GUARANTY

NATURE AND EXTENT OF GUARANTY

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the contract is called a suretyship.

PARTIES ARE THE GUARANTOR AND THE CREDITOR

The first paragraph defines this contract of guaranty. The parties thereto are the guarantor and the
creditor.

PARTIES ARE THE DEBTOR AND THE GUARANTOR:

The contract between the debtor and the guarantors is called the contract of indemnity.

Characteristics of the Contract of Guaranty

1. It is a contract between the guarantor and the creditor.

2. In general, therefore, the creditor must notify the guarantor that the former is accepting the
guaranty, unless the guaranty is not merely an offer but a direct and unconditional one. In such a
case, all that is required is for the creditor to act upon the promise; no prior notice is needed to
indicate his acceptance.
3. It is consensual, nominate, accessory, unilateral (in that only the guarantor is obligated to the
creditor and not vice versa)
4. As to form, the contract of guaranty is governed by the Statute of Frauds, being a special promise
to answer for the debt, default, or miscarriage of another.” Hence, an oral promise of guaranty is
not enforceable.

Procedure for Enforcement of Surety’s Liability

(a) Application for damages must be filed before trial or before entry of trial judgment;

(b) Due notice must be given the other party and his surety; and

(c) There must be a proper hearing, and the award of damages, if any, must be included in the final
judgment.

Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary.

Art. 2049. 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.

NOTE: Generally, a wife-guarantor responds with her paraphernal property.

Art. 2050. 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.

Art. 1236. 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.

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.

NOTE: A guarantor can recover from the debtor what the former had to pay the creditor, even if the
guaranty was without the debtor’s consent or against his will, but the recovery will only be to the extent
that the debtor had been benefited.

Art. 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.

According to manner of creation, guaranty may be:

(a) Conventional (by agreement);

(b) Legal (required by law);

(c) Judicial (required by the court as when an attachment is to be lifted).

Sub-Guaranty

A sub-guaranty may be created. This is to guarantee an obligation of a guarantor.

Art. 2052. 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.

A guaranty can be valid even if the principal obligation is:

(a) voidable;

(b) unenforceable;

(c) natural.
Consideration: The consideration of the guaranty is the same as the consideration of the principal
obligation. As long as the principal debtor receives some benefit, this is all right even if the guarantor
himself has NOT received any benefit.

Art. 2053. 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.

There can be a guaranty for:

(a) present debts;

(b) future debts (even if the amount is not yet known).

Therefore, a bond posted to secure additional credit that the principal debtor had applied for is not
void just because the said bond was signed and filed before the additional credit was extended by the
creditor.

Liquidated Debt

A debt is already considered liquidated under this article when it is for a price fixed in a
contract for the delivery of future goods and the seller is now ready to deliver said goods within the
period stipulated.

CASE #1

FACTS: Petitioners assert that the suretyship agreement they signed is void because there was no
principal obligation at the time of signing as the principal obligation was signed 6 mos. later.

HELD: The law allows a suretyship agreement to secure future loans even if the amount is not yet
known. (See Art. 2053, Civil Code)

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.

CASE #1: Example: If the principal debt is not secured by a mortgage, the guaranty should also not
be secured by a mortgage

A borrowed from B P10 million. No mortgage was constituted. C guaranteed to B the payment of
A’s debt, and to show his sincerity, C even mortgaged his land in favor of B. If A cannot pay, and C
cannot pay, may B foreclose the mortgage on C’s land?

ANS.: No. The obligation of C being merely accessory to A’s debt, it should not be more onerous than the
latter. If the principal debt is not secured by a mortgage, the guaranty should also not be secured by a
mortgage; otherwise, this would be making the guarantor’s liability more onerous than that of the
principal debtor.
CASE #2: the obligation is more onerous as to the amount not secured.

Problems

A borrowed from B P1 million. Can C act as surety and guarantee the payment and limit his
liability to merely P300,000?

ANS.: Yes, the guarantor or the surety can bind himself for less than the principal debtor.

Suppose A can pay only P900, 000, can B get anything from C?

ANS.: Yes, B can still get P100,000 from C. Out of the P1 million debt, P700,000 was unsecured;
P300,000 was secured (by the suretyship).

It follows that, applying the rule of application of payments, the payment of the P900, 000 should
first be applied to the unsecured debt of P700, 000, and the remaining P200, 000 should be
applied to the secured debt. This is so because the unsecured debt is clearly more onerous than the
secured one.

It follows that since only P200,000 of the secured debt has been paid, the creditor can still claim
from the surety the amount of P100,000.

NOTE: Where in a bond the debtor and surety have bound themselves solidarily, but limiting the
liability of the surety to a lesser amount than that due from the principal debtor, any such payment
as the latter may have on account of such obligation, must be applied first to the unsecured
portion of the debt, for, as regards the principal debtor, the obligation is more onerous as to the
amount not secured.

CASE #3: We have to apply the rule on the application of payments. The P10,000 already given
should first be applied to

FACTS: The Far Eastern Surety & Insurance Co., Inc. bound itself to pay jointly and severally
with the principal debtor the sum of P10,000.00 although the debt was really P11,230. The
principal debtor was able to pay P10,000 only. When sued, the Far Eastern Surety claimed that
inasmuch as the P10,000 had been fully satisfied, the surety cannot now be held liable for the
balance. It alleged that as surety it had agreed to guarantee the payment of merely P10,000.

Issue: Is said surety liable for the balance?

HELD: Yes, since in a case like this, we have to apply the rule on the application of payments.
The P10,000 already given should first be applied to

NOTES:

Rule if a Person Has Two Debts: His more onerous obligation to which first payment is to
be applied, is the debt as sole debtor.

When a person has two debts, one as a sole debtor, and another as solidary co-debtor, his
more onerous obligation to which first payment is to be applied, is the debt as sole debtor.

Rule if Debt is Increased

If the indebtedness is increased without the guarantor’s consent, he is completely released from
the obligation as guarantor or surety.
 Effect of a Penalty Clause

If a surety bond has a penalty clause (in case of a violation of a condition), said penalty may be
demanded in the proper case even if its value is MORE than the amount of the principal
debt.

Art. 2055. 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 comprise 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 cost incurred after he has been judicially required to pay.

Form of the Contract

To be enforceable, the contract of guaranty (between the guarantor and the creditor) must
be in writing, since this is “a special promise to answer for the debt, default, or miscarriage of
another.”

Even if oral, however, the defense may be WAIVED by the guarantor, since it is well known that
the defense of the Statute of Frauds is waivable.

Be it noted therefore that the guaranty must be EXPRESS (it is not presumed).

Kinds of Guaranty According to Period or Condition

(a) With a term (express or implied);

(b) With a condition (suspensive or resolutory);

(c) Simple or indefinite (no period specified; no amount fixed) here all the consequences provided
for in the second paragraph of Art. 2055 are enforceable.