3. Guaranty and Suretyship

C. Guaranty and Suretyship (Civil Code, arts. 2047-2081)

Civil Code, arts. 2047-2081

TITLE XV

GUARANTY

CHAPTER 1

Nature and Extent of Guaranty

Article 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)

Article 2048. A guaranty is gratuitous, unless there is a stipulation to the contrary. (n)

Article 2049. A married woman may guarantee an obligation without the husband's consent, but shall not thereby bind the conjugal partnership, except in cases provided by law. (n)

Article 2050. If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of articles 1236 and 1237 shall apply. (n)

Article 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.

It may also be constituted, not only in favor of the principal debtor, but also in favor of the other guarantor, with the latter's consent, or without his knowledge, or even over his objection. (1823)

Article 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. (1824a)

Article 2053. A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (1825a)

Article 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)

Article 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay. (1827a)

Article 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)

Article 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)

CHAPTER 2

Effects of Guaranty

SECTION 1

Effects of Guaranty Between the Guarantor and the Creditor

Article 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)

Article 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)

Article 2060. In order that the guarantor may make use of the benefit of excussion, 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)

Article 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)

Article 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)

Article 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)

Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to the guarantor and to the principal debtor. (1836)

Article 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)

SECTION 2

Effects of Guaranty Between the Debtor and the Guarantor

Article 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;

(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)

Article 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)

Article 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)

Article 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)

Article 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)

Article 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.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. (1843a)

Article 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 satisfies the debt may sue either the person so requesting or the debtor for reimbursement. (n)

SECTION 3.

Effects of Guaranty as Between Co-Guarantors

Article 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among them who has paid may demand 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)

Article 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) ARTICLE 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)

CHAPTER 3

Extinguishment of Guaranty

Article 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)

Article 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)

Article 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)

Article 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of time referred to herein. (1851a)

Article 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)

Article 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)

Characteristics of the contract

• Accessory – dependent for its existence upon the principal obligation guaranteed by it hence if principal contract is void, then guaranty is also void
• Subsidiary and Conditional – takes effect only when the principal debtor fails in his obligation subject to limitation
• Unilateral –
• It gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa
• It may be entered into even without the intervention of the principal debtor.
• Distinct Person – a person cannot be the personal guarantor of himself
• The liability of a guarantor is only subsidiary. As a rule, the guarantor may invoke excussion: the creditor must first exhaust the properties of the principal debtor and all legal remedies against him before holding the guarantor answerable for the debt. This rule does not apply in the circumstances specified in Civil Code Art. 2059, including when the guarantor has expressly renounced excussion. Thus, when excussion applies, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay. (Aglibot vs. Santia, G.R. No. 185945, 2012; Civil Code, Arts. 2058–2059)

Cause of Contract of Guaranty

• Presence of cause which supports principal obligation: Cause of the contract is the same cause which supports the obligation as to the principal debtor. The consideration which supports the obligation as to the principal debtor is a sufficient consideration to support the obligation of a guarantor or surety.
• Absence of direct consideration or benefit to guarantor: Guaranty or surety agreement is regarded valid despite the absence of any direct consideration received by the guarantor or surety, such consideration need not pass directly to the guarantor or surety; a consideration moving to the principal will suffice.

Guaranty Undertaken Without Knowledge of Debtor (Art. 2050)

Double or Sub-Guaranty (Art. 2051(2))

One constituted to guarantee the obligation of a guarantor. It should not be confounded with guaranty wherein several guarantors concur.

Guaranty of Voidable, Unenforceable, And Natural Obligations (Art. 2052(2))

A guaranty may secure the performance of:

• Voidable contract – such contract is binding, unless it is annulled by a proper court action
• Unenforceable contract – because such contract is not void
• Natural obligation – the creditor may proceed against the guarantor although he has no right of action against the principal debtor for the reason that the latter’s obligation is not civilly enforceable.
• When the debtor himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligation from a natural into a civil one.

Continuing Guaranty or Suretyship:

• Not limited to a single transaction but which contemplates a future course of dealings, covering a series of transactions generally for an indefinite time or until revoked.
• It is prospective in its operation and is generally intended to provide security with respect to future transactions.
• Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fixed and demandable.

Examples:

• To secure the payment of a loan at maturity – guarantee of the punctual payment of a loan at maturity and all other obligations of indebtedness
• To secure payment of any debt to be subsequently incurred –construed as continuing when it is evident from the terms that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved.

Updated: An accepted replacement continuing guaranty may supersede an earlier suretyship for subsequent indebtedness (Allied Banking Corporation v. Yujuico, G.R. No. 163116, 29 June 2015).

Guaranty of Conditional Obligations

A guaranty may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition.

• Principal obligation subject to a suspensive condition – the guarantor is liable only after the fulfillment of the condition.
• Principal obligation subject to a resolutory condition – the happening of the condition extinguishes both the principal obligation and the guaranty

Guarantor’s Liability Cannot Exceed Principal Obligation (Art. 2054)

General rule: Guaranty is a subsidiary and accessory contract – guarantor cannot bind himself for more than the principal debtor, both as regards the amount and the onerous nature of contract

• If he does, his liability shall be reduced to the limits of that of the debtor.
• But the guarantor may bind himself for less than that of the principal.

Exceptions:

• Interest, judicial costs, and attorney’s fees as part of damages may be recovered – creditors may recover from the surety as part of their damages the above-mentioned fees even without stipulation and even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. Attorney’s fees, however, may be awarded without stipulation only on a ground recognized by Article 2208 of the Civil Code, with the factual, legal, and equitable basis for the award stated in the decision.

Reason: Surety is made to pay, not by reason of the contract, but by reason of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment. That failure alone does not justify an award of attorney’s fees.

Interest runs from (demand):

• Filing of the complaint (upon judicial demand); or
• The time demand was made upon the surety until the principal obligation is fully paid (upon extra-judicial demand)
• Penalty may be provided – surety may be held liable for the penalty provided for in a bond for violation of the condition therein.

Types of Security

• Personal – when an individual becomes a surety or a guarantor
• Real or Property – when an encumbrance is made on property (e.g. real estate mortgage, chattel mortgage over vessels or aircrafts or security interest over movables)

Guaranty Covered by the Statute of Frauds

• Guaranty must not only be expressed but must so be reduced into writing.
• Hence, it shall be unenforceable by action, unless the same or some note or memorandum thereof be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or secondary evidence of its contents. (Macondray & Co., Inc. v. Piñon, G.R. No. L-13817, 1961)
• It need not appear in a public document.

Guaranty Distinguished from Suretyship

Q: Corp A secured a Performance Bond from Corp B wherein the latter would become the surety of the former, guaranteeing the performance of Corp A’s obligations in favor of a contract with Corp C. However, Corp A showed poor progress, which led to Corp C demanding Corp B to liquidate the Performance Bond, without specifying the exact amount claimed. Subsequently, Corp C terminated the contract with Corp A. When negotiations for amicable settlement fell through, Corp B denied Corp C’s claim. This prompted Corp C to file a complaint with the CIAC to collect a sum of money against Corp A and Corp B. The CIAC dismissed the Complaint because it was not within a reasonable period and such delay had released Corp B from its liability as per Article 2080 of the Civil Code. This was reversed by the CA on the ground that Corp A had long been in default of its obligations even before the first demand of Corp C, which meant that the liability of Corp B as surety had already arisen. Was the CA correct in saying that Corp B was liable?

A: Yes. A contract stands as the law between the parties for as long as it is not contrary to law, morals, good customs, public order, or public policy. The Performance Bond provides that upon Corp C’s first demand, Corp B as surety shall indemnify the former notwithstanding any dispute with regard to whether the principal has complied with his obligation. The Performance Bond thus stands as a contract of surety contemplated under Article 2047 of the Civil Code which defines a surety wherein a person binds himself solidarily with the principal debtor. As a result, the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching upon the obligation of the latter, and their liabilities are interwoven as to be inseparable. While the contract of surety stands secondary to the principal obligation, the surety's liability is direct, primary and absolute. Its liability for the bonded obligation is limited to the bond amount, without prejudice to interest, judicial costs, and attorney’s fees recoverable on a proper basis even if the total exceeds that amount. The surety's liability attaches the moment a demand for payment is made by the creditor. Furthermore, Article 2080 may release a guarantor even though solidarily liable when an act of the creditor prevents subrogation to the creditor’s rights, mortgages, and preferences; here, the stated delay does not establish such an act or loss of subrogation. (The Mercantile Insurance Co., Inc., v. DMCI-Laing Construction, Inc., G.R. No. 205007, December 7, 2020.)

Qualifications of an Individual Guarantor (Arts.2056-2057)

• He possesses Integrity
• He has the Capacity to bind himself
• He has Sufficient property to answer for the obligation which he guarantees

Exception: When the creditor waives the requirements.

Effect of Subsequent Loss of Required Qualifications

The qualifications need only be present at the time of the perfection of the contract. The subsequent loss of the qualifications would not extinguish the liability of the guarantor, nor will it extinguish the contract of guaranty.

Remedy of creditor: Demand another guarantor with the proper qualifications.

Exception: Creditor may waive it if he chooses and hold the guarantor to his bargain.

Guarantor Convicted of a Crime Involving Dishonesty or Became Insolvent (Art. 2057):

• Requires conviction in the first instance of a crime involving dishonesty to have the right to demand another.
• Judicial declaration of insolvency is not necessary in order for the creditor to have a right to demand another guarantor.

The supervening incapacity of a guarantor does not terminate the guaranty for it merely gives the creditor the option to demand another guarantor. He is not bound to substitute the guarantor. (Estate of Hemady v. Luzon Surety, G.R. No. L-8437, 1956)

Selection of Guarantor

• Specified person stipulated as guarantor: Substitution of guarantor may not be demanded

Reason: The selection of the guarantor is:

• A term of the agreement;
• As a party, the creditor is, therefore, bound thereby.
• Guarantor selected by the principal debtor: Debtor answers for the integrity, capacity, and solvency of the guarantor.
• Guarantor personally designated by the creditor: Responsibility for the selection should fall upon the creditor because he considered the guarantor to have the qualifications for the purpose.

Right of Guarantor to Benefit Of Excussion Or Exhaustion (Art. 2058)

• Guarantor only secondarily liable – guarantor binds himself to pay only in case the principal debtor should fail to do so. If the principal debtor fulfills the obligation guaranteed, the guarantor is discharged from any responsibility.
• All legal remedies against the debtor to be first exhausted – to warrant recourse against the guarantor for payment, it may not be sufficient that the debtor appears insolvent. Such insolvency may be simulated.

NOTE: Art. 2058 is not applicable to a contract of suretyship.

Right of Creditor to secure Judgment against Guarantor prior to exhaustion

General rule: An ordinary personal guarantor (NOT a pledgor or mortgagor who is at the same time a guarantor), may demand exhaustion of all the property of the debtor before he can be compelled to pay.

Exception: The creditor may secure a judgment against the guarantor, who shall be entitled to a deferment of the execution of said judgment against him, until after the properties of the principal debtor shall have been exhausted, to satisfy the latter’s obligation.

Exceptions to the Benefit of Excussion (Art. 2059)

• If the guarantor has expressly Waived it.
• Waiver is valid but it must be made in express terms.
• If he has bound himself Solidarily with the debtor – liability assumed that of a surety

Guarantor becomes primarily liable as a solidary co-debtor. In effect, he renounces in the contract itself the benefit of exhaustion.

• In case of insolvency of the debtor – the guarantor cannot invoke the benefit of excussion (Art. 2059(3)).

If the debtor becomes insolvent, the liability of the guarantor arises as the debtor cannot fulfill his obligation

• When he (debtor) has Absconded, or cannot be sued within the Philippines – the creditor is not required to go after a debtor who is hiding or cannot be sued in our courts

Exception: Debtor has left a manager or representative

• If it may be presumed that a judicial action including execution on the property of the principal debtor would not result in the satisfaction of the obligation – if such is the case, the guarantor can no longer require the creditor to resort to all such remedies against the debtor as the same would be but a Useless formality. It is not necessary that the debtor be judicially declared insolvent.
• If he does Not comply with Art. 2060: In order that the guarantor may make use of the benefit of excussion, he must:
• Set it up against the creditor upon the latter’s demand for payment from him;
• Point out to the creditor:
• Available property of the debtor– the guarantor should facilitate the realization of the excussion since he is the most interested in its benefit.
• Within the Philippine territory – excussion of property located abroad would be a lengthy and extremely difficult proceeding and would not conform with the purpose of the guaranty to provide the creditor with the means of obtaining the fulfillment of the obligation. Sufficient to cover the amount of the debt.
• If he is a Judicial bondsman and sub-surety (Art. 2084) – because he is solidarily liable.
• Where he has given a pledge or mortgage as a Special security.

NOTE: Article 2062 of the Civil Code provides that 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.

Duty of Creditor to Make Prior Demand for Payment From Guarantor (Art. 2060)

• When demand to be made – only after judgment on the debt for obviously the exhaustion of the principal’s property cannot even begin to take place before judgment has been obtained.
• Actual demand to be made – joining the guarantor in the suit against the principal debtor is not the demand intended by law. There must be an actual demand and not judicial demand. (Vda. De Syquia v. Jacinto, G.R. No. 41320 (1934).

Duty of The Guarantor To Set Up Benefit Of Excussion (Art. 2060)

As soon as he is required to pay, guarantor must also point out to the creditor the available property (not in litigation or encumbered) of the debtor within the Philippines.

If a party in a contract waives his right to excussion, the contract ceases to be a guaranty and is now a suretyship under Article 2047 of the Civil Code. (Trade and Investment Development Corporation of the Philippines v. Philippine Veterans Bank, G.R. No. 233850, 2019)

Duty of The Creditor To Resort To All Legal Remedies (Art. 2061)

• After the guarantor has fulfilled the conditions required for making use of the benefit of exhaustion, it becomes the duty of the creditor to exhaust all the property of the debtor pointed out by the guarantor
• If he fails to do so, he shall suffer the loss but only to the extent of the value of the said property, for the insolvency of the debtor.
• Resort to all legal remedies includes accion pauliana and accion subrogatoria, among others.

Remedies Available:

• To obtain release from the guaranty; or
• To demand security that shall protect him from:
• Any proceedings by the creditor; and
• Against the insolvency of the debtor.

NOTE: Guarantor’s remedies are alternative. He has the right to choose the action to bring.

Suit by Guarantor against Creditor Before Payment

The guarantor’s or surety’s action for release can only be exercised against the principal debtor and not against the creditor.

Reason: The creditor cannot be compelled to release the guarantor before payment of his credit. Release of the guarantor imports an extinction of his obligation to the creditor, connoting remission or a novation by subrogation which requires the creditor’s assent.

Recovery of Surety against Indemnitor (i.e., principal debtor) Even Before Payment

• Indemnity agreement is for the benefit of surety – not for the benefit of the creditor
• Indemnity agreement may be against actual loss as well as potential liability – such agreement is enforceable and not violative of any public policy
• Indemnity against loss – indemnitor will not be liable until the person to be indemnified makes payment or sustains loss
• Indemnity against liability – indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss
• Such agreement valid - A stipulation in an indemnity agreement providing that the indemnitor shall pay the surety as soon as the latter becomes liable to make payment to the creditor under the terms of the bond, regardless of whether the surety has made payment actually or not, is valid and enforceable, and in accordance therewith, the surety may demand from the indemnitor even before the surety has paid the creditor.

Where the principal debtors are simultaneously the same persons who executed the indemnity agreement, the position occupied by them is that of a principal debtor and indemnitor at the same, and their liability being joint and several.

The liabilities of an insurer under the surety bond are not extinguished when the modifications in the principal contract do not substantially or materially alter the principal's obligations. The surety is jointly and severally liable with its principal when the latter defaults from its obligations under the principal contract. (People's Trans-East Asia Insurance Corporation v. Doctors of New Millennium Holdings, Inc., G.R. No. 172404, 2014)

Guarantor of a Third Person at Request of Another (Art. 2072)

The guarantor who guarantees the debt of an absentee at the request of another has a right to claim reimbursement, after satisfying the debt from:

• The person who requested him to be a guarantor;
• The debtor

Accrual and Basis of Right:

The right of reimbursement is acquired ipso jure without need of any prior cession from the creditor by the guarantor.

Defenses Available to Co-Guarantors (Art. 2074)

• General rule: All defenses which the debtor would have interposed against the creditor (i.e. fraud, prescription, remission, illegality, etc.).
• Exception: Those which cannot be transmitted for being purely personal to the debtor.

Liability of Sub-Guarantor in case of Insolvency of Guarantor (Art. 2075)

Sub-guarantor is liable to the co-guarantors in the same manner as the guarantor whom he guaranteed in case of the insolvency of the guarantor for whom he bound himself as subguarantor.

EXTINGUISHMENT OF GUARANTY

Causes of Extinguishment of Guaranty (Art. 2076)

General rule: Guaranty being accessory, it is extinguished when principal obligation is extinguished, the causes of which are:

• Payment or performance;
• Loss of the thing due;
• Condonation or remission of the debt;
• Confusion or merger of the rights of the creditor and debtor;
• Compensation; and
• Novation
• Other causes:
• Annulment;
• Rescission;
• Fulfillment of a resolutory condition;
• Prescription

Exception: The guaranty itself may be directly extinguished although the principal obligation still remains such as in the case of the release of the guarantor made by the creditor.

When Alteration Material

Where such change will have the effect of making the obligation more onerous.

• Imposes a new obligation or added burden on the party promising; or
• Takes away some obligation already imposed, changing the legal effect of the original contract and not merely the form thereof.

Release by Conveyance of Property (Art. 2077)

• General rule: Payment is made in money.
• Exception: Any substitute paid in lieu of money which is accepted by the creditor extinguishes the obligation and in consequence, the guaranty.
• If the creditor accepts property in payment of a debt from the debtor, the guarantor is relieved from responsibility. This is also true even in case the creditor is subsequently evicted from the property.

In case of eviction: If the creditor voluntarily accepts property in payment, the guarantor remains released even if the creditor is later evicted. The creditor may pursue remedies against the debtor arising from the eviction, but the guaranty is not revived.

Reason: The creditor’s action against the debtor is for eviction and this is different from what the guarantor guaranteed.

Release of Guarantor without Consent of Others (Art. 2078)

Effect: The release benefits all to the extent of the share of the guarantor released.

Reason: A release made by the creditor in favor of one of the guarantors without the consent of the others may prejudice the others should a guarantor become insolvent.

Release by Extension of Term Granted by Creditor to Debtor (Art. 2079)

Release Without Consent of Guarantor: Creditor grants an extension of time to the debtor without the consent of the guarantor.

Effect: Guarantor is discharged from his undertaking.

Reason: To avoid prejudice to the guarantor. The debtor may become insolvent during the extension, thus depriving the guarantor of his right to reimbursement.

It doesn’t matter if the extension is:

• Prejudicial or not; or
• For a long or short period of time.

NOTE: Consent of the Guarantor is a must.

Extension must be based on some new agreement between the creditor and the principal debtor by virtue of which enforcement of the creditor’s claim is postponed for the agreed period.

• Where obligation payable in installments: Where a guarantor is liable for different payments.
• General rule: An extension of time to one or more will not affect the liability of the surety for the others
• Exception: When the unpaid balance has become automatically due by virtue of an acceleration clause for failure to pay an installment.
• Effect of exception: The act of the creditor extending the payment of said installment, without the guarantor’s consent, discharges the guarantor.
• Reason: The extension constitutes an extension of the payment of the whole amount of the indebtedness
• Where consent to an extension is waived in advance by the guarantor or surety: Such waiver is not contrary to law, nor to public policy
• Effect: Amounts to the guarantor’s or surety’s consent to all the extensions granted.

NOTE: The mere failure or neglect on the part of the creditor to enforce payment or to bring an action upon a credit, as soon as the same or any part of it matures, does not constitute an extension of the term of the obligation, and therefore, the liability of the guarantor is not extinguished.

In order to constitute an extension discharging a surety, it should appear that the extension was:

• For a Definite period
• Pursuant to an Enforceable agreement between the principal and the creditor
• Made without the surety’s consent and without a reservation of the creditor’s rights against the surety.
• The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and precludes the surety from paying the debt.
• The law does not even grant the surety the right to sue the creditor for delay, as protection against the risks of possible insolvency of the debtor; but in view of the efficacy of the action on the contract against the surety, beginning with the date the obligation becomes due, his vigilance must be exercised rather against the principal debtor.

That an extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty, also applies to suretyship. The theory behind Art. 2079 is that an extension of time given to the debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the debtor upon the maturity date. The surety is entitled to protect himself against the debtor’s insolvency during the extension. However, it must be stressed that Art. 2079 will apply only if the extension is granted by the creditor in favor of the debtor without the guarantor’s/surety’s consent. (TIDC v. APC, 2014)

Release when Guarantor cannot be Subrogated (Art. 2080)

• If there can be no subrogation because of the fault of the creditor, the guarantors are thereby released, even if the guarantors are solidary.
• If the creditor has acquired a lien upon the property of a principal debtor, the creditor at once becomes charged with the duty of retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of this security as a primary resource of payment of a debt, will discharge the surety to the extent of the value of the property or lien released for there immediately arises a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the value of the security in his hands.

Reason: The act of one cannot prejudice another. It also avoids collusion between the creditor and the debtor or a third person.

Defenses Available to Guarantor against Creditor (Art. 2081)

• General rule: All defenses, which pertain to the principal debtor and are inherent in the debt
• Exception: Those which are purely personal to the debtor.