GUARANTY AND SURETYSHIP

(ARTICLES 2047 TO 2084)

NATURE AND EXTENT OF GUARANTY
Article 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.

GUARANTY
> Contract between the guarantor and creditor
> In a broad sense, it includes pledge and mortgage because the purpose of guaranty may be accomplished not only by
securing the fulfillment of an obligation contracted by the principal debtor through the personal guaranty of a
third person but also by furnishing to the creditor for his
security, property with authority to collect the debt from the proceeds of the same in case of default.

CHARACTERISTICS OF A GUARANTY
1. Accessory—because it is dependent for its existence upon the principal obligation guaranteed by it
2. Subsidiary and conditional—it takes effect only when the principal debtor fails in his obligation subject to limitation
3. Unilateral—
a. Gives rise only to the 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. Contract, which requires that the guarantor be a distinct person from the principal debtor because a person cannot
be the personal guarantor of himself

CLASSIFICATION OF GUARANTY
1. Guaranty in the broad sense—
a. Personal—guaranty properly so-called or guaranty in the strict sense. The guarantee given is the credit
given by the person who guarantees the fulfillment of the principal obligation.
b. Real—the guaranty is property, movable or immovable
2. As to its origin
a. Conventional
b. Legal
c. Judicial

3. As to consideration
a. Gratuitous
b. Onerous

4. As to persons guaranteed
a. Single
b. Double or sub-guaranty—one constituted to secure the fulfillment of a guarantee in another guaranty

5. As to its scope and extent

a. Definite—one where the guaranty is limited to the principal obligation only, or to a specific portion thereof
b. Indefinite or simple—one where the guaranty includes not only the principal obligation but also all its
accessories

SURETYSHIP
> A relation which exists where one person has undertaken an obligation and another person is also under a direct
and primary obligation or other duty to a third person, who is entitled to but one performance, and as between the
two who are bound, the one rather than the other should perform
> Contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for a
debt, default, miscarriage of another known as the principal

LAW APPLICABLE TO SURETYSHIP

> Second paragraph
> It covers OBLIGATIONS, DIFFERENT KINDS OF OBLIGATIONS, JOINT AND SOLIDARY OBLIGATIONS,
OBLIGATIONS AND CONTRACTS
> If a person binds himself solidarily with the principal debtor, the contract is called suretyship and the guarantor is
called the SURETY
NATURE OF A SURETY’S UNDERTAKING
1. CONTRACTUAL AND ACCESSORY BUT DIRECT—The contractual obligation of the surety is merely an accessory
or collateral to the obligation contracted by the principal. BUT, his liability to the creditor is direct, primary,
and absolute.

2. LIABILITY IS LIMITED BY THE TERMS OF THE CONTRACT—The extent of a surety’s liability is determined only by the
terms of the contract and cannot be extended by implication.

3. LIABILITY ARISES ONLY IF PRINCIPAL DEBTOR IS HELD LIABLE—If the principal debtor and the surety are held
liable, their liability to pay the creditor would be solidary. But, the surety does not incur liability unless and until the
principal debtor is held liable.
a. A surety is bound by a judgment against the principal even though the party was not a party to
the proceedings.
b. The creditor may sue, separately or together, the principal debtor and the surety (since they are solidarily
bound).
c. Generally, a demand or notice of default is not required to fix the surety’s liability.
d. An accommodation party (one who signs an instrument as maker, drawer, acceptor, or indorser
without consideration and only for the purpose of lending his name) is, in effect, a surety. He is thus
liable to pay the holder of the instrument, subject to reimbursement from the accommodated party.

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

4. SURETY IS NOT ENTITLED TO EXHAUSTION—A surety is not entitled to the exhaustion of the properties of
the principal debtor since the surety assumes a solidary liability for the fulfillment of the principal obligation.

5. THE UNDERTAKING IS TO THE CREDITOR, NOT TO THE PRINCIPAL DEBTOR—The debtor cannot claim that the
surety breached its obligation to pay for the principal obligation because there is no obligation as between the
surety and the debtor. If the surety does not pay, the
principal debtor is still not relieved of his obligation.

6. SURETY NOT ENTITLED TO NOTICE OF PRINCIPAL’S DEFAULT—the surety is bound to take notice of the
principal’s default to perform the obligation

7. PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL NOT REQUIRED—the right of the creditor to proceed against
the surety alone exists independently of his right to proceed against the principal where both surety and
principal are equally bound
8. SURETY IS NOT EXONERATED BY NEGLECT OF ANOTHER TO SUE PRINCIPAL—mere want of diligence or
forbearance doesn’t affect the creditor’s rights vis-à-vis the surety, unless the surety requires him by appropriate
notice to sue on the obligation. The raison d’etre for the rule is that
there is nothing to prevent the creditor from proceeding against the principal at any time.

GUARANTY GENERALLY GRATUITOUS

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

> General rule: a guaranty is gratuitous

> Except when there is a stipulation to the contrary

WHAT IS THE CAUSE OF A CONTRACT OF GUARANTY?

1. Presence of cause which supports principal obligation
2. Absence of direct consideration or benefit to the guarantor
GUARANTY UNDERTAKEN WITHOUT KNOWLEDGE OF DEBTOR / WIFE
Category: Obligations and Contracts
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)

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

Always remember that a guaranty is unilateral. It exists for the benefit of the creditor and not for the benefit of
the debtor.
The creditor obviously has every right to take all possible means to secure the payment of his credit

WHAT THEN IS THE RIGHT OF A THIRD PERSON WHO PAYS?

Remember the rules on payment.

A person who pays without the knowledge or against the will of the debtor can recover only insofar as the
payment has been beneficial to the debtor AND he cannot demand the creditor to subrogate him into his rights

If he becomes the guarantor with the knowledge and consent of the debtor, he is subrogated by virtue
thereof to all the rights which the creditor has against the debtor
A GUARANTY MAY BE CONVENTIONAL, LEGAL OR JUDICIAL, GRATUITOUS, OR BY ONEROUS TITLE
Category: Obligations and Contracts
Conventional Guaranty, Legal Guaranty or Judicial Guaranty, Gratuitous Guaranty, or Guaranty by Onerous Title
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)

Art. 2052. A guaranty cannot exist without an 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)

GUARANTY IS AN ACCESSORY CONTRACT

> It is indispensable for its existence that there must be a principal obligation
> So if the principal obligation is void, it follows that it is also void

A GUARANTY MAY SECURE THE PERFORMANCE OF

1. A voidable contract inasmuch as such contract is binding unless it is annulled by a proper action in court
2. An unenforceable contract because contract is not void
3. A natural obligation so that the contract may proceed against the guarantor although he has no right of
action against the principal debtor for the reason that the latter’s obligation is not civilly enforceable
CONTINUING GUARANTY OR SURETYSHIP
Category: Obligations and Contracts
CONTINUING GUARANTY OR SURETYSHIP
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)

> One which isn’t 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
> Prospective in its operations and is generally intended to provide security with respect to future transactions
> 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
> Take note however that the abovementioned provision may be misleading in sanctioning guarantees for
future debts. What should be bore in mind is that there is already an existing obligation that is being
guaranteed. The guaranty would be void if there is no existing obligation.

HOW ABOUT GUARANTY OF CONDITIONAL OBLIGATIONS

> If the principal obligation is subject to a suspensive condition, the guarantor is liable only after the fulfillment of
the condition
> If it is subject to a resolutory condition, the happening of the condition extinguishes both the principal obligation
and the guaranty
THE GUARANTOR’S LIABILITY CANNOT EXCEED PRINCIPAL OBLIGATION
Category: Obligations and Contracts
THE GUARANTOR’S LIABILITY CANNOT EXCEED PRINCIPAL OBLIGATION
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)

1. Guaranty is a subsidiary and accessory contract—the 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

2. Interest, judicial costs, attorney’s fees as part of the damages may be recovered
a. The 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
b. Interest doesn’t run from the time the obligation becomes due but from the filing of the complaint

3. Penalty may be provided

GUARANTY IS NOT PRESUMED
Category: Obligations and Contracts
GUARANTY IS NOT PRESUMED
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)

> 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
> Why this rule? The law wants not only that there be assurance that the guarantor has the true intention to
bind himself but also to make certain that on making it, he proceeded with consciousness of what he was doing

GUARANTY IS COVERED BY THE STATUTE OF FRAUDS

Category: Obligations and Contracts
GUARANTY IS COVERED BY THE STATUTE OF FRAUDS
> A guaranty must not only be expressed but must also be reduced to writing
> Falls under the Statute since it is a special promise to answer for the debt, default or miscarriage of another

A GUARANTY IS STRICTLY CONSTRUED

> It has to be strictly interpreted against the creditor and in favor of the guarantor and isn’t to be extended beyond its
terms or specified limits

> The rule of strictissimi juris commonly refers to an accommodation party. Why? 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. Take note further that this rule only applies
once it is established that the contract is one of suretyship
or guaranty.

STIPULATION THAT THE GUARANTY WILL SUBSIST ONLY UNTIL MATURITY OF THE OBLIGATION
Category: Obligations and Contracts
IS A STIPULATION THAT SAYS THAT THE GUARANTY WILL SUBSIST ONLY UNTIL MATURITY OF THE OBLIGATION
VALID?
> Generally, no. Such a stipulation would defeat the purpose of a guaranty, which is to answer for the default of
the principal debtor. If the guaranty is only up to the date of maturity, there is no way that the guarantor can be liable
since default comes only at maturity date.

EXTENT OF GUARANTOR’S LIABILITY

1. DEFINITE GUARANTY—limited in whole or in part to the principal debt, to the exclusion of the accessories.

If the amount to be paid or the service to be performed by the person guaranteed is specified in a contract of
guaranty, then the obligation of the guarantor extends no further than the sum or services so specified, and extrinsic
facts cannot be resorted to for the purpose of enlarging the limit if the guarantor was ignorant of such facts.
2. INDEFINITE GUARANTY OR SIMPLE GUARANTY—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.

Reason: the guarantor in entering into the contract could have fixed the limits of his responsibility solely to the strict
terms of the principal obligation and if he didn’t do so, it must be presumed that he wanted to be bound to
the extent so established

ACCEPTANCE OF GUARANTY BY CREDITOR AND NOTICE THEREOF TO GUARANTOR

GENERAL RULE: It is not necessary for the CREDITOR to expressly accept the contract of guaranty since the contract
is unilateral; only the guarantor binds himself to do something.

EXCEPTION: If the guarantor merely offers to become a guaranty, it does not become a binding obligation unless the
creditor accepts and notice of acceptance is given to the guarantor. On the other hand, if the guarantor makes a
direct or unconditional promise of guaranty (and not merely an offer), there is no need for acceptance and notice
of such acceptance from the creditor.

QUALIFICATIONS OF A GUARANTOR?
1. He possesses integrity

2. He has the capacity to bind himself

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

EFFECT OF SUBSEQUENT LOSS OF REQUIRED QUALIFICATIONS

> Qualifications need only be present at the time of the perfection of the contract

> The creditor may however demand another guarantor with the proper qualifications but he may waive it if he
chooses and hold the guarantor to his bargain

> Note in Article 2057 that it requires conviction for a crime involving dishonesty, but a judicial declaration of
insolvency is not necessary in order for the creditor to have the right to demand another guarantor

SELECTION OF GUARANTOR

1. Specified person stipulated as guarantor—where the creditor has required and stipulated that a specific person
should be a guarantor, the substitution of a guarantor may not be demanded because obviously, in such a case, the
selection of the guarantor is a term of the agreement and the creditor is bound thereby as a party

2. Guarantor selected by the principal debtor—the debtor answers for the integrity, capacity and solvency of
the former

3. Guarantor personally designated by the creditor—the responsibility should fall upon the creditor and not on
the debtor
RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION OR EXHAUSTION
1. Guarantor is only secondarily liable
2. All legal remedies against debtor to be first exhausted

RIGHT OF CREDITOR TO SECURE JUDGMENT AGAINST GUARANTOR PRIOR TO EXHAUSTION

> As a rule, an ordinary personal guarantor may demand exclusion of all the property of debtor before he
can be compelled to pay
> The creditor however may secure prior thereto a judgment against the guarantor, who shall be entitled to a
deferment of the execution of said judgment against him until after the properties of the principal debtor shall
have been first exhausted to satisfy the latter’s obligation

EXCEPTIONS TO THE BENEFITS OF EXCUSSION

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;

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.

6. If he doesn’t comply with Article 2060

7. If he has a judicial bondsman and sub-surety

8. Where a pledge or mortgage has been given by him as special security

9. If he fails to interpose it as a defense before judgment is rendered against him

DUTY OF CREDITOR TO MAKE PRIOR DEMAND FOR PAYMENT FROM GUARANTOR

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)

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

2. Actual demand has to be made—the fact that the guarantor was joined in a suit against the principal debtor
necessarily means that a demand has already been made upon him

DUTY OF THE GUARANTOR TO SET UP BENEFIT OF EXCUSSION

> It isn’t enough that the guarantor claims the benefit of excussion

> As soon as he is required to pay, he must also point out to the creditor available property of the debtor within the
Philippines
DUTY OF CREDITOR TO RESORT TO ALL LEGAL REMEDIES

> Failure to comply with duty of creditor would mean that he would suffer the loss but only to the extent of the value of
said property, for the insolvency of the debtor

JOINDER OF GUARANTOR AND PRINCIPAL AS PARTIES DEFENDANT

> The GENERAL RULE is that the guarantor, not being a joint contractor with the principal, cannot be sued with his
principal

> EXCEPTION: not required when it would serve merely to delay the ultimate accounting of the guarantor

PROCEDURE WHEN CREDITOR SUES IN A GUARANTY

Art. 2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases
mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may
appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion
mentioned in Article 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor
and the guarantor in case of appearance by the latter. (1834a)

PROCEDURE WHEN CREDITOR SUES

1. SENT AGAINST PRINCIPAL—the creditor must sue the principal alone. The guarantor cannot be sued
together with his principal except when the guarantor is not entitled to the benefit of excussion.

2. NOTICE TO GUARANTOR OF THE ACTION—the guarantor must be notified so that he may appear, if he so
desires, and set up the defenses he may want to offer
a. If the guarantor appears, he is still given the benefit of excussion even if judgment is rendered against him
and the principal debtor
b. If he doesn’t appear, he cannot set up the defenses which, by appearing, are allowed him by
law, and 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 GUARANTOR

Compromise In A Contract With Guaranty
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)

COMPROMISE
> Contract whereby the parties, by asking reciprocal concessions, avoid a litigation or put an end to one already
commenced

EFFECTS OF COMPROMISE
1. Where prejudicial—a contract binds only the parties thereto and not third persons. Hence, a compromise
cannot prejudice the guarantor or the debtor, as the case may be, when he is not a party to such compromise.

2. Where in the nature of the stipulation in favor of third person—however, even if the guarantor or debtor is not
a party to such compromise, the same can still benefit him as it is in the nature of a stipulation in favor of a
third person which the guarantor or debtor may accept unless it has been revoked before his acceptance

SUB-GUARANTOR’S RIGHT TO EXCUSSION

> Enjoys the right with respect to the debtor but also to the principal guarantor

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)