Surety Flashcards
What is a suretyship?
A surety is the legal relation that arises when one party assumes liability for a debt, default or other failing of a second party. It is a contract where one person (the surety) engages to be answerable for the debt, default or miscarriage of another with whom it is solidarily bound.
What is the legal definition of a guaranty?
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Sec. 4, Ch. 3, Title I of this Book shall be observed.
In such case the contract is called a suretyship.
Must creditors and debtors be bound by the same manner and by the same periods and conditions for solidarity to exist?
No. Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions.
Against whom may the creditor proceed for the satisfaction of a debt in case where there are solidary debtors?
Anyone of the solidary debtors or some or all of the simultaneously.
Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.
What are the qualifications of a bondsman?
Must possess integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees.
Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed in Art. 2056 and in special laws.
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…
What if the person bound to give a bond fails to do so?
Pledge or mortgage
Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admmitted in lieu thereof.
May a judicial bondsman demand exhaustion of the property of the principal debtor?
No. Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor. A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety.
How does a contract of suretyship arise?
The obligations of a surety always arise as a consequence of contract even if the suretyship is legal (offered in virtue of a provision of law) or judicial (offered in virtue of a judicial order).
What is the form of a suretyship?
Since a surety is a special promise to answer for the debt, default, or miscarriage of another (Art. 1403 NCC), it is unenforceable by action unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or his agent; evidence, therefore, of the agreement cannot be received without the writing or a secondary evidence of its contents.
Is a direct consideration required in a contract of suretyship?
No. According to Somera, “The peculiar nature of a suretyship is that it is valid despite the absence of any direct consideration received by the surety either from the principal debtor or from the creditor.”
How are contracts of sureties construed?
Strictissimi juris. Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor [SBTC v. Cuenca].
Exception: The strictissimi juris rule has no application to sureties organized for the purpose of conduting an indemnity business at established rates of compensation.
May a contract of surety cover future debts?
Yes, in cases of comprehensive or continuing surety. Art. 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.
Comprehensive or continuing surety is a surety that is not limited to a single transaction but contemplates a prospective or future course of dealing covering a series of transactions, which are within the stipulations of the contract of suretyship, until the expiration or termination therefor.
Is a surety bound by an alteration of a Loan Agreement without his/her consent?
Yes, if it is a substantial alteration. In SBTC v. Cuenca, “[A]n essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latter’s obligation.”
“In National Bank v. Veraguth, ‘[i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.’”
Is a surety bound by an alteration of a Loan Agreement without his/her consent?
Yes, if it is a substantial alteration. In SBTC v. Cuenca, “[A]n essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latter’s obligation.”
“In National Bank v. Veraguth, ‘[i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.’”
What is the difference between a surety and a standby letter of credit?
Surety:
- Upon a debtor’s default, the surety undertakes to complete the debtor’s performance;
- There is no duty to indemnify the creditor until the creditor establishes the fact of the debtor’s non-performance;
- There may be litigation
Standby letter of credit
- Creditor-beneficiary expects that it will promptly receive cash in the event of non-performance, and that it will receive it before any litigation over the nature of the debtor-applicant’s performance takes place
- Avoids litigation.
