SURETY Ramil F. De Jesus Introduction In securing loan from a one has to get a co-maker.

The banks will not approve the loan if the borrower does not have a credible co-maker. This is the practice of the almost all financial institution. A co-maker is generally treated as a surety. In a contract of suretyship, one lends his credit by joining in the principal debtors obligation, so as to render himself directly and primarily responsible with the principal debtor. A surety is bound equally and absolutely with the principal, and is deemed an original promisor and debtor from the beginning. This is because in suretyship, there is but one contract, and the surety is bound by the same agreement which binds the principal(http://jlp-law.com/blog/liability-of-a-co-maker-distinguished-from-

guarantor/). The contract of suretyship is different from a contract of guaranty. Most often than not it is used interchangeably but it has a very different meaning and a different set of obligations are pegged unto these contracts. Objective To provide an overview discussion on surety and its undertaking citing relevant cases and jurisprudence. Discussion 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.

In a broad sense, guaranty it includes pledge and mortgage because the purpose of guaranty may be accomplished not only by securing the fulfillment of an obligation contracted by the principal debtor through the personal

guaranty of a third person but also by furnishing to the creditor for his security, property with authority to collect the debt from the proceeds of the same in case of default.(De Leon citing Manresa). Suretyship is defined as a relation which exist where one person (principal or obligor) has undertaken an obligation and another person (surety) is also under a direct or primary obligation or duty to a third person (oblige), who is entitled to but one performance, and as between the who are bound, the one rather than the other should perform.(De Leon citing AgroConglomerates, Inc. V. CA, 348 SCRA450). If a person binds himself to be solidary liable with the principal debtor, the contract is suretyship and not a contract of guaranty. The terms used in a contract is not binding. What is controlling is the terms and condition of the contract. In Palmares v. CA, G.R. No. 12649, the Court had occasion to discuss what a surety and a guaranty, it held that A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. In other words, a surety undertakes directly for the payment and is so responsible

at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.

Liability is contractual and accessory but direct Surety ship is a contractual relation. The suretys obligation although not an original and direct one for the performance of his act, but merely accessory or collateral to the obligation contracted by the principal but since he promised to be bound solidarily with the obligation, his liability is direct and primary. The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the surety either from the principal obligor or from the creditor. A contract of surety, like any other contract, must generally be supported by a sufficient consideration. However, the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the principal alone will suffice. It has been held that if the delivery of the original contract is contemporaneous with the delivery of the suretys obligation, each contract becomes completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one. And this is the kind of surety contract to which the rule of strict construction applies as opposed to a compensated surety contract undertaken by surety corporations which are organized for the purpose of conducting an indemnity business at established rates and compensation unlike an ordinary surety agreement where thesurety binds his name through motives of friendship and accommodation.( Garcia, Jr. v. CA G.R. No. 80201Nov. 20, 1990). A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and

several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. (Palmares V. CA).

Liability is limited by terms of the contract Surety is bound by the express provision of the contract and the contract cannot be extended to what is not stipulated, as ruled by the Supreme Court in Philippine Commercial and Industrial Bank v. Court of Appeals It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. The extent of a surety's liability is determined only by the clause of the contract of suretyship. It cannot be extended by implication, beyond the terms of the contract. [Zenith Insurance Corp. v. CA et al., No. 57957, December 29, 1982, 119 SCRA 485.] In the case at bar, Surety Bond No. G-1689 was executed to secure a discounting line of credit accommodation granted by PCIB to Community Builders Co., Inc. in the amount of P50.000. PCIB contends that the loan evidenced by the promissory note signed by Filadelfo Rojas, both in his personal capacity and as President of Community Builders, was granted in line with the credit

accommodation secured by the surety bond; hence, ALPHA is liable for the debt. Note however that by the express terms of Surety Bond No. G-1689, ALPHA bound itself to pay the discounting line of Community Builders only which has a personality distinct and separate from Rojas. The promissory note, on the other hand, was signed both by Rojas and by Community Builders. Also, the amount of the credit line which ALPHA agreed to secure was only P50,000; whereas, the promissory note was for P150,000. Clearly therefore, the debt on which PCIB bases its action is not within the purview of the Surety Bond No. G-1689.Thus, even granting that Rojas and Community Builders offered Surety Bond No. G-1689 as security for the P150,000 debt, ALPHA, which merely undertook to secure a P50,000 credit line of Community Builders, cannot be held answerable for the debt. The definition and characteristics of a suretyship bring into focus the fact that a surety agreement is an accessory contract that introduces a third party element in the fulfillment of the principal obligation that an obligor owes an obligee. In short, there are effectively two (2) contracts involved when a surety agreement comes into play - a principal contract and an accessory contract of suretyship. Under the accessory contract, the surety becomes directly, primarily, and equally bound with the principal as the original promissor although he possesses no direct or personal interest over the latter's obligations and does not receive any benefit therefrom.(Intra Strata Assurance Company v. Republic).

Liability arises only if principal is held liable In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship, particularly the fact that two types of relationships are involved, that is, the underlying principal relationship between the creditor (government) and the debtor (importer), and the accessory surety relationship whereby the surety binds itself, for a consideration paid by the debtor, to be jointly and solidarily liable to the creditor for the debtor's default. The creditor in

this latter relationship accepts the surety's solidary undertaking to pay if the debtor does not pay. Such acceptance, however, does not change in any material way the creditor's relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. The contract of surety simply gives rise to an obligation on the part of the surety in relation with the creditor and is a one- way relationship for the benefit of the latter. In other words, the surety does not, by reason of the surety agreement, earn the right to intervene in the principal creditor-debtor relationship; its role becomes alive only upon the debtor's default, at which time it can be directly held liable by the creditor for payment as a solidary obligor. A surety contract is made principally for the benefit of the creditor-obligee and this is ensured by the solidary nature of the sureties' undertaking. Under these terms, the surety is not entitled as a rule to a separate notice of default, nor to the benefit of excussion, and may be sued separately or together with the principal debtor. The words of this Court in Palmares v. CA are worth noting: Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.(Intra Strata Assurance Company v. Republic). Surety is not entitled to exhaustion as held in G.R. L-26449, the Court ruled that: The surety's contention is untenable. The counterbond contemplated in the rule is evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself "jointly and severally" (in

solidum) with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of the Philippines that excusion (previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has bound himself solidarily with the debtor". The rule heretofore quoted cannot be construed as requiring that an execution against the debtor be first returned unsatisfied even if the bond were a solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code, and further would nullify the express stipulation of the parties that the surety's obligation should be solidary with that of the defendant. A surety is not entitled to the exhaustion of the properties of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28 SCRA 58, 63). Undertaking is to creditor, not to debtor The contract is between the surety and the oblige and not between surety and the principal obligor.

Surety is not entitled to notice of principals default Demand on the surety is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. A surety is not even entitled, as a matter of right , to be given notice of the principals default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety The surety is bound to take notice of the principal and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to the effect in the contract of

suretyship(Palmares V. CA). Prior demand by the creditor to the principal not required

Again in Palmares the Court ruled that demand by the creditor to the principal is not required before going after the surety, it provides The alleged failure of respondent corporation to prove the
fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account. The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound.

Surety is not exonerated by neglect of creditor to sue principal Where the creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditors rights vis--vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principals request or without it, and whether it is yielded by the creditor through sympathy

or from inclination to favor the principal. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continue until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditors mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse opf time, are immaterial. The raison deetre for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of the principal, he may pay the debt and become subrogated to all the rights and remedies of the creditor. In the same case of Palmares the Supreme Court also stated that Surety is not exonerated by neglect of creditor to sue principal it ruled:
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.

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In the case of Clark vs. Seliner (42 Phil. 384), action was deferred for over four years, but the sureties were never the less held liable. As said in 21 C. L., 1032:
It is a general principle that a creditor is under no obligation to be actively diligent in pursuit of his principal debtor. He may forbear the prosecution of his claim, and remain inactive, without impairing his right to resort to the surety, particularly when his forebearance amounts to no more than a mere inaction or passivity. Therefore the mere neglect of a creditor to sue or to attempt to collect a debt a the time it falls due does not discharge the sureties, although the principal had ample means at the time, and subsequently became insolvent. Similarly, mere passiveness or mere delay in the prosecution of an execution against the principal debtor after judgment, will not discharge the surety. The principal under consideration, however, comprehends something more than mere passivity or inaction resulting from negligence. Thus, a gratuitous indulgence of the principal, whether extended at his request or without it, and whether it is yielded by the creditor from sympathy and from an inclination to favor him, or is the result or mere passiveness, will not operate to discharge the surety, unless he omits to do, when required by the surety, what the law or his duty enjoins him to do, or unless he neglects, to the injury of the surety, to discharge his duty in any matter in which he occupies the position of a trustees for the surety. Mere delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and principal debtor a valid and binding agreement therefore, one which tends to prejudice him, or to deprive him of the power of obtaining indemnity by presenting a legal obstacle, for the time, to the prosecution of an action on the original security. Positive and wilful interference by a creditor, embarrassing the recovery of the claim against the principal, will, however, release the surety. In some jurisdictions, moreover, the duty of active diligence in the prosecution of suits, or of execution against the principal can be devolved on the creditor by the surety, if he desires, by requesting it. Also, of course, if a delay in calling on the principal for the money is the result of fraud, that surety will be exonerated. In extension of the principle that the mere delay of the creditor to proceed against the principal will not discharge the surety, it has been held that the surety is not discharged, even if the delay of the creditor is such that his remedy against the principal becomes barred by imitation.

Conclusion Contract of suretyship is very much different from a contract of guaranty. A surety is like a principal because he assumes the responsibility of the principal as if he received a consideration for the contract.