I I .

GUARANTY AND SURETYSHI P

CHAPTER 1 N ATURE AN D EXTEN T OF GUARAN TY

ART. 2047 Definition of Guaranty
Art. 2047. By guaranty a person, called the guarantor, binds him self to the
creditor to fulfill the obligation of the principal debtor in case the lat ter should
fail to do so.

I f a person binds him self solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Tit le 1 of this Book shall be observed. I n such case the
contract is called a suretyship.

=It is a contract between the guarantor and creditor. A person called the
guarantor, binds himself to the creditor to fulfil the obligation of the principal
debtor in case the latter should fail to do so. (Art. 2047)
=In its broad sense, guaranty includes pledge and mortgage because the purpose of
guaranty may be accomplished not only by securing the fulfilment of an obligation
contracted by the principal debtor through the personal guaranty of a third person but
also by furnishing to the creditor for his security, property with authority to collect the
debt from the proceeds of the same in case of default.
.

A R T . 2 0 5 1, C C
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 with his objection.
(1823)

A R T . 2 0 5 5, C C

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 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. (1827a)

Classification of guaranty
✓ In the broad sense:
(a) Personal — here, the guarantee is the credit given by the person who
guarantees the fulfillment of the principal obligation; (guarantor)
(b) Real — here, the guaranty is property, movable (in the form of real
mortgage or antichresis) or immovable (in the form of pledge or chattel
mortgage).

✓ As to its origin:
(a) Conventional — constituted by agreement of the parties.
(b) Legal — imposed by virtue of a provision of law.
(c) Judicial — required by a court.

✓ As to consideration:
(a) Gratuitous — the guarantor does not receive remuneration or anything for
acting as guarantor.
(b) Onerous — the guarantor receives valuable consideration.

✓ As to the person guaranteed:

(a) Single — 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.

✓ As to the person guaranteed:

(a) Definite — the guaranty is limited to the principal obligation only, or to a
specific portion thereof.
(b) Indefinite or simple — one which not only includes the principal obligation
but also all its accessories including judicial costs.

CHARACTERISTICS
(CUGSCAF)
1. Consensual =No delivery of a thing is required to perfect the guaranty. The
guarantor’s promise and the acceptance by the creditor is enough.

2. Unilateral =It is unilateral because it only gives rise to a duty on the part of the
guarantor, and it may be entered into even without the intervention of the principal
debtor.

3. Gratuitous =A guaranty is gratuitous, unless there is a stipulation to the contrary. (n)

(ART. 2048)
=Generally, guaranty is gratuitous, but the parties may stipulate otherwise.
GENERAL RULE: Guaranty is gratuitous.
EXCEPTION: Guaranty is onerous only if it is stipulated.
What is the cause/consideration of a contract of guaranty?
The cause of a contract of guaranty is the same cause which supports the principal
obligation of the principal debtor. There is no need for an independent
consideration in order for the contract of guaranty to be valid. The guarantor
need not have a direct interest in the obligation nor receive any benefit from it. It
is enough that the principal obligation has consideration.

4. Subsidiary and conditional =It takes effect only when the principal debtor fails in his
obligation, and his property and legal remedies against him must first be exhausted
before the guarantor may be made liable

5. Accessory =The guaranty is dependent upon the existence of an obligation between

the debtor and creditor, e.g. a loan, which is the principal contract.

6. FormaL=Art. 2055 provides that a guaranty must be express and its terms must be
stipulated. Further, the Statute of Frauds mandates that a “special promise to answer for
the debt of another” must be in writing, though there is no need that it appear in a public
document.

Q: Who is a guarantor?A: The guarantor is the person who is bound to another for the
fulfillment of a promise or undertaking of a third person.
Qualifications of guarantor (Art. 2056)
1. possesses integrity;
2. has capacity to bind himself;
3. has sufficient property to answer for the obligation which he guarantees;
4. Has not been convicted of a crime in the first instance involving dishonesty, or does
not become insolvent
Exception: if a specific person was designated as guarantor, then the creditor may not
demand substitution.
=The qualifications need only be present at the time of the perfection of the contract. If
the guarantor should be convicted of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the qualifications required.

=So, 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. (Art. 2057)

ESSENTIAL REQUISITES
1. Consent =Consent to become a guarantor must be given by one with capacity.
2. Object
A R T . 2 0 5 2, C C
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. (1824a)

A R T .2053,CC
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. (1825a)

=The object of the guaranty is the performance of the principal obligation.

3. Consideration
Art. 2048
Unless stipulated, a guaranty is generally gratuitous.

=Therefore, the consideration is the liberality of the guarantor. If onerous, the

consideration is the compensation for the guaranty.

PARTIES
*A R T . 2 0 4 9, C C
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. (n)

Art. 94 of the Fam ily Code

The absolute com m unity of property shall be liable for:

( 3) Debts and obligations contracted by either spouse without the consent of the
other to the extent that the fam ily m ay have been benefited.
XPNs:
1. If with her husband’s consent, it binds the community or conjugal partnership property.
2. Without husband’s consent, in cases provided for by law, such as when the guaranty has
redounded to the benefit of the family.
Married woman as guarantor – ordinarily binds only her personal property (Art. 145, FC);
binds conjugal partnership:
1. With husband’s consent
2. Without husband’s consent in cases provided by law

=A m arried woman who acts as guarantor without the consent of the husband
binds only her separate property unless the debt benefited the family.

=There is no express prohibition against a married woman acting as guarantor for

her husband.

=Remember that now, in order to bind the absolute com m unity, the consent of
both spouses is needed. I f only the consent of one spouse is obtained, the
absolute com m unity will not be liable unless the obligation redounded to the
benefit of the com m unity.

=When the husband acts as a guarantor for another person without the consent of
the wife, the guaranty binds only the husband since the benefit really accrues to
the principal debtor and not to the husband or his family. The exception is if the
 husband is really engaged in the business of guaranteeing obligations because in
this case, his occupation or business is deem ed to be undertaken for the benefit of
the family.

*A R T . 2 0 5 6, C C
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. (1828a

*A R T . 2 0 5 7, CC
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. (1829a

I deally, the qualifications of a guarantor are the ff:

1. I ntegrity
2. Capacity to bind him self
3. Sufficient property to answer for the obligation which he guarantees

✯ But the creditor can waive these requirem ents.

Jurisdiction over the guarantor:

Jurisdiction over the guarantor belongs to the court where the principal
obligation is to be fulfilled, in accordance with the rule that accessory follows
the principal.

Effect of Subsequent Loss of Qualificat ions

The qualifications need only to be present at the t im e of the perfection of the

contract. The
subsequent loss of the qualifications would not extinguish the liability of the
guarantor, nor will it extinguish the contract of guaranty.

However, the creditor m ay dem and another guarantor with the proper
qualifications.

W hen m ay the creditor dem and another guarantor?

1. I n case the guarantor is convicted in the first instance of a crim e

involving dishonesty ( since he loses integrity)
2. I n case the guarantor becom es insolvent ( since he loses sufficient
property to answer for the obligation which he guarantees)  there is no
need for a j udicial declaration of insolvency

Parties to the contract

1. Creditor and guarantor; or
2. Principal debtor and guarantor, with stipulation in favor of third party, who is the
creditor The principal debtor is not necessary to the contract of guaranty/

FORM A R T . 1403,CC
The following contracts are unenforceable, unless they are ratified:
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum, thereof, be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents: (b) A special promise to
answer for the debt,
default, or miscarriage of another;

Art. 2055
A contract of guaranty must be in writing, but it need not be in a public instrument.
Because it is generally gratuitous, as per Art. 2048, it is strictly construed against the
creditor
Art. 2055. A guaranty is not presum ed; it m ust be express and cannot extend
to m ore than what is st ipulated therein.

I f it be sim ple or indefinite, it shall com prise not only the principal obligation, but
also all it s accessories, including the j udicial costs, provided with respect to the
lat ter, that the guarantor shall only be liable for those costs incurred after he has
been judicially required to pay
Cause of contract of guaranty
(a) Presence of cause which supports principal obligation. A guarantor or surety is
bound by the same consideration that makes the contract effective between
the principal parties.
(b) Absence of direct consideration or benefit to guarantor. The peculiar nature of
a guaranty or surety agreement the principal debtor or from the creditor.
Therefore, the guarantor or surety becomes liable for the debt or duty of
another although he possesses no direct or personal interest over the
obligation nor does he receive any benefit.
=The cause of a contract of guaranty is the sam e cause w hich supports the
principal obligation of the principal debtor. There is no need for an
independent consideration in order for the contract of
guaranty to be valid. The guarantor need not have a direct interest in the
obligation nor receive any benefit from it . I t is enough that the principal
obligation has consideration.
Origin of Guaranty (Art. 2051)
Article 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. (1823)
Guaranty by reason of origin
Judicial – constituted by decree of court Legal – by virtue of a provision of law Conventional
– by virtue of the will of the parties
Double or sub-guaranty – constituted to guarantee the obligation of a guarantor

Necessity of valid principal obligation (Art. 2052)

A guaranty cannot exist without a valid obligation. Guaranty is an accessory
contract. There must be a principal obligation for its existence. Nevertheless, a
guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract.
Necessity of valid principal obligation
Accessory, requires a principal obligation. If principal obligation is void, guaranty is void.
BUT, a guraranty m ay be constituted to guarantee the following defeCtive
contracts and natural obligations:
Guaranty of voidable, unenforceable, and natural obligations
1. Voidable – inasmuch as contract is binding unless annulled (Art. 1390)
=because the contract is binding unless it is annulled
2. Unenforceable – because it is not void (Art. 1403)
=because an unenforceable contract is not void.
3. Natural – when guaranteed, implied recognition of liability transforming the obligation to civil
(Art. 1423)
=even if the principal obligation is not civilly enforceable, the creditor m ay st ill go after the
guarantor

Definition of Suretyship (Second Paragraph of Art. 2 0 4 7 :)

Suretyship is a contractual relation resulting from an agreement where one person, the
surety, engages to be answerable to a third person for the debt, default, or miscarriage of
another known as the principal.

=I f a person binds him self solidarily with the principal debtor, it is a contract of
suretyship. The guarantor is called a surety. Suretyship is governed by Articles
1207 to 1222 of the Civil Code on solidary obligations. Suretyship dispenses with
certain legal requirem ents/ conditions precedent for proceeding against a
guarantor.

W hat is the difference betw een passive solidarit y ( solidarity am ong debtors)
and suretyship?

Review of oblicon: According to Tolentino, the two are sim ilar in the following
ways:

1. A solidary debtor, like a surety, stands for som e other person.

2. Both debtor and surety, after paym ent, m ay require that they be reim
bursed.

=The difference is that the lender cannot go after the surety r ight away.
There has to be default on the part of the principal debtor before the surety
becom es liable. I f it were m ere solidarity am ong debtors, the creditor can
go after any of the solidary debtors on due date.
Nature of surety’s undertaking
(a) Liability is contractual and accessory but direct — the surety’s
obligation is merely accessory or collateral to the obligation contracted by
the principal.
=BUT, his liability to the creditor is direct, primary, and absolute.

(b) Liability is limited by terms of contract — a contract of surety is not

presumed; it cannot extend to more than what is stipulated.

=The extent of a surety’s l i a b i l i t y is determined only by the term s of the

contract and cannot be extended by implication.

(c) Liability arises only if principal debtor is held liable — if the principal
debtor and the surety are held liable, their liability to pay the creditor would
be solidary but the nature of the surety’s undertaking is such that it does not
incur liability unless and until the principal debtor is held liable.
a. A surety is bound by a judgment against the principal even though
the party was not a party to the proceedings.

b. The creditor m ay sue, separately or together, the principal

debtor and the surety ( since they are solidarily bound) .

c. Generally, a demand or notice of default is not required to fix the

surety’s liability.

d. An accom modation party ( one who signs an instrument as maker,

drawer, accept or, or indorser without consideration and only for the
purpose of lending his name) is, in
effect, a surety. He is thus liable to pay the holder of the
instrument, subject to reimbursement from the accom modated
party.
 . Besides, a guaranty m ust be express. I t is not presum ed.

e. A surety bond is void where there is no principal debtor.

(d) Surety is not entitled to exhaustion of the properties of the principal

debtor.
=A surety is not entitled to the exhaustion of the properties of the principal
debtor since the surety assumes a solidary liability for the fulfillment of the
principal obligation.

(e) Undertaking is to creditor, not to debtor — the surety’s undertaking is

that the principal shall fulfil his obligation and that the surety shall be
relieved of liability when the obligation secured is performed.
=The debtor cannot claim that the surety breached it s obligation to pay for the
principal obligation because there is no obligation as between the surety and
the debtor. I f the surety does not pay, the principal debtor is st ill not relieved
of his obligation.

(f) Surety is not entitled to notice of principal’s default — demand on the

surety is not necessary before bringing suit against them. A surety is not
even entitled, as a matter of right, to be given notice of the principal’s
default.
(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.
(h) Surety is not exonerated by neglect of creditor to sue principal — a
mere want of diligence or forbearance does not affect the creditor’s rights
vis-á-vis the surety, unless the surety requires him by appropriate notice to
sue on the obligation.

Guaranty Distinguished from Suretyship:

GUARANTY SURETYSHI P
Guarantor prom ises to answer Surety prom ises to answer for the
for the debt, default or m debt, default or m iscarriage of the
iscarriage of the principal principal ( sam e)
Liability of the guarantor depends Surety assum es liability as a
upon an regular party to the undertaking
independent agreem ent to pay the
obligation if the prim ary debtor
fails to do so
The engagem ent of the guarantor is Surety is charged as an original
a collateral undertaking prom isor
The guarantor is secondarily liable A surety is prim arily liable

✯ MAI N DI FFERENCE: A surety undertakes to pay if the principal does not pay (
insurer of the debt). A guarantor binds him self to pay if the principal cannot pay (
insurer of the solvency of the debtor) .

✯ Since the obligation of the surety is to pay so long as the principal does not pay (
even if he can; even if he is solvent), the undertaking of the surety is m ore onerous
than that of a guarantor who pays only in the event that the principal is broke.

I llustration:

A borrows P10, 000 from B, with C agreeing to be the surety. A refuses to pay B out of
spite. I n this case, since C is a surety, B can im m ediately dem and paym ent from C.

I f, in this case, C is a guarantor instead, B would have to exhaust all the property of A
before he can collect from C.  it is not enough that A refuses to pay even if he can;
in order for C to be liable, A would have to be Unable to pay.

I f you w ere a lender and the borrow er offers as security either X as guarantor or a
real estate m ortgage, w hich one w ould you choose?

Choose the m ortgage. I f you were the lender, a real estate m ortgage is m ore
advisable because you can collect against the property. I n a guaranty/ surety, you
would have to go against the guarantor or surety – you would have to sue him , obtain
j udgm ent, and then execute j udgm ent. This is subject to a lot of delays. The
guarantor or surety can stall your claim .

GUARANTY SURETYSHIP
Surety is an original
Collateral
promissory
undertaking
Guarantor‐
Surety‐primarily
secondarily
liable
liable
Guarantor binds Surety undertakes
himself to pay if the to pay if principal
principal does not pay
cannot pay
Insurer of solvency
Insurer of the debt
of
debtor
Guarantor can
avail of the benefit Surety cannot
of excussion and avail of the benefit
division in case of excussion and
creditor proceeds division
against him
Q: What is the similarity between guaranty and suretyship?

A: Both guarantor and surety promise or undertake to answer for the debt, default or
miscarriage of another person.

Q: What are the characteristics of guaranty and suretyship?

A: ACCUNCS
1. Accessory
2. Consensual
3. Conditional
4. Unilateral
5. Nominate
6. Cannot be presumed
7. Covered by the Statute of Frauds

GUARANTY WARRANTY
an undertaking that
a contract by the title, quality or
which a person quantity of the
is bound to subject matter of a
another for the contract is what it is
fulfillment of a represented to be,
promise or and relates to some
undertaking of a agreement made
 ordinarily by the
third person party
who makes the
warranty
 Guaranty distinguished from suretyship

GUARANTY SURETYSHIP
Engagement of the guarantor is a The surety is charged as an original
collateral undertaking. promisor.
Guarantor is secondary liable in case Surety if primarily liable regardless of
the debt cannot be paid by the whether the principal is financially
principal. capable to fulfill his obligation.
Guarantor binds himself to pay should Surety undertakes to pay should the
the principal fail to pay. principal fail to pay.
Guarantor is the insurer of the solvency Surety is the insurer of the debt.
of the debtor.
Guarantor can avail of the benefit of Surety cannot avail of the benefit of
excussion and division in case the division and excussion.
creditor proceeds against him.
Discharged by the mere indulgence of Not discharged by either indulgence or
the principal; not liable unless notified neglect and want of notice.
of default.

Continuing guaranty or suretyship (Art. 2053)

Art. 2053. A guaranty m ay also be given as security for future debts, the am
ount of which is not yet known; there can be no claim against the guarantor until
the debt is liquidated. A conditional obligation m ay also be secured.

=A guaranty may also be given as security for future debts. 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. It covers all transactions,
including those arising in the future, which are within the description or contemplation of
the contract of guaranty, until the expiration or termination thereof.
A continuing guaranty is generally prospective in it s operation and is intended to secure future t
ransactions ( generally does not include past t ransactions).

1. Secure payment of loan at maturity – loan maturity and all other obligations which may
become due or be owing
2. Secure payment of any debt subsequently incurred – prospective in operation. Contract
continuing when object is to give a standing credit (Dino v. CA)
3. Secure existing unliquidated claims – Future debts may also refer to debts existing at
the time of the constitution of the guaranty of the amount is not known.
a. No theoretical or doctrinal difficulty in saying that surety itself is valid and binding even
before the principal obligation to be secured is thereby born (Atok Finance Corp. v. CA)

Guaranty of conditional obligations

I f the principal obligation is subj ect to a Suspensive condition – guarantor liable
after the fulfillment of condition
I f it is subject to a Resolutory condition – fulfillment extinguishes principal obligation
and the guaranty
OBLIGATIONS of the GUARANTOR
Art. 2047: The guarantor must fulfill the principal obligation.
1. Types of obligations that may be secured
As to validity
a) Valid
b) Voidable
c) Unenforceable
d) Natural
As to period
1. Present debts, including past debts not yet paid
2. Future debts not yet incurred/due, but demand can only be made if already liquidated
As to conditionality
a) Conditional
b) Absolute

2. Extent of obligations
A R T . 2 0 5 4, C C
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. (1826

=The guarantor’s liability may be less than the principal debt, but cannot be more, or be
subject to more onerous terms. If his liability is more, it shall be reduced to match the
debtor’s.

3.Items covered
Art. 2055:Items covered by guaranty
1. The principal obligation, or a portion thereof; and
2. If simple/indefinite, then also accessories and judicial costs.

4. Payment made without knowledge/against consent of debtor

A R T .123 6, CC
The creditor is not bound to accept payment or performance by a third person who has no
interest in
the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays
for another may demand from the debtor what he has paid, except that if he paid without
the knowledge or against the will of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor. (1158a)

A R T . 1 2 3 7, C C
Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty, or penalty. (1159a)

A R T . 2 0 5 0, C C
If a guaranty is entered into without the knowledge or consent, or against the will of the
principal debtor, the provisions of Articles 1236 and 1237 shall apply. (n)
Effects of payment without knowledge/consent
1. Guarantor may only recover amount insofar as his
 payment has been beneficial to the debtor; and
2. There is no subrogation.

5. Time & place of payment

A R T . 1 2 5 1, C C
Payment shall be made in the place designated in the obligation. There being no express
stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation was constituted. In any other case the
place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional
expenses shall be borne by him. These provisions are without prejudice to venue under the Rules
of Court. (1171a)

Summary of time and place of payment

Where payment must be made:
-Place designated in contract of guaranty; or
-Place designated in principal obligation
When payment must be made :
-After the creditor has exhausted all the
-debtor’s property and resorted to all legal remedies against him
Guaranty undertaken without knowledge of debtor (Art. 2050)
Art. 2050. I f a guaranty is entered into without the knowledge or consent, or
against the will of the principal debtor, the provisions of articles 1236 and 1237
shall apply.

=A guarantee can be constituted without the knowledge and even against the will of the
principal debtor. Because, Guaranty is unilateral. 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.

=A contract of guaranty is between the guarantor and the creditor. It can be instituted without
the knowledge or even against the will of the debtor, since the purpose of the contract is to
give the creditor all the possible measures to secure payment.

=However, if the contract of guaranty is entered into without the knowledge or consent or
against the will of the principal debtor, the effect is like payment by a 3rd person:

1. The guarantor can only recover insofar as the payment has been beneficial to the debtor.
2. The guarantor cannot compel the creditor to subrogate him in the creditor’s
rights such as those arising from a mortgage, guaranty or penalty.

=If the guaranty was entered into with the consent of the principal debtor, the guarantor
is subrogated to all the rights which the creditor had against the debtor once he pays for
the obligation.

I llustration:
A owes B P10, 000. Without the knowledge of A, C guarantees the obligation. C pays A P10, 000. C t r
ies to collect the P10, 000 from A, but A tells him that he has already paid B 4, 000.

 I n this case, C can only collect P6, 000 from A since it was only the extent to which A was benefited by
his payment.

 I f the loan was secured by a m ortgage, C cannot foreclose the m ortgage if A does not pay him
 because he is not subrogated to the r ights of B.

Applicable Law and Rights of the person who pays.

If a guaranty is entered into without the knowledge or consent, or against the
will of the principal debtor, the provisions of Articles 1236 and 1237 shall apply. 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.
PAYMENT OR PERFRMANCE:

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a
mortgage, guaranty, or penalty. (1159a)

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid
as to the creditor who has accepted it. (n)

Limitations of a Guarantor’s liability (Art. 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.

However creditors suing on a suretyship bond may 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.
Guarantor’s liability cannot exceed principal obligation
1. Subsidiary and accessory
2. Surety may pay as part of damages, interest at the legal rate, judicial costs (Art. 2055) and
attorney’s fees (Art. 2088) even without stipulation and even if he becomes liable for an
amount higher than the total in the bond.
3. Surety may be made to pay penalty

Principal’s liability may exceed guarantor’s obligation

Amount specified in the bond does not limit the extent of damages that may be
recovered from principal (Visayan Distributors v. Flores)

Since the contract of guaranty is a subsidiary and accessory contract, the guarantor’s liabilit y
cannot exceed that of the principal obligation. I f the guarantor binds him self for m ore than the
liability of the principal debtor, his liability shall be reduced.

However, if the creditor sues the guarantor, the guarantor m ay be m ade to pay costs, attorney’s fees,
and penalties even if this will m ake his liability exceed that of the principal.

How do you opt out of this rule?

Example: G guaranteed B’s 100K obligation to L to the extent of 100K. As an extra

consideration for lending the m oney, L wants an additional 20K from guarantor ( gravy,
according to JPSP). Since 2054 provides that the guarantor cannot bind him self for m ore than
the principal debtor, how do the parties opt out of the rule?
  Guarantor and Lender should enter into a new and separate agreem ent. They should take it
out of the context of the guaranty and have a new agreem ent in which L would ( kunwari)
perform som e service for G in consideration of the additional 20K.

Guaranty not presumed (Art. 2055)

Art. 2055. A guaranty is not presum ed; it m ust be express and cannot extend
to m ore than what is st ipulated therein.

I f it be sim ple or indefinite, it shall com prise not only the principal obligation,
but also all it s accessories, including the j udicial costs, provided with respect to
the lat ter, that the guarantor shall only be liable for those costs incurred after
he has been judicially required to pay.

=A guaranty is not presumed; it must be express and cannot extend to more than what is
stipulated therein. As a contract, guaranty requires the expression of consent on the part of
the guarantor to be bound. It cannot be presumed because of the existence of a contract or
principal obligation. Guaranty must not only be expressed but must also be reduced to
writing.
Rationale: Consideration of prudence in the interest of the guarantor who may fall
under the harsh necessity of paying another’s debt without benefit whatsoever for
himself.

Guaranty: how construed?

Inasmuch as guaranty is a special obligation, it has to be strictly interpreted
against the creditor and in favor of the guarantor and is not to be extended beyond
its terms or specifed limits. Doubt on the terms and conditions of the guaranty or
surety agreement should be resolved in favor of the guarantor or surety

RULE: Guaranty is never presumed. It must be express.

Reason for the rule: Because a guarantor assumes an obligation to pay for another’s debt
without any benefit to himself. Thus, it has to be certain that he really intends to incur
such an obligation and that he proceeds with consciousness of what he is doing.

*Form required for Guaranty

Guaranty must be IN WRITING
A contract of guaranty, to be enforceable, must be in writing because it falls under the Statute of
Frauds as a “special promise to answer for the debt, default or miscarriage of another.

*Construction of Guaranty
A guaranty is strictly construed against the creditor and in favor of the guarantor and is not to be
extended beyond its terms or specific limits. Doubts should be resolved in favor of the guarantor or
surety.

✯ Generally, a guarantor is liable only for the obligation of the debtor stipulated upon, and not to
obligations assumed PREVIOUS to the execution of the guaranty unless an intent to be so liable is
clearly indicated. (Prospective application of the guaranty)
However, this rule of construction is applicable only to an accommodation surety or one that is
gratuitous. It does not apply in cases where the surety is compensated with consideration. In
such cases, the agreement is interpreted against the surety company that prepared it.

Is a stipulation that says that the guaranty will subsist only until maturity of the
obligation valid?
= Generally, no. Such a stipulation would defeat the purpose of a guaranty which is to answer for
the default of the principal debtor. If the guaranty is only up to the date of maturity, there is no
way that the guarantor can be liable since default comes only at maturity date.

2nd Paragraph of Art. 2055: Extent of Guarantor’s Liability

1. Definite guaranty – The liability of the guarantor is limited to the principal debt, to the
exclusion of accessories.

2. Indefinite or simple guaranty – If the agreement does not specify that the liability of the
guarantor is limited to the principal obligation, it extends not only to the principal but also to
all its accessories.

This is because in entering into the agreement, the principal could have fixed the limits of his
responsibility solely to the principal. If he did not fix it, it is presumed that he wanted to be bound not
only to the principal but also to all its accessories.

GENERAL RULE: It is not necessary for the CREDITOR to expressly accept the contract of guaranty
since the contract is unilateral; only the guarantor binds himself to do something.

EXCEPTION:
If the guarantor merely offers to become a guaranty, it does not become a binding
obligation unless the creditor accepts and notice of acceptance is given to the guarantor.
On the other hand, if the guarantor makes a direct or unconditional promise of guaranty
(and not merely an offer), there is no need for acceptance and notice of such acceptance
from the creditor.

Art. 2056. One who is obliged to furnish a guarantor shall present a person who
possesses integrity, capacity to bind him self, and sufficient property to answer for the
obligation which he guarantees.

The guarantor shall be subject to the j urisdiction of the court of the place where this
obligation is to be com plied with.

Art. 2057. I f the guarantor should be convicted in first instance of a crim e involving
dishonesty or should becom e insolvent, the creditor m ay dem and another who has all
the qualifications required in the preceding art icle. The case is excepted where the
creditor has required and st ipulated that a specified person should be the guarantor.

I deally, the qualifications of a guarantor are the ff:

=I ntegrity
=Capacity to bind him self
=Sufficient property to answer for the obligation which he guarantees

✯ But the creditor can waive these requirem ents.

Jurisdiction over the guarantor: Jurisdiction over the guarantor belongs to the
 court where the principal obligation is to be fulfilled, in accordance with the rule
that accessory follows the principal.

Effect of Subsequent Loss of Qualificat ions

The qualifications need only to be present at the t im e of the perfection of the

contract. The subsequent loss of the qualifications would not extinguish the
liability of the guarantor, nor will it extinguish the contract of guaranty.
However, the creditor m ay dem and another guarantor with the proper
qualifications.

Effect of subsequent loss of required qualifications

Qualifications need only be present at the time of the perfection of the contract. Subsequently, the
creditor can:
1. Demand another guarantor with proper qualification
a. Dishonesty – conviction required
b. Insolvency – judicial declaration not required
2. Waive and hold the guarantor to his bargain
Selection of guarantor
1. Specified person stipulated as guarantor – substitution may not be demanded
2. Guarantor selected by the principal debtor – debtor answers for the integrity, capacity
and solvency until extinguishment of debt
3. Guarantor personally designated by the creditor – responsibility of the selection borne by the
creditor

W hen m ay the creditor dem and another guarantor?

=I n case the guarantor is convicted in the first instance of a crim e

involving dishonesty ( since he loses integrity)
=I n case the guarantor becom es insolvent ( since he loses sufficient
property to answer for the obligation which he guarantees)  there is no
need for a j udicial declaration of insolvency

W hat is the effect of the guarantor’s death on the guaranty?

The guaranty survives the death of the guarantor. The general rule is that a
party’s contractual rights and obligations are t ransm issible to his successors.
The rules on guaranty do not expressly provide that the guaranty is
extinguished upon the death of the guarantor.

Applying Art. 2057, the supervening incapacity of the guarantor does not
extinguish the guaranty but m erely gives the creditor the r ight to dem and a
replacem ent. But the creditor can waive this r ight and choose to hold the
guarantor to his bargain.

What is the effect of the debtor’s death?

A: His obligation will survive. His estate will be answerable. If the estate has no
sufficient assets, the guarantor shall be liable.
 I f he so chooses, the creditor’s claim passes to the heirs of the deceased
guarantor.
A: His heirs are still liable to the extent of the value of the inheritance because the
obligation is not purely personal and is therefore transmissible.

Q: What is the rule with respect to jurisdiction in an action based on a contract of guaranty?

A: The guarantor shall be subject to the jurisdiction of the court of the place where
the obligation is to be complied with.

W hen m ay the creditor NOT dem and another guarantor?

Where the creditor has st ipulated in the original agreem ent that a specified person
should be the guarantor, he is bound by the term s of the agreem ent and he
cannot thereafter deviate from it .

CHAPTER II. EFFECTS OF GUARANTY

II.1. EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND THE CREDITOR

Right of guarantor to the benefit of excussion or exhaustion (Art. 2058)
Art. 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.

• A guarantor is only secondarily liable, being that a contract of guaranty is accessory and
subsidiary.
• The rule provide that, 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.
Note: Article 2058 is not applicable to a contract of suretyship.
Right of guarantor to benefit of excussion or exhaustion
1. Guarantor only secondarily liable – accessory and subsidiary; distinguished guaranty
from suretyship
2. All legal remedies against debtor to be first exhausted – benefit of excussion; not
sufficient that debtor appears insolvent
Thus, in order for the creditor to collect from the guarantor, the ff. conditions m
ust be fulfilled:

1. The creditor should have exhausted all the property of the debtor; and

2. The creditor has resorted to all legal rem edies against the debtor (
ex. Accion pauliana/ rescission of fraudulent alienations)

Can the creditor im plead the guarantor as a co- defendant w ith the debtor?No.
Except in cases provided in 2059, Article 2062 says that creditor should proceed
against the principal debtor alone.
Right of creditor to secure judgment against guarantor prior to exhaustion
Generally, the rue requires a creditor to exhaust all legal remedies against debtor before going after
the guarantor. But the rule permits the creditor to secure a judgment against the guarantor. There is
nothing procedurally objectionable in impleading the guarantor as a co-defendant. The Rules of
Court explicitly allows it by permissive joinder of parties.

Art. 2059. This excussion shall not take place:

1. I f the guarantor has expressly renounced it ;

2. I f he has bound him self solidarily with the debtor;

3. I n case of insolvency of the debtor;

When he has absconded, or cannot be sued within the Philippines unless he has left a
4.
m anager or representative;

I f it m ay be presum ed that an execution on the property of the principal debtor

5.
would not result in the satisfaction of the obligation.

GEN ERAL RULE: The guarantor is entitled to dem and that the creditor first exhaust the properties of
the principal debtor before collecting from the guarantor.

EXCEPTI ONS:

1. Under Art. 2059

2. I f the guarantor does not com ply with Art. 2060
3. I f the guarantor is a j udicial bondsm an and sub- surety ( Art. 2084)
4. Where a pledge or m ortgage has been given by him as a special security.
5. I f he fails to interpose it as a defense before judgm ent is rendered against him .

Exceptions provided in Art. 2059

1. Right waived – personal right recognized, waiver must be made in express terms
2. Liability assumed that of surety – becomes surety with primary liability as a solidary co-debtor
3. Insolvency of debtor proven by unsatisfied writ of execution – guarantor guarantees
solvency; insolvency must be actual and may be proven by the return of writ unsatisfied
4. Debtor absconds or cannot be locally sued – creditor not required to go after the debtor who
is hiding and to incur the delays and expenses incident thereto 5. Resort to all legal
remedies, a useless formality

EXCEPTI ONS UN DER ART. 2 0 5 9 ( RUSI A)

1. When the r ight is Renounced or waived.

 The waiver m ust be m ade in express term s.

2. When the liability assum ed by the guarantor is Solidary.

 I n this case, he becom es a surety with prim ary liability.

3. When the principal debtor is I nsolvent.

What kind of insolvency? JPSP says it ’s praCtiCal inSolvenCy m eaning assets are less than liabilit
ies, but it st ill depends on the situation.

ExampleS:

B borrows 100K from L guaranteed by G. B has 1M in assets which are all st ill with him and
1. 5M in liabilit ies. B defaults. Can L collect from G r ight away?

 No. I n this case, G st ill has the benefit of excussion. Why? Because even if B is apparently
insolvent, since his liabilit ies exceed his assets, there is st ill no claim against these assets by
the other creditors. They can st ill be accessed by L, and L can st ill file an action for collection
of m oney against B. So in this case, even if B is insolvent on paper, his properties are st ill
with him , and he can st ill pay L. Therefore, G st ill should st ill have the benefit of excussion.
 B borrows 100K from L guaranteed by G. On due date, B defaults and has zero assets but has a
200K credit/ receivable from X. Can L collect from G.

 Still no. L m ust file an action for collection and an accion subrogatoria so that he can exercise
B’s r ight to collect the m oney from X. Only if these actions fail can L then collect from G.

4. When the principal debtor Absconds or cannot be locally sued.

So even if the borrower has fled to the Baham as, if he st ill has properties here, Lender m ust
sue against the property first before collecting from the guarantor.

5. When resort to all legal rem edies would be a Useless form alit y.

 I f exhausting the properties of the debtor would be useless since it would st ill not satisfy
the obligation, the guarantor cannot require the creditor to resort to these legal rem edies
against the debtor anym ore, since doing so would be a useless form ality.
 I n this case, it is not even necessary that the debtor is j udicially declared insolvent or
bankrupt.

1. Benefit of excussion a. Concept

A R T . 2 0 5 8, C C 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. (1830a)
A R T . 2 0 6 3, C C
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. (1835a)
A R T .206 4,CC
The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the
guarantor and to the principal debtor. (1836)

Benefit of excussion :Through excussion, the guarantor cannot be compelled to pay the
creditor until the debtor’s property has been exhausted and all legal remedies have been
resorted to. Sub-guarantors also enjoy the benefit of excussion of the principal debtor and
the previous guarantor.

b.Rationale :This arises from the nature of guaranty as an accessory and subsidiary
contract.

c. Requisites
For the guarantor to pay, the creditor must first:
1. Exhaust all of the principal debtor’s properties to satisfy the obligation; and
2. Resort to all legal remedies against him.
For guarantor to benefit from excussion, he must:
1. Set it up against the creditor when demand is made upon him; and
2. Point out to the creditor properties of the debtor in the Philippines sufficient to cover
the debt.
d. When unavailable
A R T . 2 0 5 9, C C
The 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. (1831a)

Art. 2060. I n order that the guarantor m ay m ake use of the benefit of
excussion, he m ust set it up against the creditor upon the lat ter’s dem and for
paym ent from him , and point out to the creditor available property of the debtor
within Philippine territory sufficient to cover the amount of the debt.

Art. 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.

To collect from the guarantor, the creditor m ust m ake a prior dem
and for paym ent from the guarantor.

Guarantor tells Lender “ Exhaust Borrower’s property first before collecting

from m e.” I s this enough for the Guarantor to claim the benefit of excussion?

No. I n order to dem and that the creditor exhaust the properties of
the principal debtor, the guarantor m ust:
1. Set up the benefit of excussion against the creditor upon dem and for
paym ent by the creditor from him ; and

2. Point out to the creditor available property of the debtor w ithin Philippine
territ ory
sufficient to cover the am ount of debt. ( Therefore, property located
abroad or which is not easily available is not included am ong those that
the guarantor can point out to the creditor.)
✯ Once the guarantor has fulfilled the requisites for m aking use of the benefit
of excussion, the creditor has the duty to exhaust all the property of the
debtor and to resort to all legal rem edies against the debtor. I f he fails to do
so, he shall suffer the loss to the extent of the value of the property.
Duty of creditor to make prior demand for payment from guarantor
1. When demand made – can only be made after judgment on the debt
2. Actual demand to be made – not mere joining of guarantor as co-defendant

Duty of guarantor to set up benefit of excussion (Art. 2060)

Article 2060 imposes a condition for the invocation by the guarantor of the benefit of
excussion. It is not enough that the guarantor claims the benefit of excussion. In order that
the guarantor may make use of the benefit of excussion, the same 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.
 The failure of the guarantor to point out to the creditor the debtor’s property
sufficient to cover his debt forecloses his right to set up the defense of excussion.
Duty of guarantor to set up benefit of excussion
Set it up, point it out – failure to do so forecloses his right to set up the defense of excussion
1. Property located abroad – would not conform with the purpose of guaranty
2. Property not easily available – guarantor should facilitate its realization and the payment of
the debt

Duty of creditor to resort to all legal remedies (Art. 2061)

After the guarantor has fulfilled the conditions required for making use of the benefit
of exhaustion, it becomes the duty of the creditor to exhaust all the property of the debtor
pointed out by the guarantor and if he fails to do so, he shall suffer the loss, but only to the
extent of the value of said property, for the insolvency of the debtor.

Duty or creditor to resort to all legal remedies

Neglect of not exhausting, guarantor bears the loss to the extent of value of said property.
Joinder of guarantor and principal as parties defendant
1. General Rule – not a joint contractor, cannot be sued
2. Exception – rule not required where it would merely delay ultimate accounting of the
guarantor

Q: What is the effect of the creditor’s negligence in exhausting the

properties of the debtor?

A: He shall suffer the loss to the extent of the value of the pointed property
which was not exhausted by the creditor (Art. 2061, NCC).

Note: The article applies when the guarantor has complied with the conditions
of Art. 2060 (requisites of benefit of excussion).

Exceptions to benefit of excussion (Art. 2059)

Article 2059 enumerates instances when the guarantor cannot avail of the benefit of
excussion.
(1) If the guarantor has expressly renounced it — the benefit of excussion is a personal
right recognized in a guarantor. An express waiver by the guarantor is valid.
(2) If he has bound himself solidarily with the debtor — if the guarantor binds himself
solidarily with the principal debtor, he becomes a surety with primary liability as a
solidary co-debtor.
(3) In case of insolvency of the debtor — if the debtor becomes insolvent, the liability of
the guarantor arises as the debtor cannot fulfil his obligation.
(4) When he has absconded, or cannot be sued within the Philippines unless he has left a
manager or representative — in such cases, the 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) If it may be presumed that an execution on the property of the principal debtor would
not result in the satisfaction of the obligation.
Other grounds:
1. Guarantor does not invoke the benefit against Creditor upon demand to him for
payment and he does not point out available property of the Debtor within the
Philippines sufficient to cover the obligation (Art. 2060, NCC).
2. Guarantor is a judicial bondsman or sub‐surety.
3. A pledge or mortgage of his own property has been given by Guarantor as special
security.
 4. Guarantor fails to interpose it as a defense before judgment is rendered.

e. Typical procedure

Procedure when creditor sues (Art. 2062)

Art. 2062. I n every action by the creditor, which m ust be against the principal
debtor alone, except in the cases m entioned in Article 2059, the form er shall ask
the court to notify the guarantor of the action. The guarantor m ay appear so
that he m ay, if he so desires, set up such defenses as are granted him by law.
The benefit of excussion m entioned in article 2058 shall always be unim paired,
even if j udgm ent should be rendered against the principal debtor and the
guarantor in case of appearance by the lat ter.

(1) The creditor must sue the principal alone. The guarantor cannot be sued
with his principal, much less alone except in the cases where the guarantor is
not entitled to the benefit of excussion.
(2) The guarantor, however, must be notified so that he may appear, if he so
desires, and set up defenses he may want to offer. If the guarantor appears, he
is still given the benefi t 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.
On the other hand, if the guarantor does not appear, the same 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.
(3) 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. Notice and
hearing constitute the essence of procedural due process.

=The creditor must sue the principal debtor alone. He cannot sue the guarantor with the
principal or the guarantor alone except in the cases mentioned in Art. 2059 where the
guarantor loses the benefit of excussion.

=The guarantor must be notified so that he may appear and set up his defenses if he
wants to. If the guarantor appears, he is still given the benefit of exhaustion event after
judgment is rendered against the principal debtor.

=If he does not appear, judgment is not binding on him. Lender must sue the guarantor to
claim against him.

=So, collecting from the guarantor is really a two-step process. The purpose of the two-step
process is to allow the guarantor to make use of the benefit of excussion. The
disadvantage is that there is a time lag between the judgment against the principal debtor
and the one against the guarantor, which allows the guarantor to hide his assets in the
meantime.

=How to get around this two-step process: A bank guaranty or a letter of credit. In a bank
guaranty, if the debtor does not pay, the creditor need only inform the bank of the default and the
bank releases the money. It’s like a standing loan by the bank in favor of the debtor to answer for a
debt in favor of third persons, in case he is unable to pay.
 Q: May a complaint be filed against the debtor and guarantor simultaneously in one case before
the exhaustion of all the properties of the debtor?

A: Yes. There is nothing procedurally objectionable in impleading the guarantor as a co‐

defendant. As a matter of fact, the Rules of Court on permissive joinder of parties explicitly
allow it. If the creditor obtained a favorable judgment against the debtor and guarantor, the
latter is entitled to a deferment of the execution of the said judgment against him until all
properties of the debtor shall have been exhausted to satisfy the latter’s obligation involved
in the case.

Q: What is the effect of declaration of insolvency with respect to the right of excussion?
A: Just because the debtor has been declared insolvent in insolvency proceeding does not
necessarily mean that he cannot pay, for part of the debtor’s assets may still be available to
the creditor. One good proof of the debtor’s inability to pay is an unsatisfied writ of
execution which has been returned by the implementing sheriff (Machetti v. Hospicio de San
Jose, 43 Phil. 297, Feb. 7, 1920)
Procedure
1. Suit by creditor against debtor
- Generally against the debtor, unless the guarantor has no benefit of excussion
- Guarantor must be notified in every case
- He may set up defenses granted by law
- However, lack of notice does not release him from his obligation
- Neither does non-appearance impair the benefit of excussion
2. Judgment against debtor
- Judgment does not impair/remove excussion
- Writ of execution shall issue against the debtor’s properties
- If there is a notice of satisfaction, then it means
that the debt has been sufficiently covered
3. Exhaustion of debtor’s properties
4. Demand against guarantor
- If writ of execution shows that the debt has not been covered, demand may be made
against the guarantor
5. Guarantor sets up benefit of excussion
- The guarantor must set up excussion
- He must point out the debtor’s property in the PH that would sufficiently cover the debt

Effects of compromise between the creditor and the principal debtor (Art.
2063)
(Art. 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.

A compromise is a contract whereby the parties, by making reciprocal

concessions, avoid a litigation or put an end to one already commenced. A contract
binds only the parties thereto and not third persons. Hence, a compromise cannot
prejudice the guarantor. Further, a guarantor may not bind himself for more than the
principal debtor both as regards the amount and the onerous nature of the
conditions.
 Reason: A compromise binds only the parties thereto and not third persons. Thus, it cannot
prejudice the guarantor or debtor who was not a party to the compromise.

Exception: If the compromise has a benefit in the nature of a stipulation in favor of a third
person, the compromise may bind that third person.

Exam ple: D owes C 10K with G as guarantor.

D and C agree to reduce the debt to 8K. G’s liability is also reduced to 8K in case D does not pay,
since the com prom ise is beneficial to G.

Q: What is the effect of compromise between the creditor and the debtor to the guarantor?

A: If the compromise is beneficial to the guarantor, it is valid; otherwise, it is not

binding upon him (1st sentence, Art. 2063, NCC).

Q: What is the rule on the right of indemnity and reimbursement of the

guarantor who paid the debt?
Answer
GR: Guarantor is entitled to be reimbursed by Debtor for:
1. total amount of the debt paid;
2. legal interest from the time payment was made known to the debtor;
3. expenses incurred after notifying debtor that demand to pay was made
upon him; and
4. damages in accordance with law.

XPNs:
1. Guaranty is constituted without the knowledge or against the will of the
debtor.
Effect: Guarantor may only recover only so much as was beneficial to the
debtor.

2. Payment by 3rd persons who does not intend to be reimbursed.

Effect: deemed a donation and as such requires the consent of debtor

Sub-guarantor’s right to excussion (Art. 2064)

The guarantor of a guarantor shall enjoy the benefi t of excussion, both with respect to the
guarantor and to the principal debtor.

Benefit of division among several guarantors (Art. 2065)

Art. 2065 . Should there be several guarantors of only one debtor and for the
sam e debt, the obligation to answer for the sam e is divided am ong all. The
creditor cannot claim from theguarantors except the shares which they are
respectively bound to pay, unless solidarily has been expressly st ipulated.

The benefit of division am ong the co- guarantors ceases in the sam e cases and
for the sam e reasons as the benefit of excussion against the principal debtor .

When is there a benefit of division among several guarantors?

The following conditions must concur in order that several guarantors may claim the benefit of
division:
 1. There should be several guarantors
2. Of only one debtor
3. For the same debt
In this case, the liability of the co-guarantors is joint. They are not liable to the creditor
beyond the shares which they are bound to pay

Exceptions:
1. The co-guarantors cannot avail themselves of the benefit of division under the
circumstances enumerated in Art. 2059.
2. If solidarity has been expressly stipulated.

Extent of liability of several guarantors

The guarantors are not liable to the creditor beyond the shares which they are
respectively bound to pay. The liability of each guarantor is only joint, that is, the
obligation to answer for the debt is divided among all of them.
Exception: The benefit of division also ceases should there be a stipulation that the
guarantors are solidarily liable.
Note:
GR: Creditor can claim from the guarantors only up to the extent they are respectively bound
to pay.

XPN: When solidarity has been stipulated.

Should any of the guarantors become insolvent, his share shall be borne by the other guarantors
including the paying guarantor in the same joint proportion in accordance with the rule in solidary
obligations.

The right to be reimbursed from his co‐ guarantors is acquired ipso jure by virtue of said payment.
BENEFIT OF
BENEFIT OF DIVISION
CONTRIBUTION
Controversy is Controversy
between between
the co‐guarantors and among the
and the several co‐
creditor guarantors
There is no payment There is already
yet, but there is payment of debt;
merely a claim the paying co‐
pressed against guarantor is
one or more co‐ seeking the
guarantors contribution
of the co‐guarantors

SECTION 2 Effects of Guaranty Between the Debtor and the Guarantor

a. Concept
A R T . 2 0 6 5, C C
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. (1837)

b. Rationale
The obligation of a guarantor with respect to his co-guarantors is not subsidiary, but
direct, and does not depend on their solvency or insolvency.

b. Availability of benefit

Limitations to availability of benefit of division

When available: When there are several guarantors of only one debtor for the same debt
When available: When unavailable:

When there are Solidarity has been expressly stipulated

several _______________________________________________________________
guarantors of only In the same cases and for the same reasons that the benefit of
one debtor excussion may cease to be available
for the same debt

I.2. EFFECTS OF GUARANTY BETWEEN DEBTOR AND THE GUARANTOR

Effect of payment with & without debtor’ s knowledge/consent
The guarantor who pays for a debtor must be indemnified by
the latter (Art. 2066) The indemnity comprises:
(1) The total amount of the debt.
(2) The legal interests of the debt n from the time the payment was made known
to the debtor, even though it did not earn interest for the creditor — here, 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 by virtue of the payment
he has made, and is independent of the creditor’s right to claim interest
which was necessarily regulated by the stipulations between him and the
debtor.
(3) The expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him. The expenses referred to are only
those that the guarantor has to satisfy in accordance with law as a
consequence of the guaranty.
(4) Damages — the guarantor is entitled to recover damages only if they are due
in accordance with law.
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.
(3) When the right to demand reimbursement is waived. (waiver)

Once the guarantor pays the principal obligation, the principal debtor must pay him back consisting of:

1. The Total amount of the debt – The guarantor has the right to demand reimbursement only when he has
 actually paid the debt UNLESS there is a stipulation which gives him the right to demand
reimbursement as soon as he becomes liable even if he has not yet paid. The guarantor cannot ask for
more than what he has paid.

2. Interest – The guarantor is entitled to interest from the time notice of payment of the debt was made
known to the debtor. The notice is a demand upon the debtor to pay the guarantor. If he delays, he is
liable for damages in the form of interest. The guarantor can collect interest even if the principal
obligation was a loan without an interest. This is because the right of the guarantor is independent of
the principal obligation to the creditor. The basis of the right is the delay of the debtor in reimbursing.
3. Expenses – This refers only to those expenses that the guarantor has to satisfy in accordance with law
as a consequence of the guaranty. This is limited to those expenses incurred by the guarantor after
having notified the debtor that payment has been demanded of him by the creditor.

4. Damages – Guarantor is entitled to damages only if they are due.

*Exceptions to the right to indemnity of the guarantor (look above)

Payment with knowledge & consenT Payment without knowledge &consent

Right to indemnity Must be indemnified: May only recover amount which the
(TIDE) 1. Total amount of debt; debtor benefited from
2. Legal interests counted from the
time debtor was notified of payment;
3. Damages; and
4. Expenses after debtor was notified.

Right to subrogation Available to guarantor NOT Available to guarantor

Hence, payment with the debtor’s knowledge and consent entitles the guarantor to TIDES = total of debt + indemnity +
damages + expenses + subrogation.

Guarantor’s right to subrogation (Art. 2067)

Article 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 the creditor, he cannot demand of the debtor more than what
he has really paid. (1839)
=The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had
against the debtor. Subrogation 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 mortgages, subject to stipulation in conventional subrogation. The rights to
indemnification and subrogation established and granted to the guarantor extend as well to
sureties.
Guarantor’s right to subrogation
Effect of subrogation – right to indemnification and subrogation granted to guarantor applies
also to surety (Art. 2047)

Accrual, basis and nature of right – subrogation necessary to enable guarantor to enforce the
indemnity
a.Arises from operation of law upon payment
b. Stands not upon contract, but upon natural justice
c. Not a contractual right
d. Cannot demand more than what he has paid for
3. When right not available – when there is no right to be reimbursed
When the guarantor pays, he becom es subrogated to the r ights of the creditor against the debtor.
What happens really is j ust a change in creditor. The guarantor becom es the creditor, but the
obligation subsists in all other aspects. He m ay, for exam ple, foreclose a m ortgage in case of failure
of the debtor to reim burse him .
 The r ight of subrogation is given to the guarantor so that he can enforce his r ight to indem nity/ to be
reim bursed.

I t arises by operation of law upon paym ent by the guarantor. The creditor need not form ally cede his
r ights to the guarantor.

But the r ight of subrogation is given only to the guarantor if he has the right to be reim bursed. I f, for
som e reason, he has no r ight to be reim bursed, he cannot subrogate either.

Com prom ise

B owes lender P1M. Lender was a good fr iend of Guarantor and agreed that if G becam e liable, he
would only have to pay P500K. I f B defaults and Guarantor pays P500K, he can only recover P500K
from B, not the original P1M.

I s there a situation where this rule would even be disadvantageous to the Debtor?

 Yes. Let’s say there was no such rule. B owes L P1M. G, who was a com padre of L, brokered a deal
with L, in which they agreed that should G becom e liable, he would only pay P500K. Since
there’s no rule, G tells B about the deal with L. G tells B that if G pays the P500K, B should reim burse
him P600K. This would give B a savings of P400 K, while G earns P100K. Everyone will be happy.

What is the right of the guarantor after the payment of the debt is made to the creditor?

A: Right of subrogation. The guarantor is subrogated to all the rights which the
creditor had against the debtor (1st par., Art. 2067)

What happens when guarantor pays without notice to the debtor?

A: The debtor may interpose against the guarantor defenses available to the debtor as against
the creditor at the time payment was made.

Note:
GR: Guarantor must 1st notify the debtor before paying, otherwise, if the debtor
pays again, the guarantor can only collect from the creditor and guarantor will
have no cause of action against the debtor even if the creditor becomes
insolvent.

XPN: Guarantor may still recover from debtor if the following circumstances concur:

1. Guaranty is gratuitous;
2. Guarantor was prevented by fortuitous event from notifying the debtor; and
3. Creditor was insolvent.

Effect of payment by guarantor without notice to debtor (Art. 2068)

Art. 2068. I f the guarantor should pay without notifying the debtor, the
latter m ay enforce against him all the defenses which he could have set up
against the creditor at the t im e the paym ent was m ade.
=The guarantor cannot be allowed, through his own fault or negligence, to prejudice or impair
the rights or interests of the debtor. Thus, if the guarantor should pay without notifying the
debtor, the latter may interpose against the guarantor, those defenses which he could have
set up against the creditor at the time the payment was made.

Obligation of the guarantor before he pays the creditor

Before he pays the creditor, guarantor should first give notice to the principal debtor.
I f he does not give notice, the debtor m ay enforce all the defenses which he could
have set up against the creditor at the t im e of paym ent.
 Exam ple: Debtor pays Creditor. But Creditor is sneaky and tells Guarantor that Debtor
defaulted. So Guarantor pays, without telling Debtor. Guarantor m akes a dem and for
reim bursem ent from Debtor.
I s Debtor liable?

 No. Debtor can invoke the fact of paym ent to the Creditor against Guarantor. Had
Guarantor given notice to Debtor, he would have known of the defenses that Debtor
had against Creditor which would have m ade him think twice about paying.
Guarantor’s rem edy here is against sneaky Creditor.

Effect of payment by guarantor before maturity (Art. 2069) EARLY PAYMENT

Art. 2069. I f the debt was for a period and the guarantor paid it before it
becom e due, he cannot dem and reim bursem ent of the debtor until the
expiration of the period unless the paym ent has been ratified by the debtor.
=The guarantor who pays before maturity is not entitled to reimbursement since there is no
necessity for accelerating payment. However, the debtor will be liable if the payment was
made with his consent or if the payment was subsequently ratified by him. The ratification
may be express or implied. In any case, the guarantor can recover what he has paid upon
the expiration of the period.

Effect of payment by guarantor before/after maturity

1. Obligation with a period demandable only when the day comes, guarantor who paid
before maturity not entitled to reimbursement because there is no need to accelerate
payment.
2. When demand made on guarantor during term of guarantee, immaterial if payment is
made after the term.

I f the principal debt was one with a period, it becom es dem andable only upon
expiration of the period. Guarantor is only liable if the debtor defaults, but there can be
no default before the expiration of the period. I f the guarantor st ill pays before the
expiration of the period, he m ust wait for the period to expire before he can collect from
the debtor.

Exception: Guarantor need not wait for the period if the debtor ratifies paym ent or
consents to it .
Effect of repeat payment by debtor (Art. 2070)
Art. 2070. I f the guarantor has paid without notifying the debtor, and the lat ter
not being aware of the paym ent, repeats the paym ent, the form er has no rem
edy whatever against the debtor, but only against the creditor. Nevertheless, in
case of gratuitous guaranty, if the guarantor was prevented by a fortuitous event
from advising the debtor of the paym ent, and the creditor becom es insolvent,the
debtor shall reim burse the guarantor for the am ount paid.
In case of failure to the grantor to notify the debtor of the payment of the debt to the creditor
and the debtor repeats the payment, the guarantor’s only remedy is to collect from the
creditor, but he has no cause of action against the debtor for the return of the amount paid
even if the creditor should become insolvent.
Exception: The guarantor may still claim reimbursement from the debtor in spite
of lack of notice if the following conditions are present:
(a) the creditor becomes insolvent;
(b) the guarantor was prevented by fortuitous event to advise the debtor of the
 payment; and (c) the guaranty is gratuitous.

This is like the situation in 2068, only this t im e, the guarantor pays before the debtor pays. Even in
such a case, guarantor st ill cannot recover from debtor because he should have inform ed debtor of his
intention to pay. Had he inform ed debtor, debtor would not have paid. Guarantor will suffer the loss
of his failure to com ply with his one and only obligation before paying which is to notify the debtor.

Exception: Guarantor m ay claim reim bursem ent from debtor if ( requisites):

1. I t is a gratuitous guaranty
2. The guarantor was prevented by a fortuitous event from inform ing the debtor of paym ent
3. Creditor becom es insolvent

Rem em ber that the culprit here, aside from the guarantor who did not inform the debtor, is the
sneaky creditor who nonchalantly received paym ent twice. I f he is solvent, the guarantor m ust collect
from him . But if he is insolvent and the three requisites above are present, the guarantor can
reim burse from the principal debtor.

Effect of repeat payment by debtor

1. General rule – Notice to debtor before payment. If without notice, remedy is to collect from
creditor but no cause of action for the return even when it becomes insolvent 2. Exception
– may still claim even in spite of lack of notice
a. Creditor becomes insolvent
b. Guarantor prevented from fortuitous event from notifying debtor
c. Guaranty is gratuitous
Right of guarantor to proceed against debtor before
payment (Art. 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 ten years, when the principal obligation has no fi xed period
for its maturity, unless it be of such nature that it cannot be extinguished
except within a period longer than ten 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.

I n all these cases, the action of the guarantor is to obtain release from the guaranty, or to dem and a
security that shall protect him from any proceedings by the creditor and from the danger of
insolvency of the debtor.

Article 2066 and Article 2071 distinguished

Article 2066 Article 2071
✓ Article 2066 provides for the enforcement  Article 2071 provides for the
protection of of the rights of the guarantor against the the guarantor before he has
paid but after he debtor after he has paid the debt. It gives a has become liable. A
 protective remedy right of action after payment. before payment.
✓ Article 2066 is a substantive right.  Article 2071 is in the nature of a
preliminary remedy.
✓ Article 2066 gives a right of action, which,  The remedy given in Article 2071
seeks to without the provisions of the other, might be obtain for the guarantor
“release from the worthless. 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.”
Under these 7 circum stances, the guarantor has these r ights against the debtor BEFORE he m akes
paym ent:

1. Right to be released if lender agrees

 Release from the guaranty requires that the lender consent because the guaranty is actually a
contract between the lender and the guarantor

2. Right to dem and a security

The purpose is to enable the guarantor to take m easures to protect his interest in view of the
probability that debtor would default and he would be called upon to answer for the obligation.

Right of guarantor to proceed against debtor before payment

Applicable to surety, purpose is to enable the guarantor to take measures for the protection
of his interest in view of the probability that he would be called upon to pay the debt.
Remedy to which guarantor entitled – Guarantor cannot ask for payment unless he as actually
paid. The alternative remedies are:
1. Obtain a release form guaranty
2. Demand or security

Guarantor of a third person at request of another (Art. 2072)

Art. 2072. I f one, at the request of another, becom es a guarantor for the debt
of a third person who is not present, the guarantor who satisfies the debt m ay
sue either the person so requesting or the debtor for reim bursem ent.

The guarantor who guarantees the debt of an absentee at the request of another has a
right to claim reimbursement, after satisfying the debt either from:
(1) the person who requested him to be a guarantor; or
(2) the debtor.

What is the remedy of a person who becomes a guarantor at the request of another for the debt of a third
person who is not present?
A: He has the option of suing either the principal debtor or the requesting party (Art. 2072, NCC).
Note: The provision applies when the guarantor has actually paid the debt

I.3. EFFECTS OF GUARANTY BETWEEN CO-

GUARANTORS(sec3)
Right to contribution of guarantor who pays (Art. 2073)
Art. 2073. When there are two or m ore guarantors of the sam e debtor and for the
sam e debt, the one am ong them who has paid m ay dem and of each of the others the
share which is proportionately owing from him .
 I f any of the guarantors should be insolvent, his share shall be borne by the others,
including the payer, in the sam e proportion.

The provisions of this article shall not be applicable, unless the paym ent has been m
ade in virtue of a j udicial dem and or unless the principal debtor is insolvent .

=Article 2073 contemplates a situation which arises when one guarantor has paid the debt
to the creditor and is seeking reimbursement from each of his co-guarantors the share
which is proportionately owing him.
However, before a co-guarantor may proceed directly against his co-
guarantors for their respective shares, it is required that the payment must
have been made:
(a) in virtue of a judicial demand; or
(b) because the principal debtor is insolvent.

The liability of the guarantors is j oint. I f one of them pays the entire obligation, he is entitled to be
reim bursed the am ount of the shares of the other guarantors.

Exam ple: A, B, C guaranty the 90K loan of X. A pays 90K. A can collect 30 K each from B and C.
But unlike in an ordinary j oint obligation, if one of the guarantors is insolvent, the co- guarantors m ust
answer for his share. I n this sense, the obligation behaves like a solidary obligation.

Exam ple: A, B, C guaranty the 90K loan of X. A pays 90K. B becom es insolvent. A and C m ust
shoulder B’s share. So their liabilit ies becom e 45K each. A can collect 45 K from C.

Right to contribution of guarantor who pays

1.Restrictions – applicable when
a. In virtue of a judicial demand
b. Because the principal debtor is insolvent
2. Effect of insolvency of any guarantor – follows Art. 1217[2])
3. Accrual and basis of right – Guarantor who paid becomes ipso jure entitled to
proportionate contribution or reimbursement without need of cession from creditor

Effect of insolvency of any guarantor

This follows the rule in solidary obligations. If any of the guarantors should be insolvent, his
share shall be borne by the others including the paying guarantor in the same joint
proportion. This follows the rule in solidary obligations.

Defenses available to co-guarantors (Art. 2074)

Art. 2074. I n the case of the preceding art icle, the co- guarantors m ay set up against
the one who paid, the sam e defenses which would have pertained to the principal
debtor against the creditor, and which are not purely personal to the debtor.

=In the action fi led by the paying guarantor against his coguarantors for their proportionate
shares in the obligation, the latter may avail themselves of all defenses which the debtor
would have interposed against the creditor but not those which cannot be transmitted for
being purely personal to the debtor.

Exam ple: A, B, C guaranty the obligation of X. A pays even if the obligation has prescribed already. A
dem ands reim bursem ent from B and C. Can they refuse to pay? Yes, they can invoke defenses
inherent in the obligation, such as prescription, against the co- guarantor who pays.

A, B, C guaranty the obligation of X who was a m inor. A pays. Can B and C refuse to reim burse him on
the ground that X is a m inor? No, because the defense is personal to X.
 Liability of sub-guarantor in case of insolvency of guarantor (Art. 2075)
Art. 2075. A sub- guarantor, in case of the insolvency of the guarantor for whom he
bound him self, is responsible to the co- guarantors in the sam e term s as the guarantor.

=In case of the insolvency of the guarantor for whom he bound himself, a sub-guarantor is
liable to the co-guarantors in the same manner as the guarantor whom he guaranteed.

Note: In case of insolvency of the guarantor for whom he bound

himself, he is responsible to the co‐ guarantors in the same terms as
the guarantors (Art. 2075, NCC).
Defense available to co-guarantors: all defenses the debtor would have against creditor but not those
which are purely personal

A, B, C are guarantors of X. D is a guarantor of A. C pays the entire obligation. A becom es insolvent.

Can C reim burse from D? Yes, according to Art. 2075.

CHAPTER 3: EXTINGUISHMENT OF
GUARANTY
The obligation of the guarantor is extinguished at the same time as that of the debtor, and
for the same causes as all other obligations. (Art. 2076)

Causes of extinguishment of guaranty

(1) Extinguishment of principal obligation by:

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; and
f. Novation

(2) Other causes of extinguishment of obligations, such as: annulment,

rescission, fulfilment of a resolutory condition, and prescription.
Note: The guaranty itself may be directly extinguished although the principal obligation still
remains such as in the case of the release of the guarantor made by the creditor.
Note: Death of the principal is not a defense a surety can use to wipe out its monetary
obligation under a performance bond. The obligation is merely passed on to the decedent’s
estate. A surety’s liability to the creditor or promise of the principal is direct and primary like
the principal.

Because guaranty is an accessory and subsidiary contract, it is extinguished once the principal
obligation is extinguished.

But the extinguishm ent of the guaranty does not always carry with it the extinguishm ent of the
principal obligation.
 Any agreem ent between the creditor and the principal debtor which essentially varies the term s of the
principal contract without the consent of the surety will release the surety from liability. This is
because the alteration would result in a novation of the principal contract which is consequently
extinguished and replaced with a new one. Since the old principal contract is extinguished, the
accessory contract of guaranty/ surety is also extinguished.

When is an alteration m aterial?

There m ust be a change which im poses a new obligation or added burden or which takes away som e
obligation already im posed, changing the legal effect of the contract.

Exam ples:

1. I ncrease in the principal am ount, regardless of the extent of the liability assum ed by the
guarantor
2. Substitution of the principal debtor
3. Extension or shortening of the term of the principal debt I n

these cases, the guaranty is extinguished altogether.

Decrease in the am ount of the principal obligation: The guaranty subsists and is benefited by the
change since the guarantor cannot bind him self for m ore than the principal obligation.

Art. 2077. I f the creditor voluntarily accepts im m ovable or other property in

paym ent of the debt, even if he should afterwards lose the sam e through
eviction, the guarantor is released.

Eviction revives the principal obligation but not the guaranty. The cause of action is against the
debtor for eviction which is not part of the guaranty.
This is a case of dacion. Since dacion extinguishes the principal obligation, the accessory obligation is
also extinguished and is not revived even if the creditor is subsequently evicted from the property.

Release by conveyance of property

Usually, payment is made in money. But any substitute paid in lieu of money
which is accepted by the creditor extinguishes the obligation and in consequence,
the guaranty. Thus, 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 (Art. 2077).

Release of guarantor without consent of others (Art. 2078)

Article 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. (1850)
=As a rule, the guarantors enjoy the benefit of division. However, if any of them should be
insolvent all the other guarantors must bear his share. A release made by the creditor in
favor of one of the guarantors without the consent of the others shall benefit all to the
extent of the share of the guarantor released. Because, the release may prejudice the
creditor should a guarantor become insolvent.

Release of guarantor without consent of others

Others will be prejudiced if one of the guarantors becomes insolvent. The release benefits all
to the extent of the share of the guarantor released.

A, B, C are guarantors of X for 90K. The creditor releases A without the consent of B and C. The
release should benefit B and C to the extent of 30K ( A’s share). They shall be liable only for 60K or
 30K each.

A, B, C are guarantors of X for 90K. The creditor releases A with the consent of B and C. Since B and C
consented to the release, their liability is st ill 90K or 45K each.

Merger or confusion
A R T . 1 2 7 5, C C The obligation is extinguished from the time the characters of creditor and debtor are merged in
the same person. (1192a)
A R T . 1 2 7 6, C C Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193)

Effect of merger or confusion

Parties merged Effect
Debtor & creditor Principal obligation is extinguished; guaranty also extinguished
Creditor & guarantor Principal obligation remains, but guaranty is extinguished
Debtor & guarantor Principal obligation remains, but the guaranty is extinguished

*One cannot guarantee his own debt; thus, merger extinguishes the guaranty if the guarantor’s
personality merges with either the creditor or the personal debtor

Release by extension of term granted by creditor to debtor 2079

Article 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. (1851a)

➢ If the creditor grants an extension of time to the debtor without the consent of
the guarantor (or surety), the latter is discharged from his undertaking. This is
to avoid prejudice to the guarantor, because the debtor (and/or indemnitors)
may become insolvent during the extension, thus depriving the guarantor of
his right to reimbursement.
➢ Payment by instalments — 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.
➢ The extension of the term 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. Hence, the mere failure or neglect on the part of the
creditor to enforce payment or to bring an action upon a credit, as soon as the
same or any part of it matures, does not constitute an extension of the term of
the obligation. In such case, the liability of the guarantor is not extinguished.
The rule applies even if the debtor should become insolvent subsequent to the
maturity of the debt.

Release by extension of term granted by creditor to debtor

1. Where release without consent of guarantor – extinguishes guaranty
a. Payments due to debtor from third persons assigned to creditor - extinguishes
b. Where obligation payable in installments – extension as to one will not affect
surety/guaranty’s liability as to others
c. Consent to extension waived in advance by guarantor – valid, not contrary to law or
public policy d.
Payment by guarantor after creditor’s demand
e. Extension not granted by creditor on the bond – does not extinguish
f. Extension granted to first-tier obligors – will not extinguish liability of second-tier
obligors
2. Prejudice to guarantor and period of extension immaterial
3. Extension must be based on a new agreement – mere failure or neglect to demand
 payment not deemed a suspension
4. Diligence on the part of creditor to enforce his claim generally not required – this is for
surety. For guaranty, if the creditor has done any act whereby the guaranty was impaired in
value, or discharged that act would have wholly or partially released the guarantor 5. No
cause of action against creditor for delay
I f the creditor grants the debtor an extension of t im e within which to com ply with the principal
obligation, the guaranty is extinguished. This is because the principal debtor could becom e insolvent
during the extension period, and the guarantor would not be able to ask for reim bursem ent.

But if the guarantor consents or waives his r ight under this article in advance, the extension will not
extinguish the guaranty.

I t is im m aterial whether the guarantor suffers actual prejudice as a result of the extension. The
length of t im e of the extension is also im m aterial. As long as the period is extended, the guaranty is
extinguished.

The extension m ust be based on a new agreem ent between the debtor and creditor. I f the creditor
m erely fails to m ake a dem and on due date, it is not an extension.

Can the guarantor sue the creditor for his delay in m aking a dem and, thereby lengthening the r isk of
the insolvency of the principal debtor? No.

Release when guarantor cannot be subrogated ART. 2080

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. (Art. 2080)

Release by guarantor cannot be subrogated

1. Fault of creditor for non-subrogation – act of one cannot prejudice another
2. Duty of the creditor to account for his lien on principal’s property – to retain and maintain
security; impairment will discharge the surety to the extent of lien released. This is a trust
relation with the creditor as trustee bound to account to the surety the value of the security.

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. The same rule
applies even though the guarantors be solidary.
Effect of alteration of principal contract to the Guarantor or Surety
=The guarantor or surety will not be released by a change in the principal contract where
such change does not have the effect of making its obligation more onerous. 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 thereof.

=However, it is fundamental in the law of suretyship that 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.
Defenses available to guarantor against creditor ART. 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. (Art. 2081)
=Article 2081 provides for the defenses, except those which are purely personal to the debtor, that may be
interposed by the guarantor as against the creditor. Inasmuch as the guarantor proceeded against takes
the place of the debtor, it would be absurd and unjust to deny him the defenses of the latter because the
guarantor who is only subsidiarily liable would be put in a worse position than the debtor, the one
principally liable.

LEGAL AND JUDICIAL BONDS

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 Article 2056 and in special laws. (Art. 2082)
Meaning of a bond and bondsman
A bond, when required by law, is commonly understood to mean an undertaking that
is sufficiently secured, and not cash or currency. A bondsman on the other hand, is a surety
offered in virtue of a provision of law or a judicial order.

Nature of bonds
All bonds including “judicial bonds” are contractual in nature. Bonds exist only in
consequence of a meeting of minds under the conditions essential to a contract.

Bond – undertaking that is sufficiently secured and not cash or currency

Bondsman – a surety (Art. 2047[2]) offered in virtue of a provision of law or a judicial order.
Qualifications of personal bondsman – same as a guarantor under Art. 2056
1. Integrity
2. Capacity to bind himself
3. Sufficient property to answer for the obligation which he guarantees

Jurisdiction follows principle that the accessory follows the principal.

Nature of bonds
1. Contractual in nature – only in consequence of a meeting of minds under the
conditions essential to a contract (Art. 1305)
2. Special class of guaranty, in virtue of a judicial or court order

Pledge or mortgage in lieu of bond (Art. 2083)

Guaranty or suretyship is a personal security. On the other hand, pledge or mortgage
is a property or real security. If the person required to give a legal or judicial bond should not
be able to do so, a pledge or mortgage sufficient to cover the obligation shall be admitted in
lieu thereof.

Bondsman not entitled to excussion (Art. 2084)

A judicial bondsman cannot demand the exhaustion of the property of the principal debtor. A
sub-surety in the same case. Because they are not mere guarantors, but sureties whose
liability is primary and solidary

A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor or of
the surety.
Bondsman and sub-surety not entitled to excussion because they are not mere guarantors, but
sureties whose liability is primary and solidary

Negligence of creditor will not release surety. It is his obligation to see that the debtor pays or
performs, not the creditor’s.
What is continuing guaranty or suretyship?
GR: It is not limited to a single transaction but
contemplates a future course of dealings, covering a series of transactions
generally for an indefinite time or until revoked.

XPN: A chattel mortgage can only cover obligations existing at the time
the mortgage is constituted and not to obligations subsequent to the
execution of the mortgage.

XPN to the XPN: In case of stocks in department stores, drug stores etc.

What is the test of continuing guaranty?

A: 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 (Dino v.
CA, G.R. No. 89775, Nov. 26, 1995)

May guaranty secure future debts?

Yes. A guaranty may be given to secure even future debts, the amount of which may not be
known at the time the guaranty is executed. This is the basis for contracts denominated as
continuing guaranty or suretyship. It is one which covers all transactions, including those arising
in the future, which are within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof.

*A: A bond, when required by law, is commonly understood to mean an

undertaking that is sufficiently secured, and not cash or currency. Whatever
surety bonds are submitted are subject to any objections as to their sufficiency or
as to the solvency of the bondsman.

*A: A bondsman is a surety offered in virtue of a provision of law or a judicial order. He must
have the qualifications required of a guarantor and in special laws like the Rules of Court.

What are the qualifications to a property bond?

The necessary qualifications of sureties to a property bond shall be as follows:

1. Each of them must be a resident owner of real estate with in the Philippines;
2. Where there is only one surety, his real estate must be worth at least the amount of the
undertaking;
In case there are two or more sureties, they may justify severally in amounts lass than that expressed in the
undertaking, if the entire sum justified to is equivalent to the whole amount of bail demanded. (Sec. 12, Rule 114,
Rules of Court

What is the nature of a bond?

A: All bonds including “judicial bonds” are contractual in nature.

What is a Judicial Bond? A: Judicial bonds constitute merely as a special class of contracts of guaranty,
characterized by the fact that they are given in virtue of a judicial order.

Is the right of excussion available to a bondsman?

No. A judicial bondsman and the sub‐surety are not entitled to the benefit of excussion because they are not mere
guarantors, but sureties whose liabilities is primary and solidary.
What is the liability of the surety if the creditor was negligent in collecting the debt?

A surety is still liable even if the creditor was negligent in collecting from the debtor. The contract of suretyship is
not that the oblige will see that the principal pays the debt or fulfills the contract, but that the surety will see that
the principal pay or perform(PNB v. Manila Surety & Fidelity Co., Inc., 14 SCRA 776, 1965)

What is the effect of violation by the creditor of the terms of the surety agreement?
A violation by the creditor of the terms of the surety entitles the surety to be released therefrom.
What is the effect of a surety bond filed for an alien staying in the country which is
forfeited for violating its terms?
The effect of the violation is that its subsequent unauthorized cancellation thru mistake or fraud does not relieve the
surety. A bond surrendered thru mistake or fraud may, therefore, be considered as a valid and subsisting instrument.
(Far Eastern Surety and Ins. Co., v. CA, GR No. L‐12019, Oct 16, 1958)

What is the rule when the performance of a bond is rendered impossible?

It is the surety’s duty to inform the court of the happening of the event so that it may take action or decree in the
discharge of the surety when the performance of the bond is rendered impossible by an act of God, or the obligee, or
the law.