a. Nature and Extent

NATURE AND EXTENT OF GUARANTY

Guaranty – 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. It is a contract between the guarantor and the creditor. (Art. 2047)

Principal’s Liability May Exceed Guarantor’s Obligations

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 obligations he assumed under his contract.

Guaranty Not Presumed (Art. 2055)

The assumption of guaranty must be expressed. It cannot extend to more than what is stipulated therein.

Guaranty Strictly Construed

A guaranty must be express and cannot extend beyond what is stipulated in it (Civil Code, Art. 2055). Doubt in the terms and conditions of the guaranty or suretyship agreement should be resolved in favor of the guarantor or surety.

• Liability for obligation stipulated – guarantor is not liable for obligations assumed previous to the execution of the guaranty unless an intent to be so liable is clearly indicated.
• Liability of surety limited to a fixed period – the surety must only be bound in the manner and to the extent, and under the circumstances which are set forth or which may be inferred from the contract of guaranty or suretyship, and no further
• Liability of surety to expire on maturity of principal obligation – such stipulation is unfair and unreasonable for it practically nullifies the nature of the undertaking it had assumed.

Remedy of surety: Enforce the counter-bond put up by the principal debtor (if there is any); foreclose only if it is secured by an enforceable mortgage or other foreclosable security.

Rights of the Guarantor against The Debtor

• Indemnification
• Benefit of Subrogation
• Benefit of Compromise

Between Co-Guarantors Right to Contribution of Guarantor Who Pays (Art. 2073)

Presumption of joint liability of several guarantors when there are:

• Two or more guarantors
• Same debtor
• Same debt

Effect: Each is bound to pay only his proportionate share.

Co-Guarantor has Right to Contribution When:

• One guarantor has paid the debt to the creditor
• Payment was made
• In virtue of judicial demand (benefit of division has ceased); or
• Because principal debtor is insolvent
• Guarantor who paid is seeking reimbursement from each of his coguarantors the share which is proportionately owing him.

Effect: The co-guarantor who has paid may demand of each of the others the share which is proportionally owing from him.