Ebonotes: Guaranty & Surety
- He has sufficient property to answer for
GUARANTY
I. Nature and Extent of Guaranty
Art. 2047. By a 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.
GR: Guaranty is gratuitous.
EXC: When there is stipulation to the contrary
A guaranty is not presumed, it must be express and
cannot extend to more than what is stipulated
therein.
If a guaranty is entered into without the consent,
or against the will of the principal debtor, the
guarantor can only recover the amount beneficial
to the creditor, and there is no right to
subrogation.
a. Obligation Secured by Guaranty
i. The guaranty must be founded on a valid
principal obligation
ii. A guaranty may secure the performance of a
voidable, unenforceable, and natural obligation.
iii. A guaranty may secure a future debt (Continuing
Guaranty)
- Not 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.
- It is prospective in its operation and is
generally intended to provide security
with respect to future transactions.
- Future debts, even if 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.
(Continuing Guaranty or Suretyship
Agreement)
b. Parties to a Guaranty
i. Creditor
ii. Debtor of the Principal Obligation
iii. Guarantor
Qualifications of a Guarantor
- He possesses integrity
- He has capacity to bind himself
the obligation which he guarantees
GR: Creditor has the right to demand another
guarantor with the qualifications in Art. 2056 if the
previous guarantor has:
- Been convicted in first instance of a
crime involving dishonesty
- Become insolvent
EXC: Creditor has no right to demand for a
replacement guarantor if he himself
required and stipulated that the specified
person should be the guarantor
c. Excussion
The guarantor cannot be compelled to pay the
creditor unless the latter has:
- Exhausted all the property of the debtor
- Resorted to all the legal remedies
against the debtor
To avail the benefit of excussion, the guarantor
must
- Set it up against the creditor upon
demand for payment, and
- Point out to the creditor available
property of the debtor within PH
territory sufficient to cover the amount
of the debt.
GR: The guarantor has the right to benefit from the
excussion
EXC: Excussion shall not take place:
i. If the guarantor has expressly renounced it
ii. If he has bound himself solidarily with the
creditor
iii. In case of insolvency of the debtor
iv. When he has absconded, or cannot be sued
within the Philippines, unless he has left a
representative
v. If it may be presumed that an execution on the
property of the principal debtor would not result in
the satisfaction of the obligation.
vi. If he does not point out to the creditor available
property of the debtor sufficient to cover the
amount of the debt
vii. If he has a judicial bondsman and sub-surety
viii. Where a pledge or mortgage has been given to
him as a special security
ix. If he fails to interpose it as a defense before
judgment is rendered against him
d. Right to Protection
Ebonotes: Guaranty & Surety
Art. 2071 provides a protective remedy in favor of
the guarantor. The guarantor, even before having
paid, but after he is made liable for the debt, may
proceed against the principal debtor:
i. When he is sued for the payment;
ii. In case of insolvency of the principal debtor, or
when there is imminent danger of him becoming
insolvent;
iii. When the debtor has bound himself to relieve
him from the guaranty within a specified period,
and this period has expired;
iv. When the debt has become demandable, by
reason of the expiration of the period for payment;
v. After the lapse of ten 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;
vi. If there are reasonable grounds to fear that the
principal debtor intends to abscond;
To protect his interest, a guarantor can proceed
against the principal debtor by:
i. Obtaining release from the guaranty; OR
ii. Demanding a security that shall protect him from
ang proceedings by the creditor and from the
danger of insolvency of the debtor.
e. Right to Indemnification
The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
i. The total amount of the debt
ii. The legal interest thereon from the time the
payment was made known to the debtor, even
though it did not earn interest for the creditor
iii. The expenses incurred by the guarantor after
having notified the debtor that payment had been
demanded of him.
iv. Damages if they are due
f. Right to Subrogation
The guarantor who pays is subrogated by virtue
thereof to all the rights of the creditor had against
the debtor.
If the guarantor has compromised with the
creditor, he cannot demand of the debtor more
than what he has really paid.
g. Rights of Co-guarantors
i. Right of excussion against the principal guarantor
and the principal debtor.
ii. Benefit of division
- However, the benefit of division will
cease if solidary liability has been
stipulated or if any of the exceptions to
the benefit of excussion are present
iii. Right to reimbursement
iv. Right of an insolvent guarantor to have his share
bore by the others, including the payor, in the
same proportion
v. Right to set-up defenses against the paying co-
guarantor those available to the principal debtor
against the creditor
EXC: Defenses personal to the debtor that
are not available to the guarantor.
Requisites for the applicability
i. There are two or more guarantors of the same
debtor for the same debt
ii. Payment has been made by one guarantor
iii. The payment was made
- Because of the insolvency of the debtor
- By judicial demand
iv. The paying guarantor seeks to be indemnified
only to the extent of his proportionate share in the
total obligation
II. Effects of Guaranty
i. The guarantor has the right to benefit from
excussion
ii. The creditor has the right to secure a judgment
against the guarantor prior to the excussion
GR: An ordinary personal guarantor may demand
exhaustion of all the property of the debtor before
he can be compelled to pay
EXC: 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 latter’s obligation.
iii. The creditor has the duty to make prior
demand for payment from the guarantor
The demand is to be made only after the judgment
of the debt.
iv. The guarantor has the duty to set up the
benefit of excussion
As soon as he is required to pay, the guarantor
must also point out to the creditor available
Ebonotes: Guaranty & Surety
property (not in litigation or encumbered) of the
debtor within the Philippines.
v. The creditor has the duty to resort to all legal
remedies
After the guarantor has fulfilled the conditions
required for making use of the benefit of excussion,
it becomes the duty of the creditor to:
i. Exhaust all the property of the debtor pointed
out by the guarantor
ii. If he hails to do so, he shall suffer the loss for the
insolvency of the debtor, but only to the extent of
the value of said property.
vi. The creditor has the duty to notify the
guarantor in the action against the debtor
Notice to the guarantor is mandatory in the action
against the principal debtor. The guarantor,
however, is not duty bound to appear in the case,
and his non-appearance shall not constitute
default, with its consequential effects.
Purpose: To give the guarantor the opportunity to
allege and substantiate whatever defenses he may
have against the principal obligation, and chances
to set up such defenses as are afforded him by law.
vii. A compromise shall not prejudice a person not
party to it
A compromise between creditor and principal
debtor benefits the guarantor but does not
prejudice him.
A compromise between guarantor and the creditor
benefits but does not prejudice the principal
debtor.
viii. Effects of Guaranty between the Debtor and
the Guarantor
a. The guarantor has the duty to notify the debtor
before paying his creditor
Should payment be made without notification or
against the debtor’s will, and supposing the debtor
has already made a prior payment, the debtor
would be justified in setting up the defense that the
obligation has already been extinguished by the
time the guarantor made the payment. The
guarantor will then lose the right of reimbursement
and consequently the right of subrogation.
b. The guarantor cannot demand reimbursement
for payment made by him before the obligation has
become due
GR: Since a contract of guaranty is only subsidiary,
the guarantor cannot be liable for the obligation
before the period on which the debtor’s liability
will accrue. Any payment made by the guarantor
before the obligation is due cannot be indemnified
by the debtor. The guarantor can only demand
reimbursement upon expiration of the period.
EXC: Prior consent or subsequent ratification by the
debtor
c. The guarantor may proceed against the debtor
even before payment has been made.
If the guarantor has paid without notifying the
debtor, and the latter not being aware of the
payment, repeats the payment, the former has no
remedy whatsoever against the debtor, but only
against the creditor.
In case of gratuitous guaranty, if the guarantor was
prevented by a fortuitous event from advising the
debtor of the payment, and the creditor becomes
insolvent, the debtor shall reimburse the guarantor
for the amount paid.
III. Extinguishment of Guaranty
GR: The obligation of the guarantor is extinguished
at the same time as that of the debtor and for the
same causes as all other obligations.
Specific instances that extinguish the guaranty:
i. Creditor voluntary accepts the immovable for
payment
ii. When extension is granted to the debtor without
the consent of the guarantor
- However, he mere failure of the debtor
to demand payment after the debt has
become due does not, of itself,
constitute any extension of time.
iii. When subrogation is not feasible
IV. Legal and Judicial Bonds
Bond – Undertaking that is sufficiently secured, and
not cash or currency
Bondsman – Surety offered in virtue of a provision
of law or a judicial order
If the person required to give a legal or judicial
bond should not be able to do so, a pledge or
Ebonotes: Guaranty & Surety

mortgage sufficient to cover the obligation shall be

admitted in lieu thereof.
The judicial bondsman and the sub-surety are not
entitled to the benefit of excussion because they
are not mere guarantors but sureties whose
liability is primary and solidary.
Effect of negligence of creditor – Mere negligence
on the part of the creditor in collecting from the
debtor will not relieve the surety from liability.
A suretyship is covered by the Statute of Frauds
since it constitutes a special promise to answer for
the debt, default, or miscarriage of another.
Therefore, a suretyship is unenforceable unless:
- The suretyship or some note or
memorandum thereof, is in writing; and
- The suretyship is subscribed by the
party or by his agent.
iii. Obligations Secured

A suretyship is valid despite the absence of any

SURETY direct consideration received by the surety, either
from the principal debtor or from the creditor.

The consideration necessary to support a surety’s

Art. 2017, NCC. X X X. obligation need not pass directly to the surety. A
If a person binds himself solidarily with the consideration moving the principal debtor alone is
principal debtor, the provisions of Sec. 4, Ch. 3, Title sufficient.
1 of this Book shall be observed. In such case the
contract is called a suretyship. Strictissimi juris rule – The obligation of the surety
cannot be extended by implication beyond the
i. Concept terms of the contract.
A relation which exists where one person (surety) Comprehensive or Continuing Surety – It
binds himself solidarily with the principal debtor, contemplates a prospective or future course of
such that the former undertakes a direct and dealing, covering a series of transactions within the
primary obligation or other duty to a third person stipulations of a contract, until the expiration or
(creditor), who is entitled to but one performance, termination of the suretyship.
and as between the two who are bound, the latter
rather than the former should perform. iv. Surety v. Standy Letter of Credit
A suretyship is also an agreement whereby a surety
Surety Standby LC
guarantees the performance or undertakes to
Upon the debtor’s Upon default, the
answer, under specified terms and conditions, for
default, the creditor creditor-beneficiary
the debt, default or miscarriage of the principal or
expects that the surety expects that it will
obligor, such as failure to perform, or breach of
will perform promptly receive cash
trust, negligence and the like, in favor of a third
before any litigation
party.
There is no duty to There is a duty to pay
indemnify the creditor the creditor-
It shall be deemed as insurance contract if the
until the creditor beneficiary upon
surety’s main business is that of suretyship, and
establishes the fact of presentation of the
not where the contract is merely incidental to any
the debtor’s non- required documents.
other legitimate business or activity of the surety.
performance. No need to prove non-
performance in
ii. Form or Surety
litigation.
The contract of a surety is evidenced by a
v. Surety v. Guaranty
document called surety bond which is essentially a
promise to guarantee the obligation of the obligor.
Surety Guaranty
In turn, the obligor executes an indemnity
An accessory promise A collateral
agreement in favor of
by which a person undertaking to pay the
the insurer.
binds himself for debt of another in case
another already bound, the latter is unable to
It is an accessory contract unlike a contract of
and agrees with the pay the debt
insurance which is the principal contract itself.
Ebonotes: Guaranty & Surety

creditor to satisfy the

obligation if the debtor
does not
A surety is usually The contract of
bound with his guaranty is the
principal by the same guarantor's own
instrument, executed separate undertaking,
at the same time, and in which the principal
on the same does not join. It is
consideration. He is an usually entered into
original promissor and before or after that of
debtor from the the principal, and is
beginning, and is held, often supported on a
ordinarily, to know Separate consideration
every default of his from that supporting
principal. the contract of the
principal. The original
contract of his principal
is not his contract, and
he is not bound to take
notice of its
nonperformance
A surety will not be A guarantor is often
discharged, either by discharged by the mere
the mere indulgence of indulgence of the
the creditor to the creditor to the
principal, or by want of principal, and is usually
notice of the default of not liable unless
the principal, no notified of the default
matter how much he of the principal
may be injured thereby
A surety is the insurer A guarantor is the
of the debt, and he insurer of the solvency
obligates himself to of the debtor and thus
pay if the principal binds himself to pay if
does not pay the principal is unable
to pay

vi. Surety v. Joint and Solidary Obligations

Nature of liability – Although contractual and

accessory, a surety’s liability is direct, primary, and
absolute.

Surety Joint and Solidary

Obligations
Surety has the right to Joint and solidary
indemnification and debtor has only a right
subrogation as against to reimbursement as
the principal debtor against his debtors
Accessory, ancillary, Not dependent on, or
and collateral not an incident to a
obligation principal obligation