1. WHAT IS A CONTRACT OF GUARANTY?

A guarantee is a contract where a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter fails to do so. This contract is
governed by Articles 2047 to 2084 of the Civil Code of the Philippines.
In the case of Trade and Investment Development Corporation of the Philippines vs.
Philippine Veterans Bank G.R. No. 233850 July 1, 2019, the Supreme Court upheld the liability
of a guarantor under a guarantee agreement, highlighting that a guarantor is bound to fulfill
the principal debtor’s obligation if the debtor fails to pay, and can be held directly liable by
the creditor after exhausting all legal remedies against the debtor.

2. WHAT ARE THE CLASSIFICATIONS OF GUARANTY?

As provided under Article 2051 of the Civil Code of the Philippines, a guaranty may be
classified as:
a. Conventional;
b. Legal or juridical;
c. Gratuitous; or
d. By onerous title.

3. WHAT OBLIGATIONS MAY BE SECURED BY A GUARANTY?

According to the Civil Code of the Philippines, a guaranty may be given for all kinds of
obligations, except those which are contrary to law, morals, or public policy.

In general, a guaranty can secure various types of obligations, including:

a. Monetary obligations such as loan debts;
b. Contractual obligations;
c. Tort obligations
d. Periodical obligations such as rents, and installment payments
However, a guaranty cannot secure obligations that are:
a. Contrary to law;
b. Immoral;
c. Against public policy
4. WHAT IS A CONTINUING GUARANTY?

Article 2053 of the Civil Code of the Philippines generally governs the concept of a continuing
guaranty which is where a guarantor agrees to be liable for future debts or obligations
incurred by a principal debtor, essentially covering a series of transactions over a period of
time, rather than just a single debt, and is considered valid until expressly revoked by the
guarantor with notice to the creditor.

5. WHAT ARE THE QUALIFICATIONS OF A GUARANTOR?

According to the Civil Code of the Philippines, a guarantor must have the capacity to bind
themselves, possess integrity, and have sufficient assets to cover the guaranteed debt,
meaning they must be legally competent, trustworthy, and financially stable enough to
fulfill the obligation if the principal debtor defaults.

6. WHAT ARE THE RIGHTS AND BENEFITS OF A GUARANTOR?

When the principal debtor defaults, the guarantor faces potential liability. However, the law
provides guarantors with several rights to protect their interests:

A. Right to Subrogation

Under Article 2066 of the Civil Code, once a guarantor fulfills the obligation of the
principal debtor by paying the debt, the guarantor is subrogated to the rights of the
creditor. This allows the guarantor to pursue the debtor for reimbursement of the
amount paid. The guarantor can take legal action against the debtor to recover the
amount owed, effectively assuming the creditor’s right to collect the debt.

This right to subrogation is vital because it enables the guarantor to recover their
financial outlay. The guarantor can initiate a case against the debtor to demand
payment, similar to how a creditor would pursue a debtor.

B. Right to Reimbursement (Action for Indemnity)

Apart form subrogation, the guarantor also has the right to demand reimbursement
from the debtor for any payments made under the guaranty. This is provided for under
Article 2066 of the Civil Code, which states:

“The Guarantor who pays for a debtor must be indemnified by the latter. The
indemnity comprises (1) the total amount of the debt (2) legal interest thereon from the
time the payment was made known to the debtor, even though it did not earn interest
for the creditor (3) the expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him (4) damages, if they are due.”

This provision gives the guarantor the right to recover the full amount paid to the
creditor, along with the legal interest, and any additional costs or damages incurred as a
result of the debtors’ default.

C. Action for Excussion

 The guarantor can invoke the benefit of excussion, which means that the creditor must
exhaust all legal remedies against the principal debtor before going after the guarantor.
This right, codified under Article 2060 of the Civil Code, is a valuable protection for
guarantors, allowing them to minimize their liability by compelling the creditor to first
pursue the debtor.

However, it is important to note that excussion is not absolute. There are instances
where the guarantor cannot invoke this right, such as when the debtor has become
insolvent, when the guarantor has expressly waived this right, or when the guarantor
has bound themselves as surety.

7. WHAT ARE THE CAUSES OF EXTINGUISHMENT OF GUARANTY?

The extinguishment of a guaranty is governed primarily by the Civil Code of the Philippines, a
guaranteed being an accessory obligation, is extinguished when the principal obligation to
which it is attached is extinguished, among other specific instances.

Nature of Guaranty as Accessory Obligation

Article 2052 of the Civil Code states that a guaranty is an accessory obligation and
exists only as long as the principal obligation exists. If the principal obligation is
extinguished, the guaranty is also extinguished.
Modes of Extinguishment of Principal Obligation
The guaranty is extinguished if the principal obligation is extinguished by any of the
following:
 Payment or performance
 Loss of the thing due
 Condonation or remission of the debt
 Confusion or merger of rights of creditor and debtor
 Compensation
 Novation
The guaranty may also be extinguished independently of the principal obligation due to
circumstances affecting the guarantee itself, as follows:
A. By the Release of the Guarantor
 Article 2076, the guarantor may be released by the creditor, either
expressly or impliedly
 If the creditor waives the guaranty without extinguishing the principal
obligation, the guarantor is discharged from liability.
B. By the Extinguishment of the Principal Obligation
 As previously noted, any valid extinguishment of the principal obligation
extinguishes the guaranty.
C. By Prescription
 The obligation of the guarantor prescribes at the same time as the
principal obligation. However, actions to enforce the guaranty may be
subject to different prescription periods, depending on the
circumstances. (e.g., obligations subject to the ten-year or six-year
prescription periods under Articles 1144 and 1145.)
 D. By the Beneficiary’s Actions
 Release of securities or collateral – if the creditor releases securities or
collaterals given by the debtor or guarantor without guarantor’s
consent, the guaranty is extinguished to the extent of the value of the
released securities (Art. 2081).
 Failure to Act Against the Principal Debtor – if the creditor’s negligence
or acts impair the guarantor’s right to reimbursement or subrogation
against the principal debtor, the guaranty may be extinguished.
E. By Novation of the Principal Obligation
 If the terms of the principal obligation are substantially changed without
the guarantor’s consent, the guaranty is extinguished unless the
guarantor agrees to the changes (Art. 1291)n.
F. By the Death of the Guarantor
 If the terms of the principal obligation are substantially changed without
the guarantor’s consent, the guaranty is extinguished unless the
guarantor agrees to the changes (Art. 1291)
G. By the Grounds Specific to the Guaranty
 If the guaranty was conditional, and the condition fails or does not
occur, the guaranty is extinguished.
 A guaranty may also terminate if it is limited to a specific period or
amount and that period lapses or the amount is fully satisfied.

8. WHAT IS A CONTRACT OF SURETYSHIP?

A "contract of suretyship" under the Philippine Civil Code is an agreement where a person,
called the "surety," guarantees the performance of an obligation by another person, known
as the "principal debtor," to a third party, the "creditor," essentially meaning the surety
becomes jointly liable with the principal debtor if the latter fails to fulfill the obligation; this
is considered a form of "solidary" liability under the law.

Case law also defines a contract of suretyship as "an agreement where a party called the
surety guarantees the performance by another party called the principal or obligor of an
obligation or undertaking in favor of a third person called the obligee.

9. WHEN DOES THE OBLIGATION OF SURETY TO PAY ARISE?

A surety's obligation to pay arises when the principal debtor defaults on their
obligation; meaning, the surety becomes liable to pay the debt only when the primary
debtor fails to fulfill their contractual commitments to the creditor.

Case law also tells us that the surety's role arises only upon the debtor's default, at which
time, it can be directly held liable by the creditor for payment as a solidary obligor. The
surety is considered in law as possessed of the identity of the debtor in relation to whatever
is adjudged touching upon the obligation of the latter.

10. WHAT IS THE EXTENT OF A SURETY’S LIABILITY?

A surety's liability is "co-extensive" with the principal debtor's liability, meaning that the
surety is responsible for the full amount of the debt owed by the principal debtor if they
default on the loan or obligation, essentially acting as a secondary guarantor who becomes
 liable only when the primary debtor fails to pay up; their liability mirrors the original debt in
its entirety unless otherwise specified in the contract.

11. DISTINGUISH SURETY AND GUARANTY.

A guarantor is an insurer of the debt and essentially guarantees that the debt will be paid
one way or another. Most people confuse a guarantor with a surety, another distinct concept
under our laws. But unlike a guarantor, a surety does not only insure the debt, he or she can
be compelled to pay the loan in the first instance. There is no need to prove that the debtor
has no ability to pay.

The difference between the two lie in the availability of the benefit of excussion. This is found
in Article 2058 of the Civil Code which provides that 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.

The main consideration is not the title of the agreement or the term used to describe the
person agreeing to answer for the debt, but the terms of the agreement and the nature of
the liability undertaken by the guarantor. This is well illustrated in the case of Trade and
Investment Development Corp. of the Philippines (TIDCORP) vs Philippine Veterans Bank (GR
233850, 1 July 2019).

In that case, petitioner TIDCORP executed a Guarantee Agreement for the benefit of the
principal debtor, PhilPhos, arising from its obligations with respondent PVB. PhilPhos filed a
Petition for Voluntary Rehabilitation under the Financial Rehabilitation and Insolvency Act of
2010 (FRIA), resulting in the issuance of a Commencement Order, which included a Stay
Order. PVB filed its Notice of Claim with TIDCORP. The latter denied the claim, invoking the
Stay Order which supposedly stayed along claims against PhilPhos, the principal debtor in
the Guarantee Agreement.

The Supreme Court ruled that under Section 18(c) of the FRIA and the SC Interim Rules of
Procedure on Corporate Rehabilitation, a stay order shall not apply to the enforcement of
claims against sureties and other persons solidarily liable with the debtor. The stay order has
the effect of staying enforcement only with respect to claims made against the debtor, its
guarantors and persons not solidarity liable with the debtor. In other words, the Stay Order
cannot be invoked by a surety but can be invoked by a guarantor.

In a true contract of guarantee, the guarantor binds himself to the creditor to fulfill the of
the principal debtor in case he fails to do so. A guarantee is characterized by the benefit of
excussion where the creditor must first exhaust all the property of the debtor and resort to
all the legal remedies against the debtor before collecting from the guarantor. If this benefit
of excussion is waived, the guarantor is directly made liable; hence, the arrangement is not a
guarantee but a suretyship.

While the document in the said case is entitled a “Guarantee Agreement,” it provides that
TIDCORP had waived its right of excussion under Article 2058 of the Civil Code. Hence, PVB
can claim directly against TIDCORP without having to exhaust all the properties of PhilPhos
and without need of any prior recourse against PhilPhos. Notwithstanding the Stay Order,
the claim under the Guarantee Agreement can proceed.
To summarize, a surety is one who directly, equally, and absolutely binds himself/herself with
the principal debtor for the payment of the debt. In contrast, the contract of guaranty is its
subsidiary character. The guarantor only answers if the debtor cannot fulfill his obligation,
unless he waives the benefit of excussion. A surety is principally liable, while a guarantor is
only secondarily liable.