Guaranty and Suretyship | Guarantee | Surety Bond

GUARANTY AND SURETYSHIP Chapter 1: NATURE AND EXTENT OF GUARANTY 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—a contract between the guarantor and creditor  Characteristics: a. Accessory—dependent for its existence upon the principal obligation guaranteed by it b. Subsidiary and conditional—takes effect only when the principal debtor fails in his obligation subject to limitation c. Unilateral—it gives rise only to a duty on the part of the guarantor in relation to the creditor although after its fulfillment, the principal debtor becomes liable to indemnify the guarantor, but only an incident of the contract o It may be entered into even without the intervention of the principal debtor d. The guarantor must be a person distinct from the debtor; however, in real guaranty, like pledge and mortgage, a person may guarantee his own obligation with his personal or real properties  Classification of guaranty: A. Guaranty in the broad sense a. Personal—refers to guaranty properly so-called or guaranty in the strict sense o The guaranty is the credit given by the person who guarantees the fulfillment of the principal obligation b. Real—guaranty is property, movable or immovable o If immovable, it is in the form of real mortgage or antichresis o If movable, it is in the form of pledge or chattel mortgage B. As to its origin a. Conventional—one constituted by agreement of the parties b. Legal—one imposed by virtue of a provision of law
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c. Judicial—one required by a court to guarantee the eventual right of one of the parties in a case C. As to consideration a. Gratuitous—one where the guarantor does not receive any price or remuneration for acting as such b. Onerous—one where the guarantor receives valuable consideration for his guaranty D. As to the person guaranteed a. Single—one constituted solely to guarantee or secure performance by the debtor of the principal obligation b. Double or sub-guaranty—one constituted to secure the fulfillment by the guarantor of a prior guaranty E. As to its scope and extent a. Definite—one where the guaranty is limited to the principal obligation only, or to a specific portion thereof b. Indefinite or simple—one where the guaranty includes not only the principal obligation but also all its accessories including judicial costs  Guaranty may also be continuing or not  Suretyship—one person, the surety, engages to be answerable to a third person for the debt, default, or miscarriage of another known as the principal o If a person binds himself solidarily with the principal debtor— suretyship, and the guarantor is called surety o The provisions of the Civil Code on guaranty, other than the benefit of excussion, are applicable and available to the surety  It is quite possible for a guarantor to bind himself solidarily with the principal debtor without affecting the nature of the contract o If his intention is not to convert himself into a principal debtor but merely to constitute himself as a guarantor although binding himself solidarily with him, action may be brought against him outright by reason of the said solidarity but he retains his character as a guarantor and all the rights inherent in a guarantor by reason of payment by him  Nature of surety’s undertaking a. Liability is contractual and accessory but direct—the surety’s obligation is not an original and direct one for the performance of his act, but merely accessory or collateral to the obligation contracted by the principal
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o Nevertheless, his liability to the creditor or promisee of the principal is direct, immediate, primary and absolute o In law, surety is considered as being the same party as the debtor and their liabilities are interwoven as to be inseparable b. Liability is limited by terms of contract—a contract of surety is not presumed; it cannot extend to more than what is stipulated o A surety, however, is not released by a change in the contract which does not have the effect of making its obligation more onerous c. Liability arises only if principal debtor is held liable—a surety contact is made principally for the benefit of the creditor-obligee and this is ensured by the solidary nature of the surety undertaking o In the absence of collusion, surety is bound by a judgment against the principal even though he was not a party to the proceedings o The creditor may sue, separately or together, the principal debtor and the surety  If there are several sureties, the obligee may proceed against any of them  A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal o Except where required by the provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety’s liability o An accommodation party is liable on the instrument to a holder for value o A surety bond is void where there is no principal debtor d. Surety is not entitle to exhaustion of the properties of the principal debtor e. Undertaking is to creditor, not to debtor—in a contract of suretyship, unless otherwise expressly provided, the surety makes no covenant or agreement with the principal that it will fulfill the obligation guaranteed for the benefit of the principal f. Surety is not entitled to notice of principal’s default—the surety is bound to take notice of the principal’s default and to perform the obligation o He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship
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g. Prior demand by the creditor upon principal not required—a creditor’s right to proceed against the surety alone exists independently of his right to proceed against the principal where both principal and surety are equally bound o Proper remedy of the surety is to pay the debt and pursue the principal for reimbursement h. Surety is not exonerated by neglect of creditor to sue principal— mere want of diligence or forbearance does not affect the creditor’s rights vis-à-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation  Guaranty v. Suretyship Guaranty Suretyship Guarantor’s liability depends upon Surety assumes liability as a regular an independent agreement to pay party to the undertaking the obligation if the primary debtor fails to do so A collateral undertaking Charged as an original promisor Secondarily or subsidiarily liable Primarily liable Guarantor is not bound to take A surety is ordinarily, held to know notice of the non-performance of every default of his principal his principal Discharged by the mere indulgence Will not be discharged either by the of the creditor of the principal, and mere indulgence of the creditor of is usually not liable unless notified the principal or by want of notice of of the default of the principal the default of the principal, not matter how much he may be injured thereby Guarantor only binds himself to pay Surety undertakes to pay if the if the principal cannot or unable to principal does not pay, without pay regard to his ability to do so Insurer of the solvency of the Insurer of the debt itself debtor  Guaranty v. Indorsement Guaranty Indorsement Contract is that of security Contract is that of transfer Liability is more extensive than that of an indorser Warrants the solvency of the promisor Cannot be sued as promisor May be sued as promisor
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Guaranty v. Warranty Guaranty Warranty Each is an undertaking by one party to another to indemnify or make good the assured against some possible default or defect A contract by which a person is An undertaking that the title, bound to another for the quality, or quantity of the subject fulfillment of a promise or matter of a contract is what it has engagement of a third party been represented to be and relates to some agreement made ordinarily by the party who makes the warranty 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.  Cause of contract of guaranty a. Presence of cause which supports the principal obligation—the consideration which supports the obligation as to the principal debtor is sufficient consideration to support the obligation of a guarantor or surety b. Absence of direct consideration or benefit to guarantor—it is regarded as valid despite the absence of any direct consideration received by the guarantor or surety either form the principal or from the creditor 2049. A married woman may guarantee an obligation without the husband’s consent, but shall not thereby bind the conjugal partnership, except in cases provided by law.  “in cases provided by law”—such as when the guaranty has redounded to the benefit of the family 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Arts. 1236 and 1237 shall apply.  Guaranty is unilateral o It exists for the benefit of the creditor and not for the benefit of the principal debtor who is not a party to the contract of guaranty o Creditor has every right to take all possible measure to secure the payment of his credit
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Hence, it can be constituted without the knowledge and even against the will of the principal debtor  The rights of a third person who pays or performs the obligation of the debtor and one who guarantees the obligation of the debtor are similar, hence o 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 (Art. 1236) o He cannot compel the creditor to subrogate him in his (creditor’s) rights such as those arising from a mortgage, guaranty or penalty (Art. 1237)  If he became a guarantor with the knowledge or consent of the debtor, he is subrogated by virtue of the payment to all the rights which the creditor had against the debtor (Art. 2067) 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.  Par. 2 refers to a double or sub-guaranty or one constituted to guarantee the obligation of a guarantor o It should not be confounded with guaranty wherein several guarantors concur 2052. A guaranty cannot exist without a 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.  Reason for par. 1: Guarantee is an accessory contract o So if the principal obligation is void, it is also void  Under the next article, a guaranty may also be given as security for future debts, the amount of which is not yet known  Guaranty of voidable, unenforceable and natural obligations o A guaranty may secure the performance of a a. Voidable contract—inasmuch as such contract is binding, unless it is annulled by a proper action in court
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b. Unenforceable contract—such contract is not void c. Natural obligation—creditor 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 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.  Guaranty of future debts o Denominated as a continuing guaranty or suretyship o It is one which is 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 a. To secure the payment of a loan at maturity—to guarantee the punctual payment of a loan at maturity and all other obligations or indebtedness which may become due or owing to the principal by the borrower b. To secure payment of any debt to be subsequently incurred—a guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved c. To secure existing unliquidated debts—“future debts” may also refer to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown and not to debts not yet incurred and existing at that time  Guaranty of conditional obligations o A guaranty may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition o If the principal obligation is subject to a suspensive condition, the guarantor is liable only after the fulfillment of the condition o If it is subject to resolutory condition, the happening of the condition extinguishes both the principal obligation and guaranty

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.  Guarantor’s liability cannot exceed principal obligation a. 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; but a guarantor may bind himself for less than that of the principal b. Interest, judicial costs, and attorney’s fees as part of damages may be recovered—creditors suing on a suretyship bond may, however, recover from the surety as part of their damages, interest at the legal rate, judicial costs and attorney’s fees when appropriate, even without stipulation and even if the surety would thereby become liable to pay more than the total amount stipulated in the bond 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 comprise 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.  Guaranty not presumed—requires the expression of consent on the part of the guarantor to be bound  Guaranty covered by the Statute of Frauds o It falls under SF since it is “a special promise to answer for the debt, default or miscarriage of another,” hence, it should also be in writing but need not appear in a public document to be valid or enforceable  Guaranty has to be strictly construed against the creditor and in favor of the guarantor and is not to be extended beyond its terms or specified limits
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o If there is doubt on the terms and conditions, the doubt should be resolved in favor of the guarantor or surety a. Liability for obligation stipulated—guarantor is liable only for the obligation of the debtor stipulated thereon and not to obligations assumed previous to the execution of the guaranty unless an intent to be so liable is clearly indicated b. Guaranty to render accounting—this “cannot be extended to include a guaranty that the money due the creditor will be delivered” c. Guaranty with a term subsequently cancelled—guarantor is not liable for non-compliance by the principal debtor with a subsequent contract d. Liability of surety limited to a fixed period—surety cannot be bound for a longer time, unless the contract has been renewed e. Liability of surety to expire on maturity of principal obligation— this stipulation is unfair and unreasonable for it practically nullifies the nature of the undertaking it has assumed f. Liability of surety to pay in case of forfeiture of imported goods— surety here guarantees, not the legality of the importation, but merely the payment of the appraised value of the goods imported and released g. Bond requires lessor to report to surety any violation by lessee— this does not cover defaults incurred prior to the acceptance by the lessor of the bond and the collection o A contract of guaranty or suretyship is only prospective, and not retroactive in operation unless a contrary intent is clearly shown h. Bond issued to secure defendant from possible damages as a result of injunction—this cannot be executed to satisfy the defendant’s mortgage claim against the plaintiff i. Bond issued in favor of plaintiff who filed a case for collection— this does not guarantee that the plaintiff’s cause of action is meritorious, and that it will be responsible for all the costs that may be adjudicated against its principal in case the action fails j. Contract requires that notice of principal’s default be given to surety—except when required by provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety’s liability  Strictissimi juris rule applicable only to accommodation party o This rule commonly refers to an accommodation surety
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o Rationale: 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  Rules of strict construction not applicable to compensated sureties o If there is ambiguity in the surety bond, it should be interpreted against the surety company that prepared it because  Compensated corporate sureties—business associations organized for the purpose of assuming classified risks in large numbers, for profit and on an impersonal basis, through the medium of standardized written contractual forms drawn by its own representatives with the primary aim of protecting its own interests  They are secured from all possible loss by adequate counterbonds or indemnity agreements  Although calling themselves sureties, such corporations are, in fact, insurers and in determining their rights and liabilities, the rules peculiar to suretyship do not apply  Extent of guarantor’s liability a. Where guaranty definite—the obligation of the guarantor under the terms of the contract is limited in whole or in part to the principal debt, to the exclusion of the accessories b. Where guaranty indefinite or simple—this is par. 2 of this article  Liability of guarantor for judicial costs—guarantor shall answer for such only as have been incurred after he has been judicially required to pay o However, it is within the power of the guarantor to relieve himself from responsibility of responding for such judicial costs by making payment  Acceptance of guaranty be creditor and notice thereof to guarantor a. When necessary—where there is merely an offer of a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed o Acceptance may be implied o He is entitled to notice so that he may know the nature and extent of his liability b. When not necessary—transaction amounts to direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the
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promise binding is that the promisee (creditor) should act upon it, and notice is not necessary being the contract is unilateral 2056. One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with.  Qualifications of guarantor: a. He possesses integrity b. He has capacity to bind himself c. He has sufficient property to answer for the obligation which he guarantees  Effect of subsequent loss of required qualifications o Qualifications need only be present at the time of the perfection of the contract o The subsequent loss of integrity or property or supervening incapacity of the guarantor would not operate to exonerate the guarantor of the eventual liability he has contracted, and the contract of guaranty continues o Creditor may demand another guarantor with the proper qualifications  Selection of guarantor a. Specified person stipulated as guarantor—where the creditor has required and stipulated that a specified person should be a guarantor, the substitution of guarantor may not be demanded b. Guarantor selected by the principal debtor—where the guarantor is selected by the principal debtor, the latter answers for the integrity, capacity, and solvency of the former because the guarantor must possess the qualifications prescribed not only at the moment the guaranty is given but also thereafter, until the extinguishment of the debt c. Guarantor personally designated by the creditor—where the guarantor is personally designated by the creditor, it is because he considers him to have the qualifications for the purpose, and the responsibility for the selection should, therefore, fall upon him, and not on the debtor

2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is expected where the creditor has required and stipulated that a specified person should be the guarantor.

Chapter 2: EFFECTS OF GUARANTY Section 1: Effects of Guaranty between the Guarantor and the Creditor 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.  Right of guarantor to benefit of excussion or exhaustion a. Guarantor only secondarily liable—the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so and cannot do so b. All legal remedies against debtor to be first exhausted—to warrant recourse against the guarantor for payment, it may not be a sufficient reason that the debtor appears insolvent; the law requires the creditor to resort “to all legal remedies against the debtor” including the bringing of actions for the rescission of fraudulent alienations of property made by the debtor (benefit of excussion)  This article is not applicable to a contract of suretyship  Right of creditor to secure judgment against guarantor prior to exhaustion o Creditor may secure a judgment against the guarantor, who shall be entitled, 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

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2059. This excussion shall not take place: 1. If the guarantor has expressly renounced it 2. If he has bound himself solidarily with the debtor 3. In case of insolvency of the debtor 4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative 5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation  Exceptions to the benefit of excussion: a. As provided in Art. 2059 b. If he does not comply with Art. 2060 c. If he is a judicial bondsman and sub-surety (Art. 2084) d. Where a pledge or mortgage has been given by him as a special security e. If he fails to interpose it as a defense before judgment is rendered against him  Exceptions provided under this article: 1. Right waived—a personal right recognized in a guarantor and must be made in express terms 2. Liability assumed that of surety—by binding one’s self as surety, in effect, he renounces in the contract itself the benefit of exhaustion 3. Insolvency of debtor proven by unsatisfied writ of execution—the insolvency or inability to pay must be actual, and it may be proven by the return of a writ of execution unsatisfied or by other means, but it is not sufficiently established by mere fact that the debtor has been declared insolvent in insolvency proceedings, in which the extent of the insolvent’s inability to pay is not determined until the final liquidation of his estate 4. Debtor absconds or cannot be locally sued—creditor is not required to go after a debtor who is hiding or cannot be sued in our courts, and to incur the delays and expenses incident thereto 5. Resort to all legal remedies, a useless formality—if such judicial action including execution would not satisfy the obligation, the guarantor can no longer require the creditor to resort to all such remedies against the debtor as the same would be but a useless formality
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2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. 2061. The guarantor having fulfilled all the conditions required in the preceding article, the creditor who is negligent in exhausting the property pointed out shall suffer the loss, to the extent of said property, for the insolvency of the debtor resulting from such negligence.  Duty of creditor to make prior demand for payment from guarantor a. When demand to be made—can be made only after judgment on the debt for obviously the “exhaustion of the principal’s property” cannot even begin to take place before judgment has been obtained b. Actual demand to be made—joining the guarantor in the suit against the principal debtor is not the demand intended by law  Duty of guarantor to set up benefit of excussion o As soon as the guarantor is required to pay, he must also point out, aside from the benefit of excussion, to the creditor available property, not in litigation or encumbered, of the debtor within the Philippines a. Property located abroad—it is lengthy and extremely difficult proceeding and would not conform with the purpose of guaranty to provide the creditor with the means of obtaining the fulfillment of the obligation guaranteed without hindrance or delays b. Property not easily available—same rule as above  Joinder of guarantor and principal as parties defendant o General Rule: guarantor, not being a joint contractor with his principal, cannot be sued with his principal o Exception: adherence to the general rule is not required where it would serve merely to delay the ultimate accounting of the guarantor

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2062. In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Art. 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Art. 2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter.  Procedure when creditor sues a. Sent against principal—creditor must sue the principal alone except in the cases mentioned in Art. 2059 where the guarantor is not entitled to the benefit of excussion b. Notice to guarantor of the action—guarantor must be notified so that he may appear, if he so desires, and set up defenses he may want to offer o If the guarantor appears, he is still given the benefit of exhaustion even if judgment should be rendered against him and the principal debtor  His voluntary appearance does not constitute a renunciation of his right to excussion o If he 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 c. Hearing before execution can be issued against guarantor—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 2063. A compromise between the creditor and the principal debtor benefits the guarantor but does not prejudice him. That which is entered into between the guarantor and the creditor benefits but does not prejudice the principal debtor.  Compromise—a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced

Effects of compromise: a. Where prejudicial—a compromise cannot prejudice the guarantor or the debtor when he is not a party to such compromise o A guarantor may not bind himself for more than the principal debtor both as regards the amount and the onerous nature of the conditions b. Where in the nature of a stipulation in favor of a third person— 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

2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor.  Sub-guarantor’s right to excussion o A sub-guarantor enjoys the benefit of excussion not only with respect to the principal debtor but also with respect to the guarantor for the reason that he stands with respect to the guarantor on the same footing as the latter does with respect to the principal debtor 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless solidarity has been expressly stipulated. The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor.  Benefit of division among several guarantors a. In whose favor applicable—this article entitles the several guarantors of only on debtor and for the same debt, to what is known as the benefit of division b. Extent of liability of several guarantors—their liability is only joint, that is, the obligation to answer for the debt is divided among all of them
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c. Exceptions—when solidarity has been expressly stipulated  Benefit of excussion among several guarantors o In order that a guarantor may set up the benefit of exhaustion, he must point out to the creditor the available property of the debtor with which to satisfy the debt  This, pointing out the property of his co-guarantors, however, is not required in order that the guarantor may be entitled to the benefit of division  Reason: the obligation of the guarantor with respect to his coguarantors is direct and does not depend as to its origin on the solvency or insolvency of the latter, although afterwards, if one of them should turn out to be insolvent, his share has to be borne by the others o However, where a creditor claims the share of a guarantor from the others on the ground of insolvency, the latter can set up against the creditor the existence of the property of the supposed insolvent, possessing the same conditions as are required by Art. 2060

b. Legal interest thereon—guarantor is entitled to legal interest from the time notice of payment of the debt was made known to the debtor o It is immaterial that the debt did not earn interest for the creditor, because the guarantor’s right to legal interest is granted by law c. Expenses incurred by the guarantor—these expenses are limited to those incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor  Exceptions to right to indemnity or reimbursement 1. Where 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 does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent o But the payment is in any case valid as to the creditor who has accepted it 3. Right to demand reimbursement is subject to waiver 2067. The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. If the guarantor has compromised with creditor, he cannot demand of the debtor more than what he has really paid.  Guarantor’s right to subrogation: a. Effect of subrogation—it transfers to the person subrogated the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgage, subject to stipulation in conventional subrogation o This also extends to sureties b. Accrual, basis and nature of right 1. It arises by operation of law upon payment by the guarantor 2. The right of the guarantor who has paid a debt to subrogation stands, not upon contract but upon the principles of natural justice 3. It is not a contractual right 4. If the guarantor paid a smaller amount to the creditor by virtue of a compromise, he cannot demand more than he actually paid
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Section 2: Effects of Guaranty between the Debtor and the Guarantor 2066. The guarantor who pays for a debtor must be indemnified by the latter. The indemnity comprises: 1. The total amount of the debt 2. The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor 3. The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him 4. Damages, if they are due  Guaranty, a contract of indemnity: a. Total amount of the debt—the guarantor has no right to demand reimbursement until he has actually paid the debt, unless by the terms of the contract, he is given the right before making payment
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c. When right not available—it cannot be invoked in those cases where the guarantor has no right to be reimbursed 2068. If the guarantor should pay without notifying the debtor, the latter may enforce against him all the defenses which he could have set up against the creditor at the time the payment was made.  Example: if the debtor has already paid the creditor, when the guarantor pays, the debtor can set up against the guarantor the defense of previous extinguishment of the obligation by payment  Guarantor cannot be allowed, through his own fault or negligence, to prejudice or impair the rights or interests of the debtor 2069. if the debt was for a period and the guarantor paid it before it became due, he cannot demand reimbursement of the debtor until the expiration of the period unless the payment has been ratified by the debtor.  Effect of payment by guarantor before/after maturity: o If the debtor’s obligation is with a period—it becomes demandable only when the day fixed comes  Guarantor who pays before maturity is not entitled to reimbursement  Debtor will be liable if the payment was made with his consent or if the payment was subsequently ratified by him o Where demand on the guarantor was made during the term of the guarantee—the fact that payment was actually made after said term is not material 2070. 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 whatever against the debtor, but only against the creditor. Nevertheless, in case of a 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.  General Rule: before the guarantor pays the creditor, he must first notify the debtor and if he fails to do so, the guarantor must bear the loss
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Exception: guarantor may still claim reimbursement despite lack of notice if the following conditions are present: a. Creditor becomes insolvent b. Guarantor was prevented by fortuitous event to advise the debtor of the payment c. Guaranty is gratuitous  In gratuitous guaranty, debtor shall reimburse the guarantor for the amount paid if any of the exceptions is present 2071. The guarantor, even before having paid, may proceed against the principal debtor: 1. When he is sued for the payment 2. In case of insolvency of the principal debtor 3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired 4. When the debt has become demandable, by reason of the expiration of the period for payment 5. After the lapse of 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 10 years 6. If there are reasonable grounds to fear that the principal debtor intends to abscond 7. If the principal debtor is in imminent danger of becoming insolvent In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor  General Rule: guarantor has no cause of action against the debtor until after the former has paid the obligation  Exception: Art. 2071 o This provision is also applicable to surety  Remedy to which guarantor entitled—to obtain release from the guaranty or to demand a security that shall protect him from any proceedings by the creditor and against the danger of insolvency of the debtor
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o Guarantor’s remedies are alternative  Suit by guarantor against creditor before payment—the action for release can only be exercised against the principal debtor and not against the creditor o Absent the creditor’s consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter-guaranty as is authorized by Art. 2071  Arts. 2066 and 2071 distinguished Art. 2066 Art. 2071 Provides for the enforcement of Provides for guarantor’s the rights of the guarantor against protection before he has paid but the debtor after he has paid the after he has become liable debt Gives right of action after Protective remedy before payment payment Substantive right A preliminary remedy  Recovery by surety against indemnitor even before payment a. Indemnity agreement for benefit of surety—indemnity agreement is not executed for the benefit of the creditor but rather for the benefit of the surety b. Indemnity agreement may be against actual loss as well as liability—an indemnity agreement whereby the indemnitor binds himself to indemnify the surety for any damage or prejudice the latter may sustain under the surety bond, may provide for indemnification not only against actual loss but against liability as well o Contract of indemnity against loss—indemnitor will not be liable until the person to be indemnified makes payment or sustains loss o Contract of indemnity against liability—indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss c. Such agreement valid—the principle of guarantee under this Art. does not apply, there is no more need for the surety to exhaust all the properties of the principal debtors before it may proceed against them

2072. If one, at the request of another, becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfies the debt may sue either the person so requesting or the debtor for reimbursement.

Section 3: Effects of Guaranty as between Co-guarantors 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand each of the others the share which is proportionally owing from him. If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same proportion. The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial demand or unless the principal debtor is insolvent.  Right to contribution of guarantor who pays: a. Restrictions—this article contemplates a situation which arises when on guarantor has paid the debt to the creditor and is seeking reimbursement from each of his co-guarantors the share which is proportionally owing him o It is required that the payment have been made 1. In virtue of a judicial demand 2. Because the principal debtor is insolvent o Without the requirement, guarantor who pays the debt may proceed directly against his co-guarantors for their respective shares, with the latter having to incur the trouble and expense of claiming afterwards from the debtor what they have paid o If guarantor proceeds first against the debtor who, as a consequence, makes payment, then not only the debtor but the co-guarantors as well would be discharged at once from their obligations b. Effect of insolvency of any guarantor—his share shall be borne by the others including the paying guarantor in the same joint proportion; follows the rule in solidary obligations

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c. Accrual and basis of right—this right is acquired ipso jure by the guarantor by virtue of said payment without the need of obtaining from the creditor any prior cession of rights to such guarantor 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.

2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor.

Chapter 3: EXTINGUISHMENT OF GUARANTY 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same causes all other obligations.  Causes of Extinguishment of Guaranty: 1. When principal obligation is extinguished, guaranty is also extinguished being only an accessory and subsidiary o General causes of extinguishment of obligations: a. Payment or performance b. Loss of the thing due c. Condonation or remission of the debt d. Confusion or merger of the rights of the creditor and debtor e. Compensation f. Novation 2. Other causes of extinguishment of obligations are: a. Annulment b. Rescission c. Fulfillment of a resolutory condition d. Prescriotion o Death of the principal is not a defense a surety can use because the obligation is merely passed on to the decedent’s estate
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3. Release of the guarantor by the creditor (Art. 2078)—guaranty is extinguished although the principal obligation still remains  Material alteration of principal contract a. Effect of material alteration—any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract without the consent of the surety, will release the surety from liability o Such material alteration would constitute a novation or change of the principal contract which is consequently extinguished b. When alteration material—there must be 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 o Increase in the interest rates without the guarantor’s consent does not release the guarantor where the creditor is demanding only the original and not the increased rate of interest o Assignment by the creditor without the knowledge or consent of the surety is not a material alteration 2077. If the creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same through eviction, the guarantor is released.  Eviction revives the principal obligation but not the guaranty  The creditor’s action against the debtor is for eviction and this is different from what the guarantor guaranteed 2078. A release made by the creditor in favor of one of the guarantors, without the consent of the others, benefits all to the extent of the share of the guarantor to whom it has been granted.  A, B and C are guarantors for a debt of P9 000. o A is released without the consent of B and C, both the latter will each be liable for only P3 000 or 1/3 o A is released with the consent of B and C, both the latter will each be liable for P4 500 o A is released with the consent of B only, B is liable for P6 000 and C for P3 000

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2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein.  Release by extension of term granted by creditor to debtor a. Where release without consent of guarantor—the latter is discharged from his undertaking to avoid prejudicing the guarantor b. Where obligation payable in installments—where a guarantor is liable for different payments, such as installments for rents, or upon a series of promissory notes, an extension of time as to one or more will not affect the liability of the surety for the others o But when the whole unpaid balance become automatically due, and the creditor extends the time of payment, guarantor is discharged from the liability c. Consent to extension waived in advance by guarantor—a guarantor may waive in advance his right to be notified of or to give consent to the release by the creditor of securities given or the extension of the time of payment d. Prejudice to guarantor and period of extension is immaterial e. Extension must be based on a new agreement—extension of the term, to discharge the guarantor, must be based on some new agreement between the creditor and the principal debtor by virtue of which the creditor deprives himself of his claim f. With respect to surety, creditors is under no obligation to display any diligence in the enforcement of his rights as a creditor o No creditor’s laches may discharge the surety o In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and it was made without the consent of the surety or with a reservation of rights with respect to him g. No cause of action against creditor for delay, but, beginning with the date the obligation becomes due, his vigilance must be exercised rather against the principal debtor

2080. The guarantors, even though they be solidary, and released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter.  Release when guarantor cannot be subrogated a. Fault of creditor for non-subrogation—if there can be no subrogation because of the fault of the creditor, as when the creditor releases or fails to register a mortgage, the guarantors are thereby released o This rule is founded on the principle that the act of one cannot prejudice another o It also avoids opportunity for collusion between the creditor and the debtor or a third person b. Duty of creditor to account for his lien on principal’s property— creditor is charged with the duty of retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of this security will discharge the surety to the extent of the value of the property or lien released for there immediately arises a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the value of the security in his hands 2081. The guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those that are purely personal to the debtor.

Chapter 4: LEGAL AND JUDICIAL BONDS 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in Art. 2056 and in special laws.  Bond—undertaking that is sufficiently secured, and not cash or currency  Bondsman—a surety offered in virtue of a provision of law or a judicial order o Must have the qualifications required of a guarantor and in special laws like Rules of Court, Secs. 12 and 13 of Rule 114
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Nature of bonds o All bonds including “judicial bonds” are contractual in nature o Bonds exists only in consequence of a meeting of minds under the conditions essential to a contract  Judicial bonds—special class of contracts of guaranty; given in virtue of a judicial order 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof.

2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor. A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of the surety.  A judicial bondsman and sub-surety are not entitled to the benefit of excussion because they are not mere guarantors, but sureties whose liability is primary and solidary  Mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety from liability because it is the surety who has the duty to see to it that the debtor pays or performs

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