IV.

Guaranty

A. General Concept

 A guaranty is a written pledge to pay the debt of another person or entity or to perform the
borrower’s obligation under such loan documents.
 Guarantor is usually a person or entity that is the owner, affiliate or family member of the
borrower.
 What is Guaranty?

Is a contract whereby 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. (Art. 2047)

 What is Surety?

A contract whereby the guarantor binds himself solidarily with the principal debtor. In this case,
payment made by one of the debtors extinguishes the obligation.

 As a General Rule:

A guaranty is “gratuitous” unless there is stipulation to the contrary. (Art. 2048)

 A guaranty may be conventional, legal, gratuitous or by onerous title. (Art. 2051)

a. Conventional- constituted by the agreement of the parties.

b. Legal- imposed by the provision of law
c. Gratuitous- guarantor does not receive any price or remuneration for acting as such.
d. Onerous- one where the guarantor receives valuable consideration for his guaranty.

B. Forms of Guaranty

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

 If the guaranty be simple or indefinite, the principal obligation shall be compromised

including all its accessories, judicial costs. With respect to judicial cost, the guarantor shall
only be liable for those costs incurred after he has been judicially required to pay.

C. Obligations Secured

a. A guaranty cannot exist without a valid obligation. (Art. 2052)

b. A guaranty may also be given as security for future debts when:
i. the amount of which is not yet known;
ii. there can be no claim against the guarantor until the debt is liquidated.
 iii. A conditional obligation may also be secured. (Art. 2053)
c. As regards the amount of the debt and the onerous nature of conditions, the guarantor may not
bind himself more than the principal debtor, otherwise, the obligation of the guarantor shall be
reduced to the limits of that of the debtor. (Art. 2054)

D. Parties to a Guaranty

 Who is the Guarantor?

The guarantor is the person who is bound to another for the fulfillment of a promise or undertaking
of a third person.

 What are the qualifications of a guarantor?

a. Possesses integrity.
b. Capacity to bind himself; and
c. Has sufficient property to answer for the obligation which he guarantees. (Art. 2056)

 The qualification of the guarantor is deemed lost when,

When the guarantor is convicted of a crime involving dishonesty or becomes insolvent. (Art. 2057)

(the creditor then may demand another guarantor who has all qualifications required but cannot
require or stipulate that a specific person be a guarantor)

E. Benefit of Excussion

 What is the benefit of excussion?

It is a right by which the guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the properties of the principal debtor and has resorted to all legal remedies against such
debtor.

 What are the requisites of benefit of excussion?

a. The guarantor must set up the right of excussion against the creditor upon the latter’s demand
for payment from him;
b. He must point out to the creditor the available property of the debtor (not exempted from
execution) found within Philippine territory.

F. Right of Protection

a. The guarantor, even before having paid the creditor, may proceed against the principal debtor in
the following circumstances:
b. When the guarantor is sued for the payment;
c. When the principal debtor becomes insolvent;
d. When the debtor has bound himself to relieve the guarantor from the guaranty (within specified
period, and said period has expired);
e. When the debt has become demandable (by reason of the expiration of the period for payment);
f. After the lapse of 10 years (if the principal obligation has no fixed period for its maturity), UNLESS
it be such a nature that it cannot be extinguished except within a period longer than 10 years;
g. Existence of reasonable grounds that the principal debtor intends to abscond;
h. The principal debtor is in imminent danger of becoming insolvent. (Art. 2071)

G. Right to Indemnification

The debtor MUST indemnify the guarantor who pays for his (debtor) debt. Indemnity includes:

a. The total amount of debt;

b. The legal interest (from the time payment was made known to the debtor, even though it did not
earn interest for the creditor);
c. The expenses incurred by the guarantor for notifying the debtor that payment had been
demanded of him;
d. Due damages (Art. 2066)

H. Right to Subrogation

 After the guarantor pays for the debt of the principal debtor, the guarantor acquires all the right
of the creditor against the debtor.

 If there is a compromise (settlement) between the guarantor and the creditor, the guarantor
CANNOT demand from the debtor more than what he really paid

I. Rights of Co-Guarantors