cuevas- guaranty & suretyship

7/29/2019 CUEVAS- Guaranty & Suretyship

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GUARANTY & SURETYSHIPChapter 1- Nature & Extent of Guaranty

#2047Definition of Guaranty

It is a contract between guarantor and creditor.

It includes pledge and mortgage because the purposeof guaranty may be accomplished not only bysecuring the fulfillment of an obligation contracted bythe principal debtor thru the personal guaranty of athird person but also by furnishing to the creditor for

his security, property with authority to collect thedebt from the proceeds of the same in case ofdefault.

Characteristics of the contract1. Accessory- because it is dependent for its existence on the

principal obligation guaranteed by it;2. Subsidiary & Conditional

because it takes effect only when the principal debtorfails in his obligation subject to limitation.

3. Unilateral

It gives rise only to a duty on the part of theguarantor in relation to the creditor and not vice

versa although after its fulfillment, the principalbecomes liable to indemnify the guarantor but this ismerely an incident of the contract;

It may be entered into even without the interventionof the principal debtor; and

4. It is a contract which requires that theguarantor must be a person distinct from thedebtor because a person cannot be thepersonal guarantor of himself

This is inconcistent with the purpose of a guaranteewhich is for the creditor to proceed against a thirdperson if the debtor defaults in his obligation.

Classification of Guaranty

1. Guaranty in the broad sensea. Personal- the guarantee is the credit given by theperson who guarantees the fulfillment of theprincipal obligation

b. Real- the guaranty is property. If immovable theguranty is in the form of real mortgage orantichresis. If movable, in the form of pledge orchattel mortgage

2. As to its origin

a. Conventional- constituted by agreement of theparties

b. Legal- imposed by virtue of a provision of lawc. Judicial- required by a court to guarantee the

eventual right of one of the parties in a case

3. As to its considerationa. Gratuitous- one where the guarantor does not

receive any price or renumeration for acting as such.

b. Onerous- one where the gurantor receives valuableconsideration for his guaranty

4. As to the person guaranteed

a. Single- one constituted solely to guarantee orsecure performance by the debtor of the principalobligation

b. Double or Sub-guaranty- one constituted tosecure the fulfillment by the guarantor of a priorguaranty

5. As to its scope and extent

a. Definite- one where the guaranty is limited to theprincipal obligation only, or to a specific portionthereof

b. Indefinite or simple- one where the guarantyincludes not only the principal obligation but also allits accessories (interests) including judicial costs

Law applicable to contract of suretyship

Suretyship may be defined as a relation which existswhere one person (principal or obligor) hasundertaken an obligation and another person (surety)is also under a direct and primary obligation or otherduty to a third person (obligee), who is entitled to but

one performance and as between the two who arebound, the one rather than the other should perform.

Suretyship is a contractual relation resulting from anagreement where one person, the surety, engages tobe answerable to a third personfor the debt, defaultor miscarriage of another known as the principal.

If a person binds himself solidarily with the principaldebtor, the contract is called suretyship and theguarantor is called a surety.

In a solidary obligation, a solidary debtor is himself a

principal debtor. Hence, a solidary debtor cannot beconsidered a guarantor of his co-debtor. Whenapplicable, the provisions on guaranty also apply tosuretyship.

Where the party binds himself solidarily withprincipal debtor

Since guaranty consists in an undertaking to securethe fulfillment of an obligation contracted by anotherin case the latter should fail to do so, it is quitepossible for a guarantor to bind himself solidarily withthe principal debtor without affecting the nature ofthe contract.

It all depends on the terms of the contract or theintention of the third person. Thus if his intention is

not to convert himself into a principal debtor butmerely to constitute himself as a guarantor althoughbinding himself solidarily with him, action may bebrought against him outright by reason of the saidsolidarity but he retains his character as guarantorand all the rights inherent in a guarantor by reason ofpayment by him.

Nature of suretys undertaking1. Liability is contractual and accessory but

direct

Suretyship is a contractual relation. The suretys obliis not an original and direct one for the performanceof his act, but merely accessory or collateral to the

obli contracted by the principal. Nevertheless, his liability to the creditor or the

principal is said to be direct. So he is directly,primarily and equally bound with the principal asoriginal promissor although he possesses no direct orpersonal interest over the latters obligations nordoes he receive any benefit therefrom...regardless ofWON the principal debtor is financially capable tofulfill his obligations.

In law, a surety is considered as being the same partyas the debtor and their liabilities are interwoven as tobe inseparable.

In suretyship, there is but one contract, and thesurety is bound by the same agreement which binds

the principal. A surety is usually bound with theprincipal by the same instrument executed at thesame time and upon the same consideration.

It is for the obligee to see to it that the principaldebtor pays the debt or fulfill the contract, but for thesurety to see to it that the principal debtor pays orperforms.

2. Liability is limited by terms of contract

A contract of surety is not presumed; it cannotextend to more than what is stipulated. The extent ofthe suretys liability is determined only by the clauseof the contract of suretyship as well as the conditionsstated in the bond.

3. Liability arises only if principal debtor is heldliable

Their liability to pay the creditor would be solidarybut the nature of the suretys undertaking is suchthat it does not incur liability unless and until theprincipal debtor is held liable.

4. Surety is not entitled to exhaustion of theproperties of the principal debtor

The reason is that a surety assumes a solidaryliability for the fulfillment of the principal obligationas an original promissor and debtor from thebeginning.

But when demanded by justice, the principal obligorrather than the surety may be required to pay the


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insured obli such as where the former has thenecessary amount it got under the bond with whichto comply with the terms thereof.

5. Undertaking is to creditor, not debtor

Suretys undertaking is that the principal shall fulfillhis obli and theat the surety shall be relieved ofliability when the obli secured is performed. Hemakes no agreement with the principal that it willfulfill the obli guaranteed for the benefit of theprincipal.

6. Surety is not entitled to notice of principalsdefault

The surety is bound to take notice of the principalsdefault and to perform the obli. He cannot complainthat the creditor has not notified him in the absenceof a special agreement to that effect in the contractof suretyship.

7. Prior demand by the creditor upon principalnot required

A creditors right to proceed against the surety aloneexists independently of his right to proceed againstthe principal where equally bound. As soon as theprincipal is in default, the surety likewise is in default.The proper remedy of the surety is to pay the debtand pursue the principal reimbursement.

8. Surety is not exonerated by neglect of creditorto sue principal

Mere want of diligence does not affect the creditorsrights vis a vis the surety, unless the surety requireshim by appropriate notice to sue on the obli. Thereason for the rule is that there is nothing to preventthe creditor from proceeding against the principal atany time. If dissatisfied, surety may pay the debthimself and be subrogated to creditors rights andremedies.

Guaranty distinguished from Suretyship

They are alike in that each promises to answer fordebt, default or miscarriage of another.

Surety GuarantorAssumes liability as a regularparty to the undertaking

Depends on anindependentagreement to paythe obli if theprimary debtor failsto do so

Is charged as an originalpromisor

His engagement is acollateralundertaki

ngIs primarily liable, he undertakesdirectly for the payment withoutreference to the solvency of theprincipal (regardless of WON theprincipal is financially capable tofulfill his obli), and he isresponsible at one if the lattermakes default, without anydemand by the creditor on theprincipal whatsoever or anynotice of default

Is secondarily orsubsidiarily liable, hecontracts to pay if,by the use of duediligence, the debtcannot be paid bythe principal

Is ordinarily, held to know everydefault of his principal

Is not bound to takenotice of the non-performance of hisprincipal

Will not be discharged either bythe mere indulgence of thecreditor of the principal or bywant of notice of the default of

the principal, no matter howmuch he may be injured thereby

Is often dischargedby the mereindulgence of thecreditor of the

principal and isusually not liableunless notified of thedefault of theprincipal

Guarantor not Insurer of debt guaranteed

While a surety undertakes to pay if the principal doesnot pay, without regard to his ability to do so, theguarantor only binds himself to pay if the principalcannot or unable to pay.

One is the insurer of the debt itself, the other, aninsurer of the insolvency of the debtor.

The essence of the obli of the surety is to pay thecreditor without qualification if the principal debtordoes not pay.

A guarantor on the other hand, does not contract thatthe principal will pay, but simply that he is able to doso. So the responsibility assumed by the surety isgreater or more onerous than that of a guarantor.

Terminology used by parties not controlling

The word guarantee is frequently employed in

business transactions to describe not the securing ofthe debt but an intention to be bound by a primaryobli.

But if from the language used and the circumstances,the intention to be liable as a surety cannot beinferred, the promisor must be deemed to havebound himself only as a guarantor under the rule ofreasonable construction applicable to all contracts.

Guaranty and Indorsement distinguishedIndorsement Guaranty

The contract is primarily thatof transfer

The contract is that ofsecurity

Unless the note is promptlypresented for payment atmaturity and due notice ofdishonor given to theindorser within a reasonabletime,he will be dischargedabsolutely from all liabilitythereon, whether he hassuffered any actual damageor not.

The liability is moreextensive than that of anindorsee.The failure in either orboth of these particularsdoes not work anabsolute discharge of aguarantors liability, buthe is discharged only tothe extent of the losswhich he may havesuffered in consequencethereof

Indorser does not warrant, hebeing answerable on a strictcompliance with the law by

the holder, whether thepromisor is solvent or not

Guarantor warrants theinsolvency of thepromisor

An indorser may be sued A guarantor cannot besued as promisor

Guaranty and Warranty Distinguished

Each is an undertaking by one party to another toindemnify or make good the assured against somepossible default or defect.

Guaranty WarrantyIs a contract bywhich a person isbound to another forthe fulfillment of a

promise orenagement of a thirdparty

Is an undertaking that the title,quality or quantity of the subjectmatter of a contract is what ithas been represented to be, and

relates to some agreementmade ordinarily by the party whomakes the warranty

#2048Guaranty generally gratuitous

It is onerous only when there is a stipulation to thecontrary

Cause of contract of guranty1. Presence of cause which supports principal

obligations- The cause of the contract is the same cause which

supports the obli as to the principal debtor. Theconsideration which supports the obligation as to the

principal debtor is a sufficient consideration tosupport the obligation of a guarantor or surety.

- A guarantor or surety is bound by the sameconsideration that makes the contract effectivebetween the principal parties

2. Absence of direct consideration or benefit toguarantor

- Valid. A consideration to the principal alone willsuffice.

#2049Married as guarantor


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A married woman who acts as guarantor ordinarilybinds only her separate property. However, she mayalso bind the community or conjugal partnershipproperty with her husbands consent, and evenwithout the consent of her husband, in casesprovided by law such as when the guaranty hasredounded to the benefit of the family.

There is no express prohibition against a marriedwoman acting as guarantor for her husband.

#2050Guaranty undertaken without knowledge ofdebtor

Guaranty is unilateral. It exists for the benefit of thecreditor and not for the benefit of the principal debtorwho is not a party to the contract of guaranty.

The creditor has every right to take all possiblemeasures to secure the payment of his credit. Hence,it can be constituted without the knowledge and evenagainst the will of the principal debtor.

Rights of third person who pays

The rights of a third person who pays or performs theobligation of the debtor and one who guarantees the

obligation of the debtor are similar. Hence, the ruleson payment apply.

A person who pays without the knowledge or againstthe will of debtor can recover only insofar as thepayment has been beneficial to the debtor, and hecannot compel the creditor to subrogate him in hisrights (which the creditor has against debtor), such asin mortagage, guaranty or penalty

#2051Guaranty by reason of origin

Guaranty may be conventional, legal or judicial

Judicial guaranty, is one constituted by decree ofcourt not by virtue of a provision of law, or by anagreement of the parties

Double or sub-guaranty

One constituted to guarantee the obli of a guarantor.It should not be confounded with guaranty whereinseveral guarantors concur.

Necessity of a valid principal obligation

Guaranty is an accessory contract. It is anindispensable condition for its existence that theremust be a principal obligation. So if the principalobligation is void, it is also void.

A guaranty may secure the performance of a

1. Voidable contract- inasmuch as the contract isbinding, unless it is annulled by a proper action incourt

2. Unenforceable contract- becuase such contract isnot void

3. Natural obligation- so creditor may proceed againstguarantor although he has no right of action againstprincipal debtor since latters obli is not civillyenforceable. When the debtor himself offers aguaranty for his natural obligation, he impliedlyrecognizes his liability, thereby transforming the oblifrom natural to civil.

#2053Guaranty of future debts

Continuing guaranty or suretyship. This is one whichis not limited to a single transaction but whichcontemplates a future course of dealings, covering aseries of transactions for an indefinite time or untilrevoked.

It covers all transactions, including those arising inthe future, which are within the description orcontemplation of the contract of guaranty, until theexpiration or termination thereof.

Future debts, even if the amount is not yet known,may be guaranteed but there can be no claim againstthe guarantor until the amount of the debt isascertained or fixed and demandable.

Reason: the contract of guaranty is subsidiary1. To secure the payment of a loan at maturity2. To secure payment of any debt to be subsequently

incurred3. To secure existing unliquidated debts

Guaranty of conditional obligations

A guaranty may secure all kinds of obligations, bethey pure or subject to a suspensive or resolutorycondition.

A conditional obligation may also be secured for it isvalid and binding just like a pure one.

1. Suspensive condition- the guarantor is liable onlyafter the fulfillment of the condition

2. Resolutory condition- the happening of thecondition extinguishes both the principal obligationand the guaranty.

#2054Guarantors liability cannot exceed principalobligation

1. Guaranty is a subsidiary and accessorycontract- the guarantor cannot bind himself for morethan the principal debtor and even if he does, his

liability shall be reduced to the limits of that of thedebtor. But a guarantor may bind himself for lessthan that of the principal.

2. Interest, judicial costs, and attorneys fees aspart of damages may be recovered- Creditorssuing on a suretyship bond may however, recoverfrom the surety, even without stipulation and even ifthe surety would thereby become liable to pay morethan the total amount stipulated in the bond.

a. The surety is made to pay, not by reason of thecontract, but by reason of his failure to pay whendemanded and for having compelled the creditor toresort to the courts to obtain payment.

b. Interest does not run from the time the obligationbecame due, but from the filing of the complaint orfrom the time demand was made upon the suretyuntil the principal obligation is fully paid.

3. Penalty may be provided- Similarly, a surety maybe held liable for the penalty provided for in a bondfor violation of the condition

Principals liability may exceed guarantorsobligation

The measure of the guarantors or suretys obligationis not the measure of the principals obligation. Thus,the amount specified in a surety bind as the suretysobligation does not limit the extent of the damagesthat may be recovered from the principal, the lattersliability being governed by the obli he assumed in

contract

#2055Guaranty not presumed

As a conrtact, guaranty requires the expression ofconsent on the part of the guarantor to be bound. Itcannot be presumed because of the existence of acontract or principal obligation

Reason for the rule

He who guarantees does so in the confidence that thedebtor can and will pay, but that confidence could bewrong.

The law wants, not alone that there be assurance

that the guarantor had the true intention to bindhimself, but also to make certain that, on making it,he proceeded with consciousness of what he wasdoing.

Guaranty covered by the Statute of Frauds

Guaranty must not only be expressed but must alsobe reduced to witing. It falls under the Statute ofFrauds, since it is a special promise to answer for thedebt, default or miscarriage of another

Art 1403(2), Art 1358,Guaranty strictly construed


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It has to be strictly interpreted against the creditorand in favor of the guarantor and is not to beextended beyond its terms or specified limits.

If there is any doubt on the terms and conditions ofthe guaranty or surety agreements, the doubt shouldbe resolved in favor of the gurantor or surety.

Strictissimi juris rule applicable only toaccomodation surety

Reason: An accomodation surety acts without motive

of pecuniary gain and hence should be protectedagainst unjust and pecuniary impoverishment byimposing on the principal, duties akin to those of afiduciary.

The rule will apply only after it has definitelyascertained that the contract is one of suretyship or aguaranty. It cannot be used as an aid in determiningwhether a partys undertaking is that of a s/g.

Rule of strict construction not applicable tocompensated sureties

The surety bond must be read in its entirety andtogether with the principal contract. If there is anyambiguity in the surety bond, it should be interpretedagainst the surety company that prepared it

Reason: Compensated sorporate sureties arebsuiness associations organized for the purpose ofassuming classified risks in large numbers, for profitand on an impersonal basis. Furthermore, they aresecured from all possible loss by adequateconterbonds or indemnity agreements. Althoughcalling themselves sureties, such corporation are infact, insurers.

Extent of guarantors liability1. Where guaranty definite- The obli of the guarantor under the terms of the

contract is limited in whole or in part to the principaldebt, to the exclusion of the accessories. Thus, if the

amount to be paid or the service to be performed bythe person guaranteed is specified in a contract ofguaranty, then the obligation of the guarantorextends no further than the sum or services sospecified, and extrinsic facts cannot be resorted to forthe purpose of enlarging the limit if the guarantorwas ignorant of such facts

2. Where guaranty indefinite or simple- The guarantors liability is limited to the principal

obligation, in whole or in part, it extends also to all itsaccessories, they being comprehended within theprincipal because the guaranty has secured it with allits consequences.

- Reason: the guarantor, in entering into the conract,could have fixed the limits of his responsibility to thestrict terms of the principal obligation and if he didnot do so, it must be presumed that he wanted to bebound to the extent so established.

Liability of guarantor for judicial costs

The guarantor shall answer for such judicial costsonly as have been incurred after he has beenjudicially required to pay.

It is within the power of the guarantor to relievehimself from responsibility of responding for suchjudicial costs by making payment. From the time hehad been judicially required to pay, all of the coststhat arise depend on his exclusive will and aretherefore, attributed to his fault if he does not do so.

Acceptance of guaranty by creditor and noticethereof to guarantor

In declaring that guaranty must be express, the lawrefers to the obligation of the guarantor because it ishe alone who binds himself by his acceptance.

With respect to the creditor, no such requirementneed to be prescribed because he binds himself tonothing.

1. When necessary

- Where there is merely an offer of a guaranty ormerely a conditional guaranty in the sense that itrequires action by the creditor before the obligation

becomes fixed, it does not become a binding obliuntil it is accepted and (unless there is a waiver ofnotice) until notice of such acceptance by the creditoris given to, acquired by the guarantor, or until he hasnotice or knowledge that the creditor has performedthe condition and intends to act upon the guaranty.

a. The acceptance of the guaranty by the creditor maybe implied

b. The guarantor is entitled to notice, being secondarilyliable, that he may know the anture and extent of hisliability and have an opportunity of taking indemnityfrom the principal obligor or securing himself of theloss, and have reasonable time in which to arrangefor payment of guaranty and if the principaldefaults...

2. When not necessary- When the transaction is not merely an offer of

guaranty, but it amounts to direct or unconditionalpromise of guranty, but it amounts to direct orunconditional promise of guaranty, unless notice ofacceptance is made a condition of the guaranty, allthat is necessary to make the promise binding is thatcreditor should act on it, and notice of acceptance isnot necessary, the reason being that the contract ofguaranty is unilateral.

#2056 & 2057Qualifications of guarantor (Creditor can waivethe requirements)1. He possesses integrity2. He has capacity to bind himself3. He has sufficient property to answer for the

obligation which he guarantees

Effect of subsequent loss of requiredqualifications

The qualifications need only be present at the time ofthe perfection of the contract. So the loss of theguarantor would not operate to exonerate theguarantor of the eventual liability he has contracted,and the contract of guaranty continues

However, the creditor may demand anotherguarantor with proper qualifications. But he maywaive it if he chooses to hold the guarantor to hisbargain.

Selection of guarantor1. Specified person stipulated as guarantor- The substitution of guarantor may not be demanded

because in such a case, the selection of theguarantor is a term or condition of the agreementand as a party, the creditor is, therefore, boundthereby

2. Guarantor selected by the principal debtor

- The latter answers for the solvency of the formerbecause the guarantor must possess thequalifications prescribed not only at the moment theguarnty is given but also thereafter, until theextinguishment of the debt.

3. Guarantor personally designated by thecreditor

- It is because he considers him to have thequalifications for the purpose and the responsibilityfor the selection should, therefore, fall upon him andnot on the debtor

Chapter 2- Effects of GuarantySection 1- Effects of Guaranty between the

Guarantor & the Creditor

#2058Right of guarantor to benefit of excussion orexhaustion1. Guarantor only secondarily liable2. All legal remedies against debtor to be first

exhausted- To warrant recourse against the guarantor for

payment, it may not be a sufficient reason that thedebtor appears insolvent. Such insolvency may besimulated.


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- These legal remedies include the bringing of actionsfor the recission of fraudulent alienations of propertymade by the debtor. The benefit of excusssion

Right of creditor to secure judgementagainst guarantor prior to exhaustion- An ordinary personal guarantor may demand

exhaustion of all the property of the debtor before hecan be compelled to pay.

- However, that the creditor may prior thereto, securea judgement against the guarantor, who shall beentitled, however, to a deferment of the execution ofsaid judgement against him, until after properties ofthe principal debtor shall have been exhausted tosatisfy the latters obligation.

- There is nothing procedurally objectionable inimpleading the guarantor as a co-defendant. TheRules of Court explicitly allows it. This rule isdesigned to permit the joinder of plaintiffs ordefendants whenever there is a common question oflaw or fact,

#2058Exceptions to benefit of excussion1. As provided in Article 2059

2. If he does not comply with Article 20603. If he is a judicial bondsman and sub-surety4. Where a pledge or mortgage has been given by him

a special security5. If he fails to interpose it as a defense before

judgement is rendered against himExceptions provided in Article 20591. Right waived- The benefit of excussion is a personal right

recognized in a guarantor. It waiver is valid. It mustbe in express terms.

2. Liability assumed that of surety- If the guarantor binds himself solidarily with the

principal debtor, he becomes a surety with primaryliability as a solidary co-debtor.

3. Insolvency of debtor proven by unsatisfied writof execution

- The insolvency or inability to pay must be actual, andit may be proven by the return of a writ of executionunsatisfied or by other means, but it is not sufficientlyestablished by the mere fact that the debtor hasbeen declared insolvent.

4. Debtor absconds or cannot be locally sued- The creditor is not required to go after a debtor who

is hiding or cannot be sued in our courts, and to incurthe delays

5. Resort to all legal remedies, a uselessformality

#2060 & 2061Duty of creditor to make prior demand forpayment from guarantor1. When demand to be made

- The demand for payment by the creditor upon theguarantor under Article 2060 can be made only afterjudgement on the debt for the exhaustion of theprincipals property

2. Actual demand to be made- The fact that the guarantor was joined in such suit

does not necessarily mean that a demand hasalready been made upon him.

Duty of guarantor to set up benefit of excussionThe failure of the guarantor to point out to the creditorthe debtors property sufficient to cover his debtforecloses his righ to to set up defense of excussion.

Duty of creditor to resort to all legal remediesThe exhaustion of the principals debtor property, thebenefit of which the guarantor claims-cannot even beginto take place before judgement has obtained against thedebtor. The creditor must notify the guarantor of thedebtors inability to pay.

Joinder of guarantor and principal as partiesdefendant1. General

-The guarantor, not being a joint contractor with hisprincipal, cannot be sued with his principal2. Exception- Yet adherence to this rule is not required where itwould serve merely to delay the accounting of theguarantor

#2062Procedure when creditor sues1. Sent against the principal- The creditor must sue the principal alone. The

guarantor cannot be sued with his principal, muchless alone, except in the cases in 2059, where theguarantor is not entitled to the benefit of excussion.As a rule, the creditor may hold the guarantor onlyafter judgement has been obtained against theprincipal debtor and the latter is unable to pay.

2. Notice to guarantor of action- The guarantor however, must be notified so that he

may appear, if he so desires, and set up defenses hemay want to offer.

- If the guarantor appears, he is still given the benefitof exhaustion even if judgement should be renderedagainst him and the principal debtor. His voluntaryappearance does not constitute a renunciation of his

right to excussion.- If he does not appear, he cannot set up the defenses

which, by appearing, are allowed to him by law, andit may no longer be possible for him to question thevalidity of the judgement rendered against thedebtor.

3. Hearing before execution can be issuedagainst guarantor

- A guarantor is entitled to be heard before an excutioncan be issued against him where he is not a party inthe case involving his principal. Notice and hearingconstitute the essence of of procedural due process.

#2063Effects of compromise

- A compromise is a contract whereby the parties, bymaking reciprocal concession, avoid a litigation or putan end to one already commenced.

1. Where prejudicial- A contract binds only the parties thereto and not third

persons. Hence, a compromise cannot prejudice theguarantor or the debtor, as the case may be, when heis not party to such compromise. Furthermore, aguarantor may not bind himself for more than theprincipal debtor both as regards the amount theonerous nature of the conditions.

2. Where in the nature of a stipulation in favor ofa third person

- Even if the guarantor or debtor is not a party to suchcompromise, the same can benefit him as it is in thenature of stipulation in favor of a third person whichthe guarantor or debtor may accept unless it hasbeen revoked before his acceptance.

#2064Sub-guarantors right to excussion- 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 principal debtor but also withrespect to the guarantor for the reason that hestands with respect to the guarantor on the samefooting as the latter does w/ respect to the principaldebtor

#2065Benefit of division among several guarantors1. In whose favor applicable- In addition to the benefit of exhaustion granted in

2058m this article entitles the several guarantors ofonly one debtor and for the same debt to what isknown as the benefit of division.

- This benefit cannot be availed of if there are two ormore debtors of one debt, even if they are boundsolidarily, each with different guarantors, or if there


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be two or more guarantors of the same debtor butnot only for the same debt

2. Extent of liability of several guarantors- 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 thecreditor beyond the shares which they arerespectively bound to pay.

3. Exceptions- The exception to this rule is when solidarity has been

expressly stipulated. The benefit of division alsoceases if any of the circumstances in 2059 shouldtake place as would the benefit of exhaustion of thedebtors property.

Benefit of excussion among several guarantors- But in order that the guarantor may be entitled to the

benefit of division, it is not required that he point outthe property of his co-guarantors. The obligation ofthe guarantor with respect to his co-guarantors is notsubsidiary, but direct and does not depend as to itsorigin on the solvency or insolvency of the latter,although afterwards, if one of them should turn out tobe insolvent, his share has to be borne by the others.

- Where, however, a creditor claims the share of a

guarantor from the others on the ground ofinsolvency, the latter can set up against the creditorthe existence of the property of the supposedinsolvent, possessing the same conditions as in 2060

Section 2- Effects of Guaranty Between the Debtor& Guarantor

#2066Guaranty, a contract of indemnitySince the debtor is the one directly and principally liable,it is just that the guarantor who makes payment must beindemnified by said debtor. The indemnity comprises:1. Total amount of the debt- It is evident that the guarantor has no right to

demand reimbursement until he has actually paid thedebt, unless by the terms of the contract, he is giventhe right before making payment. Of course, hecannot collect more than what he has paid

Exceptions to right to indemnity orreimbursementThe right to indemnity of the guarantor is subject tocertain exceptions or qualifications1. Where the guaranty is constituted without the

knowledge or against the will of the principal debtor,the guarantor can recover only insofar as thepayment had been beneficial to the debtor.

2. Payment by a third person who does not intend to

be reimbursed by the debtor is deemed to be adonation which however, requires the debtorsconsent. But the payment is in any case valid as tothe creditor who has accepted it.

3. The right to demand reimbursement is subject towaiver.

#2067Guarntors right to subrogation1. Effect of subrogation

- Subrogation transfers to the person subrogated, thecredit with all the rights thereto appertaining eitheragainst the debtor or against third persons, be theyguarantors or possessors of mortgages, subject tostipulation in conventional subrogation. Except forthe change in the person of the creditor by theguarantor, the obligation subsists in all respects asbefore payment

2. Accrual, basis & nature of right- This right of subrogation is necessary to enable the

guarantor to enforce the indemnity in 2066- It arises by operation of law upon payment by the

guarantor. It is not necessary that the creditor cedeto the guarantor the formers rights against thedebtor.

- It is not a contractual right. THe guarantor issubrogated by virtue of the payment, to the rights ofthe creditor, not those of the debtor. Thus, a

guarantor who has been obliged to contribute to thesatisfaction of a judgement rendered against him andthe principal debtor cannot excercise the right ofredemption of his principal with respect to realproperty belonging to the latter which was sold byvirtue of a writ of execution issued on said payment.

- If the guarantor paid a smaller amount to the creditorof a compromise, he cannot demand more than heactually paid.

3. When right not available- The benefit of subrogation is the means of

effectuating the right of the guarantor to indemnityor reimbursement. It cannot, therefore, be invoked inthose cases where the guarantor has no right to bereimbursed.

#2068Effect of payment by guarantor without notice todebtor- If the debtor has already paid the creditor, when the

guarantor pays, the debtor can set up against theguarantor the defense of previous extinguishment ofthe obligation by payment.

- The guarantor cannot be allowed, through his ownfault or negligence, to prejudice the rights or

interests of the debtor

#2069Effect of payment by guarantor before/aftermaturity1. If the debtors obligation is with a period, it becomes

demandable only when the day fixed comes. Theguarantor who pays before maturity is not entitled toreimbursement since there is no necessity foraccelerating payment.

- A contract of guaranty being subsidiary in character,the guarantor is not liable for the debt before itbecomes due.

- The debtor will be liable if the payment was madewith his consent or if the payment was subseuently

ratified by him. The ratification may be express orimplied. In any case, the guarantor can recover whathe has paid upon the expiration of the period.

2. Where demand on the guarantor was made duringthe term of the guarantee, the fact that paymentwas actually made after term is not material.

- What is controlling is that default and demand onguarantor had taken place while the guarantee wasstill in force.

#2070Effect of repeat payment by debtor1. General Rule- Before the guarantor pays the creditor, he must first

notify the debtor. If he fails to give such notice andthe debtor repeats the payment, the guarantors onlyremedy is to collect from the creditor, but he has nocause of action against the debtor for the return ofthe amount paid by him (guarantor) even if thecreditor should become insolvent. Being at fault fornot advising the debtor, the guarantor must bear theloss.

2. Exception- However, the guarantor may still claim

reimbursement from the debtor in spite of lack ofnotice if the ff conditions are present:

a. The creditor becomes insolventb. The guarantor was prevented by fortuitous event to

advise the debtor of the payment

c. The guaranty is gratuitousIn a gratuitous guaranty, the guarantor receives nothingand it would be unfair to deny him the right to recoverfrom the principal debtor.If the creditor is solvent, the guarantor must still recoverfrom him

#2071Right of guarantor to proceed against debtorbefore payment- As a rule, the guarantor has no cause of action

against the debtor until after the former has paid theobligation.


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- The article enumerates 7 instances when theguarantor may proceed against the debtor evenbefore payment, and specifies the remedy to whichthe guarantor is entitled.

- The purpose is to enable the guarantor to takemeasures for the protection of his interest in view ofthe probability that he would be called upon to paythe debt.

- The provision is applicable to surety

Remedy to which guarantor entitled- The guarantor cannot demand reimbursement for

indemnity because he has not paid the obligation. Hisremedy is to obtain release from the guaranty or todemand a security that shall protect him from anyproceedings by the creditor, and against the dangerof insolvency of the debtor.

- There are certain cases when the guarantor cannotclaim the benefit of excussion and in such cases it isbut proper that the guarantor be given the right toproceed against the debtor.

- The guarantors remedies are alternative. He has theright to choose the action to bring.

Suit by guarantor against creditor before payment

- The guarantors or suretys action for release canonly be excercised against the principal debtor andnot against the creditor. The creditor is notcompellable to release the guarantor (which is aproperty right) before payment of his credit againsthis will. For the release of the guarantor imports anextinction of his obligation to the creditor; it connoteseither a remission or a novation by subrogation, andeither operation requires the creditors assent for itsvalidity.

- Especially should this be the case where the principaldebtor has become insolvent, for the purpose of aguaranty is exactly to protect the creditor againstsuch a contingency.

- Absent the creditors consent, the principal debtor

may only proceed to protect the demandingguarantor by a counterbond or counter-guranty as isauthorized by Article 2071

-Article 2066 and 2071 distinguished

2066 2071Provides for theenforcement of the rightsof the guarantor againstthe debtor after he haspaid the debt

For his protection beforehe has paid but after hehas become liable

Gives a right of action afterpayment

Gives a protective remedybefore payment

Is a substantive right Is in the nature of a

preliminary remedy

Recovery by surety against indemnitor evenbefore payment1. Indemnity agreement for benefit of surety- An indemnity agreement is not executed for the

benefit of the creditor but rather for the benefit of thesurety; and if the indemnitor (principal debtor)voluntarily agrees to its terms and conditions, theobligations arising from the contract have the force oflaw.

2. Indemnity agreement may be againstactual loss as well as liability

- An indemnity agreement whereby the indemnitorbinds himself to indemnify the surety for any damageor prejudice the latter may sustain under the suretybond, may provide for indemnification not onlyagainst actual loss but against liability as well.

- In a contract of indemnity against loss, an indemnitorwill not be liable until the person to be indemnifiedmakes payment or sustains loss, while in contract ofindemnity against liability, the indemnitors liabilityarises as soon as the liability of the person to beindemnified has arisen without regard to WON he hassuffered actual loss.

3. Such agreement valid- A stipulation, therefore in an indemnity agreement

providing that the indemnitor shall pay the surety as

soon as the latter becomes liable to make payment tothe creditor under the terms of the bond, regardlessof whether the surety has made payment actually ornot, is valid and enforceable, and in accordancetherewith, the surety may demand from theindemnitor even before the creditor has paid.

- Hence, an action by the surety against the principaldebtor and the indemnitor to enforce payment undersuch an agreement is not premature.

- And where the principal debtors are simultaneouslythe same persons who executed the indemnityagreement, the position occupied by them is that of aprincipal debtor and indemnitor at the same time,and their liability being joint and several with thesurety, the creditor may proceed against either,

- The principle of guarantee in 2071 does not apply,i.e., there is no more need for the surety to exhaustall the properties of the principal debtors before itmay proceed against them.

#2072Guarantor of a third person at request of anotherThe guarantor who guarantees the debt of an absenteeat the request of another has a right to claimreimbursement, after satisfying the debt either from (1)

the person who requested him to be a guarantor; or (2)the debtor

Section 3- Effects of Guaranty as Between co-guarantors

#2073Right to contribution of guarantor who paysThe obligation of several guarantors of the same debtorand for the same debt is joint. Each is bound to pay onlyhis proportionate share.1. Restrictions- The article contemplates a situation which arises

when one guarantor has paid the debt to the creditorand is seeking reimbursement from each of his co-guarantors the share which is proportionately owing

him.- It is required however that the payment must have

been made(a) In virtue of a judicial demand(b) Because the principal debtor is insolvent- Without the requirement, the guarantor who pays the

debt under the circumstances giving him the right tocontribution may proceed directly against his co-gurantors for their respective shares, with the latterhaving to incur the trouble and expense of claimingafterwards from the debtor what they have paid.

- On the other hand, if the guarantor proceeds firstagainst the debtor who, as a consequence, makespayment, then not only the debtor but the co-

guarantors as well would be discharged at once fromtheir obligations.

- The guarantor is perfectly justified in paying the debtbecause any delay on his part may increase theliability for interest, expenses

2. Effect of insolvency of any guarantor- If any of the guarantors should be insolvent, his share

shall be borne by the others including the payingguarantor in the same joint proportion. This ff the rulein solidary obligations

3. Accrual and basis of right- The right of the guarantor who has paid the debt in

either of the cases specified to demand proportionatecontribution or reimbursement from his co-guarantorsis acquired ipso jure by the guarantor by virtue ofsaid payment without the need of obtaining from thecreditor any prior cession of rights to such guarantor

#2074Defenses available to co-guarantorsIn the action filed by the paying guarantor against hisco-guarantors for their proportionate shares in theobligation, the latter may avail themselves of alldefenses which the debtor would have interposedagainst the creditor but not those which cannot betransmitted for being purely personal to the debtor

#2075


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Liability of sub-guarantor in case of insolvency ofguarantorIn case of insolvency of the guarantor for whom hebound himself, a sub-guarantor is liable to the co-guarantors in the same manner as the guarantor whomhe guaranteed.

cuevas- guaranty & suretyship

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