CHAPTER 2 Effects of Guaranty

SECTION 1 Effects of Guaranty

Between the Guarantor and the
Creditor (2058-2065)
I. Procedure When Creditor Sues
A. Creditor must sue the principal alone
1. Reason: A contract of guaranty is
accessory
and subsidiary
2. Exception: Art. 2059
B. Creditor shall ask the court to notify
the
guarantor of the action
1. If the guarantor appears
He is still given the benefit of
excussion, under Art. 2058, even
if judgment should be rendered
against him and the principal
debtor.
2. If guarantor does not appear
He cannot set up the defenses
which, by appearing, are allowed
to him by law, and it may no
longer be possible for him to
question the validity of the
judgment rendered against the
debtor.

The creditor has a right to secure

judgment against guarantor prior to
exhaustion. 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 latters
obligation.
D. Who may avail
1. Guarantor - ordinary and personal
guarantors
2.
Sub-guarantor - as against the
principal debtor
and the
guarantor (Art. 2064)
3. Co-guarantors - as against the
C. How to avail
1. Guarantor must set it up against the
creditor upon demand for payment.
The duty of the creditor to demand
payment
upon the guarantor takes
place after a judgment has been
obtained against for the exhaustion of
the debtor's properties.

Hearing before execution can be

issued against guarantor

Joining the guarantor in the suit

against the principal debtor is not the
demand intended by law.

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.

2. Point out to the creditor available

property of the
debtor within the
Philippines, sufficient to cover the
amount of debt.

II. Benefit of Excussion

A. Definition
The right of GUARANTOR to demand
that the creditor first:
1. EXHAUST all properties of
principal debtor
2. RESORT to all legal remedies
against the
principal debtor

The guarantor having fulfilled all the

conditions
required
above,
the
creditor
who
is
negligent
in
exhausting the property pointed out
shall suffer the loss, but only to the
extent of the value of the said
property for the insolvency of the
debtor (Art. 2061).

C.

D. Exceptions

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1. Right waived - must be made in

express terms
2. Liability assumed is that of surety guarantor binds himself solidarily with
the principal debtor
3. Insolvency of debtor is proven by an
unsatisfied writ of execution
It is not sufficiently established by
the mere fact that the debtor has
been
declared
insolvent
in
insolvency proceedings, in which the
extent of the insolvents inability to
pay is not determined until the final
liquidation of his estate.
4.

Debtor absconds or cannot be sued

within the Philippines
5.
Resort to all legal remedies is a
useless formality
6. Others
i. Non-compliance with Art. 2060
ii. If he is a judicial bondsman or
sub-surety
iii. Failure to interpose it as a defense
before
judgment is rendered against him
iv. Where a pledge or mortgage has
been given
by him as a special security
III. Effects of Compromise
A. General rule
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.
B. Exception to the rule
However, even if the guarantor or
debtor is not a party to such
compromise, the same can 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.

IV. Benefit of Division

A. Definition
Right of a co-guarantor, as against
the creditor, to pay only the divided
share that it is bound to pay
B. Application
This article entitles the several
guarantors of only one debtor and
for the same debt.
C. Exceptions
1. Express stipulation of solidarity
2. Article 2059

SECTION 2 Effects of Guaranty

between
the
Debtor
and
the
Guarantor (Art. 2066-2072)
I. Right to Indemnification
It is the debtor that is directly and
principally liable so it is just that
the guarantor who pays must be
indemnified.
Indemnity comprises:
a. Total amount of debt but if
the guarantor paid a smaller
amount due to compromise,
he cannot demand more than
he actually paid
b. Legal interest from notice of
payment of the debt.
c. Expenses incurred by the
guarantor expenses as
consequence of the guaranty;
expenses after payment has
been demanded
d. Damages, if they are due
Exceptions to Right of Indemnity
a. A. 2050
b. A. 1238
c. Subject to waiver
A. Effect of payment
maturity (2069)

before/after

(1) Obligation with a period

obligation demandable only when
the day fixed comes. When
guarantor pays before maturity,

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he
is
not
entitled
to
reimbursement since there is no
necessity
for
accelerating
payment.
Rationale: Guaranty is subsidiary.
However, the debtor is liable if
payment was made with his
consent or the same was ratified
by him.
In any case, guarantor can
recover upon expiration of the
period.
(2) Where demand made during
term of guarantee, the fact that
payment was actually made after
said term is not material. What
is controlling is that default
and demand on guarantor had
taken
place
while
the
guarantee is still in force.
B. Effect of repeat payment
(1) No notice from guarantor: the
guarantors remedy is to collect
from the creditor.
(2) Exceptions: The guarantor
may still claim reimbursement
from the debtor in spite of lack of
notice when:
a. the creditor becomes insolvent
b. the guarantor was prevented
by FE to notify debtor
c. the guaranty is gratuitous
C. Guarantor of a third person at
request of another (2072)
The guarantor has the right to claim
reimbursement from:
a. the person who requested him
to be a guarantor
b. the debtor
II. Right to Subrogation necessary
to enforce right to indemnification. It
arises by operation of law and upon
principles of natural justice. The
guarantor is subrogated to the rights of
the creditor.

When
right
to
subrogation
not
available: when guarantor has no right
to be reimbursed
A. Effect of payment without notice
(2068)
The guarantor must notify the debtor.
If not, the the debtor may set up
defenses which he could have set up
against the creditor at the time of
payment.
Ex: The debtor has already paid.
Guarantor pays without notifying
debtor. Debtor may then raise
that the obligation has been
extinguished.
III. Right to Protection
General rule: The guarantor has no
cause of action against the debtor until
the former has paid the obligation.
Art. 2071 seven instances when the
guarantor may proceed against the
debtor even before payment. The
purpose is to enable the guarantor to
take measures for the protection of
his interest.
This for the protection of guaranty
before he has paid but after he has
become liable.
Art. 2066 remedy after payment
Remedies:
(1) Release from guaranty can
only be exercised against the
principal debtor and not against
the creditor
(2) Demand a security

SECTION 3 Effects of Guaranty as

Between
Co-guarantors
(Articles
2073-2075)
I. Right to Reimbursement is the
right of the co-guarantor who pays, as
against the other co-guarantors, to
recover the shares due from the coguarantors, but only if the following
conditions concur:

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A.
A. There are two or more guarantors
of the same debtor for the same
debt.
B. One of
paid.

the

co-guarantors

has

C. Payment is made by virtue of a

judicial demand or the principal
debtor is insolvent.
What is the effect of insolvency of any
guarantor?
The rule in solidary obligations shall
apply his share shall be borne by the
others.
Accrual and basis of the right to
reimbursement is acquired ipso jure
by the guarantor.
II.
Defenses
Available
to
Coguarantors according to Art. 2074:
In the case of the preceding article, the
co-guarantors may set up against the
one who paid, the same defenses which
would have pertained to the principal
debtor against the creditor, and which
are not purely personal to the debtor.
All defenses which the debtor would
have interposed against the creditor
Example: Defenses such as fraud,
prescription, and illegality, etc. may
be set up because they are defenses
inherent in the obligation.

Purely personal defenses of the

debtor
Example: Defense like minority

Guaranty
subsidiary

as an accessory
obligation

and

When
the
principal
obligation
is
extinguished, the guaranty is terminated
Recall: Causes of Extinguishment of
Obligations
1.
Payment or performance
2.
Loss of the thing due
3.
Condonation or remission of the
debt
4.
Merger of the rights of the
creditor and debtor in the same
person
5.
Compensation
6.
Novation
B. Material alteration of the principal
contract = extinguishment of the
guaranty
1. Material Alteration A change which
imposes new obligation or added
burden on the party promising or
which takes away some obligation
already imposed, changing the legal
effect of the original contract and not
merely the form thereof.
Material Alteration = More Onerous
Obligation
2. Effect of Material Alteration =
Release of the Guarantor (without his
consent)
Ration: Such material alteration
would constitute a novation or
change of the principal contract
which
is
consequently
extinguished.
3. Alteration Immaterial

III. Liability of Sub-guarantor in Case

of Insolvency of Guarantor the subguarantor is liable to the co-guarantors in
the same manner as the insolvent
guarantor for whom he bound himself.

Examples:
Assignment of the creditor
without the knowledge or
consent of the surety

CHAPTER 3 Extinguishment of
Guaranty

Change
in
the
technical
specifications of the items
purchases but the amount due
remains unchanged

I. Causes
guaranty

of

Extinguishment

of

II.

Release by Conveyance
Property by the Debtor

of

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A.

Acceptance by creditor of an
immovable
property
or
other
property = payment of the debt
B.
Eviction from the immovable
property does not make the guarantor
liable but revives the principal
obligation and not of the guaranty
III. Release of Guarantor without
the Consent of Other Guarantors
A. Article 2065 states that the
guarantors enjoy the benefit of
division.
B. Article 2073 states that in case one of
the guarantors become insolvent, the
guarantors must bear his share
C. Such that when one of the guarantors
is released without the consent of the
others by the creditor, the guarantors
also benefit up to the extent of the
released guarantor
IV. Release by extension of term
granted by creditor to debtor
A. Creditors Grant of Extension to the
Debtor without the consent of the
Guarantor releases the latter
Ratio: Necessity of avoiding
prejudice to the guarantor
B. Prejudice to the Guarantor and
period of extension immaterial
C. Extension must be based on a new
agreement
D. Diligence on part of the creditor to
enforce his claim generally not
required
E. No cause of action against creditor
for delay
V. Release when guarantor cannot
be subrogated
A. Guarantors who pay to the creditor
are entitled to subrogation to all the
rights of the creditor.
B. The creditor has the duty to account
for his lien on the principals
property

C. Failure of the creditor to register a

mortgage or secure a right releases
the guarantor because there can no
longer be subrogation in favor of the
guarantor.
.

CHAPTER 4 Legal and Judicial

bonds
I. Bonds
An undertaking that is sufficiently
secured and not cash or currency.
A three-party contract in which one
party (usually a bank or insurance
company) gives a guaranty to a
contractors customer (oblige) that
that the contractor (obligor) will fulfill
all the conditions of the contract
entered into with the obligee. If the
obligor fails to perform according to
the terms of
the
contract,
the
surety pays a sum agreed upon in the
contract
to
the
customer
as
compensation.
Bonds are contractual in nature. It
exist only in consequence of a meeting
of minds under the conditions
essential to a contract.
II. Kind of Bonds
A. Legal bonds - refers to a bond imposed
by virtue of a provision of law.
B. Judicial bonds - refers to a bond that is
required by the courts by virtue of a
judicial order to secure the eventual right
of one of the parties in a case
III. Qualifications of a Bondsman
A. Art 2056 (For personal bondsman)
1. He possesses integrity
2. He has capacity to bind himself,
and
3. He has sufficient property to
answer for the obligation which
he guarantees

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B. Sec 12, Rule 114, Rules of court (For

sureties in property bond)
1. Each must be a resident owner
of real estate within the Philippines;
2. Where there is only one surety,
his real estate must be worth at
least
the
amount
of
the
undertaking;
3.
If there are two or more
sureties, each may justify in an
amount less than that expressed in
the undertaking but the aggregate
of the justified sums must be
equivalent to the whole amount of
bail demanded.
In all cases, every surety must be
worth the amount specified in his
own undertaking over and above all
just
debts,
obligations
and
properties exempt from execution.
(12a)

A pledge or mortgage sufficient to

cover the obligation shall be
admitted in lieu thereof.

V.
Bondsman
excussion

not

entitled

to

A judicial bondsman and the subsurety are not entitled to the benefit
of excussion because they are not
mere guarantors, but sureties whose
liability is primary and solidary.
Excussion- the act of exhausting legal
proceedings against a debtor or his
property, before proceeding against
the property of a person secondarily
liable for the debt.

IV. Remedy if bondsman failed to

give or perform the bond required
of him

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