CONTRACT OF GUARANTY AND SURETYSHIP

(Articles 2047 - 2081)

Contract of Guaranty
- An accessory contract whereby a person called guarantor will bind himself to the creditor
to fulfill the obligation of the principal debtor in case the principal debtor will fail to pay
the obligation.
- In contract of guaranty and suretyship, the security of the obligation, the security of the
loan or indebtedness will be a person known as the guarantor (COG) and surety (COS)
- NOTE: In a COG, the guarantor does not bind himself in solidarity with the principal
debtor, the liability is only subsidiary.
- In COS, a contract by virtue of which a person binds himself in solidarity with the
principal debtor to fulfill the obligation.

Qualification of Guarantor
1. Art. 2056, The guarantor must possess the integrity at the time of the perfection.
- He should not have been convicted by the regional trial court of a crime
involving dishonesty because if the guarantor has been convicted of such
crimes where it involves dishonestly, the creditor can actually demand from
the principal debtor the delivery of another person who would act as a
guarantor.
2. The guarantor should have the capacity to bind himself at the time of the
perfection to give valid consent
- He is not insane, deaf, mute, know what is the right, not a minor
3. The guarantor should have sufficient property at the time of the perfection

*What if the guarantor becomes insolvent?

- Creditors can still ask from the principal debtor to provide another guarantor who meets
the qualifications.
*Is a married woman allowed to become a guarantor without the consent of the husband?
- Yes, as long as she’s not insane, deaf, mute, etc. as long as she can give valid consent
but it does not bind the conjugal property and only her paraphernal or exclusive
property is only bound.

Form
- Contract must be reduced in writing so that it will be enforceable
- Art. 2055, guaranty is not presumed so it must be expressed or reduced in writing and it
cannot extend to more than what is stipulated therein.
Effect when Guaranty was entered:
● Without the knowledge or consent of the debtor
- Creditor cannot be forced to receive the payment being delivered by the third
person who actually binds himself as a guarantor
● Against the will of the debtor
- Only entitled to Beneficial Reimbursement

Characteristics: (GUNAC)
1. Gratuitous
- Guarantor is not entitled to receive any compensation
2. Unilateral
- Only creates an obligation at the part of the guarantor to pay in the event that
on maturity that it has been shown or proven that the debtor has no capacity to
pay the creditor
3. Nominate
- It has specific name
4. Accessory
- Art. 2052, it cannot exist unless there is a valid/avoidable/enforceable/natural
obligation but the underlying reason is there must first be the principal contract
of loan and the loan itself must be valid or it could be avoidable, enforceable, or
natural obligation
5. Consensual
- Not needed that there must be the delivery of the payment from the guarantor
to the creditor or to create a contract from guaranty

Classification of Guaranty
I. Legal
II. Judicial
III. Conventional

What kinds of Obligation may be secured?

● Article 2053 - PRESENT and FUTURE DEBTS
● LIMITATION - Guarantor’s liability may be LESSER but NOT more than OBLIGATION
○ (Art. 2054) Obligations of the guarantor may be lesser than the obligation
secured but not more than the obligation. If it binds him more than the
obligation, the liability of the guarantor shall be reduced to the limits of that of
the debtors
Effects of Guaranty
● What is BENEFIT OF EXCUSSION?
○ Exhaustion of the properties of the debtor not exempt from execution
● When BENEFIT OF EXCUSSION is NOT APPLICABLE
○ If the guarantor has expressly renounced it
○ If he has bound himself solidarily with the debtor
○ In case of insolvency of the debtor
○ When he has absconded or cannot be sued within the Philippines unless he has
left a manager or representative
○ If it may be presumed that an execution on the property of the principal debtor
would NOT result in the satisfaction of the obligation.
○ When the guarantor has constituted in favor of the creditor a pledge or mortgage
as additional security

How to Set-up Benefit of Excussion

● Creditor must set it up when the creditor demands payment
● Guarantor points out AVAILABLE properties of the debtor WITHIN the Philippines

Benefit of Division
● Article 2064 - when there are SEVERAL GUARANTORS of the same DEBTOR - they have
BENEFIT OF EXCUSSION and BENEFIT OF DIVISION
● BENEFIT OF DIVISION
- The SEVERAL GUARANTORS are LIABLE PROPORTIONATELY

WHEN BENEFIT DIVISION IS LOST?

- Benefit of Division is LOST when Art. 2059 is present (instances when Benefit
of Excussion is lost)
Effects of Guaranty Between the Debtor and the Guarantor:
- If the guarantor paid with the consent of the principal debtor then he is entitled
to full reimbursement plus subrogation
*Subrogation - stepping into the shoes of the principal of the creditor
- If the guarantor delivered the payment without the consent or against the will of
the principal debtor, then he would only be entitled to beneficial reimbursement
● General Rule: Guarantor must be REIMBURSED and will have the RIGHT OF
SUBROGATION
● Exceptions:
1. When the guaranty is constituted without the knowledge or against the will of
the principal debtor, the guarantor can recover only insofar as the payment had
been beneficial to the debtor

2. Payment by a third person who doesn’t intend to be reimbursed by the debtor is

deemed to be a donation, which, however, requires the consent of the debtor.
But the payment is in any case valid as to the creditor who has accepted it.
3. The right to demand reimbursement is subject to waiver

Effect of Payment by Guarantor before or after maturity

● The guarantor cannot demand REIMBURSEMENT until the expiration of the period
UNLESS the DEBTOR ratified the payment

Effect of Repeat Payment by the Debtor

● If GUARANTOR paid without notifying the DEBTOR
○ The GUARANTOR can RECOVER the payment from the CREDITOR not from the
DEBTOR
○ Is the guarantor required to reimburse the guarantor for the payment that he
has made without the consent of the debtor?
■ No, under Art. 2070, if the guarantor is paid without notifying the debtor
and the debtor who is not aware of the payment made by the guarantor
repeats the payment, the guarantor has no remedy against the principal
debtor or he cannot demand from the guarantor the debtor the
reimbursement of the amount that he has paid
■ Debtor has no obligation to reimburse the payment that has been made
by the guarantor except...
● Exceptions:
a. Creditor becomes insolvent
b. The guarantor was prevented by fortuitous event to advise the debtor of the
payment
c. The guaranty is gratuitous
Rights of the Guarantor before Payment
a. To obtain release from guaranty
b. To demand security to protect him in case of any proceeding and in case of insolvency of
the debtor

Instances where the Guarantor may proceed against the debtor before payment
● When he is sued for payment;
● In case of insolvency of the principal debtor
● When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;
● When the debt become demandable, by reason of the expiration of the period for
payment;
● After the lapse of ten (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 ten years; (Oral: 6 years)
● If there are reasonable grounds to fear that the principal debtor intends to abscond'
● If the principal debtor is in imminent danger of becoming insolvent.

Effects of Guaranty between Co-Guarantors

● They are entitled to BENEFIT OF DIVISION
● EFFECT OF INSOLVENCY?
○ The share of the INSOLVENT GUARANTOR shall be borne by ALL
PROPORTIONATELY.

Extinguishment of Guaranty
● CAUSES:
○ Direct - when the guaranty itself is extinguished;
○ Indirect -when the principal obligation ends - the accessory contract of Guaranty
is likewise extinguished.

❖ EFFECT OF DACION EN PAGO

- Refers to conveyance of ownership over a thing as an accepted equivalent of an
obligation in money
- Art. 2077, if the creditor voluntarily accepts immovable or other property in
payment of debt even if he should afterwards lost the same through eviction, the
guarantor will now be released.
- Mode of extinguishing obligation (a special form of payment), the effect or
consequence of the receipt of the immovable property given by the guarantor as
payment of the obligation of the debtor, the guarantor will now be released from
his liability
 ❖ EFFECT OF RELEASE OF ONE OF THE GUARANTORS
- Release made by the creditor in favor of one of the guarantors without consent
of others benefits all to the extent of the share of the guarantor to whom it has
been granted
❖ EFFECT OF EXTENSION GRANTED BY THE CREDITOR WITHOUT CONSENT OF THE
GUARANTOR

Defenses Available to the Guarantor

- Art. 2081
● Defenses inherent in the principal obligation
● Defenses personal to a guarantor
● Defenses personal to the debtor

GUARANTY V. SURETYSHIP

GUARANTY SURETYSHIP

1. Liability is subsidiary 1. Liability is primary

2. Guarantor assumes liability by virtue 2. Surety assumes liability as a regular to
of an independent agreement to pay the undertaking or contract
the obligation if the principal debtor 3. Liability of surety is original
fails to do so 4. Surety is the insurer of the debt
3. Liability of guarantor is collateral 5. Surety has no benefit of excussion
4. Guarantor is the insurer of the
solvency of the debtor
5. Guarantor can avail himself of the
“Benefit of Excussion and Division” - if
the creditor proceeds against him for
payment of the obligation