CREDIT TRANS REVIEWER

NATURE OF GUARANTY AND SURETYSHIP

Jose Rizal University - College of Law

7/30/2018
 GUARANTY AND SURETYSHIP a. Contract is bilateral if compensation is paid to guarantor
 ARTICLE 2047 iii. Nominate – it has been given a specific name by the Civil Code;
By GUARANTY a person, called the guarantor, binds himself to the creditor iv. Accesory – it is dependent for its existence upon the principal obligation
to fulfill the obligation of the principal debtor in case the latter should fail to guaranteed by it.
do so. If a person binds himself solidarily with the principal debtor, the  It will be subsidiary and conditional; takes effect when principal
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In debtor fails in his obligation.
such case the contract is called a SURETYSHIP. v. Formal – governed by the Statute of Frauds and must be in writing;
*** Guaranty is a contract between the guarantor and creditor. vi. Gratuitous (Generally)
GOVERNING LAW: Title XV of Book IV of the NEW CIVIL CODE  It may be onerous if there is stipulation to the contrary.
PARTIES TO THE CONTRACT:
CLASSIFICATION OF GUARANTY:  Creditor and Guarantor – principal parties to the contract of guaranty.
1. In its BROAD SENSE: ESSENTIAL REQUISITES OF THE CONTRACT:
a. Personal-guarantee is the credit given by the person who guarantees the 1. Consent;
fulfilment of the principal obligation; 2. Object certain which is the subject matter of the contract;
b. Real – guaranty is property, movable or immovable. 3. Cause of the Obligation which is established.
i. Immovable; real mortgage, antichresis; SCOPE OF GUARANTY:
ii. Movable; pledge or chattel mortgage. a. The principal obligations of the debtor (Art. 2055);
2. ORIGIN: b. The Accessory obligations pertaining to the principal obligation (Art. 2055);
a. Conventional – constituted by agreement of the parties; c. The obligations that arise as a matter of law from the guaranteed obligations,
b. Legal – imposed by virtue of law; such as the payment of interest in case of DELAY;
c. Judicial – required by a court to guarantee the eventual right of one of the d. The obligation to pay judicial costs incurred after the guarantor has been
parties in a case. judicially required to pay (Art. 2055).
3. CONSIDEATION: PAYMENT BY THE GUARANTOR:
a. Gratuitous – guarantor does not receive any price/remuneration  Must pay in the manner provided in the principal contract.
b. Onerous – guarantor receives valuable consideration  In the absence of any express provision; payment must be made as follows:
4. PERSON GUARANTEED:  Place of payment – domicile of the debtor;
a. Single – constituted solely to guarantee/secure performance by the debtor  Time of payment – In general, must pay as soon the creditor was
of the principal obligation; unsuccessful in exhausting the properties of the debtor.
b. Double/Sub-Guaranty - constituted to secure the fulfilment by the SURETYSHIP
guarantor of a prior guaranty.  A relation which exists where one person has undertaken an obligation and
5. SCOPE and EXTENT: another person is also a direct and primary obligation or other duty to a third
a. Definite - guaranty is limited to the principal obligation only, or to person, who is entitled to but one performance, and as between the two who
specific portion thereof. are bound, the one rather than the other should perform.
b. Indefinite/Unlimited – includes not only the principal obligation but also  A contractual relation resulting from an agreement whereby one person, the
all its accessories. surety, engages to be answerable to a third person, the oblige/creditor, for the
CHARACTERISTICS OF THE CONTRACT: debt, default, or miscarriage of another known as the principal or
i. Consensual – perfected by mere consent, subject to Statute of Frauds; obligor/debtor.
ii. Unilateral (Generally) – it may be entered into even without intervention of
the principal debtor
NATURE OF SURETY’s UNDERTAKING GUARANTY SURETYSHIP
 Liability is contractual and accessory but DIRECT Insurer of the insolvency of the debtor Insurer of Debt
o Considered to being the same party as the debtor in relation to whatever is Assumes liabilty depending on the Assumes liability as a Regular Party to
adjudged touching the obligation and their liabilities agreement to pay obligation if the the Undertaking
o In suretyship, there is but one contract, and the surety is bound by the same primary debtor fails to pay
instrument, executed at the same time and upon the same consideration; Collateral Undertaking Original Promisor
without reference to solvency of the principal. Secondary/Subsidiarily Liable Primary Liable
o It does not insue the insolvency of the debtor, but rather the debt itself. Not bound to take notice of non- Must know every default of his principal
 Liability is limited by terms of contract performance of his principal;
o Contract of SURETY IS NOT PRESUMED; it cannot extend to more than what Will be discharged by the mere Will not be discharged by the mere
is stipulated. indulgence of creditor of the principal indulgence of creditor of principal
o The extent of surety’s liability is determined only by the clause of the contract Can claim release from obligation Cannot claim release from obligation
of suretyship as well as the conditions stated in the bond.
 Liability arises only if principal debtor is held liable; GUARANTOR NOT INSURER OF DEBT GUARANTEED:
o Surety does not incur liability until the principal debtor is held liable.  Guarantor only binds himself to pay if the principal CANNOT or UNABLE to
o Creditor may sue, separately or together, the principal debtor and the surety. pay.
o An accommodation party is a SURETY.
o Surety bond is VOID if there is no principal debtor. CASE: (Castellvi de Higgins and Higgins vs. Sellner, 41 Phil. 142 [1921].) Justice Malcolm
 SURETY is not entitled to Exhaustion
If promissory note executed by debtor is not paid, promisor undertakes to pay the same with
o Reason: surety assumes a solidary liability for the fulfilment of the principal
interest after notice and surrender of security held by creditor. Carmen Castellvi De Higgins brought
obligation as an original promissory and debtor from the beginning. action based on a letter written by “George Sellner” of the following tenor:
o Sureties do not insure the solvency of the debtor, but rather the DEBT itself.
 Undertaking is to CREDITOR, not to DEBTOR “Dear Sir. I hereby obligate and bind myself, my heirs, successors, and assigns that if the promissory
 Surety is not entitled to notice of PRINCIPAL’s DEFAULT; note executed by Key Mining Co., W.H. Clarke, and John Maye in your favor and due six months after
the date for P10,000.00 is not fully paid at maturity with interest, I will, within 15 days after notice of
o Demand on the surety is not necessary before bringing suit against them, since
such default, pay you in cash the sum of P10,000.00 and interest upon your surrendering to me the 8,000
the commencement of the suit is sufficient demand. shares of stock of Keystone Mining Co. held by you as security for the payment of said note.”
 Prior demand by the creditor upon principal NOT REQUIRED;
o The moment the principal is in default, the surety likewise is in DEFAULT. (Sgd.) “George Sellner”
 Remedy of SURETY: pay the debt and pursue the principal for
Issue: What was the status of Sellner in the transaction — a surety or a guarantor?
REIMBURSEMENT.
 Surety is not exonerated by neglect of creditor to sue principal;
o Mere want of diligence/forbearance does not affect the creditor’s rights vis-a-vis Held: It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor,
the surety, unless the surety requires him by appropriate notice to sue or, to be more precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr.
on the obligation. Sellner recites that if the promissory note is not paid at maturity, then, within fifteen days after notice of
o Surety may pay the debt himself and become subrogated to all the rights and such default and upon surrender to him of the three thousand shares of Keystone Mining Company stock,
he will assume responsibility. Sellner is not bound with the principals by the same instrument executed at
remedies of the creditor.
the same time and on the same consideration, but his responsibility is a secondary one found in an
independent collateral agreement, Neither is Sellner jointly and severally liable with the principal
debtors.

 The use of terminologies is not controlling;
CASE: (Reiss vs. Memije.) Justice Carson
Facts: Defendant, Jose Memije, entered into a contract with Buenaventura Kabalsa (building
contractor) for the repair of a house. Buenaventura undertook to furnish the necessary materials. Having
no money and no credit, Petitioner, Paul Reiss, refused to sell lumber to Buenaventura without payment
in advance. Jose accompanied Buenaventura to petitioner’s lumber yard and after satisfying Paul as to his
(Jose’s) fi nancial responsibility, told Paul that he would “guarantee” payment for the lumber. The
circumstances disclosed that the lumber was extended by Petitioner solely and exclusively to defendant
under a verbal agreement with him. Defendant admitted on the stand that Buenaventura had no
commercial credit or standing in the community, and that Defendant, after investigation, absolutely
refused to extend him any credit whatever upon any conditions and that Defendant was well aware of the
fact. Petitioner brought action against Jose for the purchase price of the lumber delivered to
Buenaventura.
Issue: Did Defendant assume liability as a guarantor or as an original promisor?
Held: Upon the facts, it is evident that Jose used the word “guaranteed” not in its technical sense but
rather that after satisfying Paul Reiss as to his own financial responsibility, he obligated himself to pay
for the lumber delivered to Buenaventura for use in his house. Hence, Jose Memije is primarily liable for
the price of the lumber. If goods are sold upon the sole credit and responsibility of the party who makes
the promise then, even though they be delivered to a third person, there is no liability of the third person
to which that of the party promising can be collateral and consequently, such a promise to pay does not
require a writing or memorandum to be enforceable by action.
CASE: (Machetti vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297 [1922].)
Justice Ostrand
Facts: By a written agreement, Machetti undertook to construct a building for Hospicio de San
Jose. One of the conditions was that Machetti should obtain the “guarantee” of Fidelity and Surety
Company. The following indorsement appears upon the contract:
“For value received we hereby guarantee compliance with the terms and conditions as outlined in the
above contract.
FSC.
(Sgd.) “Otto Vorster, Vice President.”
Issue: Was the undertaking assumed by FSC that of guarantor or surety?
Held: “It is true that notwithstanding the use of the words “guarantee” or “guaranty,” circumstances may
be shown which convert the contract into one of suretyship but such circumstances do not exist in the
present case; on the contrary it appears affi rmatively that the contract is the guarantor’s separate
undertaking in which the principal does not join, that it rests on a separate consideration moving from the
principal, and that although it is written in continuation of the contract for the construction of the
building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.”
CASE: (Piczon vs. Piczon, 61 SCRA 67 [1974].) Justice Barredo
Facts: Esteban Piczon executed an “Agreement of Loan” of the following tenor:
“In my capacity as the President of SOSING-LOBOS and Corporation as controlling stockholder and
at the same time as guarantor for the same, I do by these presents contract a loan of P12,500.00, the
receipt of which is hereby acknowledged from Y Corporation, for which I undertake, bind, and agree
to use the loan as surety cash deposit for registration with the Securities and Exchange Commission of
the incorporation papers relative to SOSING-LOBOS Co., Inc Corporation, and to pay the same
amount with 12% interest to Piczon and Corporation x x x.”
Issue: Should Esteban Piczon be held as a surety instead of a guarantor?
Held: Under the terms of the contract, Esteban expressly bound himself only as guarantor. A guaranty
must be express (Art. 2055.) and it would be violative of the law to consider a party to be bound as
surety when the very word used in the agreement is “guarantor,” and there are no circumstances in the
record from which it can be deduced that his liability is that of a surety.
CASE: (IFC vs. Imperial Textile Mills, 2005) justice Panganiban
Facts: On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and
[Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16) semi-annual
installments of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest at the
rate of 10% per annum on the principal amount of the loan advanced and outstanding from time to
time.
On December 17, 1974, a Guarantee Agreement was executed with x x Imperial Textilev
Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto.
ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement.
PPIC subsequently defaulted in the payment of the loan
Issue: Is ITM be held as a surety instead of a guarantor?
Held: ITM is a surety. While referring to ITM as a guarantor, the Agreement specifically stated that
the corporation was jointly and severally liable. To put emphasis on the nature of that liability, the
Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant
only one thing: that at bottom, and to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily[21] liable with PPIC for the latters
obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and
could not be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability
commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself
solidarily with the principal obligor.
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on Joint and
Solidary Obligations. Relevant to this case is Article 1216, which states:
The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected.
Pursuant to this provision, petitioner (as creditor) was justified in taking action directly
against respondent.
 CASE: (Severino and Vergara vs. Severino, 56 Phil. 185 [1931].) Justice Street

Facts: Upon the death of Melencio Severino, who left considerable property, a litigation ensued between
Felicitas Villanueva, Melencio’s widow, and other heirs of Melencio. A compromise was effected by
which Guillermo, a son of Melencio, took over the property pertaining to the estate of Melencio at the
same time agreeing to pay P100,000.00 to Felicitas, payable, fi rst, in P40,000.00 cash upon the
execution of the document of compromise and the balance, in three equal installments. Enrique Echaus,
appellant affi xed his name as guarantor.
Upon Guillermo’s failure to pay the balance, Felicitas instituted action against Melencio and
Enrique, the latter contending that he received nothing for affi xing his signature as guarantor to the
contract and that in effect the contract was lacking in consideration as to him.

Issue: Is there a consideration for the guaranty?

GUARANTY INDORSEMENT
Contract of Security Transfer Held: (1) A guarantor or surety is bound by the same consideration that makes the contract effective
Liability is more extensive Depends on NIL between the principal parties thereto. The compromise and dismissal of a lawsuit is recognized in law as
a valuable consideration; and the dismissal of the action which Felicitas instituted against Guillermo was
Warrants solvency of the promisor Does not warrant solvency of Drawer an adequate consideration to support the promise on the part of Guillermo to pay the sums stipulated in
Cannot be Sued as Promisor Can Be Sued the contract subject of the action.
(2) It is neither necessary that the guarantor or surety should receive any part of the benefi t, if
 ARTICLE 2048 such there be accruing to his principal. The true consideration of this contract was the detriment suffered
by the plaintiffs in the former action in dismissing that proceeding and it is immaterial that no benefi t
 A guaranty is gratuitous, unless there is a stipulation to the contrary. may have accrued either to the principal (Guillermo) or his guarantor (Enrique).
General Rule: Gratuitous
EXCEPTION: There is a stipulation to the contrary.
CAUSE OF CONTRACT OF GUARANTY: RIGHTS OF 3RD PERSON WHO PAYS:
1. Presence of CAUSE which supports principal obligation;  Rules on payment apply:
2. Absence of direct consideration received by guarantor; i. If he paid without the knowledge or against the will of the debtor, he can
3. Absence of direct/personal interest of guarantor over the obligation. recover only insofar as the payment has been beneficial to the debtor;
hoever pays on behalf of the debtor without the knowledge or against the
 ARTICLE 2049 will of the latter, cannot compel the creditor to subrogate him in his rights,
such as those arising from a mortgage, guaranty, or penalty.
 A married woman may guarantee an obligation without the husband's consent,
ii. If he became a guarantor with knowledge or consent of the debtor, he is
but shall not thereby bind the conjugal partnership, except in cases provided by
“subrogated by virtue thereof to all the rights which the creditor had
law.
against the debtor”.
GENERAL RULE: Binds only her separate property
 ARTICLE 2051
EXCEPTIONS:
1. With husband’s consent, she may bind the conjugal/community property;  A guaranty may be conventional, legal or judicial, gratuitous, or by onerous
2. Without Husband’s Consent; in cases provided by law, such as when the title.
guaranty redounded to the benefit of the family. It may also be constituted, not only in favor of the principal debtor, but also in
 ARTICLE 2050 favor of the other guarantor, with the latter's consent, or without his
knowledge, or even over his objection.
 If a guaranty is entered into without the knowledge or consent, or against the
 Legal Guaranty – one imposed by law to secure the compliance of certain
will of the principal debtor, the provisions of articles 1236 and 1237 shall
obligations. (cannot be constituted w/o an express provision of law)
apply.

 Judicial Guaranty – one constituted by decree of court not by virtue of a
provision of law or by virtue of an agreement of the parties.
Art 2051, 2 par. Refers to Double Guaranty – where one constitute to
nd
guarantee the obligation of a guarantor
 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.
 Guaranty is an accessory contract; an indispensable condition for its existence
that there must be a principal obligation.
o If Principal Obligation is VOID; Guarantee is VOID.
CASE: (Municipality of Gasan vs. Marasigan, 63 Phil. 510 [1936].) Justice Diaz
Facts: The municipality of Gasan granted Marasigan fishing privileges within its jurisdictional waters.
To secure the payment of the license fees for the said privilege, Marasigan filed a bond subscribed by
Sevilla and Luna who bound themselves to pay if Marasigan failed to comply with the terms of the
contract. This contract was, however, declared by the Executive Bureau to be illegal. Accepting this
decision, the municipality thereafter awarded the privilege to another person, who not only failed to
make the deposit required but formally yielded the privilege granted to Marasigan or any other person
selected by the municipal authorities. The municipality then advised Marasigan that the contract was to
become effective. In a case that subsequently arose, the municipality sought to recover from Marasigan,
Sevilla, and Luna an amount representing part of the license fees which Marasigan failed to pay for the
privilege granted him.
Issue: Are the contract and the bond valid and enforceable?
Held: No. The contract was not only not consummated but was cancelled. It ceased to be valid from the
time it was cancelled and this being so, neither Marasigan nor Sevilla and Luna were bound to comply
with the terms of their respective contracts of fishing privilege and guaranty. A guaranty cannot exist
without a valid obligation.
 GUARANTY OF VOIDABLE, UNENFORCEABLE, AND NATURAL
OBLIGATIONS
o They are valid until annulled.
CASE: ((Plaridel Surety & Insurance Co. vs. Artex Development Company, Inc., 120 SCRA 827
[1983].)Justice Gutierrez Jr.
Facts: Artex Development Company, Inc. withdrew from the Bureau of Customs shipments of
imported goods which were subject to customs duties and other taxes after posting surety bonds to
cover the taxes due thereon pursuant to Republic Act No. 4086 because its applications for tax
exemptions for said goods were not then
approved by the Board of Industries. In consideration of the obligation assumed by Plaridel (surety
company), Artex agreed to pay the premiums and cost of documentary stamps in advance due on the
bonds for each period of (12) months beginning March, 1965 until “said bonds and its renewals,
extensions or substitutions be cancelled in full by the person or entity guaranteed thereby, or by a
court of competent jurisdiction.” Condition No. 2 of the original surety bonds reads: “That in
case the application (of Artex for tax exemption) is approved by the Board of Industries, then this
bond shall be null and void and of no force and effect.” Artex stopped paying premiums and costs of
documentary stamps after it was granted tax exemption on December 19, 1966. Plaridel maintains that
it has renewed the surety bonds in March, 1966, more or less eight (8) months, before the application
for tax exemptions was granted.
Issue: Is Artex liable for accrued premiums and costs of documentary stamps on renewals of the
surety bonds after the grant of tax exemption to Plaridel?
Held: No. Suretyship cannot exist without a valid obligation. The purported renewals were without
consideration at all. Plaridel incurred no risk from the time Artex’s tax exemption application was
approved. Any renewals were void from the beginning because the cause or object of said renewals
did not exist at the time of the purported transaction. (Arts. 1409, 1352, and 1353, Civil Code.) S
would not possibly be liable for any violation under the original surety bonds which were already void
and
of no force and effect nor was there a need for a formal release of the surety bonds by the Board of
Industries or the Bureau of Customs. By express stipulation of the parties themselves, the surety
bonds became null and void upon the grant of tax exemption.
 ARTICLE 2053 – GUARANTY OF FUTURE DEBTS
 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.
 Continuing guaranty- One which is 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.
 Covers all transactions, including those arising in the future, which are within
the description or contemplation of the contract of guaranty, UNTIL the
expiration or termination.
  FUTURE DEBTS - may also refer to debts existing at the time of the
constitution of the guaranty but the amount thereof is unknown and not to
debts not yet incurred and existing at that time.
 Continuing guaranty or surety is prospective in operation and is generally
intended to provide security with respect to future transactions for an
indefinite time or until a certain period.
 As to Guaranty of Conditional Obligations:
 If the principal obligation is subject to a suspensive condition;
guarantor is liable ONLY AFTER the fulfilment of the condition.
 If it is subject to a resolutory condition, the happening of the condition
extinguishes both the principal obligation and the guaranty.
 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.
 Guaranty is subsdiary and accessory contract;
 Interests, Judicial Costs, and attorney’s fees as part of damages may be
recovered; SURETYSHIP
o 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.
o Interests do not run from the time of the obligation became due,
but FROM THE FILING OF THE COMPLAINT or FROM THE
TIME DEMAND was made upon the surety until the obligation is
fully paid.
 ARTICLE 2055
o 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 compromise 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.
REASON: (it must be EXPRESS)
The law wants, not alone that there be assurance that the guarantor had the
true intention to bind himself, but also to make certain that, on making it, he
proceeded with consciousness of what he was doing.
 Guaranty must not only be EXPRESSED but MUST also be REDUCED TO
WRITING.
o It falls under the Statute of Frauds since it is “a special promise to
answer for the debt, default or miscarriage of another”.
o Need not appear in a public instrument to be valid or enforceable.
Extent of Guarantor’s liability:
1. Where the guaranty DEFINITE: It is limited in whole or in part to the principal
debt, to the exclusion of accessories.
2. Where guaranty INDEFINITE OR SIMPLE: 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.
REASON FOR THE RULE:
 The guarantor, in entering into contract, could have fixed the limits of his
responsibility solely to the strict terms of the principal obligation and if he did
not do so, it must be presumed that he wanted to be bound to the extent so
established.
ACCEPTANCE OF GUARANTY BY CREDITOR AND NOTICE THEREOF
TO GUARANTOR:
1. When NECESSARY: When there is merely an offer of guaranty, or merely a
conditional guaranty in the sense that it requires action by the creditor before
the obligation becomes fixed, it does not become a binding obligation until it
is ACCEPTED and until notice of such acceptance by the creditor is given to,
or acquired by, the guarantor, or until he has notice or knowledge that the
creditor has performed the condition and intends to act upon the guaranty.
a. It may be implied
2. When NOT NECESSEARY: Where upon the other hand, the transaction is
not merely an offer of guaranty, but it amounts to direct or unconditional
promise of guaranty
 ARTICLE 2056
o 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.
 ARTICLE 2057
o 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.
Qualifications of a guarantor:
1. Possesses integrity
2. Capacity to bind himself
3. Has sufficient property to answer for the obligation which he guarantees
 The qualifications need only be present at the time of the perfection of the
contract.
 The subsequent loss of the integrity or property or supervening incapacity of
the guarantor would not operate to exonerate the guarantor or the eventual
liability he has contracted, and the contract of guaranty continues.
 However, the creditor may demand another guarantor with the proper
qualifications. But he may waive it if he chooses and hold the guarantor to his
bargain.
SELECTION OF GUARANTOR:
i. Specified person stipulated as guarantor; creditor has required and
stipulated that a specified person should be a guarantor
ii. Guarantor selected by the PRINCIPAL DEBTOR; guarantor answers for
the integrity, capacity, and solvency of the guarantor;
iii. Guarantor personally designated by the CREDITOR; creditor considers
him to have the qualifications for the purpose, and the responsibility for the
selection should, therefore, fall upon him, and not on the debtor.
CASE: . (El Vencedor vs. Canlas, 44 Phil. 699 [1923]; Justice Ostrand
Facts: An accounting between El Vencedor and Juan Canlas, its agent for the sale of merchandise,
showed that Juan Canlas had failed to pay El Vencedor for merchandise of the value of P5,000.00. El
Vencedor thereupon refused to continue to furnish Juan Canlas merchandise for sale unless he gives a
bond. Subsequently, Galang, Dulay, Rosario, Payauan and Matabang executed a document in favor of
El Vencedor whereby he bound himself “as surety and guarantor of Juan Canlas to become liable in
case of his inability to pay any such damages, as El Vencedor may suffer by reason of his failure to
return such goods and merchandise as Juan Canlas may be legally obliged to return.” It did not appear
that at the time of the execution of the bond Galang, Dulay, Rosario, Payauan and Matabang had
knowledge of the fact that Juan Canlas was indebted to El Vencedor in any sum whatever. El
Vencedor brought action on the bond for goods furnished to Juan Canlas.
Issue: Should the bond respond for the debt contracted by Juan Canlas prior to its execution?
Held: No. Galang, Dulay, Rosario, Payauan and Matabang was liable only for the value of goods
furnished to Juan Canlas subsequent to the execution of the bond. A contract of suretyship or guaranty
is ordinarily not retrospective and no liability attaches for defaults occurring before it is entered into
unless an intent to be so liable is indicated either by express words or by necessary implication.
Respondents had a right to rely on the presumption that the suretyship was prospective and to assume
that the merchandise and accounts for which he bound himself to respond related to future
transactions
CASE: . (Bank of the P.I. vs. Forester, 59 Phil.843 [1926].)Justice Ostrand
Facts: The board of directors of Arrocera de Potolan authorized its treasurer, Echevarria, to obtain for
Arrocera de Potolan a credit on current account for P100,000.00 from the Bank of the P.I. The credit
was granted and the company began to draw against it even before the formal document of the
agreement for the said credit was executed. Simultaneously with the execution of said document a
month and a half later, Echevarria gave a bond “in his own name as surety” whereby he agreed to be
bound jointly and severally in the sum of P100,000.00. Arrocera de Potolan continued to draw against
its credit with BPI until its overdraft including interest, amounted to P84,900.00. BPI was able to
collect P43,100.00 from Arrocera de Potolan as a result of an action brought against Arrocera de
Potolan, leaving a balance of P45,700.00 due and unpaid. The amount received from the bank
subsequent to the date of the bond was only P25,500.00 which is less than P43,100.00, the amount
already collected from Arrocera de Potolan.
Issue: Did the bond cover the amounts received from BPI prior to its date?
Held: Yes. It is very true that bonds or other contracts of suretyship are ordinarily not to be construed
retrospectively,but that rule must yield to the intention of the contracting parties as revealed by the
evidence. In the present case, the circumstances so clearly indicated that the bond given by Echevarria
was intended to cover all of the indebtedness of Arrocera de Potolan upon its current account with
BPI. Echevarria wasdirector-treasurer of Arrocera de Potolan and was familiar with its fi nancial
affairs. Arrocera de Potolan had only one current credit account, a fact which was known to
Echevarria, and there could be no doubt whatever that the bond was intended by all the parties to
cover the entire account. Echevarria well knew that the time the bond was executed, a large portion of
the credit secured by the bond had already been utilized. The situation would have been different if
Echevarria at that time had been ignorant of the fact.
CASE: . (Standard Oil Co. of New York vs. Cho Siong, 52 Phil. 612 [1928].) Justice Avancena
Facts: To guarantee the fulfi llment of the obligation of Cho Siong, as agent of Standard Oil, in the
sale of the latter’s petroleum products, Ong Guan Can subscribed to a personal bond in the sum of
P3,000.00. By virtue of the agency, Cho Siong received from Standard Oil petroleum to the value of
P14, 136.79 and made good to Standard Oil the amount of P14,027.33, thus leaving a balance of
P64.46. On the same date when Ong Guan Can subscribed the P3, 000.00 bond, Ong Guan Can signed
an instrument in favor of Standard Oil in which he assumed responsibility for all the accounts that
might be owing to Standard Oil by its former agent.
Issue: Could Ong Guan Can be held liable for the debt of the former agent of Standard Oil which Cho
Siong assumed in virtue of another contract of which Ong Guan Can was not even aware?
Held: No. Under the terms of the bond, Ong Guan Can did not answer for Cho Siong, save for the
latter’s acts by virtue of the contract of agreement between D and Standard Oil. A contract of
suretyship or guaranty is to be strictly interpreted and is not to be extended beyond its terms
CASE: . (Municipality of Lemery vs. Mendoza andBlas, 48 Phil. 415 [1925].)Justice Street
Facts: By a lease contract, the municipality of Lemery granted fishing privilege to Mariano Napa for
a period of two years beginning on January 1, 1921 and ending on December 31, 1922, for the sum of
P23,000.00 for each year. Thereafter, Mendoza and Blas, as bondsmen, executed a document which
declared, among other things, the lease by Mariano Napa of the privilege of fishing referred to “for the
value of P23,000.00 for the term of two years, from January 1, 1921 to December 31, 1922.” In said
document, Mariano Napa obligated themselves jointly and severally for the payment to the
municipality of Lemery the sum of P46,000.00 in case Napa, as grantee, shall fail to comply with the
conditions of the bond of which we are informed.” Mariano Napa failed to pay the sum of P23,000.00
for the year 1922.
Issue: Did Mendoza and Blas bind themselves in the sum of P46,000.00 or P23,000.00?
Held: For P23,000.00. (1) The obligating clause of the contract of guaranty is quite clear to the effect
that the rent to be paid for the privilege of fi shery was P23,000.00 for the full term of two years. It is
true that Mariano Napa declared themselves bound for P46,000.00, but as in all bonds this was only
because the bond was required to be made in double the amount of the principal liability as an
assurance of the performance of the principal obligation.
(2) The payment of Napa of the full sum of P23,000.00 for the year 1921 discharged Mendoza and
Blas from all further liability. The circumstance that the sum of P23,000.00 paid by Napa was applied
by the municipality to Napa’s indebtedness for the year 1921 was without significance as against the
sureties, since they were not parties to the contract of lease and were liable only upon the contract of
suretyship (guaranty) which called for the payment of only P23,000.00 by the principal. The
obligation of a surety must be express and cannot be extended by implication beyond its specifi ed
limits.
CASE: . . (Wise and Co. vs.Kelly, 37 Phil. 696 [1918].) Justice Fisher
Facts: Kelly purchased merchandise from Wise & CO. on credit and agreed that respondent would
apply the proceeds of its sale to the discharge of his indebtedness in the amount of P13,000.00, the
purchase price. Mariano Lim, as surety for respondent, undertook that respondent would pay over to
petitioner the entire proceeds from the sale of the merchandise.
Issue: Is Mariano Lim liable for the difference between the amount realized from the sale of the
merchandise and the purchase price of the same?
Held: No. Mariano Lim did not undertake absolutely to pay the sum of P13,749.09. His agreement
was limited to respond for then performance by respondent of his undertaking to deliver to petitioner
the total proceeds of the sale of the merchandise for the invoice value of which a promissory note was
given by respondent
CASE: . . (Pacific Tobacco Corp. vs.Lorenzana, 102 Phil. 234 [1957].)Justice Felix
Facts: Pacific Tobacco and Ricardo Lorenzana entered into a distributorship agreement whereby
Lorenzana bound himself to sell and distribute the products of Pacific Tobacco in Manila and Rizal
province. To guarantee the fulfi llment of Lorenzana’s part of the contract, he put up a bond with
Visayan Surety and Insurance Corporation, a compensated surety.
Nowhere in the agreement appears a restriction against Lorenzana’s acceptance of additional
territories if he so desired.
Issue: Does the delivery of merchandise to Lorenzana at a place other than that appearing in the
contract constitute a material alteration of the same that would release Visayan Surety and Insurance
Corporation from its liability?
Held: No. (1) The mention of Manila and Rizal in said agreement was designed more as a declaration
or identifi cation of the places wherein Lorenzana was expressly authorized and assigned to sell
Pacific Tobacco’s products which is no obstacle to Lorenzana’s acceptance of additional territories in
order to fulfill his obligation. The obligation of Lorenzana remained the same — to settle his accounts
to Pacific Tobacco at the specified time. The addition or diminution of the territories could by no
means alter or affect that duty to make payment on time and that is precisely Lorenzana’s obligation
secured by the bond.
(2) A departure from the terms of contract will not have the effect of discharging a compensated
surety unless it appears that such departure has resulted in injury, loss or prejudice to the surety. It has
been said that to allow compensated surety companies to collect and retain premiums for their
services, graded according to the nature and extent of their risk, and then to repudiate their obligations
on slight pretexts which have no relation to the risk, would be most unjust and immoral, and would be
a perversion of the wise and just rules designed for the protection of voluntary sureties.
CASE: . . (Reparation Commission vs. Northern Lines, Inc., 34 SCRA 203 [1970].) Justice
Concepcion
Facts: It appears that, pursuant to Rep. Act No. 1789, the Reparations Commission — hereinafter
referred to as the Commission — had awarded two (2) vessels to the Northern Lines Inc., a
corporation organized and existing under the Philippine law — hereinafter referred to as the Buyer —
for use in the interisland shipping. According to the schedules of payment agreed upon between the
parties, complete delivery of one of the vessels — the M/S Magsaysay, later named M/S Don
Salvador — took place on April 25, 1960, and that of the other — the M/S Estancia later named M/S
Don Amando — on May 26, 1960. These vessels were the object of separate deeds of conditional
purchase and sale of reparations goods, executed by the Commission, as vendor, and the Buyer, as
vendee, the first dated September 12, 1960, and the second October 20, 1960. In conjunction with
these contracts and in line with the provisions thereof Surety Bonds Nos. 3825 and 4123 were
executed, on April 25, 1960 and May 30, 1960, respectively, by the Buyer, as principal, and the
Fieldmen's Insurance Co., as surety, in favor of the Commission, to guarantee the faithful compliance
by the Buyer of its obligations under said contracts. The Buyer undertook therein to pay for said
vessels the installments specified in a schedule of payments, appended to each contract.
A stipulation in a bond is to the effect that the liability thereunder would expire a year before the first
installments of the principal obligation had become due.
Issue: Is the stipulation valid?
Held: No. Referring to a stipulation in a bond to the effect that the liability thereunder would expire
on the date of maturity of the principal obligation, the court declared that said stipulation in effect
nullifi ed the nature of said bond and was therefore, “unfair and unreasonable, as well as a subtle way
of making money thru trickery and deception.”
The situation in the case at bar is even worse, since the surety contends that its bond expired about a
year before the first installments had become due. To accept this theory, the result would be that the
surety had never contracted any obligation or assumed any liability in favor of the creditor
(Reparation Commission) in consequence of the execution of said bond which is manifestly contrary
to the intention of the parties. The rule of strict construction of surety bonds does not
apply to corporate sureties.
CASE: . . (National Bank vs. Escueta, 50 Phil. 991 [1927].) Justice Ostrand
Facts: To secure the payment of any obligation Island Tading Co.m might contract with Philippine
National Bank, Escueta, et. al signed a surety (guaranty) agreement in favor of Philippine National
Bank. The document evidencing the agreement was delivered to Philippine National Bank which
retained it without objection on the strength of said agreement, Philippine National Bank extended
credit to Island Trading Co..
Issue: Was there acceptance by Philippine National Bank of the surety (guaranty) agreement?
Held: Yes. The facts sufficiently indicated such acceptance. Such acceptance need not necessarily be
express or in writing.
CASE: . . ((Texas Company, Inc. vs. Alonso, 73 Phil. 90 [1941].)Justice Laurel
Facts: Tomas Alonso signed a bond whereby he guaranteed the faithful performance of an agency
contract of Leonora Bantug with Texas Co. The bond was executed at the request of Texas Co., by
virtue of the following clause of the agency contract: “Additional security — The agent shall
whenever requested by the company in addition to the guaranty herein provided furnish further
guaranty or bond, conditioned upon the agent’s faithful performance of this contract, in such form and
amount and with such bank as surety or with such individuals or fi rms as joint and several sureties as
shall be satisfactory to the company.” Alonso was never notifi ed by Texas Co. of its acceptance, and
there was no evidence tending to show that Alonso ever had knowledge of any act on the part of
Texas Co. amounting to an implied acceptance.
Issue: Was there merely an offer of guaranty on the part of Alonso?
Held: Yes, and, therefore, in the absence of the acceptance of the offer by Texas Co., Alonso could
not be held liable. The bond was subject to the creditor’s approval. Before the bond would be
accepted, it had to be in such form and amount and with such sureties, “as shall be satisfactory to the
company.” The logical implication arising from this requirement was that, if Texas Co. was satisfied
with any such bond, notice of its acceptance or approval should necessarily be given to the proper
party in interest, namely the surety or guarantor.
CASE: . (Poblete vs. Lo Singco, 44 Phil. 369 [1923].) Justice Stret
Facts: A contract of suretyship was entered into between Lo Singco, as principal, and Carreon and
Benipayo as sureties whereby Carreon and Benipayo bound themselves jointly and severally to pay a
certain amount which Lo Singco obligated himself to pay Perfecta Poblete (a third person). For failure
of Lo Singco to pay C, the latter brought an action against Carreon and Benipayo under their contract
of suretyship.
Issue: Can Poblete maintain the action against Carreon and Benipayo considering that he was not a
party to the contract?
Held: Yes. The general rule is that a third person has no rights and obligations under a contract to
which he is a stranger. However, when a contract, such as one of guaranty, contains a stipulation in
favor of a third person who accepted and acted upon such stipulation before its revocation by the
obligors, said third person may demand its fulfi llment. (see Art. 1311.) In the present case, Poblete
accepted the contract of suretyship, and upon the faith of it, allowed Lo Singco to strip his (Poblete’s)
lands of valuable plantings of hemp to secure the payment of the price of which, the contract of
suretyship was delivered by Lo Singco to Poblete. There was no revocation of the contract before it
was accepted by Poblete nor to any time before demand was made upon Carreon and Benipayo for the
fulfillment thereof.
CASE: . (Pastoral vs. Mutual Security Insurance Corp., 14 SCRA 1011 [1965].) Justice Reyes
Facts: The surety bond requires Pedro Pastoral (lessor) to report to the surety any violation of the
lease contract by D (lessee-debtor) within five (5) days, otherwise, the bond will be null and void. The
bond was executed on October 22 and copy thereof was received by the lessor on November 21. By
then, respondent defaulted in two (2) payments of the rentals, which defaults Pastoral should have
reported between October 6-10 and November 6-10, as required by the bond, but Pastoral did so only
on December 5.
Issue: Does Pastoral’s failure to notify the surety of respondent’s defaults in between October 6-10
and November 6 10, and in notifying the surety only on December 5, constitute a violation of the
condition of the bond that exonerated the surety from liability?
Held: No. (1) By imposing on Pastoral the condition in question, the surety made it necessary that
Pastoral should accept the bond; and Pastoral could not do so before learning of it. The rule is that
where the guaranty requires action by the creditor before obligation becomes fixed, it is not binding
until accepted. The rule is grounded on common sense; otherwise, the debtor and the guarantor could
easily defraud the creditor by inserting in the bond, conditions that would render it nugatory. The
suretyship contract, therefore, was not perfected and was not binding on Pastoral until November 21,
when he received a copy thereof and tacitly accepted it.
(2) A contract of guaranty or suretyship is only prospective, and not retroactive in operation unless a
contrary intent is clearly shown.
(3) The rule holding sureties to be favorites of the law, and their contracts to be strictissimi juris does
not apply to compensated sureties.
CASE: . ((Estate of Hemady vs. Luzon Surety Co., Inc., 100 Phil. 388 [1956].)Justice Reyes
Facts: Luzon Surety Co. filed a claim against the Estate of Hemady on the different indemnity
agreements or counterbonds, each subscribed by a distinct principal and by the deceased Hemady, a
surety (solidary guarantor) in all of them in consideration of Luzon Surety’s having guaranteed the
various principals in favor of different creditors. Luzon Surety prayed for allowance, as a contingent
claim, of the value of the counterbonds. The lower court dismissed the claim on the ground that
“whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his
death he ceased to be a guarantor.”
Issue: Is a guarantor’s liability extinguished by his death?
Held: No. (1) Under the law (see Art. 1311.), the general rule is that a party’s contractual rights and
obligations are transmissible to his successors. The articles of the Civil Code that regulate guaranty
and suretyship (Arts. 2047-2084.) contain no provision that the guaranty is extinguished upon the
death of the guarantor or the surety.
(2) From Article 2057, it is immediately apparent that the supervening incapacity of the guarantor
(that is to say, the disappearance of his integrity after he has become bound) does not terminate the
contract but merely entitles the creditor to demand a replacement of the guarantor. But the step
remains optional in the creditor: it is his right, not his duty; he may waive it if he chooses and hold the
guarantor to his bargain. Article 2057 is incompatible with the proposition that the requirement of
integrity in the guarantor or surety makes the latter’s undertaking strictly personal so linked to his
individuality that the guaranty automatically terminates upon his death.
(3) The contracts of suretyship entered into by Hemady in favor of Luzon Surety, not being
intransmissible, his eventual liability thereunder necessarily passed upon his death to his heirs. Such
contracts give rise to contingent claims provable against his estate under Section 5, Rule 67 of the
Rules of Court. L had, therefore, the right to fi le against the Estate of Hemady a contingent claim for
reimbursement.
CASE: . (Aglibot vs Ingersol Santia) Justice Reyes

FACTS:Private respondent-complainant Engr. Ingersol L. Santia loaned the amountof P2,500,000.00

to Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner Fideliza J.
Aglibot. The loan was evidenced by a Promissory Note dated July 1, 2003,issued by Aglibot in behalf
of PLCC, payable in one year subject to interest at 24% per annum. Allegedly as a guaranty or
security for the payment of the note, Aglibot also issued and deliveredto Santia eleven (11) post-dated
personal checks drawn from her own demand accountmaintained at Metrobank, Camiling Branch.
Aglibot is a major stockholder of PLCC, withheadquarters at 27 Casimiro Townhouse, Casimiro
Avenue, Zapote, Las Piñas, Metro Manila,where most of the stockholders also reside.Upon
presentment of the aforesaid checks for payment, they were dishonored by the bankfor having been
drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC and
Aglibot of the face value of the checks, but neither of them heeded hisdemand.

ISSUE: Whether or not Aglibot is an accommodation party or a guaranteeing party? If she is thelatter,
is she benefitted from excussion against Santia?

HELD: Aglibot is an accommodation party and therefore liable to Santia

The facts below present a clear situation where Aglibot, as the manager of PLCC, agreedto
accommodate its loan to Santia by issuing her own post-dated checks in payment thereof. Sheis what
the Negotiable Instruments Law calls an accommodation party. Concerning the liabilityof an
accommodation party.
The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the
latter on her checks without the need for Santia to first go after PLCC for the payment of its loan.
It would have been otherwise had it been shown that Aglibot was a mereguarantor, except that since
checks were issued ostensibly in payment for the loan, the provisionsof the Negotiable Instruments
Law must take primacy in application.