Guaranty and Suretyship

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Guaranty distinguished from a surety – In a contract of 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.”[1] Meanwhile, in a contract of surety, a person “binds himself solidarily with the principal debtor.”[2]

Best Legal Practices

  • Creditor to ask for surety – The creditor should ask for a surety and not a guarantor in order to maximize the security of an obligation.
  • Debtor to be asked as guarantor – Conversely, whenever it can be avoided, the debtor should refrain from being a surety and instead be a guarantor.

Valid obligation – To validly exist, a guaranty requires a valid obligation.[3] Notwithstanding, there may be a guaranty constituted to guarantee the performance of a voidable or unenforceable contract, as well as a natural obligation and a conditional obligation.[4]

Gratuitous by default – A contract of guaranty is gratuitous unless otherwise stipulated.[5] Hence, a guaranty may be conventional, legal, or judicial, as well as by onerous title.[6] In addition, a guaranty may also be constituted in favor of the other guarantor, with or without the latter’s consent, and even over his objection.[7]

No presumption of guaranty – A guaranty cannot be presumed as it must be expressly agreed upon.[8] It cannot extend to more than what is stipulated therein.[9]

For future debts allowed – Even if the amount it still unknown, a guaranty as security for future debts is allowed.[10] However, the debt must first be liquidated before a claim may be had against the guarantor.[11]

Rules when guaranty is entered without knowledge or consent, or against will of principal debtor – If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the following rules will apply: (a) the guarantor may demand reimbursement from the debtor except that if the guarantor paid without the knowledge or against the will of the debtor, the guarantor can recover only insofar as the payment has been beneficial to the debtor;[12] and (b) the guarantor who pays on behalf of the creditor without the knowledge or against the will of the latter cannot compel or require the creditor to subrogate the guarantor in the creditor’s rights.[13]

Cannot obligate himself for more than liability of debtor – The guarantor may obligate himself for less, but not for more than the principal debtor, as to both the amount and the onerous nature of the conditions.[14]

Guarantor’s qualification – A person who is required to furnish a guarantor is required to present a person who possesses integrity, has capacity to bind himself, and has sufficient property to answer for the obligation which he guarantees.[15]

Married woman as guarantor – A married woman is allowed to guaranty an obligation even without the consent of her husband. [16] Such guaranty does not bind the conjugal partnership except in cases provided by law.

Effects of Guaranty

Guarantor entitled to right of exhaustion – The guarantor’s right of exhaustion requires the creditor to exhaust all the property of the debtor, as well as resort to all the legal remedies[17] against the debtor, before compelling the creditor to pay.[18] The right of exhaustion is not required:[19]

  • If the guarantor has expressly renounced it;[20]
  • If he has bound himself solidarily with the debtor;[21]
  • In case of insolvency of the debtor;[22]
  • When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;[23] or
  • If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.[24]

Same; When and how exercised – For the guarantor to make use of the benefit of exhaustion, he has to 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.[25] After the guarantor does so, 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.[26]

Compromise between creditor and principal debtor – A compromise agreement entered into by and between the creditor and the principal debtor benefits but does not prejudice the guarantor. [27] The same rule applies if the compromise is between the creditor and guarantor with respect to the debtor.[28]

Proportionate liability for several guarantors of one debtor – If there are several guarantors of only one debtor and for the same debt, the obligation to answer for the failure of the principal debtor to pay is divided among all of the guarantors unless there is an express contrary stipulation on solidarity.[29]

Between debtor and guarantor

What constitutes indemnity to guarantor – The guarantor who pays for the debtor is entitled from the latter an indemnity comprising of the following:[30]

  • The total amount of the debt;[31]
  • 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; [32]
  • The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him;[33]
  • Damages, if they are due.[34]

Guarantor subrogated to all rights of creditor against debtor – After making payment, the guarantor is subrogated to all the rights which the creditor may have against the debtor.[35] If the guarantor compromised with the creditor, the guarantor cannot demand of the debtor more than what he actually paid.[36]

Payment of guarantor without notice to debtor entitles latter to all defenses against the creditor as against the guarantor – If the guarantor pays without notifying the debtor, the latter has the right to enforce against the guarantor all the defenses the debtor could have set up against the creditor at the time the payment was made.[37]

Guarantor to wait for expiration of period to pay – If the debt was for a period and the guarantor paid it before it became due, he can only demand reimbursement from the debtor after the expiration of the period.[38] If the debtor ratifies the earlier payment, the creditor is immediately entitled to reimbursement. [39]

Guarantor who paid without notice to debtor who also subsequently paid – If the guarantor paid without notifying the debtor who subsequently pays not being aware of earlier payment, the guarantor does not have a remedy against the debtor but only against the creditor.[40] 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 subsequently becomes insolvent, the guarantor is entitled to reimbursement from the debtor for the amount paid.[41]

When guarantor may directly proceed with principal debtor even without payment – Even before having paid, the guarantor may proceed against the principal debtor:[42]

  • When he is sued for the payment;[43]
  •  In case of insolvency of the principal debtor;[44]
  • When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;[45]
  • When the debt has become demandable, by reason of the expiration of the period for payment;[46]
  • 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 10 years;[47]
  • If there are reasonable grounds to fear that the principal debtor intends to abscond;[48] and
  •  If the principal debtor is in imminent danger of becoming insolvent.[49]

Request for guaranty – If through a request one becomes a guarantor for the debt of a third person who is not present, the guarantor who satisfies the debt may proceed for reimbursement against either the person so requesting or the debtor.[50]

Between co-guarantors

Proportionate reimbursement against co-guarantors – When there are two or more guarantors of the same debtor and for the same debt, the guarantor who has paid may demand from his co-guarantors their respective shares.[51] If any of the guarantors should be insolvent, his share shall be borne by the others, including the payor, in the same proportion.[52] These rules are applicable only in these cases: (a) when the payment has been made by virtue of a judicial demand, or (b) when the principal debtor is insolvent.[53]

Same; Co-guarantors allowed same defenses of principal debtor against creditor – The co-guarantors may set up against the guarantor who paid the same defenses which would have pertained to the principal debtor against the creditor, including those which are not purely personal to the debtor.[54]

Sub-guarantor liable for same terms as guarantor – In case of the insolvency of the guarantor for whom he bound himself, a sub-guarantor is responsible to the co­guarantors in the same terms as the guarantor.[55]

Extinguishment of Guaranty

Modes of extinguishing guaranty – A contract of guaranty is extinguished in the same way as all other obligations and simultaneous with that of the debtor.[56]

Guarantor released if creditor voluntarily accepts property as payment of debt – The guarantor is released if the creditor voluntarily accepts an immovable property or other property as payment of the debt even if the same is subsequently lost through eviction.[57]

Solidary guarantors released if they cannot be subrogated to creditor – Even if the guarantors are solidarily liable, they are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preference of the latter.[58]

Philippine National Bank v. Manila Surety & Fidelity Co.
G.R. No. L-20567, 30 July 1965 (En Banc)

PNB contends that the power of attorney obtained from ATACO was merely an additional security in its favor, and that it was the duty of the surety, and not that of the creditor, to see to it that the obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any sum from the principal debtor.

HELD: PNB was liable. “Even if the assignment with power of attorney from the principal debtor were considered as mere additional security, still, by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the Civil Code: ‘Art. 2080. — The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they can not be subrogated to the rights, mortgages and preferences of the latter.’”

People’s Bank and Trust Co. v. Tambunting
G.R. No. L-29666, 29 October 1971 (En Banc)

Petitioner People’s Bank sued defendant Francisco Santana for the recovery of the sum of money due in an overdraft agreement, with the Tambunting couple as principal debtors and the bank as surety. Subsequently, defendant Francisco D. Santana executed a document denominated as absolute guaranty in which, in consideration of the ‘overdraft agreement and pledge,’ he bound himself to the bank, jointly and severally, with the Tambunting spouses for the full and prompt payment of all the indebtedness incurred or to be incurred by said spouses on account of the overdraft line.

Defendant Santana does not dispute the indebtedness. However, it is the contention that he had been released from the guaranty for several reasons. Defendant Santana contends that he was released from his obligation on the overdraft line because the plaintiff had extended the time of payment and, released to the Tambuntings without his consent, the 135 shares of stocks of the International Sports Development Corporation which had been pledged to the bank to secure the overdraft line. It is argued that, in accordance with Article 2080 of the New Civil Code: ‘The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter.

HELD: Defendant Santana was liable. “The contract of absolute guaranty… expressly authorized the plaintiff bank to extend the time of payment and to release or surrender any security or part thereof held by it without notice to, or the consent of, Santana. He had consented in advance to the release of the guaranty which the bank might make, Santana cannot now complain that the release of the pledge was without his consent, and that it deprived him of the right to be subrogated to the rights of the creditor. The waiver is not contrary to law, nor is it contrary to public policy. The law does not prohibit the debtor-guarantor from agreeing in advance and without notice to the release of any security which had been given to assure payment of the obligation. The waiver is not contrary to public policy, because the right is purely personal, and does not affect public interest nor does it violate any public policy.

Neither does the return of the shares of stocks novate the original contract for the obligation remains the same; and if it is a novation, it is a novation made with the consent of Santana. Moreover, the pledge is merely an accessory obligation, and its release does not vary the terms of the principal obligation.”

Released by creditor in favor of one of several guarantors benefits all others – If a creditor releases one of the several guarantors without the consent of the latter, then the remaining guarantors will benefit to the extent of the share of the released guarantor.[59]

Extension to debtor without consent of guarantor extinguishes guaranty – If the creditor grants an extension[60] to the debtor without the guarantor’s consent, the guaranty is extinguished.[61]

Defenses available to guarantor against creditor – The guarantor is allowed to 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 personal to the debtor.[62]

[1] Ibid. Paragraph 1, Article 2047.

[2] Ibid. Paragraph 2, Article 2047 cf. Section 4, Chapter III, Title I, Book IV. See Chapter 3 on Law on Obligations.

[3] Ibid. Paragraph 1, Article 2052.

[4] Ibid. Article 2053, cf. Paragraph 2, Article 2052.

[5] Ibid. Article 2048.

[6] Ibid. Paragraph 1, Article 2051.

[7] Ibid. Paragraph 2, Article 2051.

[8] Ibid. Paragaph 1, Article 2055. “If it be simple or indefinite, it shall compromise 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” (Ibid.).

[9] Ibid.

[10] CIVIL CODE. Article 2053.

[11] Ibid.. Article 2053.

[12] CIVIL CODE. Article 2050, cf. Paragraph 2, Article 1236.

[13] Ibid.. Article 2050, cf. Paragraph 2, Article 1237. The creditor’s rights referred to are those arising from mortgage, guaranty, or penalty.

[14] Ibid. Paragraph 1, Article 2054. “Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor” (Paragraph 2, Article 2054, Civil Code).

[15] Ibid. Article 2056. “The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with” (Ibid.). “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 excepted where the creditor has required and stipulated that a specified person should be the guarantor” (Article 2057, Civil Code).

[16] Ibid. Article 2049.

[17] “In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in article 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 article 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” (Article 2062, Civil Code).

[18] CIVIL CODE. Article 2058. “The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor” (Article 2064, Civil Code).

[19] Ibid. Article 2059.

[20] Ibid. Article 2059 (1).

[21] Ibid. Article 2059 (2).

[22] Ibid. Article 2059 (3).

[23] Ibid. Article 2059 (4).

[24] Ibid. Article 2059 (5).

[25] Ibid. Article 2060.

[26] Ibid.. Article 2063.

[27] Ibid. Article 2061.

[28] Ibid.

[29] CIVIL CODE. Article 2065. “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” (Ibid.).

[30] Ibid. Article 2066.

[31] Ibid. Article 2066 (1).

[32] Ibid. Article 2066 (2).

[33] Ibid. Article 2066 (3).

[34] Ibid. Article 2066 (4).

[35] Ibid. Article 2067.

[36] Ibid.

[37] CIVIL CODE. Article 2068.

[38] Ibid. Article 2069.

[39] Ibid.

[40] CIVIL CODE. Article 2070.

[41] Ibid. Article 2070.

[42] Ibid. Article 2071. “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” (Ibid.).

[43] Ibid. Article 2071 (1).

[44] Ibid. Article 2071 (2).

[45] Ibid. Article 2071 (3).

[46] Ibid. Article 2071 (4).

[47] Ibid. Article 2071 (5).

[48] Ibid. Article 2071 (6).

[49] Ibid. Article 2071 (7).

[50] Ibid.. Article 2072.

[51] Ibid.. Paragraph 1, Article 2073.

[52] Ibid. Paragraph 2, Article 2073.

[53] Ibid. Paragraph 3, Article 2073.

[54] Ibid. Article 2074.

[55] Ibid. Article 2075.

[56] Ibid. Article 2076.

[57] Ibid. Article 2077.

[58] Ibid. Article 2080.

[59] Ibid. Article 2078.

[60] “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” (Article 2079, Civil Code).

[61] CIVIL CODE. Article 2079.

[62] Ibid. Article 2081.

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