GUARANTY AND SURETYSHIP

(ARTICLES 2047 TO 2084) The difference is that the lender cannot go after the surety right away.
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
There has to be default on the part of the principal debtor before the surety
becomes liable. If it were mere solidarity among debtors, the creditor can go
after any of the solidary debtors on due date.
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.

CLASSIFICATION OF GUARANTY
4. SURETY IS NOT ENTITLED TO EXHAUSTION—A surety is not entitled to
1. Guaranty in the broad sense— the exhaustion of the properties of the principal debtor since the surety
a. Personal—guaranty properly so-called or guaranty in the strict sense. The assumes a solidary liability for the fulfillment of the principal obligation.
guarantee given is the credit given by the person who guarantees the fulfillment
of the principal obligation. 5. THE UNDERTAKING IS TO THE CREDITOR, NOT TO THE PRINCIPAL
b. Real—the guaranty is property, movable or immovable 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
2. As to its origin surety and the debtor. If the surety does not pay, the
a. Conventional principal debtor is still not relieved of his obligation.
b. Legal
c. Judicial 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
3. As to consideration
a. Gratuitous 7. PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL NOT REQUIRED—
b. Onerous 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
4. As to persons guaranteed equally bound
a. Single
b. Double or sub-guaranty—one constituted to secure the fulfillment of a guarantee 8. SURETY IS NOT EXONERATED BY NEGLECT OF ANOTHER TO SUE
in another guaranty 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
5. As to its scope and extent sue on the obligation. The raison d’etre for the rule is that
a. Definite—one where the guaranty is limited to the principal obligation only, or there is nothing to prevent the creditor from proceeding against the principal at
to a specific portion any time
thereof
b. Indefinite or simple—one where the guaranty
includes not only the principal obligation but also
all its accessories GUARANTY GENERALLY GRATUITOUS
Article 2048. A guaranty is gratuitous unless there is a stipulation to the
contrary.
SURETYSHIP
> General rule: a guaranty is gratuitous
> A relation which exists where one person has undertaken an obligation and > Except when there is a stipulation to the contrary
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 WHAT IS THE CAUSE OF A CONTRACT OF GUARANTY?
> Contractual relation resulting from an agreement whereby one person, the
surety, engages to be answerable for a debt, default, miscarriage of 1. Presence of cause which supports principal obligation
another known as the principal 2. Absence of direct consideration or benefit to the guarantor

Art. 2049. A married woman may guarantee an obligation without the

LAW APPLICABLE TO SURETYSHIP husband’s consent, but shall not thereby bind the conjugal partnership,
except in cases provided by law. (n)
> Second paragraph
> It covers OBLIGATIONS, DIFFERENT KINDS OF OBLIGATIONS, Art. 2050. If a guaranty is entered into without the knowledge or
JOINT AND SOLIDARY OBLIGATIONS, OBLIGATIONS AND CONTRACTS consent, or against the will of the principal debtor, the provisions of
> If a person binds himself solidarily with the principal debtor, the contract is Articles 1236 and 1237 shall apply. (n)
called suretyship and the guarantor is called the SURETY
GUARANTY UNDERTAKEN WITHOUT KNOWLEDGE OF DEBTOR
DIFFERENCE BETWEEN PASSIVE SOLIDARITY (SOLIDARITY AMONG
DEBTORS) AND SURETYSHIP
 Always remember that a guaranty is unilateral. It exists for the benefit of
The two are SIMILAR in the following ways:
the creditor and not for the benefit of the debtor.
1. A solidary debtor, like a surety, STANDS FOR SOME OTHER PERSON.
2. Both debtor and surety, after payment, may require that they be  The creditor obviously has every right to take all possible means to secure the
REIMBURSED. 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
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
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
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
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
> 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
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.
Article 2056: WHAT ARE THE 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