Guaranty and Suretyship (Articles 2047-2084)

Chapter 1. Nature and Extent of Guaranty (Arts. 2047-2084)

Piczon vs. Piczon

Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon (president of borrowing
firm)bound himself as guarantor and agreed to the use of the loan as surety cash deposit for the
registration with the SEC. Consuelo Piczon (lending firm) brought action to recover the amount loaned.
Court ruled in favor of Consuelo Piczon and ordered Esteban Piczon and Sosing-Lobos to pay him as
guarantor the amount of the loan + interest.

Issue: WON Esteban Piczon is a surety or a guarantor?

Held: Under the terms of the contract Esteban Piczon expressly bound himself only as guarantor. A
guaranty must express, and it would be violative of the law to consider a party to be bound as surety when
the very word used in the agreement is guarantor.

Palmares vs. CA (288 SCRA 422)

Facts: Private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn
Azarraga, together with petitioner Estrella Palmares, in the amount of P30, 000.00 payable on or before
May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30days from
the date thereof. 1 On four occasions after the execution of the promissory note and even after the loan
matured, petitioner and the Azarraga spouses were able to pay a total of P16, 300.00, thereby leaving a
balance of P13, 700.00. No payments were made after the last payment on September 26, 1991.
2Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion of
the principal debtors, allegedly by reason of the insolvency of the latter.

Issue: WON Palmares is liable

Held: 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. It is a cardinal rule
in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar,
petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker
of the note. The terms of the contract are clear, explicit and unequivocal that petitioner’s liability is that of
a surety.

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Castellvi de Higgins & Higgins vs. Sellner

Facts: Sellner (defendant) wrote a letter to Mcleod (Castellvi’s agent) saying that he would bound himself
to pay the promissory note of Mining, Clarke and Maye amounting 10K + % if not fully paid at maturity,
upon the surrender 8k worth of MCM’s stock which is held by Castellvi.

Issue: WON Sellner is a guarantor or surety?

Held: Sellner is a GUARANTOR. Sellner was not bound with Castellvi by the same instrument executed
at the time and the same consideration, but his responsibility was secondary, one founded on an
independent collateral agreement. Neither was he jointly and severally liable with Castellvi.

Reiss vs. Memije

Facts: Memije entered into a contract with D (building contractor) for repair of a house. D has no credit
line so Reiss refused to sell D lumber without an advance. Memije accompanied D and told Reiss that he
would guarantee payment for lumber. The lumber extended by Reiss solely and exclusively to Memije
was under a verbal agreement. Reiss brought an action for the purchase price of the lumber.

Issue: WON Memije is liable as guarantor or as original promisor?

Held: Memije is primarily liable. It is evident that Memije used the words “guarantor” not in a technical
sense but rather that after satisfying, Reiss as to his own financial responsibility. If goods are sold upon
the sole credit and responsibility of the party who makes the promise then, even though they are delivered
to a 3rd person, there is no liability to the 3rdperson. Promise to pay need not require a writing or
memorandum to be enforceable by action.

Machetti vs. Hospicio de San Jose

Facts: By a written agreement, Machetti undertook to construct a building for Hospicio de San Jose. One
of the conditions was that Machetti obtain the guarantee of Fidelity & Surety Co. to the amount of 12K. It
was subsequently found out that the work had not been carried out in accordance with the specifications.
Hospicio refused to pay therefore Machetti brought an action to recover the amount.

Issue: WON the undertaking assumed by FSC that of guarantor or surety?

Held: Circumstances may be shown which convert the contract into one of suretyship but that does not
exist. It appears that the contract is the guarantor’s separate undertaking in which the principal does not
join, that it rests on a separate consideration moving from the principal, and that although it is written in
continuation of the contract for the construction of the building, it is collateral undertaking separate and
distinct from the latter. All these are features of a contract of guaranty.

Severino vs. Severino

Facts: Melecio Severino upon his death, left considerable properties. To end litigation among heirs a
compromise was effected where defendant (son of MS) took over the property of deceased and agreed to
pay installment of 100K to plaintiff (wife of MS) payable first in 40K cash upon execution of document
in 3 equal installments. Enrique Echauz became guarantor. Upon failure to pay the balance, plaintiff filed

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and action against the defendant and Echauz. Enchauz contends that he received nothing from affixing his
signature in the document and the contract lacked the consideration as to him.

Issue: WON there is a consideration for the guaranty?

Held: 1. The guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto.

2. It is neither necessary that guarantor or surety should receive any part of the benefit, if
such there be accruing to his principal.

Municipaity of Gasan vs. Marasigan

Facts: Municipality of Gasan granted Marasigan fishing privileges within the jurisdictional waters. To
secure payment of license fees, Marasigan filed a bond subscribed by G and H who bound themselves to
pay if Marasigan failed to comply with the terms of the contract. Contract was declared illegal by the
Executive Bureau therefore the Municipality awarded the privilege to another person who failed to pay
the deposit and yielded the privilege to Marasigan. The municipality told Marasigan that the contract was
to be effective so the municipality sought to recover from Marasigan and G and H, the amount
representing the license.

Issue: WON the contract and bond are valid and enforceable?

Held: No. Contract was not consummated and was cancelled. It ceased to be valid when it was cancelled
so Marasigsan and G&H were not bound to comply with the terms of the contract. A guaranty cannot
exist without a valid obligation.

Plaridel Surety Insurance vs. Artex Development Co.

Facts: Artex withdrew from the Bureau of Customs shipments of imported goods which were subject to
customs duties and other taxes after posting surety bonds pursuant to RA 4086 because its applications
for tax exemptions were not approved by the Board of Industries. In consideration of the obligation
assumed by Plaridel, Artex agreed to pay the premiums and cost of documentary stamps in advance due
on bonds for each period of 12 months until bonds and its renewals, extensions or substitutions be
cancelled in full by the person or entity guaranteed or by court of competent jurisdiction. Artex stopped
paying premiums and costs of documentary stamps after it was granted tax exemption. Plaridel maintains
that it renewed the surety bonds more or less 8 months before the tax exemption. Plaridel seeks recovery
of renewal of premiums on bonds which were already null and void upon grant of tax exemption to
principal

Issue: WON Artex is liable for accrued premiums and costs of doc stamps on renewals of the surety
bonds after grant of tax exemption to Plaridel?

Held: No. Suretyship cannot exist without valid obligation. The renewals were without consideration.
Plaridel incurred no risk from Artex’ tax exemption application was approved. Any renewals were void
from the beginning because the cause or object of said renewals did not exist at the time of the
transaction. Express stipulation by parties, surety bonds became null and void upon grant of tax
exemption.

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Pacific Banking Corp. vs. IAC

Facts: Cecilia Regala obtained from plaintiff the issuance and use of Pacific card credit card. Robert
Regala Jr., spouse of Cecilia, executed a “Guarantor’s Undertaking” in favor of Pacific wherein the
Regala Jr., agreed jointly and severally with Cecilia Regala, to pay Pacific upon demand and all
indebtedness, obligations, charges or liabilities due and incurred by her. Cecilia was declared in default
for failure to pay 92K within the reglementary period. Regala Jr. admitting the execution of the
“Guarantor’s Understanding” but with the understanding that his liability would be limited to2K/month.

Issue: WON the Guarantor’s Understanding is a guaranty or suretyship?

Held: It is in substance a contract of suretyship. A contract of guaranty is where a guarantor binds himself
to pay only in case the latter should fail to do so; while a contract of suretyship, the surety binds himself
solidarily with the principal debtor. Since Regala Jr. bound himself jointly and severally, he is bound to
pay the amount of indebtedness of his wife.

Commonwealth of the Philippines vs. Far Eastern Surety and Insurance

Facts:

Issue:

Held:

PNB vs. CA, Luzon Surety Co.

Facts: Estanislao Depusoy, and the Republic of the Philippines, represented by the Director of Public
Works, entered into a building contract, for the construction of the GSTS building at Arroceros Street,
Manila, Depusoy to furnish all materials, labor, plans, and supplies needed in the construction. Depusoy
applied for credit accommodation with the plaintiff. This was approved by the Board of Directors in
various resolutions subject to the conditions that he would assign all payments to be received from the
Bureau of Public Works of the GSIS to the bank, furnish a surety bond, and the surety to deposit P10,
000.00 to the plaintiff. The total accommodation granted to Depusoy wasP100, 000.00. This was later
extended by another P10, 000.00 and P25, 000.00, but in no case should the loan exceed P100, 000.00. In
compliance with these conditions, Depusoy executed a Deed of Assignment of all money to be received
by him from the GSIS to PNB. Depusoy defaulted in his building contract with the Bureau of Public
Works, and sometime in September, 1957, the Bureau of Public Works rescinded its contract with

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Dernisoy. No further amounts were thereafter paid by the GSIS to lie plaintiff bank. The amount of the
loan of Depusoy which remains unpaid, including interest, is over P100, 000.00. Demands for payment
were made upon Depusoy and Luzon, and as no payment was made, therefore herein petitioner filed with
the trial court a complaint against Estanislao Depusoy and private respondent Luzon Surety Co. Inc.
(LSCI).

Issue: WON Luzon Surety is liable

Held: the bonds executed by private respondent LSCI were to guarantee the faithful performance of
Depusoy of his obligation under the Deed of Assignment and not to guarantee payment of the loans or the
debt of Depusoy to petitioner to the extent of P100, 000.00. Besides, even if there had been any doubt on
the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety. As
concretely put in Article 2056 of the Civil Code, "A guaranty is not presumed, it must be ex-pressed and
cannot extend to more than what is stipulated therein." LSCI is liable to the full extent thereof; such
liability is strictly limited to that assumed by its terms."

El Vencedor vs. Canlas

Facts: An accounting between X company and D, its agent for the sale of merchandise, showed that Dhad
failed to pay X for the merchandise of the value of 5K. X therefore refused to continue to furnish the
merchandise for sale unless he gave a bond. Canlas bound himself as surety and guarantor to D to become
liable in case of his inability to pay damages. It did not appear that at the time of the execution of the
bond Canlas had knowledge of the fact that D was indebted to X in any sum. Canlas had no knowledge.

Issue: Should the bond respond for the debt contracted by D prior to execution?

Held: No. Canlas was liable only for the value of goods furnished to D subsequent to the execution of the
bond. A contract of suretyship or guaranty is ordinarily not retrospective and no liability attached for
defaults occurring before it is entered into unless intent to be so liable is indicated either by express words
or by necessary implication.

BPI vs. Forester

Facts: The Board of directors of corporation X authorized its treasures to obtain for them a credit in
current account for 100K from BPI. Credit was granted and X began to draw against it even before the
formal document of the agreement for the said credit was issued. The accountant G gave a bond in his
name as surety and agreed to be bound jointly and severally in the sum of 100K. The overdraft and
interest amounted to 84,900. BPI was able to collect 43,100 as a result of an action brought against X.BPI
receives 25,500 subsequently.

Issue: WON the bond covered the amounts from BPI prior to its date?

Held: Yes. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed
retrospectively, but that rule must yield to the intention of the contracting parties as revealed by the
evidence. In the present case, the circumstances clearly indicated that the bond given by G was intended
to cover all of the indebtedness.

Standard Oil Co. of NY vs. Cho Siong

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Facts: To guarantee the fulfillment of the obligation of D, as agent of X in the sale of the latter’s
petroleum products, Cho Siong subscribed to a personal bond in the sum of 3K. Cho Siong also
subscribed the 3K bond and signed an instrument in favor of X in which he assumed responsibility for
account of X’s former agent.

Issue: WON Cho Siong is liable for the debt of the former agent of X which D assumed in virtue of
another contract of which Cho Siong was not aware?

Held: No. Under the terms of the bond, Cho Siong did not answer for D, save for the latter’s acts by
virtue of the contract of agreement between D and X. A contract of suretyship or guaranty is to strictly
interpreted and is not to be extended beyond its terms.

Municipality of Lemery vs. Mendoza and Blas

Facts: Municipality of Lemery granted fishing privileges to D for a period of 2 years for the sum of 23K
for each year. Mendoza and Blas as bondsmen executed a document which declared, among other thing,
the lease by D of the privilege of fishing referred to for the term of 2 years. In said document, Mendoza
and Blass obligated themselves jointly and severally to pay the sum of 46K in case D shall fail to comply
with the conditions of the bond of which we are informed. D failed to pay.

Issue: WON Mendoza and Blas are bound to pay 46K or 23K

Held: 23K. The obligating clause of the contract of guaranty is quite clear to the effect that the rent Tobe
paid for the privilege of fishery was 23K for the full term of 2 years. It is true that Mendoza and Blas
declared 46K, but it was only because the bond was required to be made in double the amount of the
principal liability as an assurance of the performance of the principal obligation.

Wise and Co. vs. Kelly

Facts: D purchased merchandise from C on credit and agreed that D would apply the proceeds of its sale
to the discharge of his indebtedness in the amount of 13K the purchase price. Kelly as surety for D
undertook that D would pay over to C the entire proceeds from the sale of the merchandise.

Issue: WON Kelly is liable for the difference between the amount realized from the sale of the
merchandise and the purchase price of the same?

Held: No. Kelly did not undertake absolutely to pay the sum of 13K. His agreement was limited to
respond for the performance by D of his undertaking to deliver to C the total proceeds of the sale of the
merchandise for the invoice value of which a promissory note was given by D.

Pacific Tobacco Corp. vs. Lorenzana

Facts: The Pacific Tobacco Corp. is engaged in the business of manufacturing and distributing cigarettes
cigars and other tobacco products. Lorenzana and PTC entered into an agreement whereby Lorenzana will
act as Distributor of PTC. Lorenzana put up a bond in the amount of 3K with Visayan Surety & Insurance
Corporation, as surety, to guarantee the faithful fulfillment of Lorenzana’s part in the contract to sell and
distribute PTC’s cigarettes.

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Issue: WON the delivery of merchandise to Lorenzana at a place other than that appearing in the contract
constitutes a material alteration of the same that would release Lorenzana from liability?

Held: No. The mention of Manila and Rizal in said agreement was designed more as a declaration or
identification of the places wherein Lorenzana was expressly authorized and assigned to sell
PTC’sproducts which is no obstacle to his acceptance of additional territories in order to fulfill his
obligation. A departure from the terms of contract will not have the effect of discharging a compensated
surety unless it appears that such departure has resulted in injury, loss or prejudice to the surety.

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