Suretyship

Question 1

SURETYSHIP

Answer 1

an agreement whereby a party called the SURETY guarantees the performance by another party called the PRINCIPAL or OBLIGOR of an obligation or undertaking in favor of a 3rd party called the OBLIGEE.

******(Sec. 177)*****

Note: It is considered as an INSURANCE CONTRACT if it is executed by a surety as a VOCATION, an not incidentally

Question 2

UNDERTAKING within the SCOPE of Suretyship

Answer 2

(RUBS)

RECOGNIZANCES

UNDERTAKINGS issued under Act No. 536 as amended by Act No 2206

BONDS

STIPULATIONS

Question 3

NATURE OF LIABILITY OF SURETY

Answer 3

1. SOLIDARY - solidary (Joint and several)
2. LIMITED or FIXED - limited to the amount of the bond
3. CONTRACTUAL - determined strictly by the terms of the contract of suretyship in relation to the principal contract between obligor and the obligee
   * (Sec. 178)*

Question 4

LIABILITY OF SURETY

Answer 4

Although the contract of a surety is IN ESSENCE SECONDARY only to a valid principal obligation, the surety becomes LIABLE for the debt or duty of another although it possesses NO DIRECT PERSONAL INTEREST over the obligations nor does it RECEIVE ANY BENEFIT THEREFROM. And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a REGULAR PARTY to the undertaking.

Question 5

TYPES OF SURETTY BONDS

Answer 5

1. CONTRACT BOND

connected with construction and supply contracts for the protection of the owner against a POSSIBLE DEFAULT by the contractor to comply with his contract or his POSSIBLE FAILURE TO PAY material men, laborers, and sub-contractors, which may either be:

(a. ) PERFORMANCE BOND - one covering the faithful performance of a contract
(b. ) PAYMENT BOND - one covering the payment of laborers and material men

2. FIDELITY BOND

one which PAYS THE EMPLOYER for loss growing out of DISHONEST ACT of his employee, may either be

(a. ) INDUSTRIAL BOND - one required by PRIVATE EMPLOYERS to cover loss through dishonesty of employees
(b. ) PUBLIC OFFICIAL BOND - one required of PUBLIC OFFICERS for the faithful performances of their duties and as a CONDITION of entering upon the duties of their offices

3. JUDICIAL BOND

required in connection with JUDICIAL PROCEEDINGS.

Purpose: to INDEMNIFY THE ADVERSE PARTY against damages resulting from the proceeding

Question 6

CONTINUING SURETY

Answer 6

an agreement whereby the principal places itself in a position to enter into the projected series of transaction with its creditor WITHOUT EXECUTING A SEPARATE SURETY CONTRACT OR BOND for each financing or credit accomodation extended to the principal debtor

Question 7

PREMIUMS

Answer 7

CONSIDERATION for furnishing the bond or the guaranty. Thus the OBLIGATION TO PAY PREMIUMS SUBSISTS for as long as the surety shall exist

Question 8

RULES ON PAYMENT OF PREMIUMS

Answer 8

1. The Premium becomes a DEBT as soon as the CONTRACT OF SURETYSHIP or BOND is PERFECTED and DELIVERED to the obligor
2. The contract of suretyship or bond shall NOT BE VALID unless and until the premium therefor has been PAID (Sec. 179)
3. Where the OBLIGEE HAS ACCEPTED the bond, it shall be VALID and ENFORCEABLE notwithstanding the non-payment of premiums
4. If the contract of suretyship or bond is NOT ACCEPTED by or FILED with the OBLIGEE, the SURETY shall only collect a REASONABLE AMOUNT
5. If the NON-ACCEPTANCE of the bond be due to the FAULT or NEGLIGENCE of the SURETY, NO SERVICE FEE, STAMPS OR TAXES IMPOSED shall be COLLECTED by the surety
6. In the case of CONTINUING BOND (for a term longer than one year or with no fixed expiration date), the OBLIGOR shall PAY the subsequent annual premium as it falls due UNTIL the contract is CANCELLED

Question 9

SURETYSHIP vs PROPERTY INSURANCE

Answer 9

1. CLASSIFICATION

S - accessory contract

PI - Principal Contract

2. NUMBER OF PARTIES

S - 3: obligor, obligee, surety

PI - 2: insurer, insured

3. NATURE

S - Credit accommodation

PI - Contract of indemnity

4. RECOVERY

S - Surety CAN RECOVER from the principal

PI - Insurer has no right; only RIGHT OF SUBROGATION

5. CANCELLATION

S - bond can be cancelled only WITH CONSENT of OBLIGEE, COMMISSIONER, or COURT

PI - may be cancelled UNILATERALLY either by the insured or the insurer on the ground provided by law

6. ACCEPTANCE

S - REQUIRES acceptance by OBLIGEE to be VALID

PI - NO NEED of acceptance by any third party

7. SCHEME

S - RISK-SHIFTING device; premium paid being in the nature of service fee

PI - RISK-DISTRIBUTING device; premium paid as a ratable contribution to a common fund

Question 10

SURETYSHIP vs GUARANTY

Answer 10

1. DEFINITION

S - one who undertakes to pay if the principal DOES NOT PAY

G- one binds himself to pay if the principal CANNOT PAY

2. LIABILITY

S - PRIMARY: assumes the liability as a REGULAR PARTY to the undertaking

G - SECONDARY: liability DEPENDS upon an AGREEMENT TO PAY if the primary debtor fails to do so

3. BENEFIT OF EXHAUSTION

S - NOT entitled

G - ENTITLED