CHAPTER 2 Effects of Guaranty

SECTION 1 Effects of Guaranty Between the

Guarantor and the Creditor (2058-2065)

said judgment against him, until after the

properties of the principal debtor shall have
been exhausted, to satisfy the latters
obligation.

I. Procedure When Creditor Sues

A. Creditor must sue the principal alone
1. Reason: A contract of guaranty is accessory
and subsidiary
2. Exception: Art. 2059

D. Who may avail

1. Guarantor - ordinary and personal guarantors
2. Sub-guarantor - as against the principal debtor
and the guarantor (Art. 2064)
3. Co-guarantors - as against the

B. Creditor shall ask the court to notify the

guarantor of the action

C. How to avail
1. Guarantor must set it up against the creditor
upon demand for payment.

1. If the guarantor appears

He is still given the benefit of excussion,
under Art. 2058, even if judgment should
be rendered against him and the principal
debtor.
2. If guarantor does not appear
He cannot set up the defenses which, by
appearing, are allowed to him by law, and
it may no longer be possible for him to
question the validity of the judgment
rendered against the debtor.
C. Hearing before execution can be issued against
guarantor
A guarantor is entitled to be heard before an
execution can be issued against him where he
is not a party in the case involving his
principal.
II. Benefit of Excussion
A. Definition
The right of GUARANTOR to demand that the
creditor first:
1. EXHAUST all properties of principal debtor
2. RESORT to all legal remedies against the
principal debtor
The creditor has a right to secure judgment
against guarantor prior to exhaustion. The
creditor may, prior thereto, secure a judgment
against the guarantor, who shall be entitled,
however, to a deferment of the execution of

The duty of the creditor to demand payment

upon the guarantor takes place after a
judgment has been obtained against for the
exhaustion of the debtor's properties.
Joining the guarantor in the suit against the
principal debtor is not the demand intended by
law.
2. Point out to the creditor available property of
the debtor within the Philippines, sufficient to
cover the amount of debt.
The guarantor having fulfilled all the conditions
required above, the creditor who is negligent in
exhausting the property pointed out shall suffer
the loss, but only to the extent of the value
of the said property for the insolvency of the
debtor (Art. 2061).
D. Exceptions
1. Right waived - must be made in express terms
2. Liability assumed is that of surety - guarantor
binds himself solidarily with the principal debtor
3. Insolvency of debtor is proven by an unsatisfied
writ of execution
It is not sufficiently established by the mere
fact that the debtor has been declared
insolvent in insolvency proceedings, in which
the extent of the insolvents inability to pay is
not determined until the final liquidation of his
estate.
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4. Debtor absconds or cannot be sued within the

Philippines
5. Resort to all legal remedies is a useless formality
6. Others
i. Non-compliance with Art. 2060
ii. If he is a judicial bondsman or sub-surety
iii. Failure to interpose it as a defense before
judgment is rendered against him
iv. Where a pledge or mortgage has been given
by him as a special security
III. Effects of Compromise
A. General rule
A contract binds only the parties thereto and
not third persons. Hence, a compromise cannot
prejudice the guarantor or the debtor, as the
case may be, when he is not a party to such
compromise.
B. Exception to the rule
However, even if the guarantor or debtor is not
a party to such compromise, the same can
benefit him as it is in the nature of a stipulation
in favor of a third person which the guarantor
or debtor may accept unless it has been
revoked before his acceptance.
IV. Benefit of Division
A. Definition
Right of a co-guarantor, as against the creditor,
to pay only the divided share that it is bound
to pay
B. Application
This article entitles the several guarantors of
only one debtor and for the same debt.
C. Exceptions
1. Express stipulation of solidarity
2. Article 2059

SECTION 2 Effects of Guaranty between the

Debtor and the Guarantor (Art. 2066-2072)
I. Right to Indemnification

It is the debtor that is directly and

principally liable so it is just that the
guarantor who pays must be indemnified.
Indemnity comprises:
a. Total amount of debt but if the
guarantor paid a smaller amount due
to compromise, he cannot demand
more than he actually paid
b. Legal interest from notice of
payment of the debt.
c. Expenses incurred by the guarantor
expenses as consequence of the
guaranty; expenses after payment has
been demanded
d. Damages, if they are due
Exceptions to Right of Indemnity
a. A. 2050
b. A. 1238
c. Subject to waiver
A. Effect of payment before/after maturity (2069)
(1) Obligation with a period obligation
demandable only when the day fixed
comes. When guarantor pays before
maturity, he is not entitled to
reimbursement since there is no necessity
for accelerating payment.
Rationale: Guaranty is subsidiary.
However, the debtor is liable if payment
was made with his consent or the same was
ratified by him.
In any case, guarantor can recover upon
expiration of the period.
(2) Where demand made during term of
guarantee, the fact that payment was
actually made after said term is not
material. What is controlling is that default
and demand on guarantor had taken place
while the guarantee is still in force.
B. Effect of repeat payment
(1) No notice from guarantor: the
guarantors remedy is to collect from the
creditor.
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(2) Exceptions: The guarantor may still

claim reimbursement from the debtor in
spite of lack of notice when:

Remedies:
(1) Release from guaranty can only be
exercised against the principal debtor and
not against the creditor

a. the creditor becomes insolvent

b. the guarantor was prevented by FE to
notify debtor
c. the guaranty is gratuitous
C. Guarantor of a third person at request of
another (2072)
The guarantor has
reimbursement from:

the

right

to

claim

a. the person who requested him to be a

guarantor
b. the debtor

(2) Demand a security

SECTION 3 Effects of Guaranty as Between Coguarantors (Articles 2073-2075)

I. Right to Reimbursement is the right of the coguarantor who pays, as against the other coguarantors, to recover the shares due from the coguarantors, but only if the following conditions
concur:

II. Right to Subrogation necessary to enforce

right to indemnification. It arises by operation of
law and upon principles of natural justice. The
guarantor is subrogated to the rights of the
creditor.

A. There are two or more guarantors of the

same debtor for the same debt.
B.

One of the co-guarantors has paid.

C.
When right to subrogation not available: when
guarantor has no right to be reimbursed

Payment is made by virtue of a judicial

demand or the principal debtor is
insolvent.

A. Effect of payment without notice (2068)

The guarantor must notify the debtor. If not, the
the debtor may set up defenses which he could
have set up against the creditor at the time of
payment.

What is the effect of insolvency of any guarantor?

The rule in solidary obligations shall apply his share
shall be borne by the others.

Ex: The debtor has already paid. Guarantor

pays without notifying debtor. Debtor may
then raise that the obligation has been
extinguished.
III. Right to Protection
General rule: The guarantor has no cause of action
against the debtor until the former has paid the
obligation.
Art. 2071 seven instances when the guarantor
may proceed against the debtor even before
payment. The purpose is to enable the
guarantor to take measures for the protection
of his interest.
This for the protection of guaranty before he has
paid but after he has become liable.
Art. 2066 remedy after payment

Accrual and basis of the right to reimbursement is

acquired ipso jure by the guarantor.
II. Defenses Available to Co-guarantors according
to Art. 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.

All defenses which the debtor would have

interposed against the creditor
Example: Defenses such as fraud, prescription,
and illegality, etc. may be set up because they
are defenses inherent in the obligation.

Purely personal defenses of the debtor

Example: Defense like minority

III. Liability of Sub-guarantor in Case of Insolvency

of Guarantor the sub-guarantor is liable to the co3

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guarantors in the same manner as the insolvent

guarantor for whom he bound himself.

CHAPTER 3 Extinguishment of Guaranty

I. Causes of Extinguishment of guaranty
A. Guaranty as an accessory and subsidiary
obligation
When the principal obligation is extinguished, the
guaranty is terminated
Recall: Causes of Extinguishment of Obligations
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Merger of the rights of the creditor and
debtor in the same person
5. Compensation
6. Novation
B. Material alteration of the principal contract =
extinguishment of the guaranty
1. Material Alteration A change which imposes
new obligation or added burden on the party
promising or which takes away some
obligation already imposed, changing the legal
effect of the original contract and not merely
the form thereof.
Material Alteration = More Onerous Obligation
2. Effect of Material Alteration = Release of the
Guarantor (without his consent)
Ration: Such material alteration would
constitute a novation or change of the
principal contract which is consequently
extinguished.
3. Alteration Immaterial
Examples:
Assignment of the creditor without the
knowledge or consent of the surety
Change in the technical specifications of
the items purchases but the amount
due remains unchanged

II. Release by Conveyance of Property by the

Debtor
A. Acceptance by creditor of an immovable
property or other property = payment of the
debt
B. Eviction from the immovable property does not
make the guarantor liable but revives the
principal obligation and not of the guaranty
III. Release of Guarantor without the Consent of
Other Guarantors
A. Article 2065 states that the guarantors enjoy the
benefit of division.
B. Article 2073 states that in case one of the
guarantors become insolvent, the guarantors
must bear his share
C. Such that when one of the guarantors is released
without the consent of the others by the
creditor, the guarantors also benefit up to the
extent of the released guarantor
IV. Release by extension of term granted by
creditor to debtor
A. Creditors Grant of Extension to the Debtor
without the consent of the Guarantor releases
the latter
Ratio: Necessity of avoiding prejudice to
the guarantor
B.

Prejudice to the Guarantor and period of

extension immaterial
C. Extension must be based on a new agreement
D. Diligence on part of the creditor to enforce his
claim generally not required
E. No cause of action against creditor for delay

V. Release when guarantor cannot be subrogated

A. Guarantors who pay to the creditor are
entitled to subrogation to all the rights of the
creditor.
B.
C.

The creditor has the duty to account for his lien

on the principals property
Failure of the creditor to register a mortgage
or secure a right releases the guarantor
because there can no longer be subrogation in
favor of the guarantor.
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CHAPTER 4 Legal and Judicial bonds

I. Bonds

In all cases, every surety must be worth the

amount specified in his own undertaking
over and above all just debts, obligations and
properties exempt from execution. (12a)
IV. Remedy if bondsman failed to give or perform
the bond required of him

An undertaking that is sufficiently secured and

not cash or currency.
A three-party contract in which one party
(usually a bank or insurance company) gives a
guaranty to a contractors customer (oblige) that
that the contractor (obligor) will fulfill all the
conditions of the contract entered into with the
obligee. If the obligor fails to perform according
to the terms of the contract, the surety pays a
sum agreed upon in the contract to the customer
as compensation.
Bonds are contractual in nature. It exist only in
consequence of a meeting of minds under the
conditions essential to a contract.

A pledge or mortgage sufficient to cover the

obligation shall be admitted in lieu thereof.
V. Bondsman not entitled to excussion
A judicial bondsman and the sub-surety are not
entitled to the benefit of excussion because
they are not mere guarantors, but sureties
whose liability is primary and solidary.
Excussion- the act of exhausting legal
proceedings against a debtor or his property,
before proceeding against the property of a
person secondarily liable for the debt.

II. Kind of Bonds

A. Legal bonds - refers to a bond imposed by virtue
of a provision of law.
B. Judicial bonds - refers to a bond that is required
by the courts by virtue of a judicial order to secure
the eventual right of one of the parties in a case
III. Qualifications of a Bondsman
A. Art 2056 (For personal bondsman)
1. He possesses integrity
2. He has capacity to bind himself, and
3. He has sufficient property to answer for
the obligation which he guarantees
B. Sec 12, Rule 114, Rules of court (For sureties in
property bond)
1. Each must be a resident owner of real
estate within the Philippines;
2. Where there is only one surety, his real
estate must be worth at least the amount of
the undertaking;
3. If there are two or more sureties, each
may justify in an amount less than that
expressed in the undertaking but the
aggregate of the justified sums must be
equivalent to the whole amount of bail
demanded.
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