C.

Guaranty and Suretyship

Syllabus: Civil Law/VIII/C
Credit Transactions, as a broad category, can be broadly divided into
secured transactions and unsecured transactions. Secured transactions are
those supported by a collateral or an encumbrance of property, while
unsecured transactions are supported only by a promise to pay or the
personal commitment of another, such as a guarantor or surety. Security, in
this context, is anything given or deposited to ensure the fulfillment of an
obligation or to protect an interest in property. Personal security involves an
individual acting as a surety or guarantor, whereas real or property security
involves an encumbrance on property, like a real estate mortgage.
Guaranty and Suretyship are key types of personal security arrangements
within credit transactions.

1. Nature and Extent of Guaranty

A guaranty is a contract where a person, known as the guarantor, binds
themselves to the creditor to fulfill the obligation of the principal debtor in
case the latter fails to do so. It is generally gratuitous, unless there is a
stipulation to the contrary. Guaranty is not presumed; it must be express
and cannot extend beyond what is stipulated. It must be in writing to be
enforceable by action, although it does not need to appear in a public
document.
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.

• Delegacion vs. Expromision (in the context of payment by a third

person):

◦ Delegacion (payment with knowledge/consent of debtor): Whoever

pays for another may demand from the debtor what they have paid.
The guarantor who pays is subrogated to all the rights the creditor
had against the debtor.

◦ Expromision (payment without knowledge/against will of debtor):

Whoever pays on behalf of the debtor without their knowledge or
against their will can only recover insofar as the payment has been
 beneficial to the debtor. They cannot compel the creditor to
subrogate them in the creditor's rights, such as those arising from a
mortgage, guaranty, or penalty.

Guaranty can secure various types of obligations, including voidable and

unenforceable contracts, natural obligations, future debts with unknown
amounts, and conditional obligations. When a guaranty secures future
debts, it's known as a continuing guaranty or surety agreement, common in
financial practice, eliminating the need for a separate contract for each
credit accommodation.
Parties to a Guaranty: The parties are the guarantor, the creditor, and the
principal debtor. A guarantor must possess integrity, have the capacity to
bind himself, and sufficient property to answer for the obligation. If a
guarantor is convicted of a crime involving dishonesty or becomes insolvent,
the creditor may demand another qualified guarantor, unless a specific
person was stipulated. The supervening incapacity of a guarantor does not
terminate the guaranty; it merely gives the creditor an option to demand a
substitute.

2. Effects of Guaranty
The primary effect is the benefit of excussion (or exhaustion). This means
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 legal
remedies against them.

• Requisites for excussion: The guarantor must set it up against the

creditor upon demand for payment and point out sufficient available
property of the debtor within Philippine territory to cover the debt.

• When excussion does NOT take place (Art. 2059, NCC):

◦ If the guarantor has expressly waived it.

◦ If the guarantor has bound themselves solidarily with the debtor.

◦ In case of the insolvency of the debtor.

◦ If the debtor has absconded, or cannot be sued within the

Philippines unless a judicial demand has been made on him.

◦ If it can be presumed that an execution on the principal debtor's

property would not satisfy the obligation.

◦ In the case of a judicial bondsman.

 ◦ When the guarantor has constituted a pledge or mortgage as
additional security.

• Right to Protection and Indemnification: 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 interests from the time payment was made known to the
debtor.
3. Expenses incurred by the guarantor after notifying the debtor that
payment was demanded.
4. Damages, if due.

◦ The guarantor may set up against the creditor all defenses pertaining
to the principal debtor and inherent in the debt, but not those purely
personal to the debtor.

• Rights of Co-guarantors: If there are several guarantors for the same

debtor and debt, the obligation is generally joint (divided proportionally).
This is known as the benefit of division. If any co-guarantor is insolvent,
their share is borne proportionately by the others, including the payer.

3. Extinguishment of Guaranty
Guaranty, being an accessory contract, is generally extinguished when the
principal obligation is extinguished. Specific instances of extinguishment
include:

• An extension granted to the debtor by the creditor without the

guarantor's consent extinguishes the guaranty. This applies to both
gratuitous and compensated sureties.

• When the creditor releases one of the guarantors without the consent
of the others, it benefits all to the extent of the released guarantor's
share.

• If the guarantor cannot be subrogated to the creditor's rights due to the

creditor's fault, the guarantors are released. This occurs if the creditor
impairs any security or lien they have acquired from the principal debtor,
discharging the surety to the extent of the value of the security released.

Suretyship
Concept of Suretyship

Suretyship is a contract where a person, called the surety, binds themselves

solidarily with the principal debtor to fulfill the obligation. Although
secondary to a valid principal obligation, the surety's liability to the obligee is
direct, primary, and absolute. The surety becomes liable for the debt even
without direct personal interest or benefit. A contract of suretyship is also
considered an ancillary contract as it presupposes the existence of a
principal agreement.
Forms of Suretyship

Sources distinguish between:

• Private/Gratuitous/Accommodation Surety: Signs for friendship, does

not prepare the contract, assumes obligation based on debtor's
representations without legal advice. An accommodation party is
solidarily liable.

• Compensated/Corporate Surety: Signs for cash, often involves a

contract of adhesion (prepared by the surety), assumes obligation after
full investigation. These contracts are interpreted liberally in favor of the
insured and strictly against the insurer.
Obligations Secured

A Comprehensive or Continuing Surety covers both existing and future

obligations. This allows the principal to enter a series of transactions with
the creditor without needing a new surety contract for each.
Distinctions

• Suretyship vs. Standby Letter of Credit: Suretyship is attached to the

underlying transaction, while a standby letter of credit is independent.
Suretyship requires the completion of the obligor's performance, while a
standby letter of credit involves an expectation of cash payment upon
non-performance, avoiding the beneficiary's litigation burden.

• Suretyship vs. Guaranty:

◦ Liability: Surety's liability is primary, while a guarantor's is

subsidiary.

◦ Engagement: Surety assumes liability as a regular party, while a

guarantor assumes it by independent agreement.

◦ Nature of Liability: Surety's liability is original; guarantor's is

collateral.
 ◦ Insurer of: Surety is the insurer of the debt, while a guarantor is the
insurer of the solvency of the debtor.

◦ Excussion/Division: Excussion and division are NOT available to a

surety, but they ARE available to a guarantor. Article 2080 of the
Civil Code, which relates to the release of a guarantor, applies only
to the liability of a guarantor, not a surety.

• Suretyship vs. Joint and Solidary Obligations: While a surety's liability is

joint and several, the surety who pays the creditor has the right to
recover the full amount paid from the principal debtor, not just a
proportional share. In contrast, a solidary debtor who pays can claim
only their co-debtors' corresponding shares.
Liability and Rights of a Surety
A surety's liability is joint and several, limited to the amount of the bond, and
strictly determined by the contract terms. The creditor may proceed against
any one of the solidary debtors, or some or all of them simultaneously.
Demand against one solidary debtor does not prevent subsequent demands
against others as long as the debt is not fully collected. A creditor's right to
proceed against the surety exists independently of their right to proceed
against the principal debtor. The term "proceed" means to "sue" or "institute
proceedings".
The validity of a suretyship agreement does not necessarily require a written
principal contract, especially if the surety bonds do not expressly stipulate it.
Relevant Case Doctrines:

• International Finance Corporation v. Imperial Textile Mills: Obligations

arising from tort are by nature always solidary.

• Sps. Ibañez v. James: Solidary obligations cannot be inferred lightly; they

must be positively and clearly expressed. If not explicitly stated, the
obligation is presumed joint.

• Sinamban v. China Banking Corporation: A co-maker of a promissory

note who binds himself "jointly and severally" with the maker is directly
and primarily liable.

• Allied Banking v. Yujuico: The specific terms and intention of the parties
in a continuing guaranty, rather than merely the term "guarantor" in the
caption, determine if the signatory is a surety with solidary liability.

• Cellpage International Corp. v. The Solid Guaranty, Inc.: A surety's

liability is direct, primary, and absolute, making them directly and equally
bound with the principal.
 • Palmares v. CA: A creditor's right to proceed against the surety exists
independently of their right to proceed against the principal.

• Subic Bay Distribution v. Western Guaranty Corp.: A surety's liability is

joint and several and is determined strictly by the terms of the suretyship
contract in relation to the principal contract. A surety is generally not
released by changes in the principal contract unless they materially alter
the principal's obligations to be more onerous.

• The Mercantile Insurance Co., Inc., v. DMCI-Laing Construction, Inc.: A

performance bond makes the surety solidarily liable with the principal
debtor; the surety's liability attaches upon demand for payment. Article
2080 (release of guarantor due to creditor's fault) does not apply to a
surety.
Relationship to Loans: Credit transactions include Loans. A loan contract is
perfected upon the delivery of its object. Guaranty and suretyship often
secure loan obligations. The consideration for a surety obligation need not
pass directly to the surety; consideration moving to the principal is sufficient.

4. Legal and Judicial Bonds

Nature and Purpose

Legal and Judicial Bonds are types of personal security. A bondsman is a

person offered to provide a bond either by virtue of a provision of law or a
judicial order. While the nature of the contract is primarily to ensure the
fulfillment of an obligation, the sources do not explicitly define the purpose
of judicial bonds beyond their function in legal proceedings, but they are
clearly related to securing obligations similar to guaranties and suretyships.

Qualifications of a Bondsman
A bondsman who is offered in virtue of a provision of law or a judicial order
must possess the same qualifications as a guarantor. This suggests that
they must have integrity, capacity to bind themselves, and sufficient
property to answer for the obligation, similar to general requirements for a
guarantor. If a person required to give a bond cannot do so, a pledge or
mortgage considered sufficient to cover the obligation may be admitted in
lieu thereof.

Distinctive Feature: No Benefit of Excussion

A crucial characteristic of a judicial bondsman is that they cannot demand
the exhaustion of the property of the principal debtor. This means they are
not entitled to the benefit of excussion, which is a primary right of a
guarantor. This distinct liability aligns judicial bondsmen more closely with
the nature of a surety.
Solidary Liability and Non-Applicability of Article 2080 Because a judicial
bondsman is solidarily liable with the principal debtor, Article 2080 of the
Civil Code, which relates to the release of a guarantor when subrogation to
the creditor's rights is impaired by the creditor's fault, does not apply to the
liability of a judicial bondsman. This further underscores their treatment as
sureties rather than mere guarantors.
Sub-Surety's Liability In the same vein as a judicial bondsman, a sub-surety
(a person who guarantees the obligation of a surety) cannot demand the
exhaustion of the property of the debtor or of the surety. This confirms that
the solidary nature of the liability extends down to sub-sureties in such
arrangements.

Legal and Judicial Bonds are a specific form of personal security that
imposes a higher degree of direct and primary liability on the bondsman,
similar to a surety, rather than the subsidiary liability typically associated
with a guarantor. The absence of the benefit of excussion is the defining
factor distinguishing the judicial bondsman's liability from that of a
conventional guarantor.

BAR EXAM PROBLEM

Example 1: Distinction between Surety and Guarantor; Benefit of
Excussion
Q: S Company refused the claim on the ground that C Corp. has yet to
exhaust D Inc.’s property to satisfy the claim before proceeding against it,
will this defense prosper? Explain.
A: NO, the defense of S company will not prosper. The liability of a surety is
different from that of a guarantor because while the latter is entitled to the
benefit of excussion, the former is not. Hence, the creditor may proceed
directly against the surety without the need of going against the principal
debtor. Under the law, if a person binds himself solidarily with the principal
debtor, the contract is one of suretyship and as such the provisions of the
Code on solidary obligations shall apply. In a solidary obligation, the creditor
may proceed against anyone of the solidary debtors or some or all of them
simultaneously (Art. 1216, NCC). Thus, there is no need for C to exhaust the
properties of D before proceeding against S.
Example 2: Validity of an Indemnity Agreement in Suretyship
Q: Sebastian, who has a pending assessment from the Bureau of Internal
Revenue (BIR), was required to post a bond. He entered into an agreement
with Solid Surety Company (SSC) for SSC to issue a bond in favor of the BIR
to secure payment of his taxes, if found to be due. In consideration of the
insurance of the bond, he executed and Indemnity Agreement with SSC
whereby he agreed to indemnify the latter in the event that he was found
liable to pay the tax. The BIR eventually decided against Sebastian, and
judicially commenced an action against both Sebastian and SSC to recover
Sebastian’s unpaid taxes. Simultaneously, BIR also initiated action to
foreclose on the bond.

Even before paying the BIR, SSC sought indemnity from Sebastian on the
basis of the Indemnity Agreement. Sebastian refused to pay since SSC had
not paid the BIR anything yet, and alleged that the provision in the
Indemnity Agreement which allowed SSC to recover from him, by mere
demand, even if SSC had not yet paid the creditor, was void for being
contrary to law and public policy. Can Sebastian legally refuse to pay?
(2018 BAR)
A: NO, Sebastian cannot legally refuse to pay. A stipulation in an indemnity
agreement providing that the indemnitor shall pay the surety as soon as the
latter becomes liable to make payment to the creditor under the terms of the
bond, regardless of whether the surety has made payment actually or not,
is valid and enforceable. This means the surety may demand from the
indemnitor even before the creditor has paid. Under the terms of the
contract, Sebastian’s obligation to indemnify became due and demandable
from the moment he has incurred liability and not from the moment of
payment.

Example 3: Surety's Direct and Primary Liability; Applicability of

Article 2080
Q: Corp A secured a Performance Bond from Corp B wherein the latter
would become the surety of the former, guaranteeing the performance of
Corp A’s obligations in favor of a contract with Corp C. However, Corp A
showed poor progress, which led to Corp C demanding Corp B to liquidate
the Performance Bond, without specifying the exact amount claimed.
Subsequently, Corp C terminated the contract with Corp A. When
negotiations for amicable settlement fell through, Corp B denied Corp C’s
claim. This prompted Corp C to file a complaint with the CIAC to collect a
sum of money against Corp A and Corp B. The CIAC dismissed the
Complaint because it was not within a reasonable period and such delay
had released Corp B from its liability as per Article 2080 of the Civil Code.
This was reversed by the CA on the ground that Corp A had long been in
default of its obligations even before the first demand of Corp C, which
meant that the liability of Corp B as surety had already arisen. Was the CA
correct in saying that Corp B was liable?
A: Yes. A contract, such as a Performance Bond, stands as the law between
the parties as long as it is not contrary to law, morals, good customs, public
order, or public policy. The Performance Bond described in the query stands
as a contract of surety contemplated under Article 2047 of the Civil Code,
which defines a surety as a person who binds himself solidarily with the
principal debtor. As a result, the surety is considered in law to be the same
party as the debtor in relation to whatever is adjudged regarding the latter's
obligation, with their liabilities being interwoven and inseparable.
While a contract of surety is secondary to the principal obligation, the
surety's liability is direct, primary, and absolute, though limited to the
amount for which the contract of surety is issued. The surety's liability
attaches the moment a demand for payment is made by the creditor.
Furthermore, Article 2080 of the Civil Code does not apply in this case
because it is only applicable to the liability of a guarantor, not a surety.

Example 4: Nature of Suretyship and Effect of Material

Alteration
Q: What is the nature of the contract involved in a suretyship and the effect
on the surety agreement of any material alteration in the principal contract?

A: A suretyship consists of two different contracts:

1. The surety contract itself.

2. The principal contract which it guarantees.

Since the insurer's liability is strictly based only on the terms stated in the
surety contract in relation to the principal contract, any change in the
principal contract which materially alters the principal's obligations would,
in effect, constitute an implied novation of the surety contract.
A surety is released from its obligation when there is a material alteration of
the contract in connection with which the bond is given, such as a change
which imposes a new obligation on the promising party, or which takes away
some obligation already imposed, or one which changes the legal effect of
the original contract and not merely its form. However, a surety is not
released by a change in the contract which does not have the effect of
making its obligation more onerous.
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