would not result in the satisfaction of the
obligation
2. RIGHT TO REIMBURSEMENT
Art. 2073 When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid
may demand of each of the others the share which is proportionally
owing from him.
If any of the guarantors should be insolvent, his share shall be borne
by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent.
Art. 2074 In the case of the preceding article, the co-guarantors may
set up against the one who paid, the same defenses which would
have pertained to the principal debtor against the creditor, and
which are not purely personal to the debtor.
Art. 2075 A sub-guarantor, in case of the insolvency of the guarantor
for whom he bound himself, is responsible to the co-guarantors in
the same terms as the guarantor.
9
The right to reimbursement is the right of the co-guarantor who pays
as against the other co-guarantors to recover the shares due from the K. LEGAL AND JUDICIAL BONDS
co-guarantors, but only if the following conditions concur:
a. There are 2 or more guarantors of the same debtor and fro
Art. 2082 The bondsman who is to be offered in virtue of a
the same debt
provision of law or a judicial order shall have the qualifications
b. One of the co-guarantors has paid
prescribed in Article 2056 and in special laws.
c. Payment is made by virtue of a judicial demand or the
principal debtor is insolvent
Art. 2083 If the person bound to give a bond in the cases of the
If any of the co-guarantors is insolvent, the share of the insolvent co- preceding article, should not be able to do so, a pledge or mortgage
guarantor shall be born by the other co-guarantors, including the co- considered sufficient to cover his obligation shall be admitted in lieu
guarantor paying, in the same proportion as that established in the co- thereof.
guaranty
Art. 2084 A judicial bondsman cannot demand the exhaustion of
the property of the principal debtor.
J. EXTINGUISHMENT AND RIGHT OF RELEASE
A sub-surety in the same case, cannot demand the exhaustion of the
property of the debtor of the surety.
Art. 2076 The obligation of the guarantor is extinguished at the same
time as that of the debtor, and for the same causes as all other
obligations.

Art. 2077 If the creditor voluntarily accepts immovable or other

property in payment of the debt, even if he should afterwards lose
the same through eviction, the guarantor is released.

Art. 2079 An extension granted to the debtor by the creditor without

the consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extention of time
referred to herein.

Art. 2080 The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages, and preference of the
latter.

Art. 2081 The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent in
the debt; but not those that are personal to the debtor.

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IV. SURETY
A. GENERAL CONCEPTS
Art. 2047 By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. (1822a)
Art. 1211 Solidarity may exist although the creditors and the debtors
may not be bound in the same manner and by the same periods and
conditions. (1140)
Art. 1216 Novation, compensation, confusion or remission of the
debt, made by any of the solidary creditors or with any of the solidary
debtors, shall extinguish the obligation, without prejudice to the
provisions of article 1219.
The creditor who may have executed any of these acts, as well as he
who collects the debt, shall be liable to the others for the share in the
obligation corresponding to them. (1143)
Art. 2082 The bondsman who is to be offered in virtue of a provision
of law or of a judicial order shall have the qualifications prescribed in
article 2056 and in special laws. (1854a)
Art. 2056 One who is obliged to furnish a guarantor shall present a
person who possesses integrity, capacity to bind himself, and sufficient
property to answer for the obligation which he guarantees. The
guarantor shall be subject to the jurisdiction of the court of the place
where this obligation is to be complied with. (1828a)
SURETYSHIP
Legal relation that arises when one party assumes liability for a debt,
default or other failing of a second party
A contractual relation
Results from an agreement whereby one person (surety) engages to be
answerable for the debt, default or miscarriage of another (principal
or principal debtor)
A personal security transaction that involves the obligation of the
surety to fulfill a principal obligation in case the principal debtor, to
whom the surety is solidarily bound, does not do so
SURETYSHIP AS AN ACCESSORY, ANCILLARY OR
COLLATERAL OBLIGATION
Obligation is not an original and direct one, but merely accessory or
collateral to the obligation contracted by the principal debtor
Surety is solidarily bound, but the liability is consequent upon the
liability of the principal debtor and is so dependent on that of the
principal debtor (considered in law as the same party)
If principal debtor is liable, liability of the surety would be solidary
Nature of suretys undertaking: no liability unless the principal debtor
is liable
SURETYS LIABILITY
To the creditor is direct, primary and absolute
Surety is directly and equally bound with the principal
Surety becomes LIABLE for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor does
it receive benefit therefrom

Art. 2083 If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a pledge or mortgage
OBLIGATIONS OF SURETY
considered sufficient to cover his obligation shall be admitted in lieu The obligations always arise as a consequence of a contract, whether
thereof. (1855) it is legal or judicial
o Legal: offered in virtue of a provision of law
o Judicial: offered in virtue of a judicial order
Art. 2084 A judicial bondsman cannot demand the exhaustion of the
property of the principal debtor. In a legal and judicial suretyship, the surety (bondsman) must possess
the qualifications required of a guarantor:
A sub-surety in the same case, cannot demand the exhaustion of the o Integrity
property of the debtor or of the surety. o Capacity to bind itself
o Sufficient property to answer for the obligation which it
Sec. 177 amended Insurance Code A contract of suretyship is an guarantees
agreement whereby a party called the surety guarantees the
performance by another party called the principal or obligor of an
obligation or undertaking in favor of a third party called the oblige. It
includes official recognizances, stipulations, bonds or undertakings
issued by any company by virtue of and under the provisions of Act.
No. 536, as amended by Act No. 2206.

Sec. 178 amended Insurance Code The liability of the surety or

sureties shall be joint and several with the obligor and shall be limited
to the amount of the bond. It is determined strictly by the terms of the
contract of suretyship in relation to the principal contract between the
obligor and obligee.

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B. JOINT AND SOLIDARY OBLIGATIONS (OBLICON)
Art. 1207 The concurrence of two or more creditors or of two or more
debtors or of two or more debtors in one and the same obligation does
not imply that each one of the former has a right to demand, or that
each one of the latter is bound to render, entire compliance with the
prestation. There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation
requires solidarity.
Art. 1208 If from the law, or the nature of the wording of the
obligations to which the preceding article refers the contrary does not
appear, the credit or debt shall be presumed to be divided into as
many shares as there are creditors or debtors, the credits or debts
being considered distinct from one another, subject to the Rules of
Court governing the multiplicity of suits.
When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share
shall be borne by all his co-debtors, in proportion to the debt of each.
Art. 1218 Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or become illegal.
Art. 12!9 The remission made by the creditor of the share which
affects one of the solidary debtors does not release the latter from his
responsibility towards the co-debtors, in case the debt had been totally
paid by anyone of them before the remission was effected.
Art. 1220 The remission of the whole obligation, obtained by one of
the solidary debtors, does not entitle him to reimbursement from his
co-debtors.

Art. 1209 If the division is impossible, the right of the creditors may be
prejudiced obly by their collective acts, and the debt can be enforced
obly by proceeding against all the debtors. If one of the latter should
be insolvent, the others shall not be liable for his share.
Art. 1210 The indivisibility of an obligation does not necessarily give
rise to solidarity. Nor does solidarity of itself imply indivisibility.
Art. 1221 If the thing has been lost or if the prestation has become
impossible without the fault of the solidary debtors, the obligation
shall be extinguished.
If there was fault on the part of any one of them, all shall be
responsible to the creditor, for the price and the payment of damages
and interest, without prejudice to their action against the guilty or
negligent debtor.

Art. 1211 Solidarity may exist although the creditors and the debtors
may not be bound in the same manner and by the same periods and
conditions. (1140)
Art. 1212 Each one of the solidary creditors may do whatever may be
useful to the others, but not anything which may be prejudicial to the
latter.
Art. 1213 A solidary creditor cannot assign his rights without the
consent of the others
If through a fortuitous event, the thing is lost or the performance has
become impossible after one of the solidary debtors has incurred in
delay through the judicial or extrajudicial demand upon him by the
creditor, the provisions of the preceding paragraph shall apply.
Art. 1222 A solidary debtor may, in actions filed by the creditor, avail
himself of all defenses, which are derived from the nature of the
obligation and of those, which are personal to him, or pertain to his
own share. With respect to those, which personally belong to the
others, he may avail himself thereof only as regards the part of the
debt for which the latter are responsible.

Art. 1214 The debtor may pay any one of the solidary creditors; but if
any demand, judicial or extrajudicial, has been made by one of them,
payment should be made to him.

Art. 1215 Novation, compensation, confusion or remission of the

debt, made by any of the solidary creditors or with any of the solidary
debtors, shall extinguish the obligation, without prejudice to the
provisions of article 1219.

The creditor who may have executed any of these acts, as well as he
who collects the debt, shall be liable to the others for the share in the
obligation corresponding to them. (1143)

Art. 1216 The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has
not been fully collected.

Art. 1217 Payment made by one of the solidary debtors extinguishes

the obligation. If two or more solidary debtors offer to pay, the creditor
may choose which offer to accept.

He who made the payment may claim from his co-debtors only the
share which corresponds to each, with the interest for the payment
alredy made. If the payment is made before the debt is due, no interest
for the intervening period may be demanded.

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C. FORM OF SURETY
Art. 1403 The following contracts are unenforceable, unless they are
ratified:
(1) Those entered into in the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in
this number. In the following cases an agreement hereafter made shall
be unenforceable by action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot
be received without the writing, or a secondary evidence of its
contents:
(a) An agreement that by its terms is not to be performed within a year
from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage
of another;
(c) An agreement made in consideration of marriage, other than a
mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a
price not less than five hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some part of the
purchase money; but when a sale is made by auction and entry is
made by the auctioneer in his sales book, at the time of the sale, of the
amount and kind of property sold, terms of sale, price, names of the
purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year, or
for the sale of real property or of an interest therein;
( f ) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a
contract.
SURETY
Constitutes a special promise to answer for the debt, default, or
miscarriage of another
Under the Statute of Frauds, the agreement, note, or memorandum
must be:
In writing; and
Subscribed by the party charged or by his agent
If it does not comply with the above requisites, it shall be
unenforceable
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D. OBLIGATIONS SECURED
Art. 2053 A guaranty may also be given as security for future debts,
the amount of which is not yet known; there can be no claim against
the guarantor until the debt is liquidated. A conditional obligation may
also be secured. (1825a)
ON THE CONSIDERATION IN A CONTRACT OF SURETYSHIP
Peculiar nature of a suretyship: it is valid despite the absence of any
direct consideration received by the surety either from the principal
debtor or the creditor
Generally, it must be supported by a sufficient consideration
Consideration need not pass directly to the surety
If it goes to the principal debtor alone, this will suffice
ON THE EXTEND OF THE OBLIGATION OF THE SURETY
Obligation of the surety cannot be extended by implication beyond its
specified limits (terms of the contract)
To the extent, and in the manner, and under the circumstances
pointed out in the obligation, the surety is bound, and no farther
GR: Contracts are strictissimi juris (Law Dictionary: of the strictest
right or law)
XPN: Compensated sureties
Why the XPN? Formerly, parties became sureties, not for hire but as a
matter of accommodation
Strictissimi juris has no application to sureties organized for the
purpose of conducting an indemnity business at established rates of
compensation
Aside from the contract of suretyship being the law between the
parties and confining the obligations of the surety to what is stipulated,
Art. 2053 applies to suretyships as well
APPLIES TO A CONTINUING SURETY
CONTINUING SURETY: not limited to a single transaction but
contemplates a prospective or future course of dealing, covering a
series of transactions, which are within the stipulations of the contract
of surety, until the expiration or termination thereof
Applies to a succession of liabilities for which the surety becomes
liable as they accrue
Security Bank and Trust Company, Inc. vs. Cuenca (2000)
Panganiban, J.
Petitioner: SBTC
Respondents: Rodolfo M. Cuenca
Concept: Surety Obligations Secured
Brief Facts: SBTC granted a credit line to SIMC for P8M, secured by an
Indemnity Agreement wherein Cuenca, as President, held himself
solidarily liable. After Cuenca sold his shares, SIMC and SBTC agreed
to restructure its obligations, to allow the former to make several more
loans. When SIMC defaulted, SBTC filed suit against both SIMC and
Cuenca pursuant to the Indemnity Agreement.
Doctrine: Suretyship Agreements, being accessory obligations, shall
also be extinguished when the principal obligation is also
extinguished.
13
 F. Distinguished from Guaranty
E. DISTINGUISHED FROM STANDBY LETTER OF
CREDIT Art. 2047 By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
Suretyship Standby Letter of Credit latter should fail to do so.
Purpose Both ensure against the debtors nonperformance
If a person binds himself solidarily with the principal debtor, the
Obligation is to complete Obligation is to pay in the
Obligation provisions of Section 4, Chapter 3, Title I of this Book shall be
debtors performance event of nonperformance
observed. In such case the contract is called a suretyship. (1822a)
Requisites Fact of debtors non- Submission of the
for performance must first be required documents as
obligation to established, usually stated in the letter of Suretyship Guaranty
arise through litigation credit Insure the payment of the
Benefit to the creditor is debt/performance of the Insure the solvency of
Purpose
Benefit to creditor is that that he will receive obligation of the principal the principal debtor
Benefit to debtor
surety will perform if the payment in the event of
Creditor
debtor does not non-performance, ahead Surety will pay if the Guarantor will pay if
Obligation
of any litigation debtor does not pay debtor is unable to pay
Financial burden is on Enjoys the benefit of
Financial burden is
the creditor while there excussion; creditor must
Who bears reversed since the
is litigation to determine first exhaust all
financial creditor is assured of
if the debtor really is in properties of the
burden payment ahead of any Direct, primary, and
default and if so, the costs Nature of principal debtor and
litigation. absolute liability to the
of performance Liability resort to all remedies
creditor
against the principal
SURETYSHIP debtor before going after
the guarantor.
Legal relation that arises when one party assumes liability for a debt,
default or other failing of a second party
Obligated to pay
regardless of solvency or
A contractual relation Debtor must be insolvent
Debtors insolvency of the debtor;.
before guarantor can be
Solvency The only determining
Results from an agreement whereby one person (surety) engages to be obligated to pay
factor is debtors
answerable for the debt, default or miscarriage of another (principal
nonperformance
or principal debtor)
Obligation to pay arises
A personal security transaction that involves the obligation of the once creditor has
When Obligation to pay arises exhausted all of principal
surety to fulfill a principal obligation in case the principal debtor, to
whom the surety is solidarily bound, does not do so obligation when the principal debtor debtors property and
arises defaults in his performance after all remedies against
the latter has been
STANDBY LETTER OF CREDIT (AN INSTRUMENT) resorted to.
This kind of letter of credit, also known as a standby letter of credit,
or, simply, standby credit, is used as a guarantee or security for either
a monetary or non-monetary obligation.
Palmares v. CA and MB Lending Corp.
In a standby credit arrangement, the issuer agrees to pay the creditor- - When party binds himself/herself to be jointly and severally (or
beneficiary if the debtor-applicant defaults or fails to perform the solidarily) liable with the principal maker of a note, the law
obligation. considers him to be a surety.
- The rule that ignorance of the contents of an instrument does not
The standby credit becomes payable upon certification of the debtor- alter the liability of the signatories thereto also applies to contracts
applicants default or failure to perform the obligation. of suretyship.
- The rule of strictissimi juris (i.e., strict construction/interpretation)
does NOT apply in the issue of determining whether one is a
guarantor or surety.
o It only applies once a party has been identified as a surety; the
rule guarantees that liability of the surety is not extended
beyond the strict meaning of the terms of the contract of
suretyship.

Estrella Palmares vs. Court of Appeals and M.B. Lending

CorporationRegalado, J.
Petitioner: Estrella Palmares
Respondent: Court of Appeals (CA) and M.B. Lending Corporation
(MB)
Concept: Surety Distinguished from Guaranty

Brief Facts: Palmares signed as co-maker of a promissory note with

Osmea and Azarraga. She bound herself to pay the obligation jointly

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and severally. She also bound herself to pay in case Osmea and
Azarraga defaulted.
Doctrine: In a guaranty, a person called the guarantor binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so. If a person binds himself solidarily with the
principal debtor, the contract is called a suretyship. See also the text in
italics below.
E. Zobel, Inc. v. CA
- A contract of surety is an accessory promise by which a person
binds himself for another already bound, and agrees with the
creditor to satisfy the obligation if the debtor does not.
- A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter is unable
to pay the debt.
o It is a separate undertaking of a guarantor, in which the
principal debtor does not join.
o It is usually entered into before or after that of the principal
and is often supported on a separate consideration from that of
the consideration of the principal debtors contract with the
creditor
- Use of the term guarantee does not ipso facto make the contract
one of guarantee. It is frequently employed in business
transactions not to describe the security of the debt but an
intention to be bound by a primary or independent obligation.
E. Zobel v CA (1998) Martinez, J.
Petitioner: E. Zobel
Respondents: SOLIDBANK
Concept: Surety Distinguished from Guaranty
Brief Facts: Respondent spouses applied for a loan with respondent
SOLIDBANK. The loan was granted subject to the condition that
spouses execute a chattel mortgage over the 3 vessels to be acquired
by them, and that a continuing guarantee be executed by petitioner
EZ, Inc. in favor of Solid Bank. The spouses defaulted in payment of
the entire obligation upon maturity. SolidBank filed a complaint for
the sum of money against EZ Zobel. Zobel moved to dismiss the
complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080.
Doctrine: The use of the term "guarantee" does not ipso facto mean
that the contract is one of guaranty.
International Finance Corp. v. Imperial Textile Mills
- The use of the terms guarantee and guarantors do not make it
exclusively a contract of guaranty.
- When qualified by the term jointly and severally, the use of the
word guarantor to refer to a surety does not violate the law.
International Finance Corporation v. Imperial Textile Mills, Inc. (2005)
Panganiban
Petitioner: International Finance Corporation (IFC)
Respondent: Imperial Textile Mills, Inc. (ITM)
Concept: Surety: Distinguished from Guaranty
Brief Facts: IFC granted a loan to PPIC in the amount of US$7-M. IFC
contracted with ITM and Grandtex to secure the loan granted to PPIC,
denominating it as a Guarantee Agreement and using the words
guarantor and guarantee. When PPIC defaulted and an
extrajudicial foreclosure of the mortgage was unable to satisfy the
outstanding obligation, IFC filed a complaint against PPIC and ITM for
the balance.
Doctrine: Although denominated as a Guarantee Agreement, ITM has
bound itself solidarily with PPIC. Under Art. 2047, when the guarantor
binds itself solidarily, it becomes a suretyship and the provisions on
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Joint and Solidary Obligations will apply. The creditor may then
proceed against any of the solidary debtors or some or all of them
simultaneously for so long as the debt has not been fulfilled. A
suretyship, as compared to a guaranty involves a situation where the
guarantor is solidarily liable to the creditor.
G. DISTINGUISHED FROM JOINT AND SOLIDARY
OBLIGATIONS
Art. 2047 By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship. (1822a)
Art. 2066 The guarantor who pays for a debtor must be indemnified
by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made
known to the debtor, even though it did not earn interest for the
creditor;
(3) The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him;
(4) Damages, if they are due. (1838a)
Art. 2067 The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand
of the debtor more than what he has really paid. (1839)
Art. 1217 Payment made by one of the solidary debtors extinguishes
the obligation. If two or more solidary debtors offer to pay, the creditor
may choose which offer to accept.
He who made the payment may claim from his co-debtors only the
share which corresponds to each, with the interest for the payment
already made. If the payment is made before the debt is due, no
interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency,
reimburse his share to the debtor paying the obligation, such share
shall be borne by all his co-debtors, in proportion to the debt of each.
(1145a)
Surety Joint and Solidary Debtor
Has a right to indemnification and Has a right to
subrogation as against the principal reimbursement as against
debtor his co-debtors
Entitled to the total amount of the debt Entitled to be reimbursed
he has paid and to be subrogated to all for the share that
the rights that the creditor had against corresponds to each co-
the principal debtor debtor
Suretyship is an accessory, ancillary or
collateral obligation
15
Escano & Silos v. Ortigas Jr. (2007) Tinga, J.
Petitioners: Salvador P. Escao and Mario M. Silos
Respondent: Rafael Ortigas
Concept: Surety; distinguished from joint and solidary obligations

Brief Facts: Escao, Silos, and Matti, executed an Undertaking

whereby they designated themselves as sureties of Ortigas et al. who
in turn guaranteed the loan obligation of Falcon from PDCP. Falcon
defaulted in the payment of its obligation prompting PDCP to file a
complaint for collection of a sum of money against Escao et al.
(sureties) and Ortigas et al. (principal obligors). Ortigas amicably
settled with PDCP, paying P1.3M as his share in the obligation. He
now files a complaint against Escao et al. to reimburse him of what
he paid.

Doctrine: In cases where there are several obligors, in the absence of

an express stipulation that liability is solidary, it is presumed the
liability is merely joint, unless the nature of the obligation requires
solidarity.

Art. 1217 makes plain that the solidary debtor who effected the
payment to the creditor may claim from his co-debtors only the share
which corresponds to each with the interest for the payment already
made. Such solidary debtor will not be able to recover from the co-
debtors the full amount already paid to the creditor, because the right
to recovery extends only to the proportional share of the other co-
debtors, and not as to the particular proportional share of the solidary
debtor who already paid. In contrast, even as the surety is solidarily
bound with the principal debtor to the creditor, the surety who does
pay the creditor has the right to recover the full amount paid, and not
just any proportional share, from the principal debtor. Such right to
full reimbursement falls within the other rights, actions and benefits
which pertain to the surety by reason of the subsidiary obligation
assumed by the surety.

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