Guaranty

Question 1

Machetti entered into a contract with Hospicio for the construction of a building.
Hospicio imposed a condition that Machetti should obtain the guarantee from Fidelity Bank to the amount of P12K out of the P54K contract price. When the building was completed, Hospicio refused to pay the balance because the specification in the contact was not complied. Machetti filed a suit for the payment of the balance. Hospicio, by way of counterclaim, asked for damages. Machetti was declared insolvent. Hospicio claimed to the Fidelity Bank the amount for which it guaranteed in their contract

Answer 1

The terms of the endorsement must be given t he signification, which ordinarily attaches. Notwithstanding 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 appear affirmatively that the contract is
the guarantor’s separate undertaking in which the principal does not join, that its 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

Question 2

Agro sold to Wonderland two parcels of land. They stipulated under a Memorandum of
Agreement that the terms of payment would be P1,000,000 in cash, P2,000,000 in shares of stock, and thebalance would be payable in monthly installments. Thereafter, an addendum was executed between them, qualifying the cash payment. Instead of cash payment, Wonderland authorized Agro to obtain a loan from the Regent Bank on which Wonderland bound itself to pay for. This loan was to cover for the payment of P1, 000,000. This addendum was not notarized.
Soriano signed as maker the promissory notes payable to the Regent Bank. However,
Agro failed to pay the obligations, as they were due. During that time, the bank was in financial distress and this prompted it to endorse the promissory notes for collection.
The trial court held in favor of the bank. It didn’t find merit to the contention that
Wonderland was the one to be held liable for the promissory notes.

Answer 2

‘i

Question 3

Melecio is the father of Fabiola and Guillermo Severino. Upon Melecio’s death, he left a
property, which became subject to litigation among his heirs, herein plaintiff and defendant. To end the litigation, a compromise was effected wherein Guillermo took over the property and agreed to pay the heirs corresponding value (P100K). Enrique Echaus affixed his name as guarantor to this contract. P60K remained unpaid and of it, Fabiola is entitled P20K and thus she filed collection for the money. The trial court favored Fabiola – the execution of judgment should issue first against Guillermo, and if no property should be found, execution should be against the property of Echaus as guarantor.
Contention of the Plaintiff:
- Echaus is liable as guarantor in the compromise agreement made by Guillermo. Contention of the Defendant:
- He is not liable because he received nothing for affixing his signature to the
contract; that the contract was lacking in consideration as to him.

Answer 3

Echaus is liable as a guarantor. A guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration. The promise of Echaus as guarantor is therefore binding.
It is never necessary that a guarantor or surety should receive any part of the benefit, if
such there be, accruing to his principal.

Question 4

Inter Resin obtained credit accommodation from Manila Bank. To secure payment, Inter
Resin executed a “continuing surety agreement” binding them solidarily to pay Manila Bank. Then, Inter Resin and Willex executed a “continuing guaranty” in favor of Investment Corp.

Upon demand, Investment Corp paid Manila Bank Inter Resin’s outstanding obligation. Investment Corp demanded from Inter Resin and Willex reimbursement of the amount paid to Manila Bank. No one paid so a case for collection of sum of money was filed by Investment Corp.
Contention of the Plaintiff:
- The “Continuing Guaranty” is an accessory contract and as such cannot legally exist
because of the absence of a valid principal obligation. Its contention is because it is not a party either to the “continuing surety agreement” or to the loan agreement.
Contention of the Defendant:
- Willex is liable because the “continuing guaranty’s” purpose is to secure payment
for the amount it paid to Manila Bank.

Answer 4

Willex is jointly and severally liable with Inter Resin for the amount paid by Investment Corp to Mnaila Bank.
The consideration necessary to support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being sufficient. For a “guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto.
A guaranty is gratuitous. It is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal

Question 5

Can a Guaranty Exist Even Without a Valid Principal Obligation?

Answer 5

Art. 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.

A guaranty is merely an accessory contract, so if the principal obligation is void, the guaranty is also void (De la Rosa v. De Borja, 53 Phil. 990). However by express provision of the second paragraph, a guaranty can be valid even if the principal obligation is:
(a) voidable;
(b) unenforceable;
(c) natural.

Question 6

True in false. A guaranty may inline given to secure present debts.

Answer 6

False.
Article 2053 - 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.

Question 7

What is a continuing guaranty?

Answer 7

CONTINUING GUARANTY – one which isn’t 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 . It is prospective in its operations and is generally intended to provide security with respect to future transactions.

Question 8

Chua and Go executed a comprehensive surety agreement to guaranty any existing
indebtedness of Davao Corp and to induce RCBC to grant Davao Corp loan. A promissory note was issued in favor of RCBC signed by Go. The promissory note was not paid despite demand.

RCBC filed a complaint for a sum of money in the sala of the respondent judge against Davao Corp, Chua, and Go.
Contention of the Plaintiff:
- By virtue of the comprehensive surety agreement, Chua is liable because said
agreement covers not merely the promissory note, but it is continuing and it encompasses every other indebtedness of Davao Corp may from time to time incur with RCBC.
Contention of the Defendant:
- He is not liable because it was only Go who signed the promissory note and such
debt was not covered by the surety agreement because it was incurred after the surety agreement was signed by him.

Answer 8

The comprehensive agreement was jointly executed to cover existing as well as further obligations, which Davao Corp may incur with RCBC.
In the case at bar, there is no doubt that the agreement is by its nature a continuing contract, and therefore remains in full force and in effect until a notice to RCBC for its termination. Chua and Go are liable even though Chua was not a signatory in the latter transaction.

Question 9

Sanyu Chemical along with its sureties executed a continuing surety agreement in favor
of Atok Finance. Sanyu assigned its trade receivables to Atok Finance. Sanyu failed to collect and remit the amounts due under the trade receivables. Atok Finance commenced an action to collect the sum plus penalty charges again Sanyu Chemical and its sureties.
Contention of the Plaintiff:
- A continuing suretyship agreement can be effected to secure future debts and that
the agreement is valid.
Contention of the Defendant:
- The continuing surety agreement could not be enforced, because this contract like
guaranty cannot exist without a valid obligation. They are not liable with Sanyu because the continuing surety is null.

Answer 9

There is a valid surety agreement. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the
sense that it is entered into for securing the performance of another obligation that is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that “a guarantee cannot exist without a valid obligation.” This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic.

Question 10

What is the rule it debt is increased?

Answer 10

If the indebtedness is increased without the guarantor’s consent, he is completely
released from the obligation as guarantor or surety (Nat. Bank v. Veraguth, 50 Phil. 253).

Question 11

PalFox was indebted to BIR for forest charges and surcharges amounting to P11, 851. Far
Eastern Surety was jointly and severally liable with PalFOx for the payment of said charges up to P5K because of forestry bond that it executed in favor of BIR guaranteeing faithful compliance by PalFox. Palfox failed to comply, BIR seek to recover from PalFox and Far Eastern P5K plus interest from filing of complaint and P6, 842 from PalFox alone as balance plus legal interest.
Contention of the Plaintiff:
- The surety company is liable to pay the legal interest being an accessory to the
principal obligation.
Contention of the Defendant:

It is not liable to pay the legal interest because it is stipulated in the bond that it
was bound to pay BIR the sum of P5K only.

Answer 11

Far Eastern Surety is liable. A guaranty cannot be presumed. If the guaranty 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. Nevertheless, a guaranty maybe constituted to guarantee the performance of a voidable or unenforceable contract.

Question 12

MB Lending Corp extended a loan to spouses Azzaraga together with Palmares as co-
maker in the amount of P30K with compounded interest of 6% per annum. The Azzaragas and Palmares paid P16, 300 leaving P13, 700. They failed to pay the balance and the spouses became insolvent. MB Lending Corp filed a complaint for collection of money against Palmares on the basis of her solidary liability under the promissory note.
Contention of the Plaintiff:
- She can only be held liable to pay for the outstanding principal obligation excluding
the imposed interests by MB Lending Corp. This is on the ground that she cannot be compelled to pay liabilities other that what was stipulated.
Contention of the Defendant: - Palmares is liable since she signed as co-maker, and therefore she assumes solidary
liability.

Answer 12

Palmares is a surety who is equally principally liable in accordance with Article 2055 and
thus he is liable for the payment of interest. However, the law also empowers the court to reduce the rate of interest in cases where the obligation has been partially paid and when the rate is found to be excessive or unconscionable.
In the case at bar, Palmares is a surety and being such, she assumed principal liability. The creditor may proceed against her in case the principal debtor does not pay.
It is not necessary for the creditor to proceed against a principal in order to hold the
surety liable. The obligation of the surety is the same as that of the principal.

Question 13

What are the qualifications of a guarantor?

Answer 13

Article 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.

Question 14

Effect of Conviction of a Crime Involving Dishonesty

Answer 14

Article 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 the guarantor.

Question 15

Liability of Heirs if the Guarantor Dies

Answer 15

His heirs are still liable to the extent of the ‘ value of the inheritance because the
obligation is not purely personal, and is therefore transmissible. It is not personal because all the guarantors are interested in the recovery of money regardless of its giver (Estate of Hemady v. Luzon Surety & Ins. Co., 53 O.G. 2786).

Question 16

Hemady is the surety at 20 different indemnity agreements, or counterbids, each
subscribed by distinct principals. Luzon Surety guaranteed various principals in favor of different creditors. Hemady died and left his obligation unfulfilled. Luzon Surety paid the indemnities wherein Hemady is the guarantor. Luzon Surety seeks reimbursement. It prayed allowance as a contingent claim of the value of the counter bonds.

Contention of the Plaintiff:
- The obligation of Hemady as a guarantor was extinguished by his death. Moreover,
integrity, as a qualification of a guarantor cannot be transmitted to his heir.
Contention of the Defendant:
- The obligation of Hemady is transmissible to his heirs.

Answer 16

The guarantor’s liability is not extinguished by his death. The general rule is that, a party’s contractual rights and obligations are transmissible to
his successor. No provision in the Civil Code states that guaranty is extinguished upon the death of the guarantor or surety.
The supervening incapacity of the guarantor does not terminate the contract but merely
entitles the creditor to demand replacement of the guarantor, which is optional – not a duty but a right.

Question 17

Effects of Guaranty Between the Guarantor and the Creditor

Answer 17

(1) The guarantor is entitled to the benefit of excussion (benefit of exhaustion) of the properties except in the cases mentioned under Art. 2059, and provided the guarantor follows Art. 2060.
(2) A compromise between the creditor and the principal debtor benefits but does not prejudice the guarantor (Art. 2063, Civil Code).
(3) If there should be several guarantors, they are in general entitled to the benefit of division (pro-rata liability) (See Art. 2065, Civil Code).

Question 18

What is the benefit of excursion?

Answer 18

Article 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.

Question 19

When may the benefit of excursion be invoked?

Answer 19

Provided:
(a) He sets it up as defense before judgment is rendered against himself (guarantor) (See
Saavedra v. Price 68 Phil. 699);
(b) He has not pledged nor mortgaged his own property to the creditor for the
satisfaction of the principal obligation (Southern Motors, Inc. v. Barbosa, 99 Phil.
263);
(c) He does not fall in the cases enumerated in Art. 2059 (See Jaucian v. Querol, 38 Phil.
707);
(d) He complies with Art. 2060 (See Garcia v. Lianco, C.A., 50 O.G. 1145).

Question 20

Brillantes obtained a loan from Southern Motors Inc. Barbosa, as guarantor, executed a
real estate mortgage in favor of Southern Motors as security of the loan. Brillantes failed to pay. Southern Motors brought an action against Barbosa to foreclose the real estate mortgage.
Contention of the Plaintiff:
- Barbosa has mortgaged his real property and that it can be foreclosed to cover such payment.
Contention of the Defendant:
- The real estate mortgage cannot be foreclosed because Southern Motors has not yet
exhausted Brillantes’ property.

Answer 20

Barbosa, the guarantor, is not entitled to the ‘ benefit of excussion. The right of the guarantor under Art 2058 to demand exhaustion of the property of the
principal debtor exists only when a pledge or a mortgage has not been given as special security for the payment of the obligation.

Question 21

When shall excussion not take place?

Answer 21

Article 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 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.

R – renounce
U – useless because execution will not be satisfied
S – solidarily bound
I – insolvency of the debtor
A – absconded, etc.

Question 22

Additional Instances When Guarantor is NOT Entitled to the Benefit of
Excussion

Answer 22

(a) If the guaranty is in a judicial bond (Art. ‘ 2084)
(b) If Art. 2060 is not complied with
(c) If the principal debt is a natural, voidable, or unenforceable obligation (See Art.
2062, where there can still be guaranty but generally the principal debtor would not
be liable

Question 23

Felicisimo Reyes failed to pay the Reyeses. The Reyeses obtained a writ of preliminary
attachment and levied upon all the properties of Felicisimo. Imperial Insurance and F. Reyes posted a defendant’s bond for dissolution of attachment in the amount of P100K. RTC favored the creditors. Writs of execution was issued but was returned unsatisfied. Creditors filed a motion for recovery on the surety bonds. Creditors sent a letter of demand to Imperial to pay the amount of the counter bond, which the latter opposed. Respondent judge rendered judgment against the counter bonds.
Contention of the Plaintiff:
- The creditor should exhaust all the properties of F. Reyes before going after the surety in the counter bond.

Contention of the Defendant:
- They can go directly after the surety without prior exhaustion of Felicisimo’s
properties.

Answer 23

:
Imperial Insurance is primarily liable to pay the counter bond. Imperial Insurance, Inc. had bound itself solidarily with the principal, the deceased
defendant Felicisimo V. Reyes. In accordance with Article 2059, par. 2, excussion (previous exhaustion of the property of the debtor) shall not take place “if he (the guarantor) has bound himself solidarily with the debtor.” Section 17, Rule 57 of the Rules of Court cannot be construed that an “execution against the debtor be first returned unsatisfied even if the bond were a solidary one, for a procedural rule may not amend the substantive law expressed in the Civil Code, and further would nullify the express stipulation of the parties that the surety’s obligation should be solidary with that of the defendant.

Question 24

Requisites Before Guarantor Can Make Use of Excussion

Answer 24

Article 2060
In order that the guarantor ‘ may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s 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.

(a) Guarantor must set it up when the creditor demands payment (NOTE: Demand can
be made only AFTER a judgment has been rendered against the principal debtor). (b) Guarantor must point out AVAILABLE (not things in litigation) property of debtor
WITHIN the Philippines.

Question 25

Jacinto obtained a promissory note from BPI and Palma was the guarantor. Jacinto
failed to pay. A complaint was filed against Jacinto and Palma. Judgment was executed against them but all the rights of BPI were transferred to Gregorio Syquia who bought the property. Jacinto and Palma never paid anything.
Contention of the Plaintiff:
- Since the Jacintos became insolvent, guarantor Palma should pay the balance. Contention of the Defendant:
- He is not liable because he was only impleaded in the case, and, that being a
guarantor, the creditor had not demanded payment from him.

Answer 25

With reference to the entire defense available to a guarantor, Palma as guarantor is still
entitled to the benefit of excussion as the judgment creditor has made no demand on him. That joining him in the suit against the principal debtor is not the demand intended by Article 2060. That demand can be made only after the judgment on the debt for obviously the exhaustion of the principal’s property – the benefit at which the guarantor – cannot begin to take place before judgment has been obtained.

Question 26

Luzon Steel Corp sued Metal Manufacturing and Sia for breach of contract and damages.
A writ of preliminary attachment was obtained. Such attachment was lifted upon a P25K counter bond executed by Sia and Times Surety as a solidary guarantor. Parties entered into a compromise but Sia failed to comply.
Contention of the Plaintiff:
- Times Surety should pay since it bound itself to jointly and severally to pay and
that the surety cannot avail of the benefit of excussion, unless, he can point out sufficient property of the debtor within the Philippines.
Contention of the Defendant:
- It was not a party to the compromise and the writ was issued without giving the
surety notice and hearing; that the writ of execution against it is invalid because the writ issued against its principal (Sia) had been returned satisfied and that Sia’s properties must first be exhausted before the surety will be liable.

Answer 26

Excussion is not applicable to surety. The surety is therefore liable. The surety’s contention is untenable. The counter bond contemplated in the rule is
evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself “jointly and severally” (in solidum) with the debtor and it is prescribed in Article 2059, paragraph 2 that excussion (previous exhaustion of the property of the debtor) shall not take place “if he (the guarantor) has bound himself solidarily with the debtor”. Moreover, even if the surety’s undertaking were not solidary with that of the principal debtor, still he may not demand exhaustion of the property of the latter, unless he can point out sufficient leviable property of the debtor within Philippine territory.

Question 27

Characteristics of the Contract of Guaranty

Answer 27

(a) It is a contract between the guarantor and the creditor.
(b) There must be a meeting of the minds between the parties
(c) Accessory—because it is dependent for its existence upon the principal obligation
guaranteed by it
(d) Subsidiary and conditional—it takes effect only when the principal debtor fails
in his
obligation subject to limitation
(e) Unilateral— (1) gives rise only to the duty on the part of the guarantor in relation
to
the creditor and not vice versa; and (2) it may be entered into even without the
intervention of the principal debtor

(f) Nominate
(g) Consensual
(h) As to form, the contract of guaranty falls under the Statute of Frauds (See Art. 1403,
No. 2).
(i) It is strictly interpreted against the creditor and in favor of the guarantor/surety and
is not to be extended beyond its terms or specified limits.
(k) Guarantor must not be the principal debtor.

Question 28

Distinguish guarantee from sunotyship

Question 29

What is the duty of the creditor?

Answer 29

If a creditor wants to hold the guarantor liable, he must do the following:
(a) Exhaust all the property of the debtor (Art. 2058) unless the guarantor is not
entitled to such benefit under Art. 2059;
(b) Resort to all the legal remedies against the debtor (Art. 2058) (including suit) (See
Wise and Co., Inc. v. Tanglao, 63 Phil. 372);
(c) Prove that the debtor is still unable to pay (See Wise and Co., Inc. v. Tanglao, 63
Phil. 372);
(d) Notify the guarantor of the debtor’s inability to pay (Roces Hermanos, Inc. v. China
Insurance and Surety Co., Inc., Aug. 9, 1941 issue of the Official Gazette, p. 1257).

Question 30

Luzon Steel Corp sued Metal Manufacturing and Sia for breach of contract and damages.
A writ of preliminary attachment was obtained. Such attachment was lifted upon a P25K counter bond executed by Sia and Times Surety as a solidary guarantor. Parties entered into a compromise but Sia failed to comply.
Contention of the Plaintiff:
- Times Surety should pay since it bound itself to jointly and severally to pay and
that the surety cannot avail of the benefit of excussion, unless, he can point out sufficient property of the debtor within the Philippines.
Contention of the Defendant:
- It was not a party to the compromise and the writ was issued without giving the
surety notice and hearing; that the writ of execution against it is invalid because the writ issued against its principal (Sia) had been returned satisfied and that Sia’s properties must first be exhausted before the surety will be liable.

Answer 30

Excussion is not applicable to surety. The surety is therefore liable. The surety’s contention is untenable. The counter bond contemplated in the rule is
evidently an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case here, because the surety in the present case bound itself “jointly and severally” (in solidum) with the debtor and it is prescribed in Article 2059, paragraph 2 that excussion (previous exhaustion of the property of the debtor) shall not take place “if he (the guarantor) has bound himself solidarily with the debtor”. Moreover, even if the surety’s undertaking were not solidary with that of the principal debtor, still he may not demand exhaustion of the property of the latter, unless he can point out sufficient leviable property of the debtor within Philippine territory.

Question 31

Procedure When Creditor Sues

Answer 31

The creditor must sue the principal alone. The guarantor cannot be sued together
with his principal except when the guarantor is not entitled to the benefit of excussion. (a) Notice to the guarantor —the guarantor must be notified so that he may appear, if he
so desires, and set up the defenses he may want to offer.
1) If the guarantor appears, he is still given the benefit of excussion even if
judgment should be rendered against him and the principal debtor. Voluntary appearance does not constitute a renunciation of his right to excussion.
2) If he doesn’t appear, the guarantor cannot set up the defenses, and it may
no longer be possible for him to question the validity of the judgment.
(b) Hearing before execution can be issued against guarantor.

Question 32

Spouses Ong owed See Hong P58, 400, which they failed to pay. Hong sued the spouses
for the collection of such plus expenses. A writ of preliminary attachment was issued. To lift attachment, spouses Ong filed a counterbond with Towers Assurance as surety. Spouses Ong were declared in default for failure to appear at the pre-trial. A writ of execution was issued against spouses and Towers Assurance. Towers Assurance assailed the writ of execution.
Contention of the Plaintiff:
- The issuance of the writ of execution against them was invalid because being a
surety they must first be given the opportunity to be heard.

Answer 32

The surety is entitled to be heard before an execution can be issued against him since he
is not a party in the case involving his principal. Notice and hearing constitute the essence of procedural due process.
In order that the judgment creditor might recover from the surety on the counter bond, it is necessary:
a. That the execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole or in part,
b. That the creditor made a demand upon the surety for the satisfaction of the judgment, and
c. That the surety be given notice and a summary hearing in the same action as to his
liability for the judgment under his counter bond.

Question 33

What are the effects ofcompromise?

Answer 33

Article 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.

(a) Between creditor and principal debtor – the guarantor BENEFITS, but is NOT
PREJUDICED
(b) Between guarantor and creditor – the debtor BENEFITS, but is NOT PREJUDICED

Question 34

Benefits of Division?

Answer 34

Article 2065 Should there be several guarantors 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.

Question 35

Mira Hermanos and Manila Tobacconists entered into a contract whereby Mira agreed to
deliver to Manila Tobacconists merchandise for sale on consignment. To secure fulfillment of the obligation of the Tobacconists, a bond of P3K was executed by Provident. An additional bond was executed by Manila Compaña. Upon final liquidation of transactions between Mira and Tobacconists, there was a balance still unpaid. Mira demanded the two sureties for payment. Contention of the Plaintiff:
- The two sureties are liable to pay the amount of P2, 500 binding themselves jointly
and severally with the debtor.
Contention of the Defendants:
- Manila Compaña: So long as the liability of the Tobacconists did not exceed P3K, it
was not bound to pay anything because its bond referred only to the obligation of the Tobacconists in excess of P3K and up to P5K.
Provident:
- It had already paid the sum of P1363 which is the 60% of the amount owed by the
Tobacconists to Mira alleging that the remaining 40% should be paid by the other surety.

Answer 35

The benefit of division does not apply in this case. The two sureties did not guarantee the same debt. The benefit of division is only applicable where there are several guarantors or sureties of
only one debtor for the same debt.

Question 36

Indemnity to be Paid by the Debtor for Whom the Guarantor has Paid

Answer 36

Article 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;
(3) The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him; (4) Damages, if they are due.

Question 37

True or false. Since a guaranty is a strict indemnity, he can recover only what he has paid plus , losses and damages, including costs and interest

Answer 37

True

Question 38

Right of Guarantor to Subrogation

Answer 38

Article 2067
The guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid.

Question 39

True or false. if the guarantor was prevented by a fortuitous event from advising the debtor of the payment, and the creditor becomes insolvent, the debtor
shall reimburse the guarantor for the amount paid.

Answer 39

False. Applicable to Gratuitous Guaranty
Only

Question 40

Engracio Palanca, while judicial administrator of the estate of Margarita Jose, executed a
bond by order of the court. To guarantee his administration, such bond was executed jointly and severally by Engracio Palanca himself, Luis S. de Vizmanosa and four others.
On the same date, Engracio Palanca and five others executed in favor of Luis S. de
Vizmanos the following bonds: Yap Chuangco, for P20,000; Yap Chutco, for P5,000; Palanca Yap Poco, for P5,000; Palanca Tanguinlay, for P5,000; and Lim Pongco, for P5,000. All of them signed the bond except Yap Chuangco, who did not personally execute the bond; this was done for him by his attorney, Yap Chengtua. An instrument was instituted for the purpose of guaranteeing the reimbursement of the said bond or a part thereof to the executors.
The court then ordered Luis Saenz de Vizmanos Ong-Quico, as surety in solidum of the
ex-administrator Engracio Palanca, to pay to the estate the sum of P41,690.15, Philippine currency, also the interest on the said sum at the rate of 8 per cent per annum, in which he paid P8,000 only. Subsequently, he instituted suit against the five sureties above named who, with Engracio Palanca, executed the bond before mentioned in his favor, praying the Court of First Instance of the city of Manila to sentence them to pay him.
Contention of the Plaintiff:
- Each one of the four should pay P5,000. Contention of the Defendant:
- Each of them should only P1,000, instead of P2,000 according to the terms of the
contract, each one of them was bound to pay to the plaintiff.

Answer 40

In the present case the plaintiff, by virtue of the contract ad cautelam, is entitled to an
The amount to be paid is hereby fixed at P1,000, to the payment of which, in favor of the action against the four defendants for recovery from each of them up to the maximum amount of P5,000, but he cannot by such action, as surety for the principal debtor, collect more than the sum which he himself was actually compelled to pay.
aforesaid plaintiff, each of the four defendants mentioned were sentenced, “with legal interest at the rate of 6 per cent per annum on the said respective sums, from March 31, 1908, the date on which the plaintiff paid to the present administrator of the said estate the said sum of P8,000, until its complete payment. The said four defendants shall pay the costs in equal shares.” the costs of this instance shall be assessed against the plaintiff and appellant Vizmanos.

Question 41

PNB seeks a review and reversal of the decision absolving Luzon Surety of its liability to
PNB. Villarosa applied for a crop loan with PNB, which was later on approved. He then executed a chattel mortgage on standing crops to guarantee the loan.
Because of non-payment, PNB filed a complaint against the three bondsmen, the
defendant being one of them. It filed a bond of P10,000 to guarantee faithful performance of the obligation to PNB.
Contention of the Plaintiff:
- The Court of Appeals erred when it released the Luzon Surety from liability, and
that the benefit of excussion should not be availed of because they are surety of principal debtor, and that they are liable for the payment of interest even if they guaranteed only up to P10,000.
Contention of the Defendant:
- Luzon Surety on the other hand raised as its defense the alleged material alteration of the terms and conditions of the contract as the basis of its prayer for release.

Answer 41

Luzon Surety is liable to pay for legal interest. If a surety upon demand fails to pay, he
can be held for interest even if the liability becomes more than that in the principal obligation. The increased liability is not because of the contract, but because of the default and the necessity of judicial collection. However, the interest should run from the time the debt becomes due and demandable.

Question 42

What is the difference between Art. 2066 and Art. 2071

Answer 42

It should be noted that Article 2071 differs from Article 2066; payment, whereas the former refers to the rights of the guarantor after payment. Article 2071 does not give the guarantor the right to obtain money judgment in his favor for the simple reason that he has not yet paid, whereas in the latter, a money judgment would be proper since in this case, there has already been a payment. Article 2071 is of the nature of a preliminary remedy, whereas Article 2066 is a substantive right, it gives a right of action, which without the provisions of the other might be worthless (Kuenzle & Streiff v. Tan Sunco, 16 Phil. 670 and Perez v. Baria, 52 Phil. 197). In Art. 2071, the guarantor has either of two rights:
(a) to obtain release from the guaranty; (b) to demand security.

Question 43

Distinguish Art 2073 form benefit of Division

Answer 43

This Article should not be confused with the article giving as a rule to several
guarantors the benefit of division (Art. 2065) for in said article, there has been no payment as yet. Moreover, in Art. 2073, the payment must have been made because of judicial proceedings or because the principal debtor was insolvent (Cacho v. Valles, 45 Phil. 107).

Question 44

Two Causes for Extinguishment of the Guaranty

Answer 44

a) Direct (when the guaranty itself is extinguished, independently of the principal
obligation) (b) Indirect (when the principal obligation ends, the accessory obligation of guaranty
naturally ends) (See Shannon v. Phil. Lumber & Trans. Co., 61 Phil. 876)

Question 45

Effect of Novation

Answer 45

Effect of Novation
(a) If a contract is novated without the guarantors consent, the guaranty ends (Barreto
v. Albo, 62 Phil. 593; Nat’l Ban v. Veraguth, 50 Phil. 254).
(b) Therefore, a novation where the debtor is substituted or where the credit is increased, releases the guarantor who did not consent thereto (Barreto v. Albo, 62 Phil. 593; Nat’l Ban v. Veraguth, 50 Phil. 254)
[NOTE: Consent, however on the part of the guarantor may be given expressly or implicitly before or after the novation. (Naric v. Guillioso, et al., {C.A} 53 O.G. 4151).]
[NOTE: If the interest rates are increased without the guarantors consent, he is not liable for the increase, but is liable still for the principal obligation and the original rate of interest. (Bank of the P.I v. Albaledjo y Cia, 53 Phil. 141).]

Question 46

Effect of Dacion En Pago

Answer 46

Article 2077 The creditor voluntarily accepts immovable or other property in payment of the debt, even if he should afterwards lose the same
through eviction, the guarantor is released.

(a) Note that the dacion en pago here refers to either IMMOVABLE or OTHER
(personal) PROPERTY. (b) Eviction revives the principal obligation, but NOT the guaranty, for the creditor here
took the risk.

Question 47

What are the rules on Release by Extension of Term Granted by Creditor to Debtor

Answer 47

(a) Where the release without consent of guarantor — guarantor is released from his undertaking
(b) Where obligation payable in installments — where a guarantor is liable for several payments, such as installments, an extension of time as to one or more will not affect the liability of the surety for the others. But in case of an acceleration clause, the act of the creditor of extending payment of said installment without guarantor’s consent, discharges the guarantor because this constitutes an extension of the principal obligation
(c) Prejudice to guarantor and period of extension is immaterial
(d) Extension must be based on new agreement
(e) Diligence on the part of the creditor to enforce his claim

Question 48

Defenses Available to the Guarantor
As against the creditor

Answer 48

a. Defenses inherent in the principal obligation (Art. 2081).
Examples: Prescription, res judicata, payment, illegality of cause (Chinese Chamber or Commerce v. Pua Te Ching, 16 Phil. 406)
b. Defenses ordinarily personal to the principal debtor, but which are inherent in the
debt (Art. 2081).
Example: Vitiated consent (or intimidation, etc.) (Chinese Chamber or Commerce v. Pua Te Ching, 16 Phil. 406)
c. Defenses of the guarantor himself.
Examples:
i. vitiated consent on his part ii. compensation between debtor and creditor iii. remission of the principal obligation or of the guaranty iv. merger of the person of the debtor and creditor
(NOTE: Reason for the last 3 examples: extinguishment of the principal
obligation extinguishes the guaranty.)