GUARANTY and SURETYSHIP

Nature and Extent of a contract

I. Definition
A. Guaranty
1. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
fail to do so
2. It is founded on another contract
a. Without a principal obligation, a guaranty cannot exist
b. A guaranty cannot exist without a valid obligation
c. A person may constitute a guaranty for performance of a voidable
or unenforceable contract and a natural or conditional obligation
1. Why?
a. Voidable contract is binding unless it is annulled by
proper court action
b. Unenforceable contract is not void
c. A natural obligation so that the creditor may
proceed against the guarantor although he has no
right of action against the principal debtor because
the latter’s obligation is not civilly enforceable in a
court
3. A contract which requires that the guarantor must be a person distinct
from the debtor
a. Because a person cannot be the personal guarantor of himself
b. Exception: If it is a real guaranty, a person may guarantee his
own obligation with his personal or real properties
B. Suretyship
1. A relation which exists where one person (principal) has undertaken an
obligation and another person (surety) is also under direct and primary
obligation, who is entitled to one performance
a. Between the principal and surety, the surety should perform first
2. A person binds himself solidarily with the principal debtor
a. In a solidary obligation, the solidary debtor is the principal debtor
II. Parties involved
A. At least three persons are involved in the relationship of guaranty
1. Principal Debtor
2. Principal Creditor
3. Guarantor
a. Fulfills the obligation of the principal debtor fails to do so
III. Distinctions between a guaranty and a suretyship
A. Similarities
1. Each promise to answer for the debt, default, or miscarriage of another
B. Differences
1. Guaranty
 a. the liability depends upon an independent agreement to pay the
obligation if the primary debtor fails to do so
b. secondarily or subsidiarily liable for the obligation
c. promises to pay only when the debtor cannot pay
d. The contract to form is governed by the Statute of Fraud
1. Must be in writing to be enforceable because a guaranty is
a special promise to answer for the debt, default of
miscarriage of another
e. Guarantor enjoys the benefit of exhaustion or “excussion”
1. Means that the guarantor’s liability only arises after the
creditor has exhausted the properties of debtor and has
resorted to all the legal remedies against the debtor
2. Surety
a. assumes liability as a regular party to the undertaking
b. the suretyship is primarily or directly liable for the debt or
obligation as if he were the principal debtor
c. obligation arises the very instant the contract is agreed upon (co-
principal debtor)
d. Does not come under the application of Statute of Fraud
1. Suretyship is a promise that creates a primary obligation
e. Binds himself if the debtor does not pay
1. The reason why the debtor does not pay is immaterial
2. Surety is liable as fully and under the same conditions as if
the debt were his from the beginning
C. Characteristics of guaranty
1. Accessory
a. It is dependent for its existence upon the principal obligation
guaranteed by it
b. It needs a principal obligation to exist
1. If the principal obligation is void then the guaranty is also
void
2. Consensual
a. Perfected by mere consent
3. Nominate
a. Has a definite name under the Civil code
4. Subsidiary
a. Takes effect only when the principal debtor fails in his obligation
5. Unilateral
a. Gives rise only to a duty on the part of the guarantor in relation to
the creditor and not vice versa
b. After guarantor fulfills its duty, principal debtor is liable to
indemnify the guarantor (an incidental contract)
c. May be entered even without the intervention of the principal
debtor
 6. Generally gratuitous
a. The guarantor does not receive any consideration for his guaranty
unless stipulated in the contract
D. Kinds of Guaranty
1. Guaranty in the broad sense
a. Personal Guaranty
1. Refers to guaranty in the strict sense
2. the credit given by the person who guarantees the
fulfillment of the principal obligation
b. Real Guaranty
1. Property, movable or immovable
a. If immovable, guaranty is in a form of mortgage or
antichresis
b. If movable, in the form of pledge or chattel
mortgage
2. As to its origin
a. Conventional
1. Created by agreement of the parties
b. Legal
1. Created by provision of law
c. Judicial
1. Created by decree of the court
3. As to consideration
a. Gratuitous
1. Guarantor receives no consideration for the guaranty
b. Onerous
1. Guarantor receives valuable consideration for the
guaranty
4. As to person guaranteed
a. Single
1. Constituted solely to secure performance of the principal
obligation
b. Double or sub-guaranty
1. Constituted to secure the fulfillment of a prior guaranty
2. Constituted in favor of another guarantor
a. With or without his knowledge and consent and
even over his objection
3. The guarantor is called the sub-guarantor
c. Co-guarantors
1. Two or more guarantors of the same debtors
IV. Guaranty undertaken without the knowledge of debtor and even against the will
of the principal debtor
A. If the guarantor pays, he shall be entitled to reimbursement by the debtor
only insofar as his payment is beneficial to the debtor
 B. The guaranty is unilateral
C. Only exists for the benefit of the creditor and not for the benefit of the
principal debtor who is not a party of the contract of guaranty
D. Creditor has every right to take all steps to secure the payment of his credit
V. If the guaranty is consented by the debtor
A. Guarantor is entitled to reimbursement for whatever he paid and to be
subrogated into the rights of the creditor
VI. Extent of Guaranty
A. Guarantor may bind himself for less but not more than the principal
obligation as regards to the amount and the onerous nature of the condition
1. If he was bound for more, his obligation shall be reduced to the limits
of that of the debtor
B. The guaranty may also be given as security for future debts wherein the
amount is not yet known
1. The creditor cannot claim from the guarantor until the debt is
ascertained or fixed and demandable
a. Because the contract is subsidiary
VII. Qualifications of Guarantor
A. The Qualifications are:
1. He possesses integrity
2. He has the capacity to bind himself
3. He has sufficient property
B. Without these qualifications, the guarantor is useless
C. Effect of subsequent loss of required qualifications
1. Qualifications should be present at the time of the perfection of
contract
2. Subsequent loss of any of the qualifications will not exonerate the
guarantor of the eventual liability he has contracted
3. The creditor may demand for another guarantor with proper
qualifications
4. Creditor may waive the contract if he wants to except if the guarantor
was specified by the creditor
VIII. Married Woman as Guarantor
A. A married woman may guarantee an obligation without the consent of
husband
1. in accordance with Art. 73 of the Family Code: “either spouse may
exercise any legitimate profession, occupation, business activity
without the consent of the other
B. A married woman cannot bind the conjugal property as guaranty
IX. Guaranty of conditional obligation
A. Conditional obligation is valid and binding like the pure one
1. If subject to a suspensive condition, the guarantor is liable after the
fulfillment of the condition
 2. If subject to a resolutory condition, the happening of the condition
extinguishes both the principal and the guaranty
Effect of Guaranty
I. Between the Guarantor and Creditor
A. The benefit of exhaustion or “excussion”
1. For the creditor, can proceed against the guarantor, he must first exhaust all
the property of the debtor and has resorted all legal remedies against the
debtor
a. The creditor who is negligent in exhausting the property pointed out by
the guarantor shall suffer the loss to the extent of said property or the
insolvency of the debtor resulting from such negligence
2. To avail for this benefit, guarantor 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
a. Property must be within the Philippines and enough to cover the amount
of debt
b. Demand is referred to is that made by the creditor after a judgement has
already been rendered and could not be satisfied
3. The benefit should always be unimpaired, even if the judgement should be
rendered against the principal debtor and guarantor
a. Any action brought by the creditor must be against the debtor alone, but
the principal debtor may ask the court to notify the guarantor
B. When Guarantor loses the benefit of exhaustion
1. If the guarantor has expressly renounce it
a. Benefit of excussion is a personal right recognized by the guarantor
b. Guarantor may avail of it or he may renounce it
2. If he bound himself solidarily with the debtor
a. The guarantor’s liability is no longer subsidiary but primary
b. When a person binds himself solidarily the contract becomes a surety
3. In case of insolvency of the debtor
a. A guarantor must ensure the solvency of the debtor
b. If the debtor becomes insolvent, the liability of the guarantor arises as the
debtor cannot fulfill his obligation
c. Insolvency must be actual and not just a mere declaration
4. Debtor has absconded or cannot be sued locally
a. Because of the debtor’s actions, he cannot fulfill his obligation
b. The debtor may have left a representative which the creditor would ask
for the payment of obligation
c. The creditor is not required to go after a debtor who is in hiding or cannot
be sued in court
5. It may be presumed that an execution on the property of the principal debtor
would not result to the satisfaction of the obligation
a. If the creditor wants to hold the guarantor liable, the earlier must resort to
all legal remedies against the debtor and exhaust his properties
 C. Sub-Guarantor’s benefit of excussion
1. The guarantor of the guarantor shall enjoy the benefit of excussion with
respect of both the guarantor and the principal
D. Several Guarantors of one debtor
1. Benefits of Co-guarantors
a. Benefit of exhaustion as regards the properties of the debtor
b. Benefit of division among themselves
2. Benefit decision among several guarantors
a. The article entitles the several guarantors of only one debtor and for the
same debt the benefit of division
1. The benefit of division is when the creditor can only hold the co-
guarantors liable only for their proportionate share
b. The liability of several guarantors is only joint.
1. The obligation to answer for the debt would be divided among them
2. Guarantors are not liable to the creditor beyond the shares which
they are bound to pay
c. Exceptions
1. When the solidarity has been expressly stipulated
2. The benefit of division and the benefit of exhaustion ceases
II. Between Debtor and Guarantor
A. Rights of guarantor against debtor
1. Right to be indemnified by the debtor
a. Extent of indemnity
1. The total amount of the debt
2. Legal interest from the time of payment was made known to the
debtor, even though it did not earn any interest from the creditor
3. Expenses incurred by the guarantor after having notified the debtor
that payment had been demanded of him
4. Damages, if they are due
b. Exception
1. If the guaranty is constituted without the knowledge or against the
will of the principal debtor, the guarantor can only recover only
insofar as the payment has been beneficial to the debtor
2. Right to subrogation
a. Effect of subrogation
1. Subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining subject to stipulation in conventional
subrogation
i. Simply, change the person of the creditor to the guarantor
b. This right is necessary to enable the guarantor to enforce the right to be
indemnified
3. Right to sue or reimbursement
a. Only applies if he becomes a guarantor for the debt of an absent debtor at
the request of another
 B. Effect of Compromise
1. A compromise between the creditor and the principal debtor benefits the
guarantor but does not prejudice him
2. If the guarantor has compromised with the creditor, he cannot demand of the
debtor more than what he has paid
C. Payment by guarantor without notice to debtor
1. The debtor may enforce against him all the defenses which he could have set
up against the creditor at the time the payment was made
2. The guarantor cannot be allowed to prejudice the rights or interests of the
debtor
D. Payment by guarantor before maturity
1. The guarantor cannot demand reimbursement of the debtor until the
expiration of the period unless the payment has been ratified by the debtor
2. The guarantor can seek reimbursement from the debtor only upon maturity of
the obligation
3. If the debtor ratifies the payment, the ratification is equivalent to a waiver of
his benefit period
E. When the guarantor who has not yet paid can proceed against the debtor
1. Only applies in the following situations
a. When he sued for the payment
b. In case of insolvency of the principal debtor
c. When the debtor has bound himself to relieve him from the guaranty
within a specified period and this period has expired
d. When the debt has become demandable, by reason of the expiration of
the period for payment
e. 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
f. If there are reasonable grounds to fear that the principal debtor intends to
abscond
g. If the principal debtor is in imminent danger of becoming insolvent
2. Actions the guarantor may do
a. Obtain release from the guaranty
b. Demand a security that shall protect him from any proceedings by the
creditor and from the danger of insolvency of the debtor
3. Remedies afforded to the guarantor
a. To obtain a release from guaranty
b. To obtain security for his protection should he be made to pay
c. Not to seek reimbursement from the debtor
III. Between Co- guarantors
A. Right to contribution of guarantor who pays
1. If one guarantor pays for the whole obligation, he can demand from the other
guarantors their share which is proportionately owing from him
 2. If any one of the guarantors should be insolvent, his share shall be borne by
the others, including the payer
3. The Rule only applies on the following situation
a. If the payment is made by virtue of a judicial demand
b. The payment is made because the principal debtor is insolvent
B. Defenses available to co-guarantors
1. The co-guarantors may avail themselves of all defenses which the debtor
would have interposed against the creditor but not those which are purely
personal to the debtor
C. Liability of sub-guarantor in case of Insolvency of guarantor
1. Sub-guarantor is responsible to the co-guarantors in the same terms as the
guarantor

Extinguishment of Guaranty
I. Causes of extinguishment of guaranty
A. In general
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger of the rights of the creditor and debtor
5. Compensation
6. Novation
B. Any one of these modes that extinguishes the principal obligation
C. Other Acts
1. Acceptance by the creditor of immovable or other property in payment of debt
a. Known as “dation in payment”
b. Relieves the guarantor from any responsibility
c. In case of eviction, the principal obligation is revived but not the guaranty
1. creditor’s action against the debtor is no longer for the payment of the
principal obligation but for his warranty against eviction
2. Extension of time granted to the debtor without the consent of the guarantor
a. The guarantor is discharged from his liability
b. Mere failure of the creditor to demand payment from the debtor when
the debtor when principal obligation becomes due does not constitute an
extension
1. In this case, the liability of the guarantor is not extinguished
3. When by some act of creditor, the guarantor cannot be subrogated to the
rights, mortgages and preferences of the creditor
a. When the creditor by his acts has deprived the guarantor of such right, it
stands to reason that the guarantor shall be released from his
responsibility
b. Holds true even if the guarantors may be solidary
 4. 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 was granted
a. The release must benefit all to the extent of the share of the guarantor
released
b. When the creditor releases or fails to register a mortgage, guarantors are
released
II. Legal and Judicial Bonds
A. Definition
1. Bond
a. Commonly understood to mean an undertaking that is sufficiently secured
and not for cash or currency
2. Bondsman
a. Is a surety offered in virtue of a provision of law or judicial order
b. Must have the qualifications required of a guarantor
3. Pledge or mortgage
a. Property or real security
B. Pledge or mortgage in lieu of bond
1. If the person required to give a bond, should not be able to do so
a. A pledge or mortgage considered sufficient to cover his obligation shall be
admitted
C. Bondsman not entitled to excussion
1. A judicial bond has no benefit of excussion
a. He cannot demand the exhaustion of the property of the principal debtor
2. A sub-surety cannot demand the exhaustion of the property of the debtor or
of the surety

LOAN
I. Contract of loan
A. Definition
1. A real contract
a. because the delivery of the thing is necessary for the perfection of the
contract
2. Unilateral contract
a. because once the subject matter has been delivered, it creates obligations
on the part of only one of the parties
B. Cause or consideration
1. As to borrower
a. Acquisition of the thing
2. As to lender
a. Right to demand its return or its equivalent
C. Kinds of loan
1. Commodatum
a. Definition
 1. A contract where the bailor delivers to the bailee a non-consumable
thing so that the bailee may use it for a certain time and return the
identical thing
b. Precaruim
1. Definition
i. Is a kind of commodatum where the bailor may demand the thing
at will
2. Condition
i. Neither the duration of the contract nor the use to which the thing
loaned should be devoted has been stipulated
ii. The use of the thing is merely tolerated by the bailor
c. Nature
1. Is essentially gratuitous
i. the borrower who acquires to use the thing does not have to pay a
compensation for such use
2. is purely personal in character
i. Effects
a. The death of either the bailor or the bailee extinguishes the
contract
b. The bailee can neither lend or lease the object to a third person
c. But the members of the bailee’s household may make use of the
thing loaned
1. Unless there is a stipulation or unless the nature of the
thing forbids its use
3. A real contract
i. because the delivery of the thing is necessary for the perfection of
the contract
4. Consensual contract
i. Need consent for perfection of contract
d. Capacity of parties
1. The bailor need not be the owner of the thing loaned
i. Because what is transferred by the contract is use and not
ownership of the thing
2. A person may own the use of a thing although he may not be the
owner
i. A lessee may transfer to another the use of the thing leased
e. Obligation of the bailee
1. To take care of the thing loaned with diligence of a good father of the
family
2. To pay for the ordinary expenses for the use and preservation of the
thing loaned
3. To be liable for the loss and deterioration of the thing loaned, even if
it should be through a fortuitous event under the following
circumstances
 i. If he devotes the thing to any purpose different from that which it
has been loaned
ii. If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted
iii. If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exempting the bailee from
responsibility in case of fortuitous event
iv. If he lends or leases the thing to a third person =, who is not a
member of his household
v. If, being able to save either the thing borrowed or his own thing, he
chooses to save the latter
4. To return the thing loaned upon expiration of the contract
5. To be solidarily liable in the event there are two or more bailees to
whom a thing is loaned
f. Actions that the bailee cannot do
1. Make use of the fruits of the thing loaned
2. Retain the thing loaned on the ground that the bailor owes him
something, even though it may be by reason of expenses
g. Remedies of bailee
1. Right to retain the thing loaned for damages which he may have
suffered by reason of the flaws of the thing loaned of which the bailor
has knowledge but failed to advise the bailee of the same
h. Obligations of bailor
1. To refund the extraordinary expenses during the contract for the
preservation of the thing loaned
i. Bailee must bring the same to the knowledge of the bailor before
incurring them
ii. Except when they are so urgent that the reply to the notification
cannot be awaited without danger
2. To bear equally with the bailee the extraordinary expenses which
arose on the occasion of the actual use of the thing by the bailee,
even though he acted without fault
i. This is an equitable solution
ii. Bailee pays one half because of the benefit derived from the use of
the thing loaned to him
iii. Bailor pays the other half because he is the owner and the thing will
be returned to him
3. To compensate the bailee for damages suffered by him cased by the
flaws in the thing loaned
i. If only the bailor knew of the flaws but did not advise the bailee of
the same
4. Bailor cannot abandon the thing loaned to the bailee
i. In lieu of the expenses and damages bailor is liable for
 i.Rights of Bailor
1. In case of urgent need, bailor can demand the temporary use of the
thing loaned
i. The contract of commodatum is also suspended
ii. The thing is also in the possession of the bailor
2. The bailor may demand the immediate return of the thing loaned if
the bailee commits any of the following acts
i. If the bailee should commit an offense against the person, the
honor, or the property of the bailor, or his spouse or his children
under his parental authority
ii. If the bailee imputes to the bailor any criminal offense or any act
involving moral turpitude, even though he should prove it unless
the criminal act be committed aganst the bailee himself, his wife, or
children under his authority
iii. If he unduly refuses him support when the bailee is legally bound to
give support to the bailor
3. The bailor may demand the return of the thing loaned at will
i. Only if the following happens
a. the use of the thing loaned is merely tolerated by the owner
b. neither the duration of the contract nor the use to which the
thing loaned should be devoted has been stipulated
j. Extinguishment of Commodatum
1. Expiration of the period or the accomplishment of the use as
stipulated
2. Death of either the bailor or the bailee
2. Mutuum or simple loan
a. Definition
1. Where one of the parties (lender) delivers to another (borrower)
money or consumable thing who acquires the ownership thereof
2. Borrower is bound to pay the lender an equal amount of the same
kind and quality
b. Object
1. Money
2. Consumable thing
c. If the thing borrowed is non-consumable with the obligation of another to
pay with another thing of the same kind
1. Known as barter
d. Capacity of Parties
1. Lender
i. Must be the owner
ii. Have authority from the owner to lend the thing
iii. Because he is obliged to transfer the ownership of the thing
2. Borrower
i. Must have the capacity to enter into a contract
 e. Nature and Form
1. A real contract
i. Perfected by delivery of the object
2. No particular form is required
3. If the loan carries interest
i. Stipulation for the payment of interest must be in writing
ii. Otherwise there’s no interest
f. Obligations of borrower
1. If what is borrowed is money
i. Must pay in the currency which is legal tender in the Philippines
a. In case of extraordinary inflation of currency at the time of
payment
1. Basis of payment must be the value of currency at the time
the obligation was incurred
b. No interest shall be due unless stipulated in writing
1. If payment was made by mistake, lender has the obligation
to return the same
2. If stipulated, value of interest shall be appraised at the
current price of the product at the time and place of the
payment
c. Interest due and unpaid shall not earn interest unless stipulated
1. If stipulated, interest shall earn legal interest from the time
it is judicially demanded
2. If what is borrowed is a fungible thing other than money
i. Borrower must pay another thing of the same kind, quality, and
quantity
a. Even if it changes value
b. In case it is impossible to pay the same kind
1. The value at the time of the perfection of the loan shall be
paid
D. Distinction between Commodatum and Mutuum
1. Similarities
a. Both are real contracts
1. Perfected by delivery of the object
2. Differences
a. Commodatum
1. Is essentially gratuitous
2. May involve real or personal properties
i. If personal it must not be consumable
a. Exception: the consumable thing may be a subject of
commodatum provided that the purpose is not consumption but
merely for exhibition
3. Transfer of use of the property
4. Bailor retains ownership
 5. In case of urgent need, bailor may require the return of the thing
loaned before expiration
b. Mutuum
1. May be gratuitous or onerous (if with interest)
2. Involves only money or consumable thing
3. Transfers ownership of the thing
4. Ownership is transferred to the borrower
5. Lender cannot demand the payment before the term of the loan has
arrived

DEPOSIT
I. Definition
A. A real contract where a person receives a thing belonging to another, with the
obligation of safekeeping it and returning the same
B. The principal purpose of the contract must be for safekeeping of the thing delivered
II. Characteristics
A. Real Contract
1. Perfected by the delivery of the object
2. An agreement would constitute a deposit is binding but delivery is needed to
be perfected
B. Principal
1. Does not depend on another contract to exist
C. Nominate
1. Has a definite name under the Civil code
D. Generally gratuitous
1. Exception
a. when there’s an agreement to the contrary
b. unless the depository is engaged in the business of storing goods
1. known as the warehouseman
2. Applicable to the law of warehouse receipt
E. Unilateral or Bilateral
1. Unilateral if no compensation
2. Bilateral if there’s compensation
F. Parties to a Deposit
1. Depositor
a. He delivers the thing to another for safekeeping
2. Depositary
a. Person to whom the thing is delivered for safekeeping
G. Kinds of Deposit
1. Judicial Deposit
a. Known as sequestration
b. Takes place when an attachment of property in litigation is ordered
2. Extrajudicial, which
a. may be either:
1. Voluntary
i. Deposit is agreed upon by the parties
2. Necessary
i. Deposit is made:
a. In compliance of a legal obligation
1.