1 Marien Narciso ǁ Francheska Ferraren ǁ Eunis Flamme ǁ Richard Francisco ǁ Prince Karl Calansingin

CHAPTER 2 — Effects of Guaranty

SECTION 1 — Effects of Guaranty Between the

Guarantor and the Creditor (2058-2065)

I. Procedure When Creditor Sues

A. Creditor must sue the principal alone

1. Reason: A contract of guaranty is accessory

and subsidiary

2. Exception: Art. 2059

B. Creditor shall ask the court to notify the

guarantor of the action

1. If the guarantor appears

He is still given the benefit of excussion,

under Art. 2058, even if judgment should

be rendered against him and the principal

debtor.

2. If guarantor does not appear

He 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.

C. Hearing before execution can be issued against

guarantor

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.

II. Benefit of Excussion

A. Definition

The right of GUARANTOR to demand that the

creditor first:

1. EXHAUST all properties of principal debtor

2. RESORT to all legal remedies against the

principal debtor

The creditor has a right to secure judgment

against guarantor prior to exhaustion. The

creditor may, prior thereto, secure a judgment

against the guarantor, who shall be entitled,

however, to a deferment of the execution of

said judgment against him, until after the

properties of the principal debtor shall have

been exhausted, to satisfy the latter’s

obligation.

D. Who may avail

1. Guarantor - ordinary and personal guarantors

2. Sub-guarantor - as against the principal debtor

and the guarantor (Art. 2064)

3. Co-guarantors - as against the

C. How to avail

1. Guarantor must set it up against the creditor

upon demand for payment.

The duty of the creditor to demand payment

upon the guarantor takes place after a

judgment has been obtained against for the

exhaustion of the debtor's properties.

Joining the guarantor in the suit against the

principal debtor is not the demand intended by

law.

2. Point out to the creditor available property of

the debtor within the Philippines, sufficient to

cover the amount of debt.

The guarantor having fulfilled all the conditions

required above, the creditor who is negligent in

exhausting the property pointed out shall suffer

the loss, but only to the extent of the value

of the said property for the insolvency of the

debtor (Art. 2061).

D. Exceptions

1. Right waived - must be made in express terms

2. Liability assumed is that of surety - guarantor

binds himself solidarily with the principal debtor

3. Insolvency of debtor is proven by an unsatisfied

writ of execution

It is not sufficiently established by the mere

fact that the debtor has been declared

insolvent in insolvency proceedings, in which

the extent of the insolvent’s inability to pay is

not determined until the final liquidation of his

estate.

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4. Debtor absconds or cannot be sued within the

Philippines

5. Resort to all legal remedies is a useless formality

6. Others

i. Non-compliance with Art. 2060

ii. If he is a judicial bondsman or sub-surety

iii. Failure to interpose it as a defense before

judgment is rendered against him

iv. Where a pledge or mortgage has been given

by him as a special security

III. Effects of Compromise

A. General rule

A contract binds only the parties thereto and

not third persons. Hence, a compromise cannot

prejudice the guarantor or the debtor, as the

case may be, when he is not a party to such

compromise.

B. Exception to the rule

However, even if the guarantor or debtor is not

a party to such compromise, the same can

benefit him as it is in the nature of a stipulation

in favor of a third person which the guarantor

or debtor may accept unless it has been

revoked before his acceptance.

IV. Benefit of Division

A. Definition

Right of a co-guarantor, as against the creditor,

to pay only the divided share that it is bound

to pay

B. Application

This article entitles the several guarantors of

only one debtor and for the same debt.

C. Exceptions

1. Express stipulation of solidarity

2. Article 2059

SECTION 2 – Effects of Guaranty between the

Debtor and the Guarantor (Art. 2066-2072)

I. Right to Indemnification

It is the debtor that is directly and principally liable so it is just that the guarantor who pays must be indemnified. Indemnity comprises:

a. Total amount of debt – but if the

guarantor paid a smaller amount due to compromise, he cannot demand more than he actually paid

b. Legal interest – from notice of payment of the debt.

c. Expenses incurred by the guarantor – expenses as consequence of the guaranty; expenses after payment has been demanded

d. Damages, if they are due

Exceptions to Right of Indemnity

a. A. 2050 b. A. 1238 c. Subject to waiver

A. Effect of payment before/after maturity (2069)

(1) Obligation with a period – obligation demandable only when the day fixed comes. When guarantor pays before maturity, he is not entitled to reimbursement since there is no necessity for accelerating payment. Rationale: Guaranty is subsidiary. However, the debtor is liable if payment was made with his consent or the same was ratified by him. In any case, guarantor can recover upon expiration of the period. (2) Where demand made during term of guarantee, the fact that payment was actually made after said term is not material. What is controlling is that default and demand on guarantor had taken place while the guarantee is still in force.

B. Effect of repeat payment

(1) No notice from guarantor: the guarantor’s remedy is to collect from the creditor.

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(2) Exceptions: The guarantor may still claim reimbursement from the debtor in spite of lack of notice when: a. the creditor becomes insolvent b. the guarantor was prevented by FE to notify debtor c. the guaranty is gratuitous

C. Guarantor of a third person at request of another (2072) The guarantor has the right to claim reimbursement from:

a. the person who requested him to be a guarantor b. the debtor

II. Right to Subrogation – necessary to enforce right to indemnification. It arises by operation of law and upon principles of natural justice. The guarantor is subrogated to the rights of the creditor. When right to subrogation not available: when guarantor has no right to be reimbursed

A. Effect of payment without notice (2068) The guarantor must notify the debtor. If not, the the debtor may set up defenses which he could have set up against the creditor at the time of payment.

Ex: The debtor has already paid. Guarantor pays without notifying debtor. Debtor may then raise that the obligation has been extinguished.

III. Right to Protection General rule: The guarantor has no cause of action against the debtor until the former has paid the obligation.

Art. 2071 – seven instances when the guarantor may proceed against the debtor even before payment. The purpose is to enable the guarantor to take measures for the protection of his interest. This for the protection of guaranty before he has paid but after he has become liable. Art. 2066 – remedy after payment

Remedies:

(1) Release from guaranty – can only be exercised against the principal debtor and not against the creditor (2) Demand a security

SECTION 3 – Effects of Guaranty as Between Co-

guarantors (Articles 2073-2075)

I. Right to Reimbursement – is the right of the co-guarantor who pays, as against the other co-guarantors, to recover the shares due from the co-guarantors, but only if the following conditions concur:

A. There are two or more guarantors of the

same debtor for the same debt.

B. One of the co-guarantors has paid.

C. Payment is made by virtue of a judicial

demand or the principal debtor is

insolvent.

What is the effect of insolvency of any guarantor? The rule in solidary obligations shall apply – his share shall be borne by the others. Accrual and basis of the right to reimbursement is acquired ipso jure by the guarantor. II. Defenses Available to Co-guarantors – according to Art. 2074: “In the case of the preceding article, the co-guarantors may set up against the one who paid, the same defenses which would have pertained to the principal debtor against the creditor, and which are not purely personal to the debtor.” All defenses which the debtor would have

interposed against the creditor

Example: Defenses such as fraud, prescription, and illegality, etc. may be set up because they are defenses inherent in the obligation.

× Purely personal defenses of the debtor Example: Defense like minority III. Liability of Sub-guarantor in Case of Insolvency of Guarantor – the sub-guarantor is liable to the co-

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guarantors in the same manner as the insolvent guarantor for whom he bound himself.

CHAPTER 3 — Extinguishment of Guaranty I. Causes of Extinguishment of guaranty

A. Guaranty as an accessory and subsidiary

obligation

When the principal obligation is extinguished, the

guaranty is terminated

Recall: Causes of Extinguishment of Obligations

1. Payment or performance

2. Loss of the thing due

3. Condonation or remission of the debt

4. Merger of the rights of the creditor and

debtor in the same person

5. Compensation

6. Novation

B. Material alteration of the principal contract =

extinguishment of the guaranty

1. Material Alteration – A 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.

Material Alteration = More Onerous Obligation

2. Effect of Material Alteration = Release of the

Guarantor (without his consent)

Ration: Such material alteration would

constitute a novation or change of the

principal contract which is consequently

extinguished.

3. Alteration Immaterial

Examples:

Assignment of the creditor without the

knowledge or consent of the surety

Change in the technical specifications of

the items purchases but the amount

due remains unchanged

II. Release by Conveyance of Property by the

Debtor

A. Acceptance by creditor of an immovable

property or other property = payment of the

debt

B. Eviction from the immovable property does not

make the guarantor liable but revives the

principal obligation and not of the guaranty

III. Release of Guarantor without the Consent of

Other Guarantors

A. Article 2065 states that the guarantors enjoy the

benefit of division.

B. Article 2073 states that in case one of the

guarantors become insolvent, the guarantors

must bear his share

C. Such that when one of the guarantors is released

without the consent of the others by the

creditor, the guarantors also benefit up to the

extent of the released guarantor

IV. Release by extension of term granted by

creditor to debtor

A. Creditor’s Grant of Extension to the Debtor

without the consent of the Guarantor releases

the latter

Ratio: Necessity of avoiding prejudice to

the guarantor

B. Prejudice to the Guarantor and period of

extension immaterial

C. Extension must be based on a new agreement

D. Diligence on part of the creditor to enforce his

claim generally not required

E. No cause of action against creditor for delay

V. Release when guarantor cannot be subrogated

A. Guarantors who pay to the creditor are

entitled to subrogation to all the rights of the

creditor.

B. The creditor has the duty to account for his lien

on the principal’s property

C. Failure of the creditor to register a mortgage

or secure a right releases the guarantor

because there can no longer be subrogation in

favor of the guarantor.

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CHAPTER 4 — Legal and Judicial bonds

I. Bonds

An undertaking that is sufficiently secured and not cash or currency.

A three-party contract in which one party

(usually a bank or insurance company) gives a

guaranty to a contractor’s customer (oblige) that

that the contractor (obligor) will fulfill all the

conditions of the contract entered into with the

obligee. If the obligor fails to perform according

to the terms of the contract, the surety pays a

sum agreed upon in the contract to the customer

as compensation.

Bonds are contractual in nature. It exist only in

consequence of a meeting of minds under the

conditions essential to a contract.

II. Kind of Bonds

A. Legal bonds - refers to a bond imposed by virtue

of a provision of law.

B. Judicial bonds - refers to a bond that is required

by the courts by virtue of a judicial order to secure

the eventual right of one of the parties in a case

III. Qualifications of a Bondsman

A. Art 2056 (For personal bondsman)

1. He possesses integrity

2. He has capacity to bind himself, and

3. He has sufficient property to answer for

the obligation which he guarantees

B. Sec 12, Rule 114, Rules of court (For sureties in

property bond)

1. Each must be a resident owner of real estate within the Philippines; 2. Where there is only one surety, his real estate must be worth at least the amount of the undertaking; 3. If there are two or more sureties, each may justify in an amount less than that expressed in the undertaking but the aggregate of the justified sums must be equivalent to the whole amount of bail demanded.

In all cases, every surety must be worth the amount specified in his own undertaking over and above all just debts, obligations and properties exempt from execution. (12a)

IV. Remedy if bondsman failed to give or perform

the bond required of him

A pledge or mortgage sufficient to cover the

obligation shall be admitted in lieu thereof.

V. Bondsman not entitled to excussion

A judicial bondsman and the sub-surety are not

entitled to the benefit of excussion because

they are not mere guarantors, but sureties

whose liability is primary and solidary.

Excussion- the act of exhausting legal

proceedings against a debtor or his property,

before proceeding against the property of a

person secondarily liable for the debt.