TYPES OD GUARANTY
chattel mortgage.
AS TO ORIGIN
1. Conventional - by agreement of the parties
2. Legal - imposed by law
3. Judicial - required by a court to guarantee the
eventual right of one of the parties in a case.
TYPE OF CONSIDERATION
1. Gratuitous - the guarantor does not receive
anything for acting as guarantor
2. Onerous - the guarantor receives valuable
consideration for acting as guarantor.
BENEFICARY
1. Single - constituted solely to guarantee or secure
performance of the principal obligation.
2. Double or Sub-guaranty - constituted to secure
fulfillment of a prior guaranty; guarantees the
obligation of a guarantor.
In the broad sense:
Personal - the guaranty is the credit given by the person
who guarantees the fulfillment of the principal
obligation (guarantor).
Real - the guaranty is property. If the guaranty is
immovable property, it is a real mortgage or antichresis.
If the guaranty is movable property, it is pledge or
PRESENCE OF DEBTORS CONSENT
EXTENT (2055)
1. Definite - limited to the principal obligation only
or to a specific portion thereof, to the exclusion
of accessories
2. Indefinite or simple - includes not only the
principal obligation but also all its accessories,
including judicial costs.
INCLUDED DEBTS (2053)
DINO VS. CA
JACINTO UY DIO and NORBERTO UY vs. HON. COURT OF
APPEALS and METROPOLITAN BANK AND TRUST COMPANY
FACTS: In 1977, Uy Tiam Enterprises and Freight Services, thru its
representative Uy Tiam, applied for and obtained credit
accommodations (LOC and TRA) METROBANK in the sum of
P700,000.00. To secure the aforementioned credit
accommodations Uy and Dio executed separate Continuing
Suretyships, where Norberto UY agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate sum of P300,000.00
while Jacinto Uy Dio agreed to be bound up to the aggregate sum
of P800,000.00. This obligation was settled and paid by UTEFS.
1
Again in 1979, UTEFS secured another credit accommodation
which was fully settled. They then applied and obtained an
irrevocable letter of credit in the sum of P815, 600.00, covered
UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0." It was applied for and obtain by UTEFS without
the participation of Norberto Uy and Jacinto Uy Dio as they did not
sign the document denominated as "Commercial Letter of Credit
and Application." Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did METROBANK nor
UTEFS inform them that the 1979 Letter of Credit has been opened
and the Continuing Suretyships separately executed in February,
1977 shall guarantee its payment.
UTEFS executed and delivered to METROBANK the Trust Receipt
whereby the former acknowledged receipt in trust from the latter of
the aforementioned goods from Planters Products which amounted
to P815, 600.00. Being the entrusted, the former agreed to deliver
to METROBANK the entrusted goods in the event of non-sale or, if
sold, the proceeds of the sale thereof, on or before September 2,
1979.
However, UTEFS did not acquiesce to the obligatory stipulations in
the trust receipt.
METROBANK sent letters to the said principal obligor and its
sureties, Uy and Uy Dio, demanding payment of the amount due.
Dio denied his liability saying that he cannot be held liable for the
1979 credit accommodation because it is a new obligation
contracted without his participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully paid.
Accordingly, the Continuing Suretyships executed in 1977 cannot
be availed of to secure Uy Tiam's Letter of Credit obtained in 1979
because a guaranty cannot exist without a valid obligation. It was
further argued that they cannot be held liable for the obligation
contracted in 1979 because they are not privies thereto as it was
contracted without their participation.
METROBANK contends that the terms and conditions embodied in
the comprehensive suretyships separately executed by sureties-
defendants, the bank argued that sureties-movants bound
themselves as solidary obligors of defendant Uy Tiam to both
existing obligations and future ones based on Article 2053.
ISSUE: Whether petitioners are liable as sureties for the 1979
obligations of Uy Tiam to METROBANK by virtue of the Continuing
Suretyship Agreements they separately signed in 1977. YES but
only for the amount or limit stated in the surety contract
HELD: A continuing guaranty is one which 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 thereof. A guaranty shall be construed as continuing
when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time
either indefinitely or until a certain period, especially if the right to
recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to
be made "from time to time" the guaranty will be construed to be a
continuing one.
The use of particular words and expressions such as payment of
"any debt," "any indebtedness," "any deficiency," or "any sum," or
the guaranty of "any transaction" or money to be furnished the
2
principal debtor "at any time," or "on such time" that the principal
debtor may require, have been construed to indicate a continuing
guaranty.
The Court looked into the provisions of the Surety entered by Dio.
It shows that the suretyship agreement are continuing in nature.
Petitioners do not deny this; in fact, they candidly admitted it.
Neither have they denied the fact that they had not revoked the
suretyship agreements. The purpose of the execution of the
Continuing Suretyships was to induce appellant to grant any
application for credit accommodation (letter of credit/trust receipt)
UTEFS may desire to obtain from appellant bank. By its terms,
each suretyship is a continuing one which shall remain in full force
and effect until the bank is notified of its revocation.
The Continuing Suretyship Agreements CAN be made applicable to
the 1979 obligation even if the latter was not yet in existence when
the agreements were executed in 1977, as stated in Art 2053 par 2.
The limit of the petitioners respective liabilities must be determined
from the suretyship agreement each had signed. The Continuing
Suretyship Agreements signed by petitioner Dio and petitioner Uy
fix the aggregate amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. It is also stated in the
contract that they are bound to pay for the interest and for a
reasonable amount of cost of suit in case of judicial proceedings.
The law is clear that a guarantor may bond himself for less, but not
for more than the principal debtor, both as regards the amount and
the onerous nature of the conditions.
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners separately bound
themselves to pay interest, expenses, attorney's fees and costs.
Even without such stipulations, the petitioners would, nevertheless,
be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides that 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 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. Interest and damages are included
in the term accessories. However, such interest should run only
from the date when the complaint was filed in court. Even attorney's
fees may be imposed whenever appropriate, pursuant to Article
2208 of the Civil Code.
FORTUNE MOTORS CORP. V. CA
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.
RODRIGUEZA vs. THE HONORABLE COURT OF APPEALS and
FILINVEST CREDIT CORPORATION
FACTS: In 1981, Joseph Chua and Edgar Rodrigueza executed
separate surety agreements in favor of Fortune Motors (Phils.)
Corporation to cover obligations incurred by Fortune Motors
whether they be enforced or thereafter made (from the time of said
surety contracts).
In 1982, Fortune Motors secured cars from Canlubang Automotive
Resources Corporation (CARCO) via trust receipts and drafts made
3
by CARCO. These were assigned to Filinvest Credit Corporation.
Later Filinvest, when the obligation matured, demanded payment
from Fortune Motor as well as from Chua and Rodrigueza. No
payment was made. A case was filed. Rodrigueza averred that the
surety agreement was void because when it was signed in 1981,
the principal obligation (1982) did not yet exist.
ISSUE: Whether surety can exist even if there was no existing
indebtedness at the time of its execution.
HELD: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance Corporation
vs. Court of Appeals which reiterated our rulings in National Rice
and Corn Corporation (NARIC) vs. Court of Appeals and Rizal
Commercial Banking Corporation vs. Arro.
Future obligations can be covered by a surety. Comprehensive or
continuing surety agreements are in fact quite commonplace in
present day financial and commercial practice. A bank or financing
company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement
along with its sureties. By executing such an agreement, the
principal places itself in a position to enter into the projected series
of transactions with its creditor; with such suretyship agreement,
there would be no need to execute a separate surety contract or
bond for each financing or credit accommodation extended to the
principal debtor.
HOW GUARANTY IS CONSTRUED (2055)
Art. 2055. 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 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.
Guaranty is never presumed. It must be express. Because
the guarantor assumes an obligation to pay for anothers debt
without any benefit to himself. Thus, it has to be certain that he
really intends to incur such an obligation and that he proceeds with
consciousness of what he is doing.
FORM REQUIRED for Guaranty:
Guaranty must be in writing.
A contract of guaranty, to be enforceable, must be in writing
because it falls under the Statute of Frauds as a special promise to
answer for the debt, default or miscarriage of another. (De Leon
textbook says that surety is not covered by Statute of Frauds, but
some professors say that surety is still covered by it because it is
still a promise to answer for the debt of another person. What is not
covered by the Statute of Frauds is being a solidary co-debtor).
CONSTRUCTION of Guaranty
Guaranty is strictly construed against the creditor and in
4
favor of the guarantor and is not to be extended beyond its terms or
specific limits. Doubts should be resolved in favor of the guarantor
or surety.
However, this rule of construction is applicable only to an
accommodation surety or one that is gratuitous. It does not apply
where the surety is compensated with consideration. In such cases,
the agreement is interpreted against the surety company that
prepared it.
General Rule: It is not necessary for the creditor to expressly
accept the contract of guaranty since the contract is unilateral; only
the guarantor binds himself to do something.
Exception: If the guarantor merely offers to become guaranty, it
does not become a binding obligation unless the creditor accepts
and notice of acceptance is given to the guarantor. On the other
hand, if the guarantor makes a direct or unconditional promise of
guaranty (and not merely an offer), there is no need for acceptance
and notice of such acceptance from the creditor.
QUALIFICATIONS OF GUARANTOR (2056, 2057)
Art. 2056. 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
Art. 2057. If the guarantor should be convicted in the 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 guarantor.
Ideally, the qualifications of a guarantor are the following:
integrity, capacity to bind himself, and sufficient property to answer
for the obligation which he guarantees. But the creditor can waive
these requirements.
Jurisdiction over the guarantor belongs to the court where
the principal obligation is to be fulfilled, in accordance with the rule
that accessory follows the principal.
Question: What is the effect of subsequent loss of qualifications?
Answer: The qualifications need only to be present at the time of
the perfection of the contract. The subsequent loss of the
qualifications would not extinguish the liability of the guarantor, nor
will it extinguish the contract of guaranty. However, the creditor has
the discretion to demand another guarantor with the proper
qualifications.
1. The creditor may demand another guarantor:
2. In case the guarantor is convicted in the first instance of a
crime involving dishonesty.
Question: What is the effect of the guarantors death on the
guaranty?
5
Answer: The guaranty survives the death of the guarantor. The
general rule is that a partys contractual rights and obligations are
transmissible to his successors. The rules on guaranty does not
expressly provide that the guaranty is extinguished upon the death
of the guarantor. Applying Art. 2057, the supervening incapacity of
the guarantor does not extinguish the guaranty but merely gives the
creditor the right to demand a replacement. But the creditor can
waive this right and choose to hold the guarantor to his bargain. If
he so chooses, the creditors claim passes to the heirs of the
deceased guarantor.
Question: When may the creditor not demand another guarantor?
Answer: Where the creditor has stipulated in the original agreement
that a specified person should be the guarantor, he is bound by the
terms of the agreement and he cannot thereafter deviate from it.
In case the guarantor becomes insolvent (since he loses sufficient
property to answer for the obligations which he guarantees). There
is no need for a judicial declaration of insolvency
ESTATE OF HEMADY VS. LUZON SURETY CO INC.
FACTS: The Luzon Surety Co. had filed a claim against the Estate
based on twenty different indemnity agreements, or counter bonds,
each subscribed by a distinct principal and by the deceased K. H.
Hemady, a surety solidary guarantor) in all of them, in consideration
of the Luzon Surety Co.s of having guaranteed, the various
principals in favor of different creditors.
The Luzon Surety Co., prayed for allowance, as a contingent claim,
of the value of the twenty bonds it had executed in consideration of
the counterbonds, and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the bonds, with 12
per cent interest thereon.
Before answer was filed, and upon motion of the administratrix of
Hemadys estate, the lower court, by order of September 23, 1953,
dismissed the claims of Luzon Surety Co., on two grounds: (1) that
the premiums due and cost of documentary stamps were not
contemplated under the indemnity agreements to be a part of the
undertaking of the guarantor (Hemady), since they were not
liabilities incurred after the execution of the counterbonds; and (2)
that whatever losses may occur after Hemadys death, are not
chargeable to his estate, because upon his death he ceased to be
guarantor.
Lower Courts ruling: The administratrix further contends that upon
the death of Hemady, his liability as a guarantor terminated, and
therefore, in the absence of a showing that a oss or damage was
suffered, the claim cannot be considered contingent. This Court
believes that there is merit in this contention and finds support in
Article 2046 of the new Civil Code. It should be noted that a new
requirement has been added for a person to qualify as a guarantor,
that is: integrity. As correctly pointed out by the Administratrix,
integrity is something purely personal and is not transmissible.
Upon the death of Hemady, his integrity was not transmitted to his
estate or successors. Whatever loss therefore, may occur after
Hemadys death, are not chargeable to his estate because upon his
death he ceased to be a guarantor. Another clear and strong
indication that the surety company has exclusively relied on the
personality, character, honesty and integrity of the now deceased K.
H. Hemady, was the fact that in the printed form of the indemnity
agreement there is a paragraph entitled Security by way of first
6
mortgage, which was expressly waived and renounced by the
security company. The security company has not demanded from
K. H. Hemady to comply with this requirement of giving security by
way of first mortgage. In the supporting papers of the claim
presented by Luzon Surety Company, no real property was
mentioned in the list of properties mortgaged which appears at the
back of the indemnity agreement.
ISSUE: WON the liability of Hemady as guarantor terminated upon
his death.
NO
HELD: We find this reasoning untenable. Under the present Civil
Code (Article 1311), as well as under the Civil Code of 1889 (Article
1257), the rule is that
Contracts take effect only as between the parties, their assigns and
heirs, except in the case where the rights and obligations arising
from the contract are not transmissible by their nature, or by
stipulation or by provision of law.
While in our successional system the responsibility of the heirs for
the debts of their decedent cannot exceed the value of the
inheritance they receive from him, the principle remains intact that
these heirs succeed not only to the rights of the deceased but also
to his obligations. Articles 774 and 776 of the New Civil Code (and
Articles 659 and 661 of the preceding one) expressly so provide,
thereby confirming Article 1311 already quoted. (See Art. 774 and
776)
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:
Under the Civil Code the heirs, by virtue of the rights of succession
are subrogated to all the rights and obligations of the deceased
(Article 661) and cannot be regarded as third parties with respect to
a contract to which the deceased was a party, touching the estate
of the deceased (Barrios vs. Dolor, 2 Phil. 44).
The binding effect of contracts upon the heirs of the deceased party
is not altered by the provision in our Rules of Court that money
debts of a deceased must be liquidated and paid from his estate
before the residue is distributed among said heirs (Rule 89). The
reason is that whatever payment is thus made from the estate is
ultimately a payment by the heirs and distributees, since the
amount of the paid claim in fact diminishes or reduces the shares
that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a partys
contractual rights and obligations are transmissible to the
successors. The rule is a consequence of the progressive
depersonalization of patrimonial rights and duties that, as
observed by Victorio Polacco, has characterized the history of these
institutions.
Of the three exceptions fixed by Article 1311, the nature of the
obligation of the surety or guarantor does not warrant the
conclusion that his peculiar individual qualities are contemplated as
a principal inducement for the contract. What did the creditor Luzon
Surety Co. expect of K. H. Hemady when it accepted the latter as
surety in the counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse on
account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an
obligation to give; and to the Luzon Surety Co., it was indifferent
7
that the reimbursement should be made by Hemady himself or by
someone else in his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by
stipulation of the parties.
Being exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable from the
provisions of the contract itself, and the text of the agreements sued
upon nowhere indicate that they are nontransferable.
Because under the law (Article 1311), a person who enters into a
contract is deemed to have contracted for himself and his heirs and
assigns, it is unnecessary for him to expressly stipulate to that
effect; hence, his failure to do so is no sign that he intended his
bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require bondsman
Hemady to execute a mortgage indicates nothing more than the
companys faith and confidence in the financial stability of the
surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under
Article 1311 exists when they are not transmissible by operation of
law. The provision makes reference to those cases where the law
expresses that the rights or obligations are extinguished by death,
as is the case in legal support (Article 300), parental authority
(Article 327), usufruct (Article 603), contracts for a piece of work
(Article 1726), partnership (Article 1830 and agency (Article 1919).
By contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the
guaranty is extinguished upon the death of the guarantor or the
surety. The lower court sought to infer such a limitation from Art.
2056, to the effect that one who is obliged to furnish a guarantor
must present a person who possesses integrity, capacity to bind
himself, and sufficient property to answer for the obligation which he
guarantees. It will be noted, however, that the law requires these
qualities to be present only at the time of the perfection of the
contract of guaranty. It is self-evident that once the contract has
become perfected and binding, the supervening incapacity of the
guarantor would not operate to exonerate him of the eventual
liability he has contracted; and if that be true of his capacity to bind
himself, it should also be true of his integrity, which is a quality
mentioned in the article alongside the capacity.
The foregoing concept is confirmed by the next Article 2057, that
runs as follows: ART. 2057. 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 guarantor. From this article it should be
immediately apparent that the supervening dishonesty 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. Hence Article 2057 of the present Civil Code is
incompatible with the trial courts stand that the requirement of
integrity in the guarantor or surety makes the latters undertaking
8
strictly personal, so linked to his individuality that the guaranty
automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of
Luzon Surety Co. not being rendered intransmissible due to the
nature of the undertaking, nor by the stipulations of the contracts
themselves, nor by provision of law, his eventual liability thereunder
necessarily passed upon his death to his heirs. The contracts,
therefore, give rise to contingent claims provable against his estate
under section 5, Rule 87.
The most common example of the contigent claim is that which
arises when a person is bound as surety or guarantor for a principal
who is insolvent or dead. Under the ordinary contract of suretyship
the surety has no claim whatever against his principal until he
himself pays something by way of satisfaction upon the obligation
which is secured. When he does this, there instantly arises in favor
of the surety the right to compel the principal to exonerate the
surety. But until the surety has contributed something to the
payment of the debt, or has performed the secured obligation in
whole or in part, he has no right of action against anybody no
claim that could be reduced to judgment.
For Defendant administratrix it is averred that the above doctrine
refers to a case where the surety files claims against the estate of
the principal debtorand it is urged that the rule does not apply to the
case before us, where the late Hemady was a surety, not a principal
debtor. The argument evinces a superficial view of the relations
between parties. If under the Gaskell ruling, the Luzon Surety Co.,
as guarantor, could file a contingent claim against the estate of the
principal debtors if the latter should die, there is absolutely no
reason why it could not file such a claim against the estate of
Hemady, since Hemady is a solidary co-debtor of his principals.
What the Luzon Surety Co. may claim from the estate of a principal
debtor it may equally claim from the estate of Hemady, since, in
view of the existing solidarity, the latter does not even enjoy the
benefit of exhaustion of the assets of the principal debtor.
Our conclusion is that the solidary guarantors liability is not
extinguished by his death, and that in such event, the Luzon Surety
Co., had the right to file against the estate a contingent claim for
reimbursement.
NOTE: The liability of the solidary guarantor is not terminated by his
death.
LIABILITY OF THE CONJUGAL FUNDS
Art. 2049. A married woman may guarantee an obligation
without the husbands consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law.
Art. 94 (3) of the Family Code states that the absolute community of
property shall be liable for debts and obligations contracted by
either spouse without the consent of the other to the extent that the
family may have been benefited.
A married woman who acts as guarantor without the consent
of the husband binds only her separate property unless the debt
benefited the family.
There is no express prohibition against a married woman acting as
guarantor for her husband. Remember, in order to bind the absolute
9
community of property, the consent of both spouses is needed. If
only the consent of one spouse is obtained, the absolute community executed by individual respondents Wilfrido C. Martinez, Miguel J.
will not be liable unless the obligation redounded to the benefit of Lacson and Ricardo A. Lopa who bound themselves jointly and
the family.
severally with respondent corporation for the payment of the loan.
When the husband acts as guarantor for another person without the
consent of the wife, the guaranty binds only the husband since the
benefit really accrues to the principal debtor and not to the husband Respondent corporation was not able to pay all its debt balance as
or his family. The exception is if the husband is really engaged in
the business of guaranteeing obligations because in that case, his it suffered business reversals, eventually ceasing operations.
occupation or business is deemed to be undertaken for the benefit
Petitioner filed a complaint against respondent corp and individual
of the family.
respondents.
SECURITY BANK AND TRUST COMPANY v. MAR TIERRA

CORP, WILFRIDO MARTINEZ, MIGUEL LACSON, and RICARDO RTC issued a writ of attachment on all real and personal properties
LOPA of respondent corporation and individual respondent Martinez
November 29, 2006 (508 SCRA 419) including the conjugal house and lot of the spouses but it found that

it did not redound to the benefit of his family, hence, it ordered the
FACTS: lifting of the attachment on the conjugal house and lot of the
Respondent Mar Tierra Corporation, through its president, Wilfrido spouses Martinez.
C. Martinez, applied for a P12,000,000 credit accommodation with

petitioner Security Bank and Trust Company. Petitioner approved Petitioner appealed to CA. It affirmed RTC decision. Petitioned to
the application and entered into a credit line agreement with SC.
respondent corporation. It was secured by an indemnity agreement

10
ISSUE: WON the conjugal partnership may be held liable for an transaction falls within the term obligations for the benefit of the

indemnity agreement entered into by the husband to accommodate conjugal partnership. In other words, where the husband contracts

a third party an obligation on behalf of the family business, there is a legal

presumption that such obligation redounds to the benefit of the

HELD: conjugal partnership.

No. SC upheld the CA. Under Article 161(1) of the Civil Code, the

conjugal partnership is liable for all debts and obligations On the other hand, if the money or services are given to another

contracted by the husband for the benefit of the conjugal person or entity and the husband acted only as a surety or

partnership. guarantor, the transaction cannot by itself be deemed an obligation

for the benefit of the conjugal partnership. It is for the benefit of the

The court ruled in Luzon Surety Co., Inc. v. de Garcia that, in acting principal debtor and not for the surety or his family.

as a guarantor or surety for another, the husband does not act for

the benefit of the conjugal partnership as the benefit is clearly In the case at bar, the principal contract, the credit line agreement

intended for a third party. between petitioner and respondent corporation, was solely for the

benefit of the latter. The accessory contract (the indemnity

In Ayala Investment and Development Corporation v. Court of agreement) under which individual respondent Martinez assumed

Appeals, we ruled that, if the husband himself is the principal the obligation of a surety for respondent corporation was similarly

obligor in the contract, i.e., the direct recipient of the money and for the latters benefit. Petitioner had the burden of proving that the

services to be used in or for his own business or profession, the

11

conjugal partnership of the spouses Martinez benefited from the
transaction. It failed to discharge that burden.
EFFECTS OF GUARANTY BETWEEN THE GUARANTOR AND
CREDITOR
1. EXCUSSION (2058, 2059)
Art. 2058. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the
debtor.
Again, the liability of the guarantor is only accessory and subsidiary.
Thus, in order for the creditor to collect from the guarantor, the
following conditions must be fulfilled:
The creditor should have exhausted all the properties of the
debtor.
The creditor has resorted to all legal remedies against the
debtor (ex. accion pauliana, rescission of fraudulent
alienations).
Question: Can the creditor implead the guarantor as a co-
defendant with the debtor?
Answer: No, except in cases provided in Art. 2059. Article 2062
says that creditor should proceeds against the principal debtor
alone.
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it
(2) If he has bound himself solidarily with the debtor
(3) In case of insolvency of the debtor
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or a representative
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation
General rule: The guarantor is entitled EXCUSSION or to demand
that the creditor first exhaust the properties of the principal debtor
before collecting from the guarantor.
Exceptions:
Those under Art. 2059
If the guarantor does not comply with Art. 2060
If the guarantor is a judicial bondsman and sub-surety (Art.
2084)
Where a pledge or mortgage has been given by him as a
special security
If he fails to interpose it as a defense before judgment is
rendered against him
Exceptions under Art. 2059
When the right is renounced or waived
12
 The waiver must be made in express terms
When liability assumed by the guarantor is solidary
In this case, he becomes a surety with primary liability
When the principal debtor is insolvent
Illustration: Stephen borrows from P100,000 from Henry
guaranteed by Jericson. Stephen has P1M in assets which are still
with him and P1.5M in liabilities. Stephen defaults. Can Henry
collect from Jericson right away?
No. In this case, Jericson still has the benefit of excussion. Why?
Because even if Stephen is apparently insolvent, there is still no
claim against his assets by the other creditors. They are still with
him and can still be accessed by Henry by filing an action for
collection of money against Stephen.
Illustration: Alden borrows P100,000 from Gary, guaranteed by
Kristine. On due date, Alden defaults and has zero assets but has a
P200,000 credit/receivable from Lawrence. Can Gary collect from
Kristine?
No. Gary must file an action for collection and an accion
subrogatoria so that he can exercise Aldens right to collect money
from Lawrence. Only if these actions fail can Gary then collect from
Kristine.
When the principal debtor absconds or cannot be sued locally
So even if the borrower has fled to Timbuktu, if he still has
properties in the Philippines, the lender must sue against the
property first before collecting from the guarantor.
When resort to all legal remedies would be a useless formality
If exhausting the properties of the debtor would be useless since
it would still not satisfy the obligation, the guarantor cannot require
the creditor to resort to these legal remedies against the debtor
anymore, since doing so would be a useless formality.
In this case, it is not even necessary that the debtor is judicially
declared insolvent or bankrupt.
Hypothetical Question: How can a lender get around excussion?
If the lender wants to be able to go against the guarantor right away
without having to go through excussion, he must get the guarantor
to either sign a waiver of the benefit of excussion or make him
solidarily liable (as a surety).
Hypothetical Question: Sarah borrowed from Samantha
P100,000 guaranteed by Mike. Sarah defaulted. Samantha made a
demand for payment against Mike. Mike paid. Later, Mike found out
that he had the benefit of excussion. He demanded reimbursement
from Samantha. Can Mike recover?
No. Payment constitutes a waiver of the benefit.
2. Procedure to make guarantor liable (2062)
13
Art. 2062. In every action by the creditor, which must be
against the principal debtor alone, except in cases mentioned
in Article 2059, the former shall ask the court to notify the
guarantor of the action. The guarantor may appear so that he
may, if he so desires, set up such defenses as are granted him
by law. The benefit of excussion mentioned in Article 2058
shall always be unimpaired, even if judgment should be
rendered against the principal debtor and the guarantor in
case of appearance by the latter.
Procedure when the creditor sues:
Sue the principal first. The creditor must sue the principal debtor
alone. He cannot sue the guarantor with the principal or the
guarantor alone except in the cases mentioned in Art. 2059 where
the guarantor loses the benefit of excussion.
In other words, adherence to the rule to sue the principal alone can
be overruled by the court when it is proved that it would be a
useless formality because no different result would be attained if the
plaintiff were forced to institute separate actions against the
principal and the guarantor.
Notice to guarantor of the action. The guarantor must be notified
so that he may appear and set up his defenses if he wants to. If the
guarantor appears, he is still given the benefit of exhaustion even if
judgment should be rendered against the principal debtor.
If he does not appear, judgment is not binding on him. Lender must
sue the guarantor to claim against him.
So, collecting from the guarantor is really a two-step process. The
purpose of the two-step process is to allow the guarantor to make
use of the benefit of excussion. The disadvantage is that there is a
time lag between the judgment against the principal debtor and the
one against the guarantor, which allows the guarantor to hide his
assets in the meantime.
How to get around this two-step process? A bank guaranty or letter
of credit. In a bank guaranty, if the debtor does not pay, the creditor
need only inform the bank of the default and the bank releases the
money. Its like a standing loan by the bank in favor of the debtor to
answer for a debt in favor of third persons, in case he is unable to
pay.
3. How guarantor uses excussions (2058. 2060, 2061)
Baylon V. CA, 312 SCRA 502
Art. 2058. The guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property
of the debtor, and has resorted to all the legal remedies
against the debtor.
Again, the liability of the guarantor is only accessory and
subsidiary. Thus, in order for the creditor to collect from the
guarantor, the following conditions must be fulfilled:
1. The creditor should have exhausted all the properties of the
debtor.
2. The creditor has resorted to all legal remedies against the
debtor (ex. accion pauliana, rescission of fraudulent
alienations).
Question: Can the creditor implead the guarantor as a co-
defendant with the debtor?
14
 Answer: No, except in cases provided in Art. 2059. Article 2062
says that creditor should proceeds against the principal debtor
alone.
Art. 2060. In order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor
upon the latters demand for payment from him, and point out
to the creditor available property of the debtor within
Philippine territory sufficient to cover the amount of the debt.
Art. 2061. The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent
in exhausting the property pointed out shall suffer the loss, to
the extent of said property, for the insolvency of the debtor
resulting from such negligence.
Duty of creditor to make prior demand for payment from
guarantor. To collect from the guarantor, the creditor must make a
prior demand for payment from the guarantor.
When should demand be made? The demand can only be made
after judgment on the debt.
How should it be made? The demand must be an actual demand.
Joining the guarantor in the suit against the principal is not the
demand intended by law.
Duty of guarantor to set up benefit of excussion. What should the
guarantor do to claim the benefit of excussion:
1. Set up the benefit of excussion against the creditor upon
demand for payment by the creditor from him; and
2. Point out to the creditor available property of the debtor
within Philippine territory sufficient to cover the amount of
debt. (Therefore, property located abroad or which is not
easily available is not included among those that the
guarantor can point out to the creditor).
Duty of creditor to resort to all legal remedies. Once the guarantor
has fulfilled the requisites for making use of the benefit of
excussion, the creditor has the duty to exhaust all the property of
the debtor and to resort to all leal remedies against the debtor. If he
fails to do so, the creditor shall suffer the loss to the extent of the
value of the property he failed to collect from the principal debtor.
PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE
COURT OF APPEALS (Former Ninth Division) and
LEONILA TOMACRUZ, respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review by way of certiorari under Rule 45
of the Revised Rules of Court of the decision of the Court of
Appeals[1] dated November 29, 1991 in CA-G.R. CV No. 27779
affirming the decision[2]of the Regional Trial Court of Quezon City,
Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and
the Resolution of the Court of Appeals dated April 27, 1993 denying
petitioner's Motion for Reconsideration.
The pertinent facts, as found by the trial court and affirmed by
respondent court, are briefly narrated as follows:
Sometime in 1986, petitioner Pacionaria C. Baylon introduced
private respondent Leonila Tomacruz, the co-manager of her
husband at PLDT, to Rosita B. Luanzon.[3] Petitioner told private
respondent that Luanzon has been engaged in business as a
15
contractor for twenty years and she invited private respondent to
lend Luanzon money at a monthly interest rate of five percent (5%),
to be used as capital for the latter's business. Private respondent,
persuaded by the assurances of petitioner that Luanzon's business
was stable and by the high interest rate, agreed to lend Luanzon
money in the amount of P150,000.On June 22, 1987, Luanzon
issued and signed a promissory note acknowledging receipt of the
P150,000 from private respondent and obliging herself to pay the
former the said amount on or before August 22, 1987.[4] Petitioner
signed the promissory note, affixing her signature under the word
"guarantor." Luanzon also issued a postdated Solidbank check no.
CA418437 dated August 22, 1987 payable to Leonila Tomacruz in
the amount of P150,000.[5] Subsequently, Luanzon replaced this
check with another postdated Solidbank check no. 432945 dated
December 22, 1987, in favor of the same payee and covering the
same amount.[6] Several checks in the amount of P7,500 each were
also issued by Luanzon and made payable to private respondent.[7]
Private respondent made a written demand upon petitioner for
payment, which petitioner did not heed. Thus, on May 8, 1989,
private respondent filed a case for the collection of a sum of money
with the Regional Trial Court (RTC) of Quezon City, Branch 88,
against Luanzon and petitioner herein, impleading Mariano Baylon,
husband of petitioner, as an additional defendant. However,
summons was never served upon Luanzon.
In her answer, petitioner denied having guaranteed the
payment of the promissory note issued by Luanzon. She claimed
that private respondent gave Luanzon the money, not as a loan, but
rather as an investment in Art Enterprises and Construction, Inc. -
the construction business of Luanzon. Furthermore, petitioner avers
that, granting arguendo that there was a loan and petitioner
guaranteed the same, private respondent has not exhausted the
property of the principal debtor nor has she resorted to all the legal
remedies against the principal debtor as required by law. Finally,
petitioner claims that there was an extension of the maturity date of
the loan without her consent, thus releasing her from her
obligation.[8]
After trial on the merits, the lower court ruled in favor of private
respondent. In its Decision dated June 14, 1990, it stated that -
The evidence and the testimonies on record clearly established a
(sic) fact that the transaction between the plaintiff and defendants
was a loan with five percent (5%) monthly interest and not an
investment. In fact they all admitted in their testimonies that they
are not given any stock certificate but only promissory notes similar
to Exhibit B wherein it was clearly stated that defendant Luanzon
would pay the amount of indebtedness on the date due. Postdated
checks were issued simultaneously with the promissory notes to
enable the plaintiff and others to withdraw their money on a certain
fixed time. This shows that they were never participants in the
business transaction of defendant Luanzon but were creditors.
The evidences presented likewise show that plaintiff and others
loan their money to defendant Luanzon because of the assurance
of the monthly income of five percent (5%) of their money and that
they could withdraw it anytime after the due date add to it the fact
that their friend, Pacionaria Baylon, expresses her unequivocal
gurarantee to the payment of the amount loaned.
xxx xx xxx
WHEREFORE, premises considered, judgment is hereby rendered
against the defendants Pacionaria C. Baylon and Mariano Baylon,
to pay the plaintiff the sum of P150,000.00, with interest at the legal
rate from the filing of this complaint until full payment thereof, to pay
the total sum of P21,000.00 as attorneys fees and costs of suit.[9]
16
 On appeal, the trial court's decision was affirmed by the Court
of Appeals. Hence, this present case wherein petitioner makes the
following assignment of errors -
I. RESPONDENT COURT ERRED IN HOLDING THAT THE
PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR OF
DEFENDANT LUANZON AND NOT AN INVESTOR IN THE
CONSTRUCTION BUSINESS OF ART ENTERPRISES &
CONSTRUCTION, INC.
II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-
APPELLANT BAYLON WAS A "GUARANTOR" AS APPEARING IN
THE NOTE (EXH. "A") THE RESPONDENT COURT ERRED IN
RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO
THE PRIVATE RESPONDENT BECAUSE THE LATTER HAS NOT
TAKEN STEPS TO EXHAUST THE PROPERTY OF THE
PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE
LEGAL REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR,
DEFENDANT LUANZON.
III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-
APPELLANT BAYLON WAS A GUARANTOR UNDER THAT NOTE
(EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER COURT
ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM
HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS
BETWEEN THE RESPONDENT-APPELLANT AND DEFENDANT
LUANZON.
At the outset, we note that petitioners claim that the factual
findings of the lower court, which were affirmed by the Court of
Appeals, were based on a misapprehension of facts and
contradicted by the evidence on records[10] is a bare allegation and
devoid of merit. As a rule, the conclusions of fact of the trial court,
especially when affirmed by the Court of Appeals, are final and
conclusive and cannot be reviewed on appeal by the Supreme
Court.[11] Although this rule admits of several exceptions,[12] none of
the exceptions are in point in the present case. The factual findings
of the respondent court are borne out by the record and are based
on substantial evidence.
Petitioner claims that there is no loan to begin with; that private
respondent gave Luanzon the amount of P150,000, not as a loan,
but rather as an investment in the construction project of the
latter.[13] In support of her claim, petitioner cites the use by private
respondent of the words investment, dividends, and commission in
her testimony before the lower court; the fact that private
respondent received monthly checks from Luanzon in the amount of
P7,500 from July to December, 1987, representing dividends on her
investment; and the fact that other employees of the Development
Bank of the Philippines made similar investments in Luanzons
construction business.[14]
However, all the circumstances mentioned by petitioner cannot
override the clear and unequivocal terms of the June 22, 1987
promissory note whereby Luanzon promised to pay private
respondent the amount of P150,000 on or before August 22,
1987. The promissory note states as follows:
June 22, 1987
To Whom It May Concern:
For value received, I hereby promise to pay Mrs. LEONILA
TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND
PESOS ONLY (P150,000.00) on or before August 22, 1987.
The above amount is covered by _____ Check No. _____ dated
August 22, 1987.
(signed)
17
 ROSITA B. LUANZON
GURARANTOR:
(signed)
PACIONARIA O. BAYLON
Tel. No. 801-28-00
18 P. Mapa St., DBP Village
Almanza, Las Pinas, M.M.[15]
If the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its
stipulation shall control.[16] Resort to extrinsic aids and other
extraneous sources are not necessary in order to ascertain the
parties' intent when there is no ambiguity in the terms of the
agreement.[17] Both petitioner and private respondent do not deny
the due execution and authenticity of the June 22, 1987 promissory
note. All of petitioner's arguments are directed at uncovering the
real intention of the parties in executing the promissory note, but no
amount of argumentation will change the plain import of the terms
thereof, and accordingly, no attempt to read into it any alleged
intention of the parties thereto may be justified.[18] The clear terms
of the promissory note establish a creditor-debtor relationship
between Luanzon and private respondent. The transaction at bench
is therefore a loan, not an investment.
It is petitioner's contention that, even though she is held to be a
guarantor under the terms of the promissory note, she is not liable
because private respondent did not exhaust the property of the
principal debtor and has not resorted to all the legal remedies
provided by the law against the debtor.[19] Petitioner is invoking the
benefit of excussion pursuant to article 2058 of the Civil Code,
which provides that -
The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor, and has resorted
to all the legal remedies against the debtor.
It is axiomatic that the liability of the guarantor is only
subsidiary.[20] All the properties of the principal debtor must first be
exhausted before his own is levied upon. Thus, the creditor may
hold the guarantor liable only after judgment has been obtained
against the principal debtor and the latter is unable to pay, for
obviously the exhaustion of the principals property - the benefit of
which the guarantor claims - cannot even begin to take place before
judgment has been obtained.[21] This rule is embodied in article
2062 of the Civil Code which provides that the action brought by the
creditor must be filed against the principal debtor alone, except in
some instances when the action may be brought against both the
debtor and the principal debtor.[22]
Under the circumstances availing in the present case, we hold
that it is premature for this Court to even determine whether or not
petitioner is liable as a guarantor and whether she is entitled to the
concomitant rights as such, like the benefit of excussion, since the
most basic prerequisite is wanting - that is, no judgment was first
obtained against the principal debtor Rosita B. Luanzon. It is
useless to speak of a guarantor when no debtor has been held
liable for the obligation which is allegedly secured by such
guarantee. Although the principal debtor Luanzon was impleaded
as defendant, there is nothing in the records to show that summons
was served upon her. Thus, the trial court never even acquired
jurisdiction over the principal debtor. We hold that private
respondent must first obtain a judgment against the principal debtor
before assuming to run after the alleged guarantor.
18
 IN VIEW OF THE FOREGOING, the petition is granted and the
questioned Decision of the Court of Appeals dated November 29,
1991 and Resolution dated April 27, 1993 are SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima,
JJ., concur.
4. Excussion in sub-guaranty (2064)
Art. 2064. The guarantor of a guarantor shall enjoy the benefit
of excussion, both with respect to the guarantor and tot he
principal debtor.
Sub-guarantors right to excussion. A sub-guarantor can
demand the exhaustion of the properties of both the guarantor and
the principal debtor before he pays the creditor.
5. Compromises (2063)
Art. 2063. A compromise between the creditor and the principal
debtor benefits the guarantor but does not prejudice him. That
which is entered into between the guarantor and the creditor
benefits but does not prejudice the principal debtor.
Effects of compromise. A compromise is a contract
whereby the parties, by making reciprocal concessions, avoid a
litigation or put an end to one already commenced. A compromise
cannot prejudice the guarantor or the debtor, as the case may be,
when he is not a party to such compromise. Furthermore, if you
remember, a guarantor may not bind himself for more than the
principal debtor both as regards the amount and the onerous nature
of the conditions.
Exception: If the compromise has a benefit in the nature of a
stipulation in favor of a third person, the compromise may bind that
person.
Illustration: Victor owes Joanna P10,000 with Lawrence as
guarantor. Victor and Joanna agree to reduce the debt to P8,000.
Lawrences liability is also reduced to P8,000 in case Victor does
not pay, since the compromise is beneficial to Lawrence.
6. Joint Guaranty (2065)
Art. 2065. Should there be several guarantor of only one debtor
and for the same debt, the obligation to answer for the same is
divided among all. The creditor cannot claim from the
guarantors except the shares which they are respectively
bound to pay, unless solidarity has been expressly stipulated.
The benefit of division against the co-guarantors ceases
in the same cases and for the same reasons as the benefit of
excussion against the principal debtor.
Benefit of division among several guarantors. This speak of the
benefit of division. The following conditions must concur in order
that several guarantors may claim the benefit:
1. There should be several guarantors
2. There is only one debtor
19
 3. There is only one and the same debt
In this case, the liability of the co-guarantors is joint. They are not
liable to the creditor beyond the shares which they are bond to pay.
Exceptions
1. If solidarity among the guarantors has been expressly
stipulated.
2. The co-guarantors cannot avail themselves of the benefit of
division under circumstances enumerated in Art. 2059
Illustration: Mike and Karla are guarantors of the debt of
Lawrence to Joanna in the amount of P10,000. Joanna can
demand from Mike or Karla only P5,000 unless Mike and Karla
had bound themselves solidarily with Lawrence in which case
they would be sureties and, therefore Joanna can hold each of
them responsible for P10,000. Joanna may also demand from
Mike or Karla the entire P10,000 in the cases mentioned in Art.
2059 as where Mike or Karla has expressly renounced the
benefit of division.
EFFECTS OF GUARANTY BETWEEN THE DEBTOR AND THE
GUARANTOR
1. Indemnification (2066, 2067)
Art. 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the
payment was made known to the debtor, even though it
did not earn interest for the creditor;
made known to the debtor, even though it did not earn
interest for the creditor;
(4) Damages, if they are due.
Guaranty is a contract of indemnity. The debtor is
directly
and principally liable to the creditor, therefore, the general
rule is that the guarantor who makes payment must be
indemnified by the said debtor.
The indemnity comprises of:
A. Total amount of the debt - Guarantor cannot collect more
than what he has paid.
B. Legal interest thereon - even if the debt did not earn
interest for the credit, the guarantor is entitled to legal
interest from the time notice of payment of the debt was
made known to the debtor.
C. Expenses incurred by the guarantor - Only those
expenses that the guarantor has to satisfy in accordance
with the law as a consequence of the guaranty.
Excludes: Those which depend upon guarantors will or
own acts or fault.
Limited to: Those incurred b the guarantor after having
notified the debtor that payment has been demanded of
him by the creditor.
20
 D. Damages, if they are due.
Exceptions or Qualifications to the right to indemnity or
reimbursement
1. Where guaranty is constituted without the knowledge or
against the will of the principal debtor, the guarantor can
recover only insofar as payment had been beneficial to the
debtor (Art. 2050)
2. Payment by a third person who does not intend to be
reimbursed by the debtor is deemed a donation (which
requires the debtors consent, but in any case valid as to the
creditor who has accepted it)
3. When waiver of the right to demand reimbursement is
effected
Art. 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor has against the
debtor.
If the guarantor has compromised with the creditor, he
cannot demand of the debtor more than what he has really
paid.
Guarantor has a right to subrogation. Subrogation transfers to the
person subrogated, the credit, with all the rights thereto
appertaining either against the debtor or against third persons, be
they guarantors or possessors of mortgages, subject to stipulation
in conventional subrogation.
Except only for the change in person of the creditor by the
guarantor, the obligation subsists in all respects as before payment.
The right to subrogation enables the guarantor to enforce the
indemnity.
Accrual: The right of subrogation arises by operation of law upon
payment to the creditor, who no longer has to cede his rights
against the debtor.
The benefit of subrogation cannot be invoked in cases when the
guarantor has no right to be reimbursed.
a. Effects of payment by the guarantor who
failed to notify the debtor (2068. 2070)
Art. 2068. If the guarantor should pay without notifying the
debtor, the latter may enforce against him all the defenses
which he could have set up against the creditor at the time the
payment was made.
Effect of payment by guarantor without notice to debtor. The debtor
may interpose against the guarantor, those defenses which he
could have set up against the creditor at the time payment was
made (ex. If the debtor has already paid the creditor when the
guarantor pays, the debtor can set up the defense of previous
extinguishment of the obligation against the guarantor).
Art. 2070. If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment, repeats
the payment, the former has no remedy whatever against the
debtor, but only against the creditor. Nevertheless, in case of
gratuitous guaranty, if the guarantor was prevented by a
fortuitous event form advising the debtor of the payment, and
21
the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid.
Effect of repeat payment by the debtor. General rule:
Before the guarantor pays the creditor, he must notify the debtor
(Art. 2068). If he fails to give such notice and the debtor repeats
payment, the guarantors only remedy is to collect form the creditor
even if the latter should become insolvent.
However, the guarantor may still claim reimbursement from the
debtor in spit of lack of notice if the following conditions are present:
1. from the debtor in spit of lack of notice if the following
conditions are present:
2. The guarantor was prevented by fortuitous event to advise
the debtor of the payment; AND
3. The guaranty is gratuitous
b. Effect of payment before designated period
(2069)
Art. 2069. If the debt was for a period and the guarantor paid it
before it became due, he cannot demand reimbursement of the
debtor until the expiration of the period unless the payment
has been ratified by the debtor.
Effect of payment by guarantor before maturity. Recall that, if
the debtors obligation is with a period, it becomes demandable only
when the day fixed comes. Consequently, the guarantor who pays
before maturity is not entitled to reimbursement since there is no
necessity for accelerating payment. The guaranty being subsidiary
in character, the guarantor is not liable for the debt before it
becomes due.
However, the debtor will be liable if the payment was made with
his consent or it was subsequently ratified by him (expressly or
impliedly).
c. Guarantors claim against third party (2072)
Art. 2072. If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present, the
guarantor who satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.
Guarantor of a third person at the request of another. The guarantor
who guarantees the debt of an absentee at the request of another
has a right to claim reimbursement after satisfying the debt either
from the person who requested him to be a guarantor, or the
debtor.
E. Subrogation (2067, 1237, 2050)
Art. 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor has against the
debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
22
Guarantor has a right to subrogation. Subrogation transfers to the
person subrogated, the credit, with all the rights thereto
appertaining either against the debtor or against third persons, be
they guarantors or possessors of mortgages, subject to stipulation
in conventional subrogation.
Except only for the change in person of the creditor by the
guarantor, the obligation subsists in all respects as before payment.
The right to subrogation enables the guarantor to enforce the
indemnity.
Accrual: The right of subrogation arises by operation of law upon
payment to the creditor, who no longer has to cede his rights
against the debtor.
The benefit of subrogation cannot be invoked in cases when the
guarantor has no right to be reimbursed.
F. Guarantors legal remedies against debtor before
payment (2071)
Art. 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such nature
that it cannot be extinguished except within a period longer
than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.
Right of guarantor to proceed against debtor before payment.
General rule: the guarantor has no cause of action against the
debtor until the former has paid the obligation (Art. 2066). This
applies also to suretyship.
The exceptions are:
1. When the guarantor is sued for payment
2. In case of insolvency of the principal debtor
3. When the debtor has bound himself to relieve the
guarantor from the guaranty within a specified
period, and this period has expired
23
 4. When the debt has become demandable, by
reason of the expiration of the period for payment
5. After lapse of ten years, when the principal
obligation has no fixed period for maturity, unless
it be of such nature that it cannot be extinguished
6. Reasonable grounds to fear that the principal
debtor intends to abscond
7. If the principal debtor is in imminent danger of
becoming insolvent
The alternative remedies to which the guarantor is entitled
are:
The provisions of this article shall not be applicable, unless
the payment has been made in virtue of a judicial demand or
unless the principal debtor is insolvent.
Right of contribution of guarantor who pays. The obligation of
several guarantors of the same debtor and for the same debt is
joint. Each is bound to pay only his proportionate share.
Art. 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.

1. To obtain release from the guaranty

2. To remand a security that shall protect him from any
proceedings by the creditor, and against the danger of
insolvency of the debtor.

General Indemnity Co., Inc. C. Alvarez

EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS

(2073, 2075)

Art. 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one among them who has
paid may demand of each of the others the share which is
proportionately owing from him.

If any of the guarantors should be insolvent, his share shall be

borne by the others, including the payer, in the same
proportion.

24
EXTINGUISHMENT OF GUARANTY (2076-2080, 1672, 1261) he obligates himself to pay if the debtor and thus binds himself to
principal does not pay. pay if the principal is unable to
E. ZOBEL, INC. V. CA, (1998) pay
Surety distinguished from Guaranty, Art. 2047

A contract of surety is an accessory promise by which a person Held: Based on the aforementioned definitions, it appears that the
binds himself for another already bound, and agrees with the contract executed by petitioner in favor of SOLIDBANK, albeit
creditor to satisfy the obligation if the debtor does not. denominated as a "Continuing Guaranty," is a contract of surety.
The terms of the contract categorically obligates petitioner as
A contract of guaranty, on the other hand, is a collateral "surety" to induce SOLIDBANK to extend credit to respondent
undertaking to pay the debt of another in case the latter does not spouses. The contract clearly disclose that petitioner assumed
pay the debt. liability to SOLIDBANK, as a regular party to the undertaking and
obligated itself as an original promissor. It bound itself jointly and
Surety Guarantor severally to the obligation with the respondent spouses. In fact,
usually bound with his principal guarantor's own separate SOLIDBANK need not resort to all other legal remedies or exhaust
by the same instrument, undertaking, in which the respondent spouses' properties before it can hold petitioner liable
executed at the same time, and principal does not join. It is for the obligation.
on the same consideration usually entered into before or
after that of the principal, and is Stipulation
often supported on a separate agrees t guarantee, and hereby guarantee, the payment
consideration from that
supporting the contract of the The use of the term "guarantee" does not ipso facto mean that the
principal. contract is one of guaranty. Authorities recognize that the word
He is an original promissor and The original contract of his "guarantee" is frequently employed in business transactions to
debtor from the beginning, and is principal is not his contract, and describe not the security of the debt but an intention to be bound by
held, ordinarily, to know every he is not bound to take notice of a primary or independent obligation. As aptly observed by the trial
default of his principal its non-performance. court, the interpretation of a contract is not limited to the title alone
Usually, he will not be He is often discharged by the but to the contents and intention of the parties.
discharged, either by the mere mere indulgence of the creditor
indulgence of the creditor to the to the principal, and is usually
principal, or by want of notice of not liable unless notified of the
the default of the principal, no default of the principal.
matter how much he may be
injured thereby
the insurer of the debt, and the insurer of the solvency of the

25