REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS

NOTES BY: HECTOR DE LEON COLLEGE OF LAW

LECTURE BY: ATTY. VERGARA
➢ If the receipt, DELIVERABLE TO BEARER is ➢ In its broader sense, the guaranty includes pledge and mortgage
indorsed and negotiated, the receipt may be because the purpose of guaranty may be accomplished not only
FURTHER NEGOTIATED ONLY BY by securing the fulfillment of an obligation contracted by the
INDORSEMENT WITH DELIVERY. principal debtor through the personal guaranty of a third person
but also by furnishing to the creditor for his security, property
with auhority to collect the debt from proceeds of the same in
POINTS TO REMEMBER: case of default

NEGOTIABILITY OF A WAREHOUSE RECEIPT CHARACTERISTICS OF THE CONTRACT

Query: How may a negotiable receipt be negotiated?
Answer: By SIMPLE DELIVERY or by INDORSEMENT
WITH DELIVERY
BY INDORSEMENT WITH DELIVERY
➢ Where the goods are deliverable to the bearer of
the receipt and it indorsed (e.g. ordered by the
bearer to be deliverable to a specified person)
➢ The indorsement may be an INDORSEMENT IN
BLANK, an INDORSEMENT TO BEARER or an
INDORSEMENT TO A SPECIFIED PERSON.
GUARANTY AND SURETYSHIP
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. (1822a)
DAVP
1. It is a consensual contract, because it is perfected by mere consent
subjec to Statute of Fraud
2. It is generally unilateral contract
2.1. It give rise only to a duty on the part of the guarantor in relation to
the creditor and not vice versa although after its fulfillment, the
principal debtor becomes liable to indemnify the guarantor but this is
merely an incident of the cotnract.
2.2. It may be entered into even without the intervention of the
principal debtor
3. It is an accessory contract, because it is dependent for its existence
upon the principal obligation guaranteed by it. It is also subsidiary and
conditional because it takes effect only when the principal debtor fails
in his obligation, subject to certain limitations.
4. It is formal contract, because it is governed by the Statute of Frauds
5. It is generally a gratuitous contract but it may be an onerous
contract.
SOURCE OF THE GUARANTOR’S OBLIGATIONS
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REVIEWER IN CREDIT TRANSACTIONS
NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
➢ As a rule, the obligations of the guarantor arise from the
contract entered into y the creditor and the guarantor. In
addition, the guarantor’s obligations may arise from a contract
entered into by the debtor and the guarantor, in which the
guarantor binds himself to fulfill the debtor’s obligation if the
latter should fail to do so.
➢ The creditor may demand its fulfillment provided the creditor
communicated his acceptance to the guarantor before its
revocation.
SCOPE OF GUARANTEE
1) The principal obligations of the debtor
2) The accessory obligations pertaining to the principal
obligations
3) The obligations that arise as a matter of law from the
guaranteed obligations, such as the payment of interest in case
of delay
4) The obligation to pay judicial costs incurred after the guarantor
has been judicially required to pay.
PAYMENT BY THE GUARANTOR
➢ The guarantor must pay in the a mnner provided in the
principal contract. In the absence of any express provision in
the principal contract or in the contract of guarantee, payment
must be made as follows:
A. Place of payment, in the absence of an express
stipulation on place of payment, the place of payment
must be at the domicile of the debtor
B. Time of payment, in general, the guarantor must pay
as soon the creditor was unsuccessful in exhausting the
properties of the debtor.
DAVP
UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
SURETYSHIP
➢ A relaion which exists where one person has undertaken an
obligation and another person (surety) is also under a direct and
primary obligation or other duty to a third person (obligee),
who is entitled to but one performance, and as between the two
who are bound, the one rather than the other should perform
➢ Surety is a contractual relation resulting from an
agreement whereby one person, the surety, engages to be
answerable to a third person, the obligee/creditor, for the
debt, default, or miscarriage of another known as the
principal or obligor/debtor
➢ It invovlves two(2) relationship; the principal relationship
between the obligee and the obligor, and the accessory
relationship between the principal and the surety
LAW APPLICABLE TO CONTRACT OF SURETYSHIP
1) If a person binds himself solidarily with the principal debtor,
the contract is called suretyship and the guarantor is called a
surety. In a suretyship agreement, the surety guarantees
the performance by the principal obligor of n obligation or
undertaking in favor of the obligee.
2) The Supreme Court has applied the following provisions on
guarantee to a suretyship:
a. Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the
payment was made known to the debtor, even though it
did not earn interest for the creditor;
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REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS
NOTES BY: HECTOR DE LEON COLLEGE OF LAW
LECTURE BY: ATTY. VERGARA
(3) The expenses incurred by the guarantor after having WHERE PARTY BINDS HIMSELF SOLIDARILY WITH
notified the debtor that payment had been demanded of PRINCIPAL DEBTOR
him;
(4) Damages, if they are due. (1838a) ✓ GUARANTOR WITH SOLIDARY LIABILITY
➢ Since guaranty consists in an undertaking to secure the
b. Art. 2067. The guarantor who pays is subrogated by fulfillment of an obligation contracted by another in case the
virtue thereof to all the rights which the creditor had
latter should fail to do so, it is quite possible for a guarantor to
against the debtor.
bind himself solidarily with the principal debtor
If the guarantor has compromised with the creditor, he ✓ CHARACTER AND RIGHTS AS GUARANTOR
cannot demand of the debtor more than what he has REMAIN
really paid. (1839) ➢ If his intention is not to convert himself into a principal debtor
c. Art. 2079. An extension granted to the debtor by the but merely to constitute himself as guarantor although binding
creditor without the consent of the guarantor himself solidarily with him, action may be brought against him
extinguishes the guaranty. The mere failure on the part
outright by reason of the said solidarily but he retains his
of the creditor to demand payment after the debt has
become due does not of itself constitute any extention character as a guarantor and all the rights inherent in a
of time referred to herein. (1851a guarantor by reason of payment by him
3) On the hand, the Supreme Court has ruled that the following
provisions on guarantee do not apply to a suretyship: NATURE OF SURETY’S UNDERTAKING
a. Art. 2058. The guarantor cannot be compelled to pay the
✓ LIABILITY IS CONTRACTUAL AND ACCESSORY
creditor unless the latter has exhausted all the property of
BUT DIRECT
the debtor, and has resorted to all the legal remedies against
➢ Suretyship is a contractual relation. The surety’s obligation is
the debtor. (1830a)
not an original and direct one for the performance of his act,
b. Art. 2063. A compromise between the creditor and the
but merely accessory or collateral or secondary to the
principal debtor benefits the guarantor but does not
obligation contracted by the principal.
prejudice him. That which is entered into between the
a. His liability to the creditor or promisee of the principal is said
guarantor and the creditor benefits but does not prejudice
to be direct, immediate, primary, and absolute. He is
the principal debtor. (1835a)
directly, primarily, and equally bound with the principal as
c. Art. 2080. The guarantors, even though they be solidary,
original promisor although he possesses no direct or personal
are released from their obligation whenever by some act of
interest over the latter’s obligations nor does he receive any
the creditor they cannot be subrogated to the rights,
mortgages, and preference of the latter. (1852
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REVIEWER IN CREDIT TRANSACTIONS
NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
benefit therefrom and regardless of whether the principal
debtor is financially capable to fulfill his obligations.
b. A surety is considered in law as being the same party as the
debtor in relation to whatever is adjudged touching the
obligation and their liabilities are interwoven and
dependent as to be inseparable.
c. In a suretyship, there is but one contract, and the surety is
bound by the same agreement which binds the principal. A
surety is usually bound with the principal by the same
instrument, executed at the same time and upon the same
consideration. Without reference to the solvency of the
principal. The effect is that the creditor is given the right to
directly proceed against either the principal debtor or the
surety.
d. It is not for the obligee to see to it that the principal debtor pays
the debt or fulfill the contract, but for the surety to see to it that
the principal debtor pays or performs.
e. The surety does not insure the solvency of the debtor, but
rather the debt itself.
f. The acceptance by the obligee of the surety’s solidary
undertaking to pay if the obligor does not pay, does not
change in any material way the obligee’s relationship with
the principal obligor nor does it make the surety an adverse
party to the principal creditor-debtor relationship. In other
words, the acceptance does not give the surety the right to
intervene in the principal contract
✓ LIABILITY IS LIMITED BY TERMS OF CONTRACT
a. A contract of surety is not presumed; it cannot extend to
more than what is stipulated. The extent of the surety’s
liability is determined only by the clause of the contract of
DAVP
UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
suretyship as well as the conditions stated in the bond. It cannot
be extended by implication beyond the terms of the contract.
b. A surety is not released by a change in the contract which does
not have the effect of making its obligation more onerous
3.LIABILITY ARISES ONLY IF PRINCIPAL DEBTOR IS
HELD LIABLE
➢ A surety contract is made principally for the benefit of the
creditor-obligee and his ensured by the solidary nature of the
surety undertaking. In other words, if the principal debtor and
the surety are held liable, their liability to pay the creditor
would be solidary but the nature of the surety’s undertaking is
such that it does not incur liability unless and until the principal
debtor is held liable.
a. The surety is bound by a judgment against the principal even
though he was not a party to the proceedings
b. The creditor may sue, separately or together, the principal
debtor and the surety
✓ SURETY IS NOT ENTITLED TO EXHAUSTION
➢ A surety is not entitled to the exhaustion of the properties of
the principal debtor. The reason is that a surety assumes a
solidary liability for the fulfillment of the principal obligation
as an original promissor and debtor from the beginning
NOTE: SURETIES DO NOT INSURE THE SOLVENCY OF
THE DEBTOR, BUT RATHER THE DEBT ISELF. THEY ARE
CONTRACTED PRECISELY TO MITIGATE RISKS OF NON-
PERFORMANCE ON THE PART OF THE OBLIGOR. THIS
RESPONSIBILITY NECESSARILY PLACES A SURETY ON
THE SAME LEVEL AS THAT OF THE PRINCIPAL DEBTOR.
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REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS
NOTES BY: HECTOR DE LEON COLLEGE OF LAW
LECTURE BY: ATTY. VERGARA
THE EFFECT IS THAT THE CREDITOR IS GIVEN THE GUARANTY DISTINGUISHED FROM SURETYSHIP
RIGHT TO DIRECTLY PROCEED AGAINST EITHER
PRINCIPAL DEBTOR OR SURETY. THIS IS THE REASON GUARANTY SURETY
Guarantor is the insurer of the Surety is the insurer of the
WHY EXCUSSION CANNOT BE INVOKED
insolvency of the debtor and debt, and he obligates himself
BUT WHEN DEMANDED BY THE REQUIREMENTS OF thus binds himself to pay if the to pay if the principal does not
principal is unable to pay pay
JUSTICE, THE PRINCIPAL OBLIGOR RATHER THAN THE
An undertaking that the debtor An undertaking that the debt
SURETY MAY BE REQUIRED TO PAY THE INSURED shall pay shall be paid
OBLIGATION SUC AS WHERE THE FORMER HAS THE Liability depends upon an Assumes liability as a regular
NECESSARY AMOUN IT GOT UNDER T BOND WITH independent agreement to pay party to the undertaking
WHICH TO COMPLY WITH THE TERMS THEREOF. the obligation if the primary
debtor fails to do so
5.SURETY IS NOT ENTITLED TO NOTICE OF PRINCIPAL’S Engagement of the guarantor is A surety is charged as an
DEFAULT a collateral undertaking original promissor and debtor
from the beginning
➢ Demand is not necessary before bringing suit against them, Secondary or subsidiarily liable It is in essence secondary only
since the commencement of the suit is a sufficient demand. A to a valid principal obligation,
surety is not even entitled, as a matter of right, to be given a his liability to the creditor is
separate notice of the principal’s default. direct, primary and absolute.
The surety undertakes directly
➢ The surety is bound to take notice of the principal’s default
the payment without reference
and to perform the obligation. He cannot complain that the to the solvency of the principal,
creditor has not notified him in the absence of a special and is so responsible at once if
agreement to that effect in the contract of suretyship. The the latter makes default,
surety may, in fact, be sued separately or together with the without any demand by the
principal debtor. creditor upon the principal
whatsoever or any notice of
6.PRIOR DEMAND BY THE CREDITOR UPON PRINCIPAL default
NOT REQUIRED A surety is ordinarily, held to
know every default of his
➢ As soon as the principal is in default, the surety likewise is in principal, while a guarantor is
default. The proper remedy of the surety is to pay the debt and not bound to take notice of the
pursue the principal for reimbursement non-performance of his
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REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS
NOTES BY: HECTOR DE LEON COLLEGE OF LAW
LECTURE BY: ATTY. VERGARA
principal ➢ If he became a guarantor with the knowledge or consent of the
Guarantor is often discharged by A surety will not be discharged debtor, he is “subrogated” by virtue thereof to all the rights
the mere indulgence of the either by the mere indulgence which ”the creditor had against the debtor
creditor of the principal, and is of the creditor of the principal
usually not liable unless notified or by want of notice of the Art. 2052. A guaranty cannot exist without a valid obligation.
of the default of the principal default of the principal, no
matter how much he by mere Nevertheless, a guaranty may be constituted to guarantee the
injured thereby performance of a voidable or an unenforceable contract. It may also
Cannot claim release from his guarantee a natural obligation. (1824a)
obligation
➢ Guaranty is an accessory contract. It is an indispensable
condition for its existence that there must a principal
Art. 2050. If a guaranty is entered into without the knowledge or
obligation. So, if the principal obligation is void, the guarantee
consent, or against the will of the principal debtor, the provisions of
is also void.
Articles 1236 and 1237 shall apply. (n)
➢ It exist for the benefit of the creditor and not for the benefit of
Art. 2053. A guaranty may also be given as security for future debts,
the principal debtor who is not usually a party to the contract of the amount of which is not yet known; there can be no claim against
guaranty. The creditor has every right to take all possible the guarantor until the debt is liquidated. A conditional obligation may
measures to secure the payment of his creditor. Hence, it can also be secured. (1825a)
be constituted without the knowledge and even against the will
of the principal debtor. ➢ To secure the payment of a loan at maturity, a surety binds
himself to guarantee the punctual payment of a laon at maturity
and all other obligations or indebtedness which may become
due or owing to the principl by the borrower, together with any
and all expenses which may be incurred by the principal in
collecting such obligations or indebtedness provided that the
RIGHTS OF THIRD PERSON WHO PAYS liability of the surety shall not exceed at any one time as a
specified sum is guaranty of future debts
➢ A person who pays without the knowledge or against the will ➢ To secure paymet of any debt to be subsequently incurred
of the debtor can recover only insofar as the payment has been ➢ To secure existing unliquidated debt
beneficial to the debtor and he cannot compel the creditor to
subrogate him in his rights, such as those arising from a GUARANY OF CONDITIONAL OBLIGATIONS
mortgage, guaranty or penalty ➢ A conditional obligation may also be secured for its valid and
binding Just like a pure one. If the principal obligation is
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REVIEWER IN CREDIT TRANSACTIONS
NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
subject to a suspensive condition, the guarantor is liable only
after the fulfillment of the condiion. If it is subject to a
resolutory condition, the happening of he condition
extinguishes both the principal obligation and the guaranty.
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. (1826)
➢ Inasmuch as a contract of guaranty is only a subsidiary and
accessory contract, the guarantor cannot bind himself for more
than the principal debtor and even if he does, his liability shall
be reduced to the limits of that of the debtor. But a guarantor
may bind himself for less than that of the principal.
PRINCIPAL’S LIABILITY MAY EXCEED GUARANTOR’S
OBLIGATION
➢ The measure of the guarantor’s or surety’s obligation is not,
however, the measure of the principal’s obligation. Thus, the
amount specified in a surety bond as the surety’s obligation
does not limit the extent of the damages that may be recovered
from the principal, the latter’s liability being governed by the
obligation he assumed under his contract.
Art. 2055. A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein.
DAVP
UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
If it be simple or indefinite, it shall compromise 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 costs incurred after he has been judicially required to
pay. (1827a)
➢ As a contract, guaranty requires the expression of consent on
the part of the guarantor to be bound. It cannot be presumed
because of the existence of a contract or principal obligation.
Art. 2056. One who is obliged to furnish a guarantor shall present
a person who possesses integrity, capacity to bind himself, and
sufficient property to answer for the obligation which he
guarantees. The guarantor shall be subject to the jurisdiction of
the court of the place where this obligation is to be complied with.
(1828a)
Art. 2057. If the guarantor should be convicted in first instance of a
crime involving dishonesty or should become insolvent, the creditor
may demand another who has all the qualifications required in the
preceding article. The case is excepted where the creditor has required
and stipulated that a specified person should be the guarantor. (1829a)
QUALIFICATIONS OF GUARANTOR
✓ He possesses integrity
✓ He has capacity to bind himself
✓ He has sufficient property to answer for the obligation which
he guarantees
➢ The qualifications need only be present at the time of the
perfection of the contract. So the subsequent loss or integrity or
property or supervening incapacity of the guarantor would not
operate to exenorate the guarantor of the eventual liability he
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NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
has contracted, and the contract of guaranty cotinues. However,
the creditor may demand another guarantor with the proper
qualifications.
EEFECTS OF GUARANTY
Art. 2058. 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. (1830a)
RIGHT OF GUARANTOR TO BENEFIT OF EXCUSSION
✓ GUARANTOR ONLY SECONDARILY LIABLE
➢ The guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail
to do so and cannot do so. It is the rule that distinguishes
guaranty from suretyship
✓ ALL LEGAL REMEDIES AGAINST DEBTOR TO BE
FIRST EXHAUSTED
➢ The law requires the creditor to first exhaust all legal remedies
agaisnt the debtor including the bringing of actions for the
rescission of fradulent alienations of property made by the
debtor. This is what is otherwise known as the “benefit of
excussion”
✓ PAYMENT PRIOR TO EXHAUSTION
➢ While a guararantor enjoys the benefit of excussion, nothing
prevents him from paying the obligation once demand is made
on him, excussio after all, is a rigt granted to him by law and as
such he may opt to make use of it or waive it. The law does not
prohibit the payment by a guarantor on his own volition.
DAVP
UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
PROBLEM: DOES THE CREDITOR NEEDS TO WAIT FOR
THE DECISION OF THE COURT?
ANSWER: YES. That is the implication
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property
of the principal debtor would not result in the satisfaction
of the obligation. (1831a)
EXCEPTION TO BENEFIT OF EXCUSSION
✓ As provided in Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative;
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NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation. (1831a)
✓ If he does not comply with Art. 2060. In order that the
guarantor may make use of the benefit of exclusion, he must
set it up against the creditor upon the latter's demand for
payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to
cover the amount of the debt. (1832)
✓ If the guarantor bound himself solidarily with the principal
debtor
✓ If he is a judicial bondsman and sub-surety
✓ Where a pledge or mortgage has been given by him as a special
security. Guarantee without any such pledge or mortgage are
governed by Title XV of the Civil Code, whereas pledges and
mortgages fall under Title XVII thereof.
✓ If he fails to interpose it as a defense before jusgment is
rendered against him.
NOTE: There is no right of excussion in suretyship
Art. 2060. In order that the guarantor may make use of the benefit
of exclusion, he must set it up against the creditor upon the latter's
demand for payment from him, and point out to the creditor
available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt. (1832)
➢ The demad for payment by the creditor upon the guarantor can
be made only after judgment on the debt for obviously the
“exhaustion of the principal’s property”- the benefit of which
the guarantor claims- cannot even begin to take place before
judgment has been obtained.
➢ Joining the guarantor in the suit against the principal debtor is
not the demand intended by law. The fact the guarantor was
DAVP
UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
joined in such suit does not necessarily mean that a demand has
already been made upon him.
➢ The guarantor may invoke the benefit of excussion if the
creditor sues for payment judicially or makes an extrajudicial
demand
CONDITION FOR GUARANTOR TO SET UP BENEFIT OF
EXCSSION
➢ It should not be used as a pretext to delay or make more
difficult the creditor’s right to collect. It is not enough that the
guarantor claims the benefit of excssion. He must also point
out to the creditor available property of the debtor witihn the
Philippines. The failure of the guarantor to point out to the
creditor the debtor’s property sufficient to cover his debt
forcloses his right to set up the defense of excussion.
Art. 2061. The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent in
exhausting the property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the debtor resulting
from such negligence. (1833a)
➢ The creditor ust notify the guarantor of the debtor’s inability to
pay
Art. 2062. In every action by the creditor, which must be against the
principal debtor alone, except in the cases mentioned in Article 2059,
the former shall ask the court to notify the guarantor of the action. The
guarantor may appear so that he may, if he so desire, set up such
defenses as are granted him by law. The benefit of excussion
mentioned in Article 2058 shall always be unimpaired, even if
judgment should be rendered against the principal debtor and the
guarantor in case of appearance by the latter. (1834a)
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NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
PROBLEM: THE COURT NOTIFIED THE GUARANTOR,
AND UPON THE DEMAND, THE GUARANTOR MAY NOW
INVOKE ITS RIGHT OF EXCUSSION. IF THE DEBTOR’S
PROPERTY IS INSUFFICIENT, WHO SHALL SHOULDER
THE DEFIENCY?
ANSWER: It shall be the guarantor who will shoulder the defiency. If
the creditor does not proceed with the debtor’s property thru creditor’s
negligence is not therefore that guarantor’s fault
Art. 2063. A compromise between the creditor and the principal
debtor benefits the guarantor but does not prejudice him. That which is
entered into between the guarantor and the creditor benefits but does
not prejudice the principal debtor. (1835a)
➢ If the guaranty is for compensation, the guarantor took the risk
of the debt.
➢ The guarantor cannot represent the debtor in compromise,
because the guarantor is compromising his own obligation.
That is why compensation is paid to the guarantor for taking
risk
Art. 2064. The guarantor of a guarantor shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal
debtor. (1836)
➢ A guarantor has the right to demand the exhaustion of the
properties of the principal debtor
➢ A sub-guarantor enjoys the benefit of excussion not only with
respect to the principal debtor but also with respect to the
guarantor for the reason that he stands with respect to the
guarantor on the same footing as the latter does with respect to
the principal debtor
DAVP
UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
Art. 2065. Should there be several guarantors of only one debtor and
for the same debt, the obligation to answer for the same is divided
among all. The creditor cannot claim from the guarantors except the
shares which they are respectively bound to pay, unless solidarity has
been expressly stipulated.
The benefit of division against the co-guarantors ceases in the same
cases and for the same reasons as the benefit of excussion against the
principal debtor. (1837)
➢ It entitles the several guarantors of only one debtor and for
one debt, even if they are bound solidarily, each with
different guarantor, or if there be two or more guarantors
of the same debtor but not only for the same debt.
➢ Their liability is only joint that is, the obligation to answer
for the debt is divided among all of them. Therefore, the
guarantors are not liable to the creditor beyond the shares
which they are respectively bound to pay.
➢ The obligation of the guarator with respect to his co-
guarantors is not subsidiary, but direct and does not
depend as to its origin on the solvency or insolvency of the
latter, although afterwards, if one of them should turn out
to be insolvent, his share has to be borne by the others.
EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND
THE GUARANTOR
Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
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NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
(2) The legal interests 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. (1838a)
• TOTAL AMOUNT OF DEBT
➢ Guarantor has nor ight to demand reimbursement until he has
actually paid the debt, unless by the terms of the contract, he is
given the right before making payment
• LEGAL INTEREST THEREON
➢ The gurantor is entitled to legal interest form the time notice of
payment of the debt was made known to the debtor. The notice
is, in effet, a demand so that if the debtor does not pay
immediately, he incurs in delay and hence, renders him liable
for legal interest, as indemnity, from then on. The liability is
increased not because of the contract but because of the
defaul and the necessity of judicial decision
➢ 6% interest per annum – penalty
➢ 12% income- the court will set the 12%
➢ 20% interest in usurious
• EXPENSES INCURRED BY THE GUARANTOR
➢ The expenses referred to are only those that the guarantor has
to satisfy in accordance with law as a consequence of the
guaranty not those which depend upon his will or own acts or
his fault for these are his exclusive personal responsibility and
it is not just that they be shouldered by the debtor. These
espenses are limited to those incurred by the guarantor
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UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
after having notified the debtor that payment has been
demanded of him by the creditor.
➢ The debtor is to blame for said expenses for its within him
to free himself from the responsibility by making payment
and if he does not do so, then they are attributable to his
fault
• DAMAGES, IF THEY ARE DUE
➢ The guarantor is entitled to recover damages only if they are
due in accordance with law. Note that the damages suffered by
the guarantor with respect to the payment of money to the
creditor is compensated by the payment of legal interest to the
guarantor.
PROBLEM: IS THE COLLECTION OF DAMAGES IS
ABSOLUTE?
ANSWER: NO. Unless they are due, to be proven by evidence as a
fact.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid. (1839)
Art. 2068. If the guarantor should pay without notifying the debtor,
the latter may enforce against him all the defenses which he could
have set up against the creditor at the time the payment was made.
(1840)
➢ It assumes that the guarantor may pay the credior without any
notification to the debtor.
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NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
➢ However, if the guarantor should pay without notifying the
debtor, the latter may interpose against the guarantor, those
defenses which could have set up against the creditor at the
time the payment was made. Thus, if the debtor has already
paid the creditor, when the guarantor pays, the debtor can
set up against the guarantor the defense of previous
extinguishment of the obligation by payment.
Art. 2069. If the debt was for a period and the guarantor paid it before
it became due, he cannot demand reimbursement of the debtor
until the expiration of the period unless the payment has been
ratified by the debtor. (1841a)
➢ Ratification is thru debtor’s payment to the guarantor.
Art. 2070. If the guarantor has paid without notifying the debtor, and
the latter not being aware of the payment, repeats the payment, the
former has no remedy whatever against the debtor, but only
against the creditor. Nevertheless, in case of a gratuitous guaranty,
if the guarantor was prevented by a fortuitous event from advising
the debtor of the payment, and the creditor becomes insolvent, the
debtor shall reimburse the guarantor for the amount paid. (1842a)
➢ As a general rule, before the guarantor pays the creditor, he
must first notify the debtor. If he fails to give such notice,
and the debtor repeats the payment, the guarantors only
remedy is to collect from the creditor. If the creditor should
become insolvent, being at fault for not advising the debtor, the
guarantor must bear the loss.
➢ Expn: the guarantor may still claim reimbursement from the
debtor in spite of lack of notice if the following conditions are
present
▪ The creditor becomes insolvent
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UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
▪ The guarantor was prevented by fortuitous event to
advise the debtor of the payment
▪ The guaranty is gratuitous
In a gratuitous guaranty, the guarantor receives nothing and it would
be unfair to deny him the right to recover from the principal debtor. If
the creditor is insolvent, the guarantor must still recover from him.
Art. 2071. The guarantor, even before having paid, may proceed
against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity, unless it be
of such nature that it cannot be extinguished except within
a period longer than ten years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.
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REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS
NOTES BY: HECTOR DE LEON COLLEGE OF LAW
LECTURE BY: ATTY. VERGARA
In all these cases, the action of the guarantor is to obtain release THE RELEASE OF THE GUARANTOR IMPORTSS AN
from the guaranty, or to demand a security that shall protect him EXTINCTION OF THE GUARANTOR’S OBLIGATION
from any proceedings by the creditor and from the danger of TO THE CREDITOR. IT CONNOTES, THEREFORE
insolvency of the debtor. (1834a EITHER A REMISSION OR NOVATION BY
➢ Par.1 , the guarantor cannot claim the benefit excussion and SUBROGATION, AND EITHER OPERATION
wishes to protect himself against the possible insolvency of the REQUIRES THE CREDITOR’S ASSENT FOR ITS
debtor VALIDITY. THIS SHOULD BE THE CASE WHERE THE
➢ As a rule, the guarantor has no cause of action against the PRINCIPAL DEBTOR HAS BECOME INSOLVENT, FOR
debtor until after the former has paid the obligation. THE PURPOSE OF A GUARANTY IS EXACTLY TO
➢ The. Purpose is to enable the guarantor to take measures for the PROTECT THECREDITOR AGAINST SUCH A
protection of his interest in view of the probability that he CONTINGENCY
would be called upon to pay the debt. ➢ THE DEBTOR MAY BE ABLE TO RELEASE THE
➢ The guarantor cannot demand reimbursement for GUARANTOR FROM THE GUARANTEE IF THE
indemnity because he has not paid the obligation. DEBTOR PAYS THE CREDITOR OR OBTAINS THE
According to the Civil Code, his remedy is to obtain release CONSENT OF THE CREDITOR.
from the guaranty or to demand a security that shall ➢ THE RELEASE OF THE GUARANTOR ULTIMATELY
protect him from any proceedings by the creditor, and DEPENDS ON THE CONSENT OF THE CREDITOR.
against the danger of insolvency of the debtor. ABSENT THE CREDITOR’S CONSENT, THE
➢ There are certain cases when the guarantor cannot claim PRINCIPAL DEBTOR MAY ONLY PROCEED TO
the benefit of excussion and in such cases it is but proper PROTECT THE DEMANDING GUARANTOR BY A
that the guarantor be given the right to proceed against the COUNTER BOND OR COUNTER-GUARANTY AS IS
debtor. AUTHORIZED
➢ The guarantor’s remedies are alternative. He has the reight ART. 2066 VS ART. 2071
to choose the action to bring. However, as explained, the Art. 2066. The guarantor who Art. 2071. The guarantor,
debtor does not have the power to release the guarantor pays for a debtor must be even before having paid,
from the guaranty. indemnified by the latter. may proceed against the
➢ THE DEBTOR DOES NOT HAVE THE POWER TO principal debtor:
RELEASE THE GUARANTOR FROM THE The indemnity comprises:
GUARANTEE, SINCE THE GUARANTOR IS (1) When he is sued
OBLIGATED TO THE CREDITOR, ONLY THE (1) The total amount of for the payment;
CREDITOR HAS THE POWER TO RELEASE THE the debt;
GUARANTOR FROM THE GUARANTEE. (2) In case of
➢ THE CREDITOR CANNOT BE COMPELLED, (2) The legal interests insolvency of the
AGAINST HIS WILL TO RELESE THE GUARANTOR. thereon from the time
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REVIEWER IN CREDIT TRANSACTIONS UNIVERSITY OF CORDILLERAS
NOTES BY: HECTOR DE LEON COLLEGE OF LAW
LECTURE BY: ATTY. VERGARA
the payment was made principal debtor; to fear that the
known to the debtor, principal debtor
even though it did not (3) When the intends to abscond;
earn interest for the debtor has bound
creditor; himself to relieve (7) If the principal
him from the debtor is in
(3) The expenses guaranty within a imminent danger of
incurred by the specified period, becoming insolvent
guarantor after having and this period has Provides enforcement of the Provides protection before
notified the debtor that expired; rights of the guarantor against he has paid but after he has
payment had been the debtor after he has paid the become liable.
demanded of him; (4) When the debt debt
has become Gives a right of action after It is a protective remedy
(4) Damages, if they are demandable, by payment before payment
due. (1838a) reason of the It is substantive right Nature of a preliminary
expiration of the remedy
period for
payment; Art. 2072. If one, at the request of another, becomes a guarantor for
the debt of a third person who is not present, the guarantor who
(5) After the lapse satisfies the debt may sue either the person so requesting or the
of ten years, when debtor for reimbursement. (n)
the principal
obligation has no ➢ The guarantor who guarantees the debt of an absentee at the
fixed period for its request of another has a right to claim reimbursement after
maturity, unless it satisfying the debt either from:
be of such nature ✓ The person who requested him to be a guarantor(he is
that it cannot be not a guarantor to the debtor)
extinguished except ✓ The debtor
within a period
longer than ten SECTION 3. - Effects of Guaranty as Between Co-Guarantors
years;
Art. 2073. When there are two or more guarantors of the same debtor
(6) If there are and for the same debt, the one among them who has paid may demand
reasonable grounds
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REVIEWER IN CREDIT TRANSACTIONS
NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
of each of the others the share which is proportionally owing from
him.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made by virtue of a judicial demand or unless the
principal debtor is insolvent. (1844a)
➢ The obligation of several guarantors of the same debtor and
for the same debt is joint. Each is bound to pay only his
proportionate share
➢ IF ANY OF THE GUARANTORS SHOULD BE
INSOLVENT, HIS SHARE SHALL BE BORNE BY THE
OTHERS INCLUDING THE PAYING GUARANTOR IN
THE SAME JOINT PROPORTION
PROBLEM: A owes B 90 thousand, hence A has 3 guarantors (G1,
G2, G3) G2 and G3 became insolvent, since G1 was left as the sole
guarantor
ANSWER: Debtor shall reimburse the sole guarantor
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. (1845)
Art. 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor. (1846)
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UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
➢ In case of insolvency of the guarantor for whom he bound
himself, a sub-guarantor is liable to the co-guarantors in the
same manner as the guarantor whom he guaranteed.
EXTINGUISHMENT OF GUARANTY
Art. 2076. The obligation of the guarantor is extinguished at the same
time as that of the debtor, and for the same causes as all other
obligations. (1847)
➢ Since guaranty is an accessory and subsidiary contract, it is
also extinguished when the principal obligation is extinguished
MODES OF EXTINGUISHMENT
• DIRECT
✓ Contract of guaranty is extinguished independentl
✓ Consequence: principal obligation may still exist
• INDIRECT
✓ Contract of guaranty is indirectly extinguished
A GUARANTY MAY BE EXTINGUISHED:
• PAYMENT OR PERFORMANCE
• DACION EN PAGO
➢ Art. 2077. If the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor is
released. (1849)
➢ The guarantor is released if the creditor voluntarily accepts
immovable or other property in payment of the debt, even is he
should afterwards lose the same through eviction
➢ Caveat: Eviction
➢ Whether the creditor is evicted or not, the contract of
guaranty is extinguished but the principal obligation is
revived
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NOTES BY: HECTOR DE LEON
LECTURE BY: ATTY. VERGARA
➢ If the creditor is evicted, the crediot can deman to the
principal debtor the payment
Art. 2077. If the creditor voluntarily accepts immovable or other
property in payment of the debt, even if he should afterwards lose
the same through eviction, the guarantor is released. (1849)
➢ The guarantor is released if the creditor voluntarily accepts
immovable or other property in payment of the debt, even is he
should afterwards lose the same through eviction
➢ Caveat: Eviction
➢ Whether the creditor is evicted or not, the contract of
guaranty is extinguished but the principal obligation is
revived
➢ If the creditor is evicted, the crediot can deman to the
principal debtor the payment
Art. 2078. A release made by the creditor in favor of one of the
guarantors, without the consent of the others, benefits all to the
extent of the share of the guarantor to whom it has been granted.
(1850)
PROBLEM: CAN CREDITOR RELEASE THE GUARANTOR
BEFORE MATURITY?
ANSWER: NO. BEFORE MATURITY, THERE IS ONLY
DEBTOR-CREDITOR RELATIONSHIP
PROBLEM: AFTER MATURITY
ANSWER: EITHER THE DEBTOR AND GUARANTOR MAY BE
HELD LIABLE
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. The mere
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UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extention of
time referred to herein. (1851a)
➢ The reason for the rule is the necessity of avoiding
prejudice to the guarantor. The debtor may become
insolvent during the extension, thus depriving the guaranto
of his right to reimbursement
➢ The theory behind this article is that an extension of time
given to the principal debtor by the creditor without the
surety’s consent would deprive the surety of his to pay the
creditor and to be immediately subrogted to the creditor’s
remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect
himself against the contingency of the principal debtor or
the indemnitors becoming insolvent during the extended
period
➢ In co-guarantors, if one is discharged, the rest of the guarantors
is also discharge
PROBLEM: (When there is no consent): A owes B 1 Million.
Hence a has 10 guarantors, B released the 2 guarantors.
ANSWER: 800 thousand shall remain, borne by the remaining 8
guarantors having 100 thousand each.
Art. 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and
preference of the latter. (1852)
Art. 2081. The guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent in
the debt; but not those that are personal to the debtor. (1853)
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LECTURE BY: ATTY. VERGARA
LEGAL AND JUDICIAL BONDS
Art. 2082. The bondsman who is to be offered in virtue of a
provision of law or of a judicial order shall have the qualifications
prescribed in Article 2056 and in special laws. (1854a)
Art. 2083. If the person bound to give a bond in the cases of the
preceding article, should not be able to do so, a pledge or mortgage
considered sufficient to cover his obligation shall be admitted in
lieu thereof. (1855)
Art. 2084. A judicial bondsman cannot demand the exhaustion of
the property of the principal debtor.
A sub-surety in the same case, cannot demand the exhaustion of
the property of the debtor of the surety.
PLEDGE
Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage:
1. That they be constituted to secure the fulfillment of a
principal obligation;
2. That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
(1857)
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UNIVERSITY OF CORDILLERAS
COLLEGE OF LAW
CONSTITUTED TO SECURE FULFILLMENT OF A
PARTICULAR PRINCIPAL OBLIGATIONS
➢ Pledge and mortgage are purely accessory contracts like
guarantee. They cannot exist without a valid obligation.
It may guarantee:
a. Valid, voidable and unenforceable obligations
b. Pure obligations and conditional obligations
c. Present debts and debts to be incurred in the future
d. Payment obligations and performance obligations.
CONSTITUTED BY THE ABSOLUTE OWNER
➢ It is essential that the contract be constituted only by the
absolute owner of the thing pledge or mortgaged or at least by
the pledgor or mortgagor with the authority or consent of the
owner of the property pledge or mortgaged.
➢ Thus, a mortgaged of real property executed by one who is not
an owner thereof at the time of the execution of the mortgaged
is without legal existence
➢ A foreclosure sale, though essentially a forced sale, is still a
sale under which the mortgagor in default, the forced seller,
becomes obliged to transfer ownership of the thing sold to
the highest bidder, who in turn, is obliged to pay the bid
price in money or its equivalent.
PROPERTY PLEDGE OR MORTGAGE
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