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Articles 2047 to 2081, Civil Code

Title XV. – GUARANTY

CHAPTER 1

NATURE AND EXTENT OF GUARANTY

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)

Definition of guaranty

1. Contract between guarantor and creditor

2. In the broad sense includes pledge and mortgage because the purpose of
guaranty maybe accomplished by securing the fulfillment of an obligation
through personal guaranty of a third person but also by furnishing to the
creditor for his security, property with authority to collect the debt (Manresa)

Governing Law

Classification of guaranty for commercial and civil abolished; now governed


primarily by Title XV, Book IV

Characteristics of the contract

1. Accessory – dependent on a principal obligation

2. Subsidiary and conditional – takes effect only when the debtor fails in his
obligation (Art. 2053, 2058, 2063, 2065)
3. Unilateral

a. Duty only on the part of the guarantor in relation to creditor


b. May be entered into without intervention of the debtor (Art. 2050)

4. Requires that guarantor must be a person distinct from the debtor –


consistent with the purpose which is for the guarantor to proceed against the
third party if debtor defaults (Velasquez v. Solidbank Corp.)

Law applicable to contract of suretyship

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1. A relation which exists where one person has undertaken an obligation and
another person is also under a direct and primary obligation of or other duty
to a third person who is entitled to but one performance

2. Contractual relation resulting from an agreement whereby one person engages


to be answerable for the debt, default or miscarriage of another

a. Art. 2047 points to Art. 1207 to 1222 on joint and solidary obligations

b. Provisions of the Civil Code on guaranty, other than the benefit of


excussion, are applicable and available to the surety (Autocorp. Group v.
Intra Strata Assurance Corp.).

Common law guaranty and suretyship

Civil law surety = common law guaranty

Civil law co-debtors in solidum = common law suretyship Where party binds
himself solidarily with principal debtor

It is possible to bind himself solidarily without affecting the nature of the contract, in
which case action can be brought outright against the guarantor.

But it has been held that where a party signs a promissory note as a co-maker and
binds herself solidarily, the undertaking is deemed to be that of a surety as an insurer
of the debt, not a guarantor who warrants the insolvency of the debtor (Palmares v.
CA).

Nature of surety’s undertaking

1. Liability is contractual and accessory but direct – direct, immediate,


primary, absolute regardless whether or not the principal debtor is financially
capable to fulfill his obligations. Surety is considered as being the same party
as the debtor and their liabilities are interwoven as to be inseparable (usually
bound by same agreement, same instrument).

2. Liability is limited by the terms of the contract – contractual in nature


and ordinarily restricted to the obligation expressly assumed therein. Surety
not presumed and cannot be extended by implication beyond the terms of the
contract.

3. Liability arises only if principal debtor is held liable

a. In the absence of collusion, surety is bound by a judgment against the


principal even though he was not a party to the proceedings.

b. Principal debtor and surety may be sued separately or together.

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c. Unless required by surety contract, demand or notice of default is not
required to fix the surety’s liability.

d. Accommodation party liable on the instrument to a holder for value


although he has the right to reimbursement, the relation between them,
is in effect, that of principal and surety (People v. Maniego).

e. A surety bond is void where there is no principal debtor, undertaking


requires that obligation be enforceable against someone else besides the
surety (Manila Railroad Co. v. Alvendia)

4. Surety not entitled to exhaustion – surely assumes solidary liability

5. Undertaking is to creditor, not to debtor – unless otherwise expressly


provided, surety makes no covenant with the principal debtor. Promise is not
implied by law.
6. Surety is not entitled to notice of principal’s default –

Commencement of suit is sufficient demand; surety is bound to take notice


of the principal’s default and to perform the obligation.

7. Prior demand by the creditor upon principal not required – Right to


proceed against surety exists independently of his right to proceed against
the principal where both are equally bound (Art. 1216). Proper remedy is to
pay and then ask for reimbursement.

8. Surety is not exonerated by neglect of creditor to sue principal – There


is nothing to prevent the creditor from

proceeding against the principal at any time.


He may pay
and be subrogated in all his rights.

Guaranty Suretyship
Independent agreement to pay Regular party to the undertaking
the obligation if primary debtor
fails to do so
Collateral undertaking Original promissor
Secondarily or subsidiarily liable Primarily liable
Not bound to take notice of the Held to know every default of his
non-performance of his principal principal
Discharged by the mere Not discharged by either mere
indulgence of the principal; not indulgence or neglect and want
liable unless notified of default of notice
Undertakes to pay if the Undertakes to pay if the
principal cannot or is unable to principal does not pay
Pay Insurer of debt itself
Insurer of the solvency of the
Debtor

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Terminology used by the parties – not conclusive that the contract of one of
guaranty.
If the promissor says
―I guarantee payment,‖
―I will see you paid,‖ or
―I will pay if he does not pay,
‖ the promise standing alone is collateral or subsidiary yet may be adjudged original
or an independent one (Reiss v. Memije).

Guaranty Indorsement
Security Transfer
Liability more extensive, If not promptly presented and no
discharged only up to the extent due notice within reasonable
of the loss suffered in time, completely discharged
consequence
Warrants solvency of debtor Does not warrant solvency
Cannot be sued as promissor Can be sued as promissor

Guaranty Warranty
Contract by which a person is Undertaking that the title,
bound to another for the quality, or quantity of the subject
fulfillment of a promise or matter of a contract is what it
engagement of a third party has been presented to be

Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.


(n)

Guaranty generally gratuitous – Onerous only when there is a stipulation to


the contrary (Art. 1933, 1956, 1965).

Cause of contract of guaranty

1. Presence of cause which supports principal obligation – same cause,


sufficient that there is a consideration for the principal debtor (Pyle v.
Johnson)

2. Absence of direct obligation or benefit to guarantor – valid; consideration


need not pass directly to surety or guarantor; sufficient to move principal.

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. (n)

Married woman as guarantor – ordinarily binds only her personal property


(Art. 145, FC); binds conjugal partnership:

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1. With husband’s consent
2. Without husband’s consent in cases provided by law

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. (n)

Guaranty undertaken without knowledge of debtor – unilateral for the


benefit of the creditor, not the principal debtor.

1. If payment without knowledge of debtor,

a. Recovery to the extent beneficial to debtor (Art. 1236)

b. Guarantor cannot compel creditor to subrogate him in his rights


(mortgage, guaranty or penalty) (Art. 1237).
2. If payment is made with knowledge and consent of the debtor, he is
subrogated by virtue of the payment to all rights of the creditor against
the debtor (Art. 2067)

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. (1823)

Guaranty by reason of origin

Judicial – constituted by decree of court


Legal – by virtue of a provision of law
Conventional – by virtue of the will of the parties

Double or sub-guaranty – constituted to guarantee the obligation of a guarantor

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.
(1824a)

Necessity of valid principal obligation


Accessory, requires a principal obligation. If principal obligation is void, guaranty is
void.

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Guaranty of voidable, unenforceable and natural obligations

1. Voidable – inasmuch as contract is binding unless annulled (Art. 1390)


2. Unenforceable – because it is not void (Art. 1403)
3. Natural – when guaranteed, implied recognition of liability transforming the
obligation to civil (Art. 1423)

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)

Guaranty of future debts

Continuing guaranty or suretyship - contemplates a future course of dealings,


covering a series of transactions generally for an indefinite time or until revoked.
Subsidiary so no claim until debt liquidated.

1. Secure payment of loan at maturity – loan maturity and all other obligations
which may become due or be owing

2. Secure payment of any debt subsequently incurred – prospective in


operation. Contract continuing when object is to give a standing credit (Dino
v. CA)

3. Secure existing unliquidated claims – Future debts may also refer to debts
existing at the time of the constitution of the guaranty of the amount is not
known.

a. No theoretical or doctrinal difficulty in saying that surety itself is valid


and binding even before the principal obligation to be secured is
thereby born (Atok Finance Corp. v. CA)

Guaranty of conditional obligations

Suspensive condition – guarantor liable after the fulfillment of condition

Resolutory condition – fulfillment extinguishes principal obligation and the guaranty

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. (1826)

Guarantor’s liability cannot exceed principal obligation

1. Subsidiary and accessory

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2. Surety may pay as part of damages, interest at the legal rate, judicial costs
(Art. 2055) and attorney’s fees (Art.
2088) even without stipulation and even if he becomes liable for an amount
higher than the total in the bond.
3. Surety may be made to pay penalty

Principal’s liability may exceed guarantor’s obligation

Amount specified in the bond does not limit the extent of damages that may be
recovered from principal (Visayan Distributors v. Flores)

Art. 2055. A guaranty is not presumed; it must be express and cannot 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. (1827a)

Guaranty not presumed; requires the expression of consent on the part of the
guarantor to be bound and cannot be presumed because of the existence of a
contract or principal obligation.

Reason for rule – assurance that the guarantor intended to bind himself and he
proceeded with consciousness

Guaranty covered by the Statute of Frauds – must be reduced to writing, being


―a special promise to answer for the debt, default or miscarriage of another.‖ (Art.
1403[2]) But need not be in a public document to be valid (Art. 1358).

Guaranty strictly construed – against the creditor and in favor of the debtor. Any
doubt must be resolved in favor of the guarantor (PNB v. CA)

1. Liability for obligation stipulated – not for prior debts unless intent to be
liable shown

2. Guaranty to render accounting – does not guarantee that money due will be
paid

3. Guaranty with a term subsequently cancelled – not liable for obligations


subsequently entered into

4. Liability of surety limited to a fixed period – cannot be bound for a longer


time unless renewed. Renewal valid (Art. 1306)

5. Liability of surety to expire on maturity of principal obligation – unfair,


nullifies the purpose of contract. Liability attaches to surety as soon as
the principal defaults

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6. Liability of surety to pay in case of forfeiture of imported goods –guarantees
payment of appraised value and not legality of import

7. Bond requires lessor to report to surety any violation of lessee – does not
cover defaults prior. Only prospective unless intention to the contrary
clearly shown.
8. Bond issued to secure defendant from possible damages as a result of
injunction – cannot be issued to satisfy any other claim of the parties

9. Bond issued in favor of a plaintiff who filed a case for collection – does not
guarantee that the plaintiff’s cause of action is meritorious

10. Contract requires that notice of principal’s default be given to surety – where
contract stipulates, failure to comply will prevent recovery from surety

Strictissimi juris applicable only to accommodation surety

Without motive of pecuniary gain and should be protected against unjust pecuniary
impoverishment. Applicable only where the contract has been ascertained a surety or
guaranty.

Rule of strict construction not applicable to compensated sureties

1. Business associations organized for the purpose of assuming classified risks


in large numbers for profit and on an impersonal basis

2. Secured from all possible loss by adequate counterbonds or indemnity


agreements

3. They are in fact insurers

Extent of guarantor’s liability

1. Where guaranty definite – limited in whole or in part to the principal debt, to


the exclusion of accessories

2. Where guaranty indefinite – comprises the principal obligation, all its


accessories, (including the judicial costs after being judicially required to
pay)

a. Guarantor could have limited his liability and if he did not, it is presumed
that he wanted to be bound to the extent established.

Acceptance of guaranty by creditor and notice thereof to guarantor

Creditor not required because he binds himself to nothing.

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1. When necessary – conditional guaranty does not become fixed until it is
accepted by creditor

a. Need not be express or in writing, may be acts amounting to


acceptance

b. Guarantor entitled to notice to know the nature and extent of his liability

2. When not necessary – direct or unconditional promise of guaranty, all that is


necessary is for the promisee (guarantor) to act upon it

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)

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.
(1829a)

Qualifications of guarantor

1. Integrity

2. Capacity to bind himself

3. Sufficient property to answer for the obligation which he guarantees

Jurisdiction follows principle that the accessory follows the principal.

Effect of subsequent loss of required qualifications

Qualifications need only be present at the time of the perfection of the contract.
Subsequently, the creditor can:

1. Demand another guarantor with proper qualification


a. Dishonesty – conviction required

b. Insolvency – judicial declaration not required


2. Waive and hold the guarantor to his bargain

Selection of guarantor

1. Specified person stipulated as guarantor – substitution may not be


demanded

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2. Guarantor selected by the principal debtor – debtor answers for the
integrity, capacity and solvency until extinguishment of debt

3. Guarantor personally designated by the creditor – responsibility of the


selection borne by the creditor

CHAPTER 2

EFFECTS OF GUARANTY

SECTION 1. - Effects of Guaranty

Between the Guarantor and the Creditor

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. (1830a)

Right of guarantor to benefit of excussion or exhaustion

1. Guarantor only secondarily liable – accessory and subsidiary;


distinguished guaranty from suretyship

2. All legal remedies against debtor to be first exhausted – benefit of


excussion; not sufficient that debtor appears insolvent

Right of creditor to secure judgment against guarantor prior to exhaustion

Creditor may secure a judgment against the guarantor, who shall be entitled to a
deferment of execution until properties of the creditor shall have been exhausted
(Tupaz v. CA). There is nothing procedurally objectionable in impleading guarantor as
a co-defendant.

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;

(4) When he has absconded, or cannot be sued within the Philippines


unless he has left a manager or representative;

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(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. (1831a)

Exceptions to benefit of excussion

1. Art. 2059
2. Art. 2060

3. Judicial bondsman or sub-surety


4. Pledge or mortgage has been given as a special security

5. Fails to interpose it as a defense before judgment is rendered against


him

Exceptions provided in Art. 2059

1. Right waived – personal right recognized, waiver must be made in express


terms

2. Liability assumed that of surety – becomes surety with primary liability as


a solidary co-debtor

3. Insolvency of debtor proven by unsatisfied writ of execution – guarantor


guarantees solvency; insolvency must be actual and may be proven by the
return of writ unsatisfied

4. Debtor absconds or cannot be locally sued – creditor not required to go after


the debtor who is hiding and to incur the delays and expenses incident
thereto

5. Resort to all legal remedies, a useless formality

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. (1832)

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. (1833a)

Duty of creditor to make prior demand for payment from guarantor

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1. When demand made – can only be made after judgment on the debt

2. Actual demand to be made – not mere joining of guarantor as co-defendant

Duty of guarantor to set up benefit of excussion

Set it up, point it out – failure to do so forecloses his right to set up the defense of
excussion

1. Property located abroad – would not conform with the purpose of


guaranty

2. Property not easily available – guarantor should facilitate its realization and
the payment of the debt

Duty or creditor to resort to all legal remedies

Neglect of not exhausting, guarantor bears the loss to the extent of value of said
property.

Joinder of guarantor and principal as parties defendant

1. General Rule – not a joint contractor, cannot be sued

2. Exception – rule not required where it would merely delay ultimate


accounting of the guarantor

Art. 2062. In every action by the creditor, which must be against the principal
debtor alone, except in the cases mentioned in Art. 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 Art. 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. (1834a)

Procedure when creditor sues

1. Sent against principal – creditor must sue principal alone; guarantor only
after judgment has been obtained against principal debtor

2. Notice to guarantor of action – must be notified so that he may appear

a. Guarantor appears – given benefit of excussion


b. Guarantor does not appear – cannot set up excussion

3. Hearing before execution can be issued against guarantor

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– entitled to be heard before an execution can be issued against him where
he is not a party

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.
(1835a)

Effects of compromise

Compromise – contract whereby the parties, by making reciprocal concessions,


avoid litigation or put an end to one already commenced (Art. 2028).

1. Where prejudicial – binds parties only (Art. 1311); cannot prejudice the
guarantor or debtor when not party to compromise

2. Where in the nature of a stipulation in favor of a third person – if in the nature


of stipulation pour autrui, guarantor and debtor though not parties can benefit
from a compromise

Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both
with respect to the guarantor and to the principal debtor. (1836)

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. (1837)

Benefit of division among several guarantors

1. In whose favor applicable – several guarantors for one debtor for one debt,
not applicable to guarantors of several debtors of one debt

2. Extent of liability of several guarantors – joint (Art. 1208), not liable to


creditors beyond their respective shares
3. Exceptions – conditions under Art. 2059 and when solidary expressly
stipulated (Art. 2047[2])

Benefit of excussion among several guarantors

For exhaustion, co-guarantors need not point out available property of co-guarantors.
But when creditor claims an insolvent co-guarantor’s share, other co-guarantors can
point out the former’s available property.

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SECTION 2. - Effects of Guaranty

Between the Debtor and the Guarantor

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)

Guaranty, a contract of indemnity – guarantor has the right to reimbursement


of

1. Total amount of the debt – no right until guarantor actually paid


unless right is given to contract
2. Legal interest thereon – guarantor entitled from the time of notice of
payment to the debtor which is in effect a demand, whether or not it earns
interest

3. Expenses incurred by the guarantor – only those that the guarantor has
to satisfy in accordance with law as a consequence of the guaranty (Art.
2055[2])

4. Damages, if they are due – in accordance with law; general rules on


damages (Arts. 2195-2235) apply

Exceptions to right to indemnity or reimbursement

1. Constituted without the knowledge or against the will of the debtor – only
insofar as had been beneficial (Art. 2050)
2. No intention to be reimbursed (Art. 1238)
3. Waiver

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)

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Guarantor’s right to subrogation

1. Effect of subrogation – right to indemnification and subrogation granted to


guarantor applies also to surety (Art. 2047)

2. Accrual, basis and nature of right – subrogation necessary to enable


guarantor to enforce the indemnity

a. Arises from operation of law upon payment


b. Stands not upon contract, but upon natural justice
c. Not a contractual right
d. Cannot demand more than what he has paid for

3. When right not available – when there is no right to be reimbursed

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. (1840)

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. (1841a)

Effect of payment by guarantor before/after maturity

1. Obligation with a period demandable only when the day comes, guarantor
who paid before maturity not entitled to reimbursement because there is no
need to accelerate payment

2. When demand made on guarantor during term of guarantee, immaterial if


payment is made after the term

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. (1842a)

Effect of repeat payment by debtor

1. General rule – Notice to debtor before payment. If without notice, remedy is


to collect from creditor but no cause of action for the return even when it
becomes insolvent
2. Exception – may still claim even in spite of lack of notice

a. Creditor becomes insolvent

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b. Guarantor prevented from fortuitous event from notifying debtor
c. Guaranty is gratuitous

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. (1834a)

Right of guarantor to proceed against debtor before payment

Applicable to surety, purpose is to enable the guarantor to take measures for the
protection of his interest in view of the probability that he would be called upon to
pay the debt.

Remedy to which guarantor entitled – Guarantor cannot ask for payment


unless he as actually paid. The alternative remedies are:

1. Obtain a release form guaranty


2. Demand or security

Art. 2066 and 2071 distinguished

Art. 2066 Art. 2071


Enforcement of rights of Before he has paid but after he
guarantor against debtor after becomes liable
he paid Protective remedy before
Right of action before payment payment
Substantive right Preliminary remedy
No such person Release or security

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Recovery by surety against indemnitor even before payment

1. Indemnity agreement for benefit of surety – if debtor agrees to terms,


obligations of the contract have the force of law

2. Indemnity agreement may be against actual loss as well as liability – if


against loss, indemnitor liable to person only when paid; if against liability,
indemnitor liable to person upon attachment of liability
3. Such agreement valid

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. (n)

Guarantor of a third person at request of another has a right to claim


reimbursement after satisfying the debt either from:

1. Person who requested him to be a guarantor


2. Debtor.

SECTION 3. - Effects of Guaranty as Between Co-Guarantors

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 Art. shall not be applicable, unless the payment has been
made by virtue of a judicial demand or unless the principal debtor is insolvent.
(1844a)

Right to contribution of guarantor who pays

1. Restrictions – applicable when


a. In virtue of a judicial demand
b. Because the principal debtor is insolvent

2. Effect of insolvency of any guarantor – follows Art. 1217[2])

3. Accrual and basis of right – Guarantor who paid becomes ipso jure entitled
to proportionate contribution or reimbursement without need of cession
from creditor

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

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principal debtor against the creditor, and which are not purely personal to the
debtor. (1845)

Defense available to co-guarantors:


all defenses the debtor would have against creditor but not those which are purely
personal

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. (1846)

CHAPTER 3
EXTINGUISHMENT OF GUARANTY

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. (1847)

Causes of extinguishment of guaranty

1. Accessory and subsidiary – extinguishes when the principal obligation is


extinguished:

a. Payment or performance, loss of the thing due, condonation or


remission of the debt, confusion or merger of rights of the creditor and
debtor, compensation and novation (Art. 1231)

2. Other causes: annulment, rescission, fulfillment of a resolutory


condition, and prescription (Art. 1231)

3. Release of guarantor made by creditor (Art. 2078)

Material alteration of principal contract

1. Effect of material alteration – constitutes novation and surety cannot be


held to a new contract without its consent

2. When alteration material – surety or guaranty will not be released where such
change does not make the obligation more onerous (Visayan Distributors v.
Flores)

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. (1849)

Release by conveyance of property

Eviction revives the principal obligation but not the guaranty. The cause of action is
against the debtor for eviction which is not part of the guaranty.

18
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. (1850)

Release of guarantor without consent of others

Others will be prejudiced if one of the guarantors becomes insolvent. The release
benefits all to the extent of the share of the guarantor 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
extension of time referred to herein. (1851a)

Release by extension of term granted by creditor to debtor

1. Where release without consent of guarantor – extinguishes guaranty

a. Payments due to debtor from third persons assigned to creditor -


extinguishes

b. Where obligation payable in installments – extension as to one will not


affect surety/guaranty’s liability as to others

c. Consent to extension waived in advance by guarantor – valid, not


contrary to law or public policy
d. Payment by guarantor after creditor’s demand

e. Extension not granted by creditor on the bond – does not extinguish

f. Extension granted to first-tier obligors – will not extinguish liability of


second-tier obligors

2. Prejudice to guarantor and period of extension immaterial

3. Extension must be based on a new agreement – mere failure or neglect to


demand payment not deemed a suspension

4. Diligence on the part of creditor to enforce his claim generally not required –
this is for surety. For guaranty, if the creditor has done any act whereby the
guaranty was impaired in value, or discharged that act would have wholly or
partially released the guarantor
5. No cause of action against creditor for delay

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. (1852)

19
Release by guarantor cannot be subrogated

1. Fault of creditor for non-subrogation – act of one cannot prejudice another

2. Duty of the creditor to account for his lien on principal’s property – to retain
and maintain security; impairment will discharge the surety to the extent of
lien released. This is a trust relation with the creditor as trustee bound to
account to the surety the value of the security.

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. (1853)

20. Surety

Articles 1207 to 1222, 2082 to 2084, Civil Code

SECTION 4. - Joint and Solidary Obligations

Art. 1207. The concurrence of two or more creditors 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. (1137a)

Art. 1208. If from the law, or the nature or the wording of the obligations to which
the preceding Art. 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. (1138a)

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced
only by their collective acts, and the debt can be enforced only by proceeding
against all the debtors. If one of the latter should be insolvent, the others shall
not be liable for his share. (1139)

Art. 1210. The indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility. (n)

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. (1141a)

20
Art. 1213. A solidary creditor cannot assign his rights without the consent of the
others. (n)

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. (1142a)

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 Art. 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. (1144a)

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)

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. (n)

Art. 1219. 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. (1146a)

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. (n)

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.

21
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.

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. (1147a)

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 that part of the debt for which the latter are responsible. (1148a)

22
CHAPTER 4

LEGAL AND JUDICIAL BONDS

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 Art. 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)

Bond – undertaking that is sufficiently secured and not cash or currency

Bondsman – a surety (Art. 2047[2]) offered in virtue of a provision of law or a


judicial order.

Qualifications of personal bondsman – same as a guarantor under Art. 2056

1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation which he guarantees

Jurisdiction follows principle that the accessory follows the principal. Nature of
bonds

1. Contractual in nature – only in consequence of a meeting of minds under the


conditions essential to a contract (Art. 1305)

2. Special class of guaranty, in virtue of a judicial or court order

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 considered sufficient to cover his
obligation shall be admitted in lieu thereof. (1855)

Pledge or mortgage in lieu of bond

Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of
the principal debtor.

A sub-surety in the same case, cannot demand the exhaustion of the property of
the debtor of the surety.

Bondsman and sub-surety not entitled to excussion because they are not
mere guarantors, but sureties whose liability is primary and solidary

23
Negligence of creditor will not release surety. It is his obligation to see that the
debtor pays or performs, not the creditor’s.

Cases:

E. Zobel, Inc. v. Court of Appeals,

G.R. No. 113931, May 6, 1998.

Continuing guaranty is a surety! Petitioner assumed liability to SOLIDBANK, as a


regular party to the undertaking and obligated itself as an original promissor. It
bound itself jointly and severally to the obligation with the respondent spouses. In
fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for the obligation.

Art. 2080 does not apply where the liability is as a surety, not as a guarantor. Even
assuming that 2080 is applicable, SOLIDBANK's failure to register the chattel
mortgage did not release petitioner from the obligation. In the Continuing Guaranty
executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective
of the existence of any collateral.

Surety Guaranty
Accessory promise by which a Collateral undertaking to pay the
person binds himself for another debt of another in case the latter
already bound, and agrees with does not pay the debt
the creditor to satisfy the
obligation if the debtor does not
bound with his principal by the guarantor's own separate
same instrument, executed at undertaking, in which the
the same time, and on the same principal does not join
consideration
original promissor and debtor - usually entered into before or
from the beginning, and is held, after that of the principal, and is
ordinarily, to know every default often supported on a separate
of his principal consideration from that
supporting the contract of the
principal
- original contract of his principal
is not his contract, and he is not
bound to take notice of its non-
performance
not discharged, either by the often discharged by the mere
mere indulgence of the creditor indulgence of the creditor to the
to the principal, or by want of principal, and is usually not
notice of the default of the liable unless notified of the
principal, no matter how much default of the principal
he may be injured thereby
insurer of the debt, and he insurer of the solvency of the
obligates himself to pay if the debtor and thus binds himself to
principal does not pay pay if the principal is unable to
pay

24
International Finance Corporation v. Imperial Textile Mills, Inc.,
G.R. No. 160324, November 15, 2005.

The Agreement uses ―guarantee and guarantors,‖ prompting ITM to base its argument on those words but
the use of the two words limits the contract to a mere guaranty. The specific stipulations in the contract
show otherwise.

While referring to ITM as a guarantor, the agreement specifically stated that the corporation was 'jointly and
severally liable. To put emphasis on the nature of that liability, the contract further stated that ITM was a
primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal
intents and purposes, it was a surety.

IFC was justified in taking action directly against respondent. The use of the word guarantee does not
ipso facto make the contract one of guaranty. The word is frequently employed in business transactions
to describe the intention to be bound by a primary or an independent obligation. The very terms of a contract
govern the obligations of the parties or the extent of the obligor's liability. Thus, the Court has ruled in favor of
suretyship, even though contracts were denominated as a 'Guarantor's Undertaking or a 'Continuing Guaranty.

Philippine Blooming Mills, Inc. v. Court of Appeals,


G.R. No. 142381, October 15, 2003.

Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21
July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts PBM
―may now be indebted or may hereafter become indebted‖ to TRB.

The law expressly allows a suretyship for "future debts". 2053 provides: ―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.xxx‖

Diño v. Court of Appeals:


A guaranty may be given to secure even future debts, the amount of which may not be known at the time the
guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A
continuing guaranty is one which is not limited to a single transaction, but which contemplates a future
course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It
is prospective in its operation and is generally intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor
becomes liable.

Continuing guaranty covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the expiration or termination thereof. A
guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a
certain period; especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract states that the guaranty is to secure advances to be made "from time to time," it will be construed to
be a continuing one.

In other jurisdictions, it has been held that the use of particular words and expressions such as payment of
"any debt," "any indebtedness," or "any sum," or the guaranty of "any transaction," or money to be furnished
the principal debtor "at any time," or "on such time" that the principal debtor may require, have been
construed to indicate a continuing guaranty.

Escano & Silos v. Ortigas, JR.,

G. R. No. 151953, June 29, 2007.

There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the
liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all
the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor
has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The Undertaking does not contain any express stipulation that the petitioners agreed ―to bind themselves
jointly and severally‖ in their obligations to the Ortigas group, or any such terms to that effect. Hence, such

25
obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to overcome the presumption of jointness of obligations. We
rule and so hold that he failed to discharge such burden.

Right of reimbursement by surety:


Under Art. 2066 of the Civil Code, which assures that ―[t]he guarantor who pays for a debtor must be
indemnified by the latter,‖ such indemnity comprising of, among others, ―the total amount of the debt.‖
Further, Art. 2067 of the Civil Code likewise establishes that ―[t]he guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had against the debtor.‖

Articles 2066 and 2067 explicitly pertain to guarantors, and it is Dr. Tolentino’s observation that ―[t]he
reference in the second paragraph of [Art. 2047] to the provisions of Section 4, Chapter 3, Title I,
Book IV, on solidary or several obligations, however,

26
does not mean that suretyship is withdrawn from the applicable provisions governing guaranty.‖
For if that were not the implication, there would be no material difference between the surety as defined under
Art. 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Art. 2047.
These rights granted to the surety who pays materially differ from those granted under Art. 1217 to the
solidary debtor who pays, since the ―indemnification‖ that pertains to the latter extends ―only [to] the share
which corresponds to each [co-debtor].‖

Tupaz IV & Tupaz, v. Court of Appeals and Bank of the Philippine Islands,

G.R. No. 145578, November 18, 2005.

Any doubt as to the import or true intent of the solidary guaranty clause should be resolved against
the drafter. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and
prepared solely by the petitioner; Chi’s participation therein is limited to the affixing of his signature thereon.
It is, therefore, a contract of adhesion; as such, it must be strictly construed against the party responsible for
its preparation.

In Prudential Bank v. CA, it was held that had there been more than one signatories to the trust receipt, the
solidary liability would exist between the guarantors. The clause ―we jointly and severally agree and
undertake‖ refers to the undertaking of the two (2) parties who are to sign it or to the liability existing
between themselves. It does not refer to the undertaking between either one or both of them on the one
hand and the petitioner on the other with respect to the liability described under the trust receipt.

Excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can still
demand deferment of the execution of the judgment against him until after the assets of the principal debtor
shall have been exhausted.

27
GUARANTY AND SURETYSHIP

GUARANTY (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. It is a contract between the guarantor and the creditor.

CHARACTERISTICS OF THE CONTRACT

1. Accessory – dependent for its existence upon the principal obligation


guaranteed by it;

2. Subsidiary and conditional – takes effect only when the principal debtor
fails in his obligation subject to limitation

3. Unilateral –
a. It gives rise only to a duty on the part of the guarantor in relation to the
creditor and not vice versa
b. It may be entered into even without the intervention of the principal
debtor.
4. Guarantor must be a person distinct from the debtor – a person cannot
be the personal guarantor of himself

CLASSIFICATION OF GUARANTY

1. Guaranty in the broad sense:

a. Personal – guaranty is the credit given by the person who guarantees


the fulfillment of the principal obligation; or
b. Real – guaranty is property, movable, or immovable
i. Real mortgage (2124) or antichresis (2132) – guaranty is
immovable
ii. Chattel mortgage (2140) or pledge (2093) – guaranty is
movable
2. As to its origin:
a. Conventional – constituted by agreement of the parties (2051[1])
b. Legal – imposed by virtue of a provision of law
c. Judicial – required by a court to guarantee the eventual right of one
of the parties in a case.

3. As to consideration:
a. Gratuitous – guarantor does not receive any price or remuneration
for acting as such (2048)
b. Onerous – one where the guarantor receives valuable consideration
for his guaranty

4. As to person guaranteed:
a. Single – constituted solely to guarantee or secure performance by
the debtor of the principal obligation; b. Double or sub- guaranty –
constituted to secure the fulfillment

28
by the guarantor of a prior guaranty

5. As to its scope and extent:


a. Definite – where the guaranty is limited to the principal obligation
only, or to a specific portion thereof;
b. Indefinite or simple – where the guaranty included all the accessory
obligations of the principal, e.g. costs, including judicial costs.

GUARANTY GENERALLY GRATUITOUS (2048) GR: Guaranty is gratuitous

Exception: When there is a stipulation to the contrary

Cause of contract of guaranty

1. Presence of cause which supports principal obligation: Cause of the


contract is the same cause which supports the obligation as to the
principal debtor. The consideration which supports the obligation as to the
principal debtor is a sufficient consideration to support the obligation of a
guarantor or surety.

2. Absence of direct consideration or benefit to guarantor: Guaranty or


surety agreement is regarded valid despite the absence of any direct
consideration received by the guarantor or surety, such consideration need
not pass directly to the guarantor or surety; a consideration moving to the
principal will suffice.

MARRIED WOMAN AS GUARANTOR (2049)

GR: Married woman binds only her separate property

Exceptions:

1. With her husband’s consent, bind the


community or ConjugalQuickTime™partnershipanda property
TIFF (Uncompressed) decompressor
2. Without husband’sareneeded to seeconsent,thispicture. in cases provided by law, such
as when the guaranty has redounded to the benefit of the family.

GUARANTY UNDERTAKEN WITHOUT KNOWLEDGE OF DEBTOR (2050)

1. Guaranty is unilateral – exists for the benefit of the creditor and not for the
benefit of the principal debtor

2. Creditor has every right to take all possible measures to secure


payment of his credit – guaranty can be constituted even against the will of
the principal debtor

29
Rights of third persons who pay:

1. Payment without the knowledge or against the will of the debtor:

a. Guarantor can recover only insofar as the payment has been beneficial
to the debtor
b. Guarantor cannot compel the creditor to subrogate him in his rights
2. Payment with knowledge or consent of the debtor: Subrogated to all the
rights which the creditor had against the debtor

GUARANTY BY REASON OF ORIGIN (2051[1])

1. Conventional;
2. Judicial;
3. Legal

DOUBLE OR SUB-GUARANTY (2051[2])

One constituted to guarantee the obligation of a guarantor. It should not be


confounded with guaranty wherein several guarantors concur.

NECESSITY OF VALID PRINCIPAL OBLIGATION (2052[1])

Guaranty is an accessory contract: It is an indispensable condition for its existence


that there must be a principal obligation. Hence, if the principal obligation is void,
it is also void.

GUARANTY OF VOIDABLE, UNENFORCEABLE, AND NATURAL OBLIGATIONS


(2052[2])

A guaranty may secure the performance of a:

1. Voidable contract – such contract is binging, unless it is annulled by a


proper court action

2. Unenforceable contract – because such contract is not void

3. Natural obligation – the creditor may proceed against the guarantor


although he has not right of action against the principal

debtor for the reason that the latter’s obligation is not civilly enforceable.
When the debtor himself offers a guaranty for his natural obligation, he
impliedly recognizes his liability, thereby transforming the obligation from a
natural into a civil one.

GUARANTY OF FUTURE DEBTS (2053)

30
Continuing Guaranty or Suretyship:

1. Not limited to a single transaction but which contemplates a future course of


dealings, covering a series of transactions generally for an indefinite time or
until revoked.

2. It is prospective in its operation and is generally intended to provide security


with respect to future transactions.

3. Future debts, even if the amount is not yet known, may be guaranteed but
there can be no claim against the guarantor until the amount of the debt is
ascertained or fixed and demandable.
Reason: A contract of guaranty is subsidiary.

a. To secure the payment of a loan at maturity – surety binds himself to


guarantee the punctual payment of a loan at maturity and all other
obligations of indebtedness which may become due or owing to the
principal by the borrower.

b. To secure payment if any debt to be subsequently incurred – a


guaranty shall be construed as continuing when by the terms therof it is
evident that the object is to give a standing credit to the principal debtor
to be used from time to time either indefinitely or until a certain period,
especially if the right to recall the guaranty is expressly reserved.
c. To secure existing unliquidated debts
– refer to debts existing at the time of the constitution of the guaranty but
the amount thereof is unknown and not to dents not yet incurred and
existing at that time. The surety agreement itself is valid
and binding evenQuickTime™beforeanda the principal
TIFF (Uncompressed) decompressor
obligation intendedareneeedto seeto thisbepicturesecured. thereby is born, any
more than there would be in saying that obligations which are subject to a
condition precedent are valid and binding before the occurrence of the
condition precedent

GUARANTY OF CONDITIONAL OBLIGATIONS: A guaranty may secure all kinds of


obligations, be they pure or subject to a suspensive or resolutory condition.

1. Principal obligation subject to a suspensive condition – the guarantor is


liable only after the fulfillment of the condition.

2. Principal obligation subject to a resolutory condition – the happening of


the condition extinguishes both the principal obligation and the guaranty

GUARANTOR’S LIABILITY CANNOT EXCEED PRINCIPAL OBLIGATION (2054)

31
GR: Guaranty is a subsidiary and accessory contract – guarantor cannot bind
himself for more than the principal debtor and even if he does, his liability shall be
reduced to the limits of that of the debtor. But the guarantor may bind himself for less
than that of the principal.

Exceptions:

1. Interest, judicial costs, and attorney’s fees as part of damages may be


recovered – creditors suing on a suretyship bond may recover from the surety as
part of their damages, interest at the legal rate, judicial costs, and attorney’s fees
when appropriate, even without stipulation and even if the surety would thereby
become liable to pay more than the total amount stipulated in the bond.

• Reason: Surety is made to pay, not by reason of the contract, but by reason
of his failure to pay when demanded and for having compelled the
creditor to resort to the courts to obtain payment.

Interest runs from:

a.Filing of the complaint (upon judicial demand); or


b.The time demand was made upon the surety until the principal
obligation is fully paid (upon extra-
judicial demand)
2. Penalty may be provided – a surety may be held liable for the penalty
provided for in a bond for violation of the condition therein.

Principal’s liability may exceed guarantor’s obligations

The amount specified in a surety bond as the surety’s obligation does not limit
the extent of the damages that may be recovered from theprincipal, the
latter’s liability being governed by the obligations he assumed under his
contract.

GUARANTY NOT PRESUMED (2055)

Guaranty requires the expression of consent on the part of the guarantor to be bound.
It cannot be presumed because of the existence of a contract or principal obligation.

Reasons:

1. There be assurance that the guarantor had the true intention to bind himself;
2. To make certain that on making it, the guarantor proceeded with
consciousness of what he was doing.

GUARANTY COVERED BY THE STATUTE OF FRAUDS

• Guaranty must not only be expressed but must so be reduced into writing.

32
• Hence, it 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.

• It need not appear in a public document.

GUARANTY STRICTLY CONSTRUED

Strictly construed against the creditor in favor of the guarantor and is not be extended
beyond its terms or specified limits.

If there is any doubt on the terms and conditions of the guaranty or surety
agreements, the doubt should be resolved in favor of the guarantor or surety.

1. Liability for obligation stipulated – guarantor is liable only for the


obligation of the debtor stipulated upon, and not to
obligations assumed previous to the
QuickTime™ and a
execution of theTIFF(Uncompguarantyessed)decompreunlessor an intent to
are needed to see this picture.
be so liable is clearly indicated.

2. Liability of surety limited to a fixed period


– the surety must only be bound in the manner and to the extent, and under
the circumstances which are set forth or which may be inferred from the
contract of guaranty or suretyship, and no farther.
3. Liability of surety to expire on maturity of principal obligation – such
stipulation is unfair and unreasonable for it practically nullifies the nature of
the undertaking it had assumed.

Reason: The liability of the surety attaches as soon as the principal debtor
defaults, and notice thereof is given the surety within a reasonable time to
enable it to take steps to protect its interest.

Remedy of surety: Foreclose the counterbond put up by the principal debtor (if
there is any)

GUARANTY DISTINGUISHED FROM WARRANTY

GUARANTY WARRANTY

Contract by which a An undertaking that the title,


person is bound to quality, or quantity of the
another for the subject matter of a contract
i
fulfillment of a s what it has been
promise or represented to be, and

33
engagement of a third relates to some agreement
party made ordinarily by the party
who makes the warranty

GUARANTY DISTINGUISHED FROM SURETYSHIP

GUARANTY SURETYSHIP

Liability depends upon Assumes liability as a


an independent regular party to the
agreement to pay the undertaking
obligation if the primary
debtor fails to do so

Engagement is a Charged as an original


collateral undertaking promisor

Secondarily liable – he Primarily liable –


contracts to pay if, by undertakes directly for
the use of due the payment without
diligence, the dent reference to the solvency
cannot be paid of the principal, and is so
responsible at once the
latter makes default,
without any demand by
the creditor upon the
principal whatsoever or
any notice of default

Only binds himself to Undertakes to pay if the


pay if the principal principal does not pay,
cannot or unable to pay without regard to his
ability to do so

Insurer of the solvency Insurer of the debt

34
of the debtor

P
a
Does not contract that the
y creditor without
qualificat
the principal will pay, ion if the
but simply that he is principal debtor does not
p
a
y
able to do so . Hence, the
responsi
bility or
obligation
assumed by
the surety is greater or
m
o
r
eonerous than that
of a
guaranto
r

QUALIFICATIONS OF GUARANTOR (2056-2057)

1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for the obligation which he
guarantees.

Exception: The creditor waives the requirements

Effect of Subsequent Loss of Required Qualifications: The qualifications need


only be present at the time of the perfection of the contract. The subsequent
loss of integrity or property or supervening incapacity of the guarantor would not
operate to exonerate the guarantor of the eventual liability he has contracted, and
the contract of guaranty continues.

Remedy of creditor: Demand another guarantor with the proper qualifications

Exception: Creditor may waive it if he chooses and hold the guarantor to his
bargain.

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Article 2057:

1. Requires conviction in the first instance of a crime involving dishonesty to


have the right to demand another.

2. Judicial declaration of insolvency is not necessary in order for the creditor to


have a right to demand another guarantor.

SELECTION OF GUARANTOR:

1. Specified person stipulatedQuckTime™anda as guarantor:


TIFF (Uncompressed) decompressor
Substitution ofare neededguarantortoseehispicturemay. not be demanded

Reason: The selection of the guarantor is:

a. Term of the agreement;

b. As a party, the creditor is, therefore, bound thereby.


2. Guarantor selected by the principal debtor: Debtor answers for the
integrity, capacity, and solvency of the guarantor.

3. Guarantor personally designated by the creditor: Responsibility of the


selection should fall upon the creditor because he considered the guarantor to
have the qualifications for the purpose.

RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION OR EXHAUSTION (2058)

Reasons:

1. Guarantor only secondarily liable – the guarantor binds himself to the


creditor to fulfill the obligation of the principal debtor only in case the latter
should fail to do so. If the principal debtor fulfills the obligation guaranteed,
the guarantor is discharged from any responsibility.
2. All legal remedies against the debtor to be first exhausted – to warrant
recourse against the guarantor for payment, it may not be sufficient that the
debtor appears insolvent. Such insolvency may be simulated.

Right of Creditor to Secure Judgment against Guarantor prior to Exhaustion

GR: An ordinary personal guarantor (NOT a pledgor or mortgagor), may demand


exhaustion of all the property of the debtor before he can be compelled to pay.

Exception: The creditor may, prior thereto, secure a judgment against the guarantor,
who shall be entitled, however, to a deferment of the execution of said judgment
against him, until after the properties of the principal debtor shall have been
exhausted, to satisfy the latter’s obligation.

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EXCEPTIONS TO THE BENEFIT OF EXCUSSION (2059)

The guarantor is not entitled to the benefit of excussion:

1. As provided in Art. 2059:

a. If the guarantor has expressly renounced it – Waiver

i. Waiver is valid but it must be made in express terms.

b. If he has bound himself solidarily with the debtor – liability assumed that
of a surety
i. Guarantor becomes primary liable as a solidary co-debtor. In effect,
he renounces in the contract itself the benefit of exhaustion.
i. In case of insolvency of the debtor – guarantor guarantees the
solvency of the debtor

If the debtor becomes insolvent, the liability of the guarantor as the


debtor cannot fulfill his obligation

d. When he (debtor) has absconded, or cannot be sued within the


Philippines – the creditor is not required to go after a debtor who is
hiding or cannot be sued in our courts, and to incur the delays and
expenses incident thereto.
Exception: Debtor has left a manager or representative;

e. If it may be presumed that an execution on the property of the principal


debtor would not result in the satisfaction of the obligation – if such
judicial action including execution would not satisfy the obligation, the
guarantor can no longer require the creditor to resort to all such remedies
against the debtor as the same would be but a useless formality. It is not
necessary that the debtor be judicially declared insolvent.

2. If he does not comply with Art. 2060: In order that the guarantor may
make use of the benefit of excussion, he must:
a. Set it up against the creditor upon the latter’s demand for payment from
him;
b. Point out to the creditor:
i. Available property of the debtor – the guarantor should facilitate the

realization of the excussion since he is the most interested in its


benefit.

ii. Within the Philippine territory – excussion of property located abroad


would be a lengthy and extremely difficult proceeding and would not
conform with the purpose of the guaranty to provide the creditor with
the means of obtaining the fulfillment of the obligation.

iii. Sufficient to cover the amount of the debt.

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3. If he is a judicial bondsman and sub-surety (2084)
4. Where a pledge or mortgage has been
given by him as a specialQuickTime™ andsecuritya.
TIFF (Uncompressed) decompressor
5. If he fails to areinterposeededtoseethis itpictureas. a defense before
judgment is rendered against him.

DUTY OF CREDITOR TO MAKE PRIOR DEMAND FOR PAYMENT FROM


GUARANTOR (2060)

1. When demand to be made – only after judgment on the debt for obviously
the exhaustion of the principal’s property cannot even begin to take place
before judgment has been obtained.

2. Actual demand to be made – joining the guarantor in the suit against the
principal debtor is not the demand intended by law

DUTY OF THE GUARANTOR TO SET UP BENEFIT OF EXCUSSION (2060)

As soon as he is required to pay, guarantor must also point out to the creditor
available property (not in litigation or encumbered) of the debtor within the
Philippines.

DUTY OF THE CREDITOR TO RESORT TO ALL LEGAL REMEDIES (2061)

1. After the guarantor has fulfilled the conditions required for making use of the
benefit of exhaustion, it becomes the duty of the creditor to:

2. Exhaust all the property of the debtor pointed out by the guarantor;

3. If he fails to do so, he shall suffer the loss but only to the extent of the value
of the said property, for the insolvency of the debtor.

JOINDER OF GUARANTOR AND PRINCIPAL AS PARTIES DEFENDANT

GR : The guarantor, not being a joint contractor with his principal, cannot be sued
with his principal.

Exception: Where it would serve merely to delay the ultimate accounting of the
guarantor or if no different result would be attained if the plaintiff were forced to
institute separate actions against the principal and the guarantors.

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PROCEDURE WHEN CREDITOR SUES (2062)

1. Sent against the principal – as a rule, the creditor may hold the guarantor
only after judgment has been obtained against the principal debtor and the
latter is unable to pay.

2. Notice to guarantor of the action – guarantor must be notified so that he


may appear, if he so desires, and set up defenses he may want to offer

a. Guaranty appears – voluntary appearance does not constitute a


renunciation of his right to excussion.

b. Guaranty does not appear –

i. He cannot set up the defenses which, by appearing are allowed to him


by law; and

ii. It may no longer be possible for him to question the validity of the
judgment rendered against the debtor

3. Hearing before execution can be issued against the guarantor – a


guarantor is entitled to be heard before an execution can be issued against
him where he is not a party in the case involving his principal.

EFFECTS OF COMPROMISE (2063)

Compromise – a contract whereby the parties, by making reciprocal concessions,


avoid a litigation or put an end to one already commenced.

1. Compromise between creditor and principal debtor benefits the guarantor but
does not prejudice him.

2. Compromise between guarantor and the creditor benefits but does not
prejudice the principal debtor.

SUB-GUARANTOR’S RIGHT TO EXCUSSION (2064)

Sub-guarantor enjoys the benefit of excussion with respect to:

1. Principal debtor; and

2. Guarantor
Reason: He stands with respect to the guarantor on the same footing as the latter
does with respect to the principal debtor

BENEFIT OF DIVISION AMONG SEVERAL GUARANTORS (2065)

2. In whose favor applicable –

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Several guarantors;
Only one debtor;
For the same debt

Cannot be availed of if there are:


QuickTime™ and a
TIFF (Uncompressed) decofmpressor
b. Two or moreareneedebtorsdtoseethis pictureone. debt, even if they be
bound solidarily, each with different guarantors; or
c. Two or more guarantors of the same debtor but not only for the same
debt

d. If any of the circumstances enumerated in Art. 2059 should take place, as


would the benefit of exhaustion of the debtor’s property.

1. Extent of liability of several guarantors – joint obligation: the obligation


to answer for the debt is divided among all of them. The guarantors are not
liable to the creditor beyond the shares which they are respectively bound to
pay.

Exceptions: When solidarily has been expressly stipulated

BENEFIT OF EXCUSSION AMONG SEVERAL GUARANTORS:

In order that the guarantor may be entitled to the benefit of division, it is not required
that he point out the property of his co-guarantors.

Reason: Obligation of the guarantor with respect to his co-guarantors is not


subsidiary but direct and does not depend as to its origin on the solvency or
insolvency of the latter.

GUARANTOR’S RIGHT TO SUBROGATION (2067)

SUBROGATION – transfers to the person subrogated, the credit with all the rights
thereto appertaining either against the debtor or against third persons, be they
guarantors or possessors of mortgages, subject to stipulation in conventional
subrogation.

1. Accrual, basis, and nature of right – right of subrogation is necessary to


enable the guarantor to enforce the indemnity given in Art. 2066

Arises by operation of law upon payment by the guarantor

It is not a contractual right


The guarantor is subrogated, by virtue of the payment, to the right of
the creditor, not those of the debtor.

40
2. When right not available – since subrogation is the means of effectuating
the right of the guarantor to be reimbursed. It cannot therefore be invoked
in those cases where the guarantor has no right to be reimbursed.

EFFECT OF PAYMENT BY GUARANTOR WITHOUT NOTICE TO DEBTOR


(2068)

If the debtor has already paid the creditor, when the guarantor pays, the debtor can
set up against the guarantor the defense of previous extinguishments of the obligation
by payment. Hence, guarantor must notify the debtor before making payment.

Reason: The guarantor cannot be allowed, through his own fault or negligence to
prejudice or impair the rights or interests of the debtor.

EFFECT OF PAYMENT BY GUARANTOR BEFORE MATURITY (2069)

Debtor’s obligation with a period – demandable only when the day fixed comes.

A. The guarantor who pays before maturity is not entitled to reimbursement since
there is no necessity for accelerating payment.

B. A contract of guaranty being subsidiary in character, the guarantor is not liable


for the
debt before it becomes due.
Exception: The debtor will be liable if the payment was made:

1. With his consent; or


2. Subsequently ratified by him (ratification may be express or implied)

RIGHT OF GUARANTOR TO PROCEED AGAINST DEBTOR BEFORE PAYMENT


(2071)

GR: Guarantor has no cause of action against the debtor until after the former has
paid the obligation.

Exceptions: 2071 enumerates instances when the guarantor may proceed against the
debtor even before the payment.

B. When he is sued for the payment;

C. In case of insolvency of the principal debtor;


D. When the debtor has bound himself to relieve him from the guaranty within a
specified period, and this period has expired;
E. When the debt has become demandable, by reason of the expiration of the
period for payment;

41
F. After the lapse of 10 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 10 years;

G. If there are reasonable grounds to fear that


the principal debtor intendsQuickTime™ andto aabscond;
TIFF (Uncompressed) decompressor
7. If the principal aredebtorneededto issee thisin pimminentcture. danger of becoming
insolvent.

Purpose: To enable the guarantor to take measures for the protection of his interest
in view of the probability that he would be called upon to pay the debt.

REMEDY TO WHICH THE GUARANTOR ENTITLED

GR: The guarantor cannot demand reimbursement for indemnity because he has not
paid the obligation.

Exceptional remedies:

3. To obtain release from the guaranty; or

4. To demand security that shall protect him from:

a Any proceedings by the creditor; and


b Against the insolvency of the debtor. Guarantor’s remedies are
alternative. He has the right to choose the action to bring.

SUIT BY GUARANTOR AGAINST CREDITOR BEFORE PAYMENT

The guaranty’s or surety’s action for release can only be exercised against the
principal debtor and not against the creditor.

Reason: Release of the guarantor imports an extinction in the obligation to the


creditor; it connotes therefore, either a remission or novation by subrogation, and
either operation requires the creditor’s assent for its validity.

2066 AND 2071 DISTINGUISHED

2066 2071
(Right of Guarantor to (Right of Guarantor to
Reimbursement after Proceed against Debtor
Payment) even before payment)

42
Provides for the Provides for the
enforcement of the rights protection before he has
of the guarantor against paid but after he has
the debtor after he has become liable – gives a
paid the debt – gives a protective remedy before
right of action after payment
payment

Substantive right Preliminary remedy

Gives a right of action, Remedy given seeks to


which, without the obtain from the guarantor
provisions of the other “release from the
might be
worthless 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.”

43
RECOVERY OF SURETY AGAINST INDEMNITOR EVEN BEFORE PAYMENT

1. Indemnity agreement for the benefit of surety – indemnity agreement is


not for the benefit of the creditor but for the benefit of the surety.

2. Indemnity agreement may be against actual loss as well as liability –


such agreement is enforceable and not violative of any public policy

Indemnity against loss – indemnitor will not be liable until the person
to be indemnified makes payment or sustains loss;
Indemnity against liability – indemnitor’s liability arises as soon as the
liability of the person to be indemnified has arisen without regard to

whether or not he has suffered actual loss.

Where the principal debtors are simultaneously the same persons who
executed the indemnity agreement, the position occupied by them is that of a
principal debtor and indemnitor at the same, and their liability being joint and
several.

GUARANTOR OF A THIRD PERSON AT REQUEST OF ANOTHER (2072)

The guarantor who guarantees the debt of an absentee at the request of another has a
right to claim reimbursement, after satisfying the debt from:

1. The person who requested him to be a guarantor;


2. The debtor

BETWEEN CO-GUARANTORS

RIGHT TO CONTRIBUTION OF GUARANTOR WHO PAYS (2073)

Presumption of joint liability of several guarantors when there are:


1. Two or more guarantors;
QuickTime™ and a
1. Same debtor; TIFF (Uncompressed) decompressor are needed to see
this picture.
2. Same debt
Effect: Each is bound to pay only his proportionate share.

When Art. 2073 Applicable:

1. When one guarantor has paid the debt to the creditor;


2. Payment by such guarantor must have been made:
By virtue of a judicial demand; or
Because the principal debtor is insolvent;

44
1. Guarantor who paid is seeking reimbursement from each of his co-guarantors
the share which is proportionately owing him.

Effect of Insolvency of Any Guarantor:

Follows the rule on solidary obligations :The share of the insolvent guarantor shall
be borne by the others including the paying guarantor in the same joint proportion.

Accrual and Basis of Right:

The right of reimbursement is acquired ipso jure without need of any prior cession
from the creditor by the guarantor.

DEFENSES AVAILABLE TO CO-GUARANTORS (2074)

GR: All defenses which the debtor would have interposed against the creditor.

Exception: Those which cannot be transmitted for being purely personal to the
debtor.

LIABILITY OF SUB-GUARANTOR IN CASE OF INSOLVENCY OF GUARANTOR


(2075)

Sub-guarantor is liable to the co-guarantors in the same manner as the guarantor


whom he guaranteed in case of the insolvency of the guarantor for whom he bound
himself as sub-guarantor.

CAUSES OF EXTINGUISHMENT OF GUARANTY (2076) (PL3CN-ARFP)

GR: Guaranty being accessory, it is extinguished when principal obligation is


extinguished, the causes of which are:

(1) Payment or performance;


(2) Loss of the thing due;
(3) Condonation or remission of the debt;
(4) Confusion or merger of the rights of the creditor and debtor;
(5) Compensation; and
(6) Novation
(7) Other causes:
Annulment;
Rescission;
Fulfillment of a resolutory condition;
Prescription
Exception: The guaranty itself may be directly extinguished although the principal
obligation still remains such as in the case of the release of the guarantor made by the
creditor.

45
Material Alteration of Principal Contract – any agreement between the creditor
and the principal debtor which essentially varies the terms of the principal contract
without the consent of the surety, will release the surety from liability.

Such material alteration would constitute a novation or change of the principal


contract, which is

consequently extinguished. Upon such extinguishments, the accessory contract to


guaranty is also terminator and the guarantor cannot be held liable on the new
contract to which he has not given his consent.

When Alteration Material – where such change will have the effect of making the
obligation more onerous.

Imposes a new obligation or added burden on the party promising; or

1. Takes away some obligation already imposed, changing the legal effect of the
original contract and not merely the form thereof.

RELEASE BY CONVEYANCE OF PROPERTY (2077)

GR: Payment is made in money.

Exception: Any substitute paid in lieu of money which is accepted by the creditor
extinguishes the obligation and in consequence, the guaranty.

In case of eviction: Eviction revives the principal obligation but not the guaranty.

Reason: The creditor’s action against the debtor is for eviction and this is different
from what the guarantor guaranteed.

RELEASE OF GUARANTOR WITHOUT CONSENT OF OTHERS (2078)

Effect: The release benefits all to the extent of the share of the guarantor released.

Reason: A release made by the creditor in favor of


QuickTime™ and a
one of the guarantorsTIFF (Uncompressed)withoutthedecompressorconsent of the
are needed to see this picture.
others may prejudice the others should a guarantor become insolvent.

RELEASE BY EXTENSION OF TERM GRANTED BY CREDITOR TO DEBTOR (2079)

Release Without Consent of Guarantor: Creditor grants an extension of time to the


debtor without the consent of the guarantor.

46
Effect: Guarantor is discharged from his undertaking.

Reason: Necessity of avoiding of prejudice to the guarantor. The debtor may become
insolvent during the extension, thus depriving the guarantor of his right to
reimbursement.

It is unimportant whether the extension given has actually proved prejudicial or not to
the guarantor or surety. Nor does it matter for how short a period the time of payment
has been extended.

Extension must be based on some new agreement between the creditor and the
principal debtor by virtue of which the creditor deprives him of his claim.

1. Where obligation payable in installments: where a guarantor is liable for


different payments:

GR: An extension of time to one or more will not affect the liability of the
surety for the others.

Exception: When the unpaid balance has become automatically due by virtue
of an acceleration clause for failure to pay an installment.

Effect of exception: The act of the creditor extending the payment of said
installment, without the guarantor’s consent, discharges the guarantor.

Reason: The extension constitutes an extension of the payment of the whole


amount of the indebtedness

2. Where consent to an extension is waived in advance by the guarantor:


Such waiver is not contrary to law, nor to public policy Effect: Amounts to the
surety’s consent to all the extensions granted.

RELEASE WHEN GUARANTOR CANNOT BE SUBROGATED (2080)

If there can be no subrogation because of the fault of the creditor, the guarantors are
thereby released, even if the guarantors are solidary.

Reason: The act of one cannot prejudice another. It also avoids collusion between the
creditor and the debtor or a third person.

DEFENSES AVAILABLE TO GUARANTOR AGAINST CREDITOR (2081)

GR: All defenses, which pertain to the principal debtor and are inherent in the debt.

47
Exception: Those, which are purely personal to the debtor.

LEGAL AND JUDICIAL BONDS MEANING AND FORM OF


BOND (2082)

BOND – an undertaking that is sufficiently secured, and not cash or currency.

Bondsman – a surety offered in virtue of a provision of law or a judicial order.

Qualifications of personal bondsman:

1. He possesses integrity;

2. He has capacity to bind himself;


3. He has sufficient property to answer for the obligation which he
guarantees.

PLEDGE OR MORTGAGE IN LIEU OF BOND (2083)

Guaranty or suretyship is a personal security.

Pledge or mortgage is a property or real security.

If the person required to give a legal or judicial bond should not be able to do so, a
pledge or mortgage sufficient to cover the obligation shall be admitted in lieu thereof.

BONDSMAN NOT ENTITLED TO EXCUSSION (2084)

A judicial bondsman and the sub-surety are not entitled to the benefit of excussion.

Reason: They are not mere guarantors, but sureties whose liability is primary and
solidary.

Effect of negligence of creditor: Mere negligence on the part of the creditor in


collecting from the debtor will not relieve the surety from liability.

SURETYSHIP – a relation which exists where one person (principal) has undertaken
an obligation and another person (surety) is also under a direct and primary obligation
or other duty to the obligee, who is entitled to but one performance,
anddecompreassorbetween theeeded to see this picture.

two who are bound, the second, rather than the first should perform.

If a person binds himself solidarily with the principal debtor, the contract is called
suretyship and the guarantor is called a surety.

48
NATURE OF SURETY’S UNDERTAKING

1. Liability is contractual and accessory but direct:


2. Liability is limited by terms of contract
3. Liability arises only if principal debtor is held liable
In the absence of collusion, the surety is bound by a judgment against
the principal event though he was not a party to the proceedings;
The creditor may sue, separately or together, the principal debtor and
the surety;
A demand or notice of default is not required to fix the surety’s liability
Exception: Where required by the provisions of the contract of
suretyship

A surety bond is void where there is not principal debtor because such
an undertaking presupposes that the obligation is to be enforceable
against someone else besides the surety, and the latter can always
claim that it was never his intention

to be the sole person obligated thereby.

NOTE: Surety is not entitled to exhaustion

(1) Undertaking is to creditor, not to debtor: The surety makes no covenant


or agreement with the principal that it will fulfill the obligation guaranteed for
the benefit of the principal. The surety’s undertaking is that the principal shall
fulfill his obligation and that the surety shall be relieved of liability when the
obligation secured is performed.

Exception: Unless otherwise expressly provided.

NOTE: Surety is not entitled to notice of principal’s default

(2) Prior demand by the creditor upon principal not required


Surety is not exonerated by neglect of creditor to sue principal

STRICTISSIMI JURIS RULE APPLICABLE ONLY TO ACCOMMODATION SURETY

Reason: An accommodation surety acts without motive of pecuniary gain and hence,
should be protected against unjust pecuniary impoverishment by imposing on the
principal, duties akin to those of a fiduciary.

49
Surety
1975 No. XVIII
A debtor pledged to his surety pieces of jewelry to indemnify the Utter in case the surety would be obliged to pay the
creditor. The surety paid P2,800 00 to the creditor. To recover the amount, the surety sold at public auction the jewelry but realized
only P500. May the surety recover the deficiency from the debtor? Explain.
Answer
No, the surety is not entitled to recover the deficiency. Article 2115 of the Civil Code provides that in the foreclosure of a
pledge, if the price of the sale is less than the indebtedness secured by the pledge, the creditor shall not be entitled to recover the
deficiency, notwithstanding any stipulation to the contrary. By electing to sell the articles pledged, the creditor waived any other
remedy, and must abide by the results of the sale. No deficiency is recoverable, [Manila Surety v. Velayo, 21 SCRA 615]
14; Surety; recovery of deficiency
1997 No. 16:
AB sold to CD a motor vehicle for and in consideration of P120,000.00. to be paid in twelve monthly equal installments of
P10,000,00, each Installment being due and payable on the 15th day of each month starting January 1997.
To secure the promissory note, CD (a) executed a chattel mortgage on the subject motor vehicle, and (b) furnished a
surety bond issued by Philam life, CD failed to pay more than two (2) installments, AB went after the surety but he was only able to
obtain three-fourths (3/4) of the total amount still due and owing from CD. AB seeks your advice on how he might, if at all, recover
the deficiency.
How would you counsel AB? Answer:
Yes, he can recover the deficiency. The action of AB to go after the surety bond cannot be taken to mean a waiver of his
right to demand payment for the whole debt, The amount received from the surety is only payment pro tanto, and an action may be
maintained for a deficiency debt.

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