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V. GUARANTY

A. Definition

Guarantyis a contract whereby a person binds himself to the creditor to fulfill the obligation of

the principal debtor in case the latter should fail to do so.

B. Characteristics

1. accessory

2. subsidiary and conditional

3. unilateral

4. requires that the guarantor must be a person

distinct from the debtor

C. Distinction between Guaranty and Suretyship

1

2

3

Guaranty

Guarantor is secondarily

liable.

Guarantor binds himself

to pay only when the

principal cannot pay.

Guarantor is an insurer of

the debtors solvency.

1

2

3

Suretyship

Surety is primarily liable and is

therefore not entitled to the

exhaustion of the properties of the

principal debtor

Surety assumes liability as a regular

party to the undertaking and

undertakes to pay if the principal does

not pay.

Surety is an insurer of the debt.

D. Recent Jurisprudence on Suretyship

Inciong, Jr. vs. Court of Appeals

(257 SCRA 578)

Issue: Petitioner argues that the dismissal of the complaint against Naybe, the principal debtor,

and against Pantanosas, his co-member, constituted a release of his obligation especially because

the dismissal of the case against Pantanosas was upon the motion of private respondent itself,

citing Article 2080 as basis for his argument.

Held: Section 4, Chapter 3, Title 1, Book IV of the Civil Code states the law on joint and several

obligations. Under Article 1297 thereof, when there are two or more debtors in one and the

same obligation, the presumption is that the obligation is joint so that each of the debtors is

liable only for a proportionate part of the debt. There is a solidary liability only when the

obligation expressly so states, when the law so provides or when the nature of the obligation so

requires.

Petitioner signed the promissory note as a solidary co-maker and not as a guarantor thereforeArticle 2080 is not applicable. Because the promissory note involved in this case expressly states

that the three signatories therein are jointly and severally liable, any one, some or all of them

may be proceeded against for the entire obligation. The choice is left to the solidary creditor to

determine against whom he will enforce collection. Consequently, the dismissal of the case

against Judge Pantanosas may not be deemed as having discharged petitioner from liability as

well. As regards Naybe, suffice it to say that the court never acquired jurisdiction over him.

Petitioner, therefore, may only have recourse against his co-makers, as provided by law.

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Philippine National Bank vs. Court of Appeals

(198 SCRA 767)

A suretys liability to the creditor or promisee of the principal is said to be direct,

primary and absolute. In other words, he is directly, primarily and equally bound with the

principal as original promissor although he possesses no direct or personal interest over thelatters obligations nor does he receive any benefits therefrom.

Philippine National Bank vs. Pineda

(197 SCRA 1)

If the principal debtor and the surety are held liable, their liability to pay the creditor

would be solidary but the nature of the suretys undertaking is such that it does not incur liability

unless and until the principal debtor is held liable.

Finman General Assurance Corp. vs. Salik

(188 SCRA 740)

In the absence of collusion, the surety is bound by a judgment against the principal even

though he was not a party to the proceedings. The nature of its undertaking makes it privy to all

proceedings against its principal.

E. Rules Governing the Nature and Extent of Guaranty

1. G.R.-Guaranty is generally gratuitous

Exception: contrary stipulation

Garcia, Jr. vs. Court of Appeals

(191 SCRA 493)

The peculiar nature of a guaranty or surety agreement is that it is regarded as valid

despite the absence of any direct consideration received by the guarantor or surety either from

the principal debtor or from the creditor. While a contract of guaranty or surety, like any other

contract, must generally be supported by a sufficient consideration, such consideration need not

pass directly to the guarantor or surety; a consideration moving to the principal alone will suffice.

The guarantor or surety, therefore, becomes liable for the debt or duty of another although he

possesses no direct or personal interest over the obligations nor does he receive any benefit

therefrom.

2. Guaranty is an accessory contract therefore there must be a valid principal obligation for guaranty to be

valid. Guarantor may secure the performance of voidable, unenforceable, natural, conditional, and future

obligations (Article 2052).

3. Guarantors liability cannot exceed the principal obligation (Article 2054).

4. Guaranty cannot be presumed. If there is any doubt on the terms and conditions of the guaranty or

surety agreements, the doubt should be resolved in favor of the guarantor or surety (Philippine National Bank vs.

Court of Appeals, 198 SCRA 767). However, the rule of strictissimi juris commonly refers to an accommodation

surety and is not applied in case of compensated sureties.

5. The qualifications of a guarantor are:

He possesses integrity;

He has capacity to bind himself; and

He has sufficient property to answer for the obligation which he guarantees

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6. Where the creditor has required and stipulated that a specified person should be a guarantor, the

substitution of guarantor may not be demanded (Article 2057) because in such a case the selection of the

guarantor is a term of the agreement and as a party, the creditor, is therefore, bound thereby (see Articles 1159,

1306).

F. Effects of Guaranty between the

Guarantor and the Creditor

1. G.R.-Guarantor has the right to the benefit of excussion or exhaustion of the debtors property before he

can be compelled to pay.

Exceptions:

a) if guarantor has expressly renounced excussionb) if guarantor has bound himself solidarily with the debtor (suretyship)c) in case of debtors insolvencyd) when guarantor has absconded or cannot be sued within the Philippines unless he left a manager or

representative

e) if it may be presumed that an execution on the debtors property will not satisfy the obligationf) if guarantor does not set up the benefit of excussion and fails to point out to the creditor available

property of the debtor within the Philippines

g) if he is a judicial bondsman and sub-suretyh) where a pledge or mortgage has been given by the guarantor as a special securityi) if guarantor fails to interpose it as a defense before judgment is rendered against him (Saavedra vs.

Price, 68 Phil. 669)

2. A compromise between the creditor and the principal debtor benefits the guarantor but does not

prejudice him. A compromise which is entered into between the guarantor and the creditor benefits but does not

prejudice the principal debtor (Article 2063).

3. Guarantor is likewise entitled to the benefit of division where there are several guarantors of only one

debtor and for the same debt. Guarantors liability is only joint therefore, they are not liable beyond the shares

which they are respectively bound to pay (Article 2065).

Exceptions: a) solidarity

B) if any of the circumstances in Article 2057 should take place.

WillexPlastic Industries Corporation vs. Court of Appeals

(256 SCRA 478)

Willex Plastic argues that the Continuing Guaranty. Being an accessory contract,

cannot legally exist because of the absence of a valid principal obligation. Its contention is based

on the fact that it is not a party either to the Continuing Surety Agreement or to the loan

agreement between Manila Bank and Inter-Resin Industrial.

Put in another way, the consideration necessary to support a surety obligation need not

pass directly to the surety, a consideration moving to the principal alone being sufficient. For a

guarantor or surety is bound by the same consideration that makes the contract effective

between the principal parties thereto . It is never necessary that a guarantor or surety should

receive any part or benefit, if such there be, accruing to his principal. xxx

Willex Plastic contends that the Continuing Guaranty cannot be retroactively applied

so as to secure the payments made by Interbank under the two Continuing Surety Agreementsand invokes the El Vencedor and Dio rulings to support its contention that a contract if

suretyship or guaranty should be applied prospectively.

In El Vencedor vs. Canlas (44 Phil. 699), we held that a contract of suretyship is not

retroactive and no liability attaches for defaults occurring before it is entered into unless anintent to be so liable is indicated. There we found nothing in the contract to show that the

parties intended the surety bonds to answer for the debt contracted previous to the execution of

the bonds. In contrast, in this case, the parties to the Continuing Guaranty clearly provided

that the guaranty would cover sums obtained and/or to be obtained by Inter-Resin Industrial

from Interbank.

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On the other hand, in Dio vs. Court of Appeals (216 SCRA 9), the issue was whether the

sureties could be held liable for an obligation contracted after the execution of the continuing

surety agreement. It was held that by its very nature a continuing suretyship contemplates a

future course of dealing. It is prospective in its operation and is generally intended to provide

security with respect to future transactions. By no means, however, was it meant in that case

that in all instances a contract of guaranty or suretyship should be prospective in application.

Indeed, as we also held in Bank of the Philippine Islands vs. Foerster (49 Phil. 843),

although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the

intention of the parties as revealed by the evidence is controlling.

Dio vs. Court of Appeals

(216 SCRA 91)

Issue: If the contract of guaranty states that the same is to secure advances to be

made from time to time, is this a valid guaranty?

Held: Yes, this will be construed as a continuing guaranty/surety given to secure

future debts and is not limited to a single transaction but which contemplates a future course of

dealing, covering a series of transactions generally for an indefinite period of time or until

revoked.

G. Effects of Guaranty between the

Debtor and the Guarantor

1. Guaranty is a contract of indemnity. The guarantor who pays for a debtor must be indemnified by the

latter. The indemnity comprises:

1.1 the total amount of the debt;1.2 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;

1.3 The expenses incurred by the guarantor after having notified the debtor that payment had beendemanded of him;1.4 Damages, if they are due (Article 2066)

Exceptions:

a) 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 (Article

2050)

b) Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be adonation, which, however, requires the debtors consent. But the payment is in any case valid as to

the creditor who has accepted it (Article 1238)

c) The right to demand reimbursement is subject to waiver.2. Guarantor has the right of subrogation against the debtor to enable him to enforce the indemnity granted

in Article 2066 and he cannot demand more than what he actually paid (Article 2067).

3. Guarantorhas the right to proceed against the debtor even before payment in the following instances:

When he is sued for the 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 has become demandable by reason of the expiration of the period for payment; 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;

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 (Article 2071).

Guarantor may either obtain release from the guaranty or demand a security that shall protect him from

any proceedings by the creditor and from danger of debtors insolvency (Article 2071).

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H. Effects of Guaranty as Between Co-guarantors

1. The obligation of several guarantors of the same debtor and for the same debt is joint and each is bound

only to pay his proportionate share. Therefore, one who has paid the entire debt may seek reimbursement from

each of his co-guarantors the share which is proportionately owing him.

Requisites:

a) payment must have been made by virtue of a judicial demand orb) because the principal debtor is insolvent

I. Extinguishment of Guaranty

1. Being accessory and subsidiary, guaranty is terminated when the principal obligation is extinguished by:

a) payment or performance;b) loss of the thing duec) condonation or remission of the debtd) confussion or merger of the rights of the creditor and debtore) compensationf) novationGuaranty may also be extinguished if the creditor has released the guarantor although the principal

obligation remains (Article 2078) or in case of material alteration which imposes a new obligation or added burden

on the party promising or which takes away some obligation already imposed, changing the legal effect of the

original contract and not merely the form thereof. (NASCO vs. Torrento, 20 SCRA 427 [1967]).

2. Release of one guarantor by the creditor without the consent of the other guarantors benefits all to the

extent of the share of the guarantor released (Article 2078).

3. An extension of the term granted by the creditor to the debtor without guarantors consent extinguishes

the guaranty (Article 2029).

4. The guarantor who pays is entitled to be subrogated to all the rights of the creditor (Article 2067). 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. The same rules applies even though the guarantors be solidarily

(Article 2080).

J. Legal and Judicial Bonds

1. A 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.