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DIVINA ON coMMERCIAL LAW:
356 A COMPREHENSIVE GUIDE VOLUME II
9
I
s. Rebroadcast of a radio program_ after 25 years from the
date the broadcast took place without the consent of the
broadcasting organization which owns the copyright.
No copyright infringement. The term of broadcast is only 20 VIII. CREDIT TRANSACTIONS
42
years from the date the broadcast took place.'
t. Reproduction of the photograph by the owner without I. Guaranty
the consent of the person, subject of the photograph.
1. What is a contract of guaranty?
No copyright infringement. The photographer, not the subject
has the copyright to the photograph and as such, enjoys the economi~ It is a contract whereby a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
right of reproduction.
debtor in case the latter should fail to do so. A guaranty may be
u. X's painting of Madonna and Child was used by her conventional, legal or judicial, gratuitous, or by onerous title. It may
mother to print some personalized gift wrapper. As also be constituted, not only in favor of the principal debtor, but also
part of her mother's efforts to raise funds for Bantay in favor of the other guarantor, with the latter's consent, or without
Bata, the mother of X sold the wrapper to friends. v. his knowledge, or even over his objection.'
an entrepreneur, liked the painting in the wrapper and I •
made many copies and sold the same through National 2. \\/hat are the characteristics of a contract of guaranty?
Bookstore. Characteristics of a contract of guaranty:
There is infringement because artistic works are protected a .. - Nominate
from the moment of creation.
b. Consensual - the contract is between the creditor and the
guarantor.
c. Generally, it is gratuitous. Exception: when there is a
stipulation to the contrary.
I I
I d. Accessory - it cannot exist without a valid principal
I, obligation.
e. Can be given as security for future debts
f. Governed by the Statute of Frauds - it must be in writing
to be enforceable.2
3. Can a married woman guarantee an obligation?
Yes. 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.'
1Articles. 2047, 2051, Civil Code.
2Articles 2047, 2048, 2052, 2053, 1403(2)(b), Civil Code.
3 Article 2049, Civil Code.
J 442
Section 215.2, IPC, as amended. 357
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358 A COMPREHENSIVE GlITDE VOLUME II
4. What is the scope of the obligation of a guarantor? When he has absconded, or cannot be
A guarantor may bind himself for less, but not for more than sued within the Philippines unless he
has left a manager or representative;
the principal debtor, both as regards the amou~t and the onerous
nature of the conditions. Should he have bound himself for more, his If it may be presumed that an execution
4
obligations shall be reduced to the limits of that of the debtor. on the property of the principal debtor
would not result in the satisfaction of
the obligation.
5, What is the extent of a contract of guaranty?
(2) The guarantor complies He must set it up against the creditor
A guaranty is not presumed; it must be express and cannot with Article 2060 upon the latter's demand for payment
extend to more than what is stipulated therein. If it be simple or from him, and point out to the creditor
indefinite, it shall comprise not only the principal obligation, but available property of the debtor within
also all its accessories, including the judicial costs, provided with Philippine territory, sufficient to cover
respect to the latter, that the guarantor shall only be liable for those the amount of the debt.
costs incurred after he has been judicially required to pay.•
6. Who may act as a guarantor? 9, What happens if the creditor is negligent in exhausting the
property pointed out by the guarantor?
A person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he guarantees.6 The creditor who is negligent in exhausting the property
pointed out shall suffer the loss, to the extent of said property, for
7. What is the benefit of excussion? the insolvency of the debtor resulting from such negligence.'
The guarantor cannot be compelled to pay the creditor unless 10, In the event that the benefit of excussion is available, how
the latter has exhausted all the property of the debtor, and has should the creditor proceed?
resorted to all the legal remedies against the debtor.7
The creditor shall ask the court to notify the guarantor of the
8. What are the conditions for the exercise of the benefit of action. The guarantor may appear so that he may, ifhe so desire, set
10
excussion? up such defenses as are granted him by law.
The conditions for the exercise of the benefit of excussion are 11. What is the effect, if any, of a compromise between the creditor
as follows: and principal debtor? What about a compromise between the
(1) The case does not fall Excussion shall not take place: guarantor and creditor?
under any of the instances A compromise between the creditor and the principal debtor
• If the guarantor has expressly
enumerated in Article benefits the guarantor but does not prejudice him. That which is
renounced it;
2059
entered into between the guarantor and the creditor benefits but
• If he has bound himself solidarily with
the debtor; does not prejudice the principal debtor."
• In case of insolvency of the debtor;
8Articles 2059, 2060, Civil Code.
'Article 2054, Civil Code.
6
Article 2055, Civil Code. 9Article 2061, Civil Code.
6
Article 2056, Civil Code. 10Article 2062, Civil Code.
7
Article 2058, Civil Code. llArticle 2063, Civil Code .
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361
12. Is there a sub-guarantor's right to excussion?
16, What happens if the guarantor pays without notifying the
Yes. The guarantor of a guarantor shall enjoy the benefit of debtor?
excussion, both with respect to the guarantor and to the principal
If the guarantor should pay without notifying the debtor, the
debtor."
latter may enforce against him all the defenses which he could have
What is the benefit of division? set up against the creditor at the time the payment was made.
13.
Also, if the guarantor has paid without notifying the debtor, and
Should there be several guarantors of only one debtor and the latter not being aware of the payment, repeats the payment,
for the same debt, the obligation to answer for the same is divided the former has no remedy whatever against the debtor, but only
among all. The creditor cannot claim from the guarantors except the against the creditor. Nevertheless, in case of a gratuitous guaranty,
shares which they are respectively bound to pay, unless solidarity if the guarantor was prevented by a fortuitous event from advising
has been expressly stipulated. The benefit of division against the co- the debtor of the payment, and the creditor becomes insolvent, the
guarantors ceases in the same cases and for the same reasons as the debtor shall reimburse the guarantor for the amount paid.15
benefit of excussion against the principal debtor. 13
17. What are the instances when the guarantor, even before having
14. What right does a guarantor who pays for a debtor acquire paid, may proceed against the principal debtor?
I
against the latter?
The guarantor, even before having paid, may proceed against
11 The guarantor who pays for a debtor must be indemnified by the principal debtor:
the latter. The indemnity comprises: (i) the total amount of the debt;
(ii) the legal interests thereon from the time the payment was made a. when he is sued for the payment;
known to the debtor, even though it did not earn interest for the b. in case of insolvency of the principal debtor;
creditor; (iii) the expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of him; (iv) C. when the debtor has bound himself to relieve him from
damages, if they are due. the guaranty within a specified period, and this period
has expired;
Note, however, that if the debt was for a period and the guarantor
paid it before it became due, he cannot demand reimbursement of d. when the debt has become demandable, by reason of the
the debtor until the expiration of the period unless the payment has expiration of the period for payment;
been ratified by the debtor." after the lapse of 10 years, when the principal obligation
e.
has no fixed period for its maturity, unless it be of such
15. Does the guarantor who pays for a debtor acquire a right to nature that it cannot be extinguished except within a
subrogation?
period longer than 10 years;
Yes. The guar~ntor who pays is subrogated by virtue thereof if there are reasonable grounds to fear that the principal
to all the rights which the creditor had against the debtor. If the
f.
debtor intends to abscond;
guarantor has compromised with the creditor, he cannot demand of
the debtor more than what he has really paid.'' g. if the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
"Article 2064, Civil Code. release from the Guaranty, or to demand a security that shall protect
"Article 2065, Civil Code.
14
Articles 2066, 2069, Civil Code.
II " Article 2067, Civil Code.
16 Articles 2068, 2070, Civil Code.
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DIVINA ON coMMERCIAL LAW: VIII. CREDIT TRANSACTIONS 363
362 A COMPREHENSIVE GUIDE VOLUME II
him from any proceedings by the creditor and from the danger of To illustrate:
insolvency of the debtor." Using our previous example, if SG is the guarantor of G3, and
18. In case the payment has been made in virtue of a judicial G3 becomes insolvent, SG is liable to Gl for PIO Million, or P15
Million if G2 is also insolvent.
demand, or when the principal debtor or one of the guarantors
is insolvent, what are the effects of guaranty as between co.
d. The co-guarantors may set up against the one who paid,
guarantors?
the same defenses which would have pertained to the
In case the payment has been made in virtue of a judicial
principal debtor against the creditor, and which are not
~emand, or when the principal debtor or one of the guarantors is purely personal to the debtor.'•
insolvent, the effects of Guaranty as between co-guarantors are a
follows : s 19, What are the causes for extinguishment of Guaranty?
a. When there are two (2) or more guarantors of the same Causes for extinguishment of guaranty:
debtor and for the same debt, the one who has paid
may demand of each of the others the share which is a. Principal obligation is extinguished;
proportionally owing from him. b. Same causes as all other obligations; 1'
c. If creditor voluntarily accepts immovable or other
To illustrate: properties in payment of the debt (even if he should
Gl, G2, and G3 are D's guarantors of a P30 Million loan obtained afterwards lose the same through eviction or conveyance I
from C. If D becomes insolvent, guarantors Gl, G2, and G3 loses of property);
the benefit of division as far as C is concerned. C may demand d. Release in favor of one of the guarantors, without consent
payment of the entire P30 Million from any of the guarantors. of the others, benefits all to the extent of the share of the
{Arts. 2065, par.2, 2059(3), Civil Code] guarantor to whom it has been granted;
If Gl pays the entire loan of P30 Million, she can later demand e. Extension granted to the debtor by the creditor without
from G2 and G3 PIO Million each. the consent of guarantor; or
f. When by some act of the creditor, the guarantors even
b. If any of the guarantors should be insolvent, his share though they are solidarily liable cannot be subrogated to
20
shall be borne by the others, including the payer, in the the rights, mortgages, and preferences of the former.
same proportion.
To illustrate: 18Articles 2073-2075, Civil Code.
19Article 1231, Civil Code. Obligations are extinguished:
Using our previous example, if G2 is insolvent, her share shall be
(1) By payment or performance;
borne by GJ and G3 proportionately. Thus, Gl can demand P15
(2) By the loss of the thing due;
Million from G3.
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
c. A sub-guarantor, in case of the insolvency of the guarantor (5) By compensation;
for whom he bound himself, is responsible to the co- ( 6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission,
guarantors in the same terms as the guarantor. fulfillment of a resolutory condition, and prescription, are governed elsewhere in this
Code.
17 20Articles 2076-2081, Civil Code.
Article 2071, Civil Code.
 DIVINA ON COMMERCIAL LAW:
VIII. CREDIT TRANSACTIONS 365

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364 A COMPREHENSIVE GUIDE VOLUME II
agreement. The limit of Chabs Inc.'s . . . . .
20. What is a bond? from the suretyship agreement it ha/~bilities ~ust be determmed
hat the law looks upon th signed. It 1s undoubtedly true
A bond, when required by Jaw, is commonly understood t 0 t e contract of su t hi ·h •
I eye, and the rule is settled that th 0 bli _re ys P wit a Jea1ous
I mean an undertaking that is sufficiently secured, and not cash O be extended by implication b d g~twn ~f the surety cannot
currency. Whenever surety bonds are submitted, they are subjec~ d in the manner a d e;on its s_pec1fied limits. To the extent,
I to any objections as to their sufficiency or as to the solvency of the an . . . ' n un er the circumstances pointed out in
his obhgation, he 1s. bound
I bondsman." . , and no farth er. Th e 1aw 1s . clear that
a ?'1~rantor may bmd himself for less, but not for more than the
21. What is a bondsman? Pnnc1pal debtor,
.. both as regards the amount and the onerous nat ure
of the. conditions.
. However , in this case , the a greemen t proVI'des £or
A bondsman is a surety offered in virtue of a provision of law liabihty for mterest and e~penses, then Chabs Inc. is bound by this
111
or a judicial order. He must have t~e . qualifications r_equired a o! agreement and should be hable for the entire P7,000,000.00."
guarantor under Article 2056 of the ClVII Code and special laws (hke
the Rules of Court)." 24, BSB obtained a 10-year credit facility from xvz Bank in the
amount of P1 Billion. ABC Guaranty Inc. issued a guaranty to
I 22. Is a judicial bondsman and sub-surety entitled to excussion? secure the obligations of BSB. In year five (5), the loan released
,11111 to BSB increased to P1.5 Billion. Can the guaranty issued by
No. A judicial bondsman cannot demand the exhaustion of the
I ABC Guaranty Inc. sufficiently secure the obligations of BSB
property of the principal debtor. Likewise, a sub-surety in the same
currently amounting to P1.5 Billion already?
case, cannot demand the exhaustion of the property of the debtor or
of the surety. 23 Yes. A guaranty may be given to secure future debts. The
11111
Supreme Court in the case Atok Finance Corp. v. Court of Appeals,
23. Chabs Inc. issued a guaranty in favor of DSD, which among et al., 25 stated, "It is clear to us that the Rizal Commercial Banking
others, provides that should DSD default on its obligations to X Corporation•• and the NARIC'- 1 cases rejected the distinction which
Co., Chabs Inc. shall be liable to pay P5,000,000.00 pesos and the Court of Appeals in the case at bar sought to make with respect
for any interest and expenses relating to the default of DSD. to Article 2053, that is, that the 'future debts' referred to in that
Article relate to 'debts already existing at the time of the constitution
During the term of the contract, DSD defaulted and X Co. ofthe_agreement but the amount [of which] is unknown,' and not to
I/Ii came after Chabs Inc. as the guarantor to collect the damages
totaling to P7,000,000.00 pesos including all the interests and
debts not yet incurred and existing at that time. Of course, a surety
Ill is not bound under any particular principal obligation until that
I
expenses. principal obligation is born. But there is no theoretical or doctrinal
I difficulty inherent in saying that the suretyship agreement itself is
Chabs, Inc. responded that they should not be made
to pay more than the fixed amount written in their guaranty valid and binding even before the principal obligation intended to be
agreement. X Co. countered that the guaranty agreement secured thereby is born, any more that there would be in saying that
provided for liability for interest and expenses. obligations which are subject to a condition precedent are valid and
binding before the occurrence of the condition precedent."
Who is correct? Decide.
X Co. is correct. It can collect from Chabs Inc. the entire
amount notwithstanding the fixed amount written on the guaranty
24 Dino & Uy v. Court of Appeals and Metropolitan Bank & Trust Company,
G.R. No. 89775, November 26, 1992.
21 26G.R. No. 80078, May 18, 1993.
Comm. of Customs v. Alikpala, G.R. No. L-32542, November 26, 1970.
"Article 2082, Civil Code. 26 115SCRA 777.
23
Article 2084, Civil Code. 27103 Phil. 1131.
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DIVINA ON COMMERCIAL LAW:
366 VIII. CREDIT TRANSACTIONS
A COMPREHENSIVE GUIDE VOLUME II 367
. th xt nt of the "right to indemnification" of the The Stay Order relied u 0 b
25. What Is e e e . . ?
guarantor against the principal debtor· staying and suspension of / n YABC Corp. merely ordered the "
against XYZ, Inc. and n t en ?rcement of all claims and proceedings
As a rule, a guarantor who pays for a debtor should be I' able with the debt oSag~mst other persons or entities solidarily
indemnified by the latter and would be legally subrogated to the t~at a stay order s~:ll ect1on 18(c?, of the FRIA explicitly states
rights which the creditor has against the debtor. ~owever, person . • not apply to the enforcement of claims
who makes payment without the knowledge or agamst the will of the agadl~~~ s;reti~s a nd other persons solidarily liable with the debtor
debtor has the right to recover only in~ofar as the _payment has been an ir par Y ?r accommodation mortgagors as well as issuer~
beneficial to the debtor. If the obligat10n was subJect to defenses on of letters of credit, x x x'. In addition u d R 1 4 s · 6 f
M No 00-8-10-S . ' n er u e ' ection o
the part of the debtor, the same defenses which could have been set A. • . : . C or the lntenm Rules of Procedure on Corporate
up against the creditor can be set up against the paying guarantor." Rehab~htatwn, a stay ?rder has the effect of staying enforcement
only with respect t~ cla~ms made against the debtor, its guarantors
26. In 2011, Veterans Bank granted a five (5)-year 10 million-peso and persons not solidarity liable with the debtor:
loan with xvz, Inc. To secure payment, ABC Corp. executed a ~ecti?n 6. Stay Order. - If the court finds the petition to be
Guarantee Agreement agreeing to guarantee payment of XYZ sufficient m form and substance, it shall, not later than five (5)
lnc:s entire loan obligation. working days from the filing of the petition, issue an order: (a)
The Guarantee Agreement, however, states that ABC appointing a rehabilitation receiver and fixing his bond; (b) staying
Corp. waives its right of excussion under Article 2058 of the enforcement of all claims, whether for money or otherwise and
Civil Code and that, consequently, Veterans Bank can claim whether such enforcement is by court action or otherwise, against
under the Guarantee Agreement directly against ABC Corp,
the debtor, its guarantors and persons not solidarily liable with the
debtor xx x.
without having to exhaust all the properties of XYZ, Inc. and
I without need of any prior recourse against XYZ, Inc. The Guarantee Agreement, however, shows that ABC, Corp.
waived its right of excussion under Article 2058 of the Civil Code. In
In 2013, a huge storm destroyed XYZ, lnc:s facilities
I indefinitely halting its business operations.
effect, the nature of the guarantee obligation assumed by ABC, Corp.
under the Guarantee Agreement was transformed into a suretyship
II In 2014, XYZ Inc. filed a Petition for Voluntary Rehabilitation thus solidarily binding itself with XYZ, Inc.
under the Financial Rehabilitation and Insolvency Act of 2010
Under a normal contract of guarantee, the guarantor binds
("FRIA") before the RTC which, acting as a Rehabilitation
himself to the creditor to fulfill the obligation of the principal debtor
Court, issued a Stay Order in favor of XYZ Inc.
in case the latter should fail to do so. The guarantor who pays for
In 2015, Veterans Bank demanded payment of the entire a debtor, in turn, must be indemnified by the latter. However, the
loa~ from ABC Corp. Invoking the RTC's Stay Order, ABC Corp. guarantor cannot be compelled to pay the creditor unless the latter
,,1 denied Veterans Bank's claim. Veterans Bank filed a collection has exhausted all the property of the debtor and resorted to all the
suit against ABC Corp. before the RTC. legal remedies against the debtor. This is what is otherwise known
Decide.
as the benefit of excussion. Conversely, if this benefit of excussion
is waived, the guarantor can be directly compell~d by the credit~r
The Stay Order issued by the Rehabilitation Court does not to pay the entire debt even without the exhaustion of the debtors
preclu~e the RTC from hearing and deciding Veterans Bank's properties.
complaint.
In other words, a guarantor who engages to direc~ly shoulder
I• I the debt of the debtor, waiving the benefit of excuss10n an~ the
· · present ment , demand , protest
reqmrement of pr10r . . , or. notice of
28
Philippine Export and Foreign Loan Guarantee Corporation v. V.P. Eusebio any kind, undoubtedly makes himself/herself sohdanly hable to the
Construction, Inc., et al., G.R. No. 140047, July 13, 2004.
creditor.
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368 A COMPREHENSIVE GUIDE VOLUME II
Veterans Bank can thus claim under the Guarantee Agreement the latter fails to do so. On the other hand, if a person himself is
DIRECTLY against ABC, Corp. without having to exhaust all the solidarily liable with the principal debtor, the contract is called a
properties of X'/Z, Inc. and without need of any prior recourse suretyship.
against XYZ, Inc. 29 Guaranty Surety
II. Surety Guarantor is secondarily liable. Surety is primarily liable.
Insurer of solvency of debtor Insurer of the debt
27. What is the concept and nature of suretyship?
(a guarantor agrees that the credi- (a surety promises to pay the prin-
If a person binds himself solidarily with the principal debtor, tor, after proceeding against the cipal's debt if the principal will
0 principal, may proceed against
the contract is called a Suretyship.' not pay)
the guarantor if the principal is
A Contract of Suretyship is an agreement whereby a party,
unable to pay)
called the surety, guarantees the performance by another party,
called the principal or obligor, of an obligation or undertaking in 33
favor of another party, called the obligee. Although the Contract of
30. Distinguish surety from solidary co-debtor.
a Surety is secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses A suretyship requires a principal debtor to whom the surety I
no direct or personal interest over the obligations nor does it receive is solidarily bound by way of an ancillary obligation of segregate
any benefit therefrom. The surety's obligation is not an original and identity from the obligation between the principal debtor and the H
1,
direct one for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal. Nevertheless,
creditor. Further, solidarity signifies that the creditor can compel
any one of the joint and several debtors or the surety alone to
l~
R
although the contract of a surety is in essence secondary only to a answer for the entirety of the principal debt. The difference lies with
valid principal obligation, his liability to the creditor or promisee regard the right to seek reimbursement for the sums paid out to the
of the principal is said to be direct, primary, and absolute; in other creditor. 34
words, he is directly and equally bound with the principal."
Surety Solidary co-debtor
28. Is there a required form for a contract of suretyship?
not a party to the obligation; a party to the obligation
Yes. A contract of suretyship is a special promise to ansV:..er for and does not benefit from the
the debt, default, or miscarriage of another; hence, pursuant to ·the transaction between the creditor
Statute of Frauds, it must in writing and subscribed by the party and the solidary debtors
charged or by the latter's duly authorized agent. Otherwise,-it would entitled to obtain indemnification right for reimbursement is subject
be unenforceable." ' for the entire amount to deductions pertaining to his
share or at times even pertaining
29. Distinguish surety from guaranty. to his proportionate share in the
portion that should have been paid
By a guaranty a person, called the guarantor, binds himself to by an insolvent solidary debtor
the creditor to fulfill the obligation of the principal debtor in case
2
'Trade and Investment Development Corporation of the Philippines also
known as Philippine Export-Import Credit Agency v. Philippine Veterans Bank, G.R.
No. 233850, July 1, 2019. -- -
33Article 2047, Civil Code; Gateway Electronics v. Asian Bank, G.R. No.
30Article 2084, Civil Code.
31 172041, December 18, 2008.
Lim v. Security Bank Corporation, G.R. No. 188539, March 12, 2014. · 34
Articles 2047, 1217, Civil Code; Escano, et al. v. Ortigas, Jr., G.R. No. 151953,
32
Article 1403(2)(b), Civil Code. '
June 29, 2007.
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A COMPREHENSIVE GUIDE VOLUME II
. . . h an ,,ace ommodation surety" from a "compensated 32 Does a change in th t · ·
31. D1stmgu1s · . e erms of the prmc1pal contract
automatically cancel the surety contract?
surety•:
The S upreme Cour t has clarified on the distinction between . Th_e liabilities of an insurer under the surety bond are not
.
an accommo d a t ion surety and a compensated surety and the extmgm~hed when the_modifications in the principal contract do not
reasons for treating them differently: substantially or materially alter the principal's obligations.
The law has authorized the formation of corporations for the A suretyship consists of two (2) different contracts: (1) the surety
contract and (2) the principal contract which it guarantees. Since
purpose of conducting surety b~~iness, ~nd the corpor_ate sur~ty
the insurer's liability is strictly based only on the terms stated in
differs significantly from the ind1v1dual priv~te surety. First, unhke
the surety contract in relation to the principal contract, any change
the private surety, the corporate _surety signs for cash an~ not
in the principal contract, which materially alters the principal's
for friendship. The private surety 1s regarded as someone domg a
obligations would, in effect, constitute an implied novation of the
rather foolish act for praiseworthy motives; the corporate surety, to surety contract.
the contrary, is in business to make a profit and charges a premium
depending upon the amount of guaranty and the risk involved. A surety is released from its obligation when there is a material
Second, the corporate surety, like an insurance company, prepares alteration of the contract in connection with which the bond is given,
the instrument, which is a type of contract of adhesion whereas the such as a change which imposes a new obligation on the promising
private surety usually does not prepare the note or bond which he party, or which takes away some obligation already imposed, or
signs. Third, the obligation of the private surety often is assumed one which changes the legal effect of the original contract and not
simply on the basis of the debtor's representations and without merely its form . A surety, however, is not released by a change in
legal advice, while the corporate surety does not bind itself until the contract which does not have the effect of making its obligation
a full investigation has been made. For these reasons, the courts more onerouS. 36
distinguish between the individual gratuitous surety and the
33. Can a surety agreement secure an obligation in the absence of
vocational corporate surety. In the case of the corporate surety, the
a written contract evidencing the principal obligation?
rule of strictissimi juris is not applicable, and courts apply the rules
of interpretation of appertaining to contracts of insurance. Yes. Section 175 of P.D. No. 612 (Insurance Code, as amended)
defined suretyship as an agreement where a party called the surety
Consequently, the rule of strict construction of the surety guarantees the performance by another party called the principal
contract is commonly applied to an accommodation surety but is not or obligor of an obligation or undertaking in favor of a third person
extended to favor a compensated corporate surety.
called the obligee.
The rationale of this doctrine is reasonable; an accommodation Under Section 176 of the Insurance Code, the nature and
surety acts wi~hout ~otive of pe~uniary gain and, hence, should be extent of a surety's liability are as follows:
protected _ag~mst ui:Just pecumary impoverishment by imposing
on th~ prmc1pal duties akin to those of a fiduciary. This cannot SEC. 176. The liability of the surety or sureties shall
be said of a compensated corporate surety which is a business "be joint and several with the obligor and shall be limited
~ssociation organized for the purpose of assuming classified risks to the amount of the bond. It is determined strictly by
the terms of the contract of suretyship in relation
m large _numbers, for pr?fit and on an impersonal basis, t};i~ough
to· the principal contract between the obligor and
~he medium of sta1:dard1~ed written contractual forms drawn by
~ts own representatives with the primary aim of protecting its own the obligee. 37
interests. 35
36 People's Trans-East Asia Insurance Corporation, a.k.a. People's General In-
surance Corporation v. Doctors of New Millennium Holdings, Inc., G.R. No. 172404,
35
Erma Industries, Inc. v. Security Bank Corporation, G.R. No. • 191274, August 13, 2014.
December 6, 2017. 37 Emphasis supplied.
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DIVINA ON COMMERCIAL LAW: VIII. CREDIT TRANSACTIONS
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t r
I
1• bTt
1 is joint and several with the obligor such security immovable pro
Thus, the surety's nd and determined strictly by th~ property, in case the princi aie~t! or_ re~l rights over immovable
O
limited to the amountt ft ~re~yship in relation to the principal stipulated.•o P O ligation 1s not fulfilled at the time
terms of the contrac O s .
contract between the obligor and the obhgee.
• f th Civil Code provides that contracts shall 36, What are the characteristics of a REM?
Artie1e 1 356 o e b d ·
. t
b e obl1ga · hatever form they may have een entere into, 'Characteristics of REM:
ory m w · l"d"t
provi"d e d a 11 th e e ssential requisites for their va 1 · 11Y are · present.
· _a. it is a real right;
Th us, an ora1 agreement which has all the essentia requisites for
·dit be guaranteed by a surety contract. To rule otherwise · b. it is an accessory contract;
val1 Y may f h c· ·1 C d
contravenes the clear import of Article 1356 o t e 1v1 o e.' 8
c. it is indivisible [each and every parcel under mortgage
34. can a surety become liable to pay the leg~I i~terest thereby answers for the totality of the debt];
making its liability more than the amount of its issued bonds? d. it i~ inseparable [a mortgage directly and immediately
Yes. As early as Tagawa v. Aldanese and Union Guarantee subJects the property upon which it is imposed, whoever
Co. and reiterated in Plaridel Surety & Insurance Co., Inc. v. P.L. the possessor may be, to the fulfillment of the obligation
Galang Machinery Co., Inc., and more recently, in Republic v. Court for whose security it was constituted; the mortgage
of Appeals and R & B Surety and Insurance Company, Inc., the adheres to the property, regardless of who its owner may
subsequently be] ; and
Supreme Court has sustained the principle that if a surety upon
demand fails to pay, he can be held liable for interest, even if in thus .e. the object of the contract is immovable property or
paying, its liability becomes more than the principal obligation. The alienable real rights over immovable property."
increased liability is not because of the contract but because of the
default and the necessity of judicial collection. 37. Can a valid REM be constituted on the building erected on the
A surety's liability under the suretyship contract is different . ~a.nd belonging to another?
from its liability under the law. There is no question that a surety . Yes. The Supreme Court has ruled that the inclusion of
should not be made to pay more than its assumed obligation under "building'' as separate and distinct from the land in the enumeration
the surety bonds. However, a surety's liability for the payment of in ¼ticle 415 of the Civil Code can only mean that a building is by
interest is not by reason of the suretyship agreement itself but itself.an immovable property. Thus, while it is true that a mortgage
because of the delay in the payment of its obligation under the said of land necessarily includes, in the absence of stipulation of the
agreement. 39 improvements thereon, buildings, still a building by itself may be
mortgaged apart from the land on which it has been built. Such a
Ill. Real Estate Mortgage Law mortgage would still be a real estate mortgage for the building would
I' I still be considered immovable property even if dealt with separately
35. What is a Real Estate Mortgage {"REM")? and apart from the land. In the same manner, possessory rights over
said properties before title is vested on the grantee, may be validly
A REM is a contract whereby the debtor secures to the creditor transferred or conveyed as in a deed of mortgage."
the fulfillment of the principal obligation, specially subjecting to
• 0 12 Manresa 467.
38
"Articles 2089, 2124, 2126, Civil Code; PNB v. Mallorca, 128 SCRA 747·
June 17,Cellpage
2020. International Corp. v. The Solid Gua ranty, Inc., G.R. No. 226731, McCullough v. Veloso, 46 Phil. 1. '
39
"Prudential Bank v. Panis, 153 SCRA 390 citing Lopez v. Orosa, Jr. , et al.,
29, 2004.Commonwealth Insurance v. Court of Appeals, G.R. No. 130886, January G.R. No. L-10817-18, February 28, 1958; Leung Yee v. Strong Machinery Co., 37 Phil.
644, and Vda. de Bautista v. Marcos, 3 SCRA 438 (1961).