CREDIT

TRANSACTIONS
(GUARANTY)
NATURE AND EXTENT OF GUARANTY

GUARANTY – where one person (guarantor)

binds himself to another (creditor) to fulfill the
obligation of the principal debtor in case the
latter should fail to do so. (Art. 2047)
NATURE AND EXTENT OF GUARANTY

CHARACTERISTICS OF GUARANTY: [USA-CD]

Only the guarantor has the obligation to
a. Unilateral indemnify the creditor in case of failure

The guarantor becomes liable to the

b. Subsidiary creditor only upon failure to pay by the
principal debtor

Existence depends upon an existing valid

c. Accessory principal contract.

d. Conditional Operate only when the principal debtor

failed to fulfill his obligation.

Guarantor must be a person distinct from

e. Distinct the debtor.
NATURE AND EXTENT OF GUARANTY

CLASSIFICATION OF GUARNTY: [B-COPS]

a. In its Broad Sense
• Personal – assumes by an individual
• Real – property is committed
b. Consideration
• Gratuitous – for no valuable consideration
• Onerous – paid a valuable consideration
c. Origin
• Conventional – agreed by parties
• Legal – imposed by law
• Judicial – ordered by court
NATURE AND EXTENT OF GUARANTY

CLASSIFICATION OF GUARNTY: [B-COPS]

d. Person guaranteed
• Single - ordinary
• Double - sub-guaranty
e. Scope
• Definite – principal obligation only
• Indefinite – includes accessories
NATURE AND EXTENT OF GUARANTY

SURETYSHIP – contractual relation resulting

from the agreement whereby one person, the
surety, engages to be answerable to a third
person for the debt, default, or miscarriage of
another known as the principal.

NOTE: Art. 2047, par. 2. “If a person binds

himself solidarily with principal debtor…the
contract is called SURETYSHIP”.
NATURE AND EXTENT OF GUARANTY

SIMILARITY BETWEEN GUARANTOR AND SURETY

– both promise or undertake to answer for the

debt, default or miscarriage of another person.
NATURE AND EXTENT OF GUARANTY
DISTINCTIONS BETWEEN GUARANTOR AND
SURETY
Guarantor
1 His Liability depends upon an
independent agreement.
2 Obligation is secondary
3 Pay if the principal debtor
CANNOT pay
4 Insurer of the principal
debtor’s SOLVENCY
5 Entitled to excussion
Surety
He assumes liability as a
regular party to the contract
Obligation is primary
Pay if the principal debtor
DOES NOT pay
Insurer of the principal
debtor’s DEBT
Not entitled to excussion
NATURE AND EXTENT OF GUARANTY
IMPORTANT FEATURE OF GUARANTY:
a. Guaranty is GRATUITOUS unless there is a
stipulation to the contrary. In the latter case, it
becomes ONEROUS;
b. MARRIED woman may guarantee an
obligation without the husband’s consent, but
shall not thereby bind the conjugal
partnership, EXCEPT in cases provided by law.
Example:
• With husband’s consent
• Guaranty redounded to the benefit of the family
NATURE AND EXTENT OF GUARANTY
IMPORTANT FEATURE OF GUARANTY:
c. If a guaranty is entered into WITHOUT THE
KNOWLEDGE of the principal debtor, the debtor can
recover only insofar as the payment has been
BENEFICIAL to him and he cannot SUBROGATE the
creditor on his rights;
d. Guaranty is:
• Judicial – ordered by the court
• Gratuitous – the guarantor receives no valuable
consideration
• Onerous – guarantor is paid a valuable
consideration for his guaranty
e. Double or sub-guaranty is allowed with his consent,
without his knowledge, or even he objects.
NATURE AND EXTENT OF GUARANTY
IMPORTANT FEATURE OF GUARANTY:
f. NO guaranty for VOID CONTRACTS;
g. For VOIDABLE, UNENFORCEIABLE CONTRACTS
AND NATURAL OBLIGATION guaranty is
ALLOWED;
h. May be given to secure a FUTURE DEBTS even the
amount of which is not yet known. HOWEVER,
there can be no claim against the debtor until debt
is LIQUIDATED;
i. Debt is considered LIQUIDATED when it is for a
price fixed in the contract.
j. A CONDITIONAL OBLIGATION may also be
secured.
NATURE AND EXTENT OF GUARANTY
IMPORTANT FEATURE OF GUARANTY:
k. Guarantor may bind himself for LESS, but not for
MORE. Should he have bound himself for more, his
obligation shall be REDUCED;
l. Guaranty is NOT PRESUMED;
m. If it is SIMPLE OR INDEFINITE, it shall comprise
both PRINCIPAL OBLIGATION and ACCESSORIES.
PROVIDED, that he shall be liable only to those
which incurred AFTER he has been judicially
required to pay;
n. Any DOUBTS in the contract is generally resolved
IN FAVOR OF SURETY;
NATURE AND EXTENT OF GUARANTY
IMPORTANT FEATURE OF GUARANTY:
o. QUALIFICATIONS OF GUARANTOR: [SPF]
• Sufficient Property
• Person of integrity
• Full legal capacity
p. The PLACE WHERE THE OBLIGATION is, is the
JURISDICTION of the court;
q. WHEN CREDITOR MAY DEMAND A SUBSTITUTE:
• Original guarantor convicted of crime involving
dishonesty (e.g. ESTAFA or MISAPPROPRIATION)
• Original guarantor becomes insolvent
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE
GUARANTOR AND THE CREDITOR:

a. Guarantor is SECONDARY LIABLE. He cannot

be liable UNLESS:
• ALL of principal debtor’s property are
EXHAUSTED
• ALL LEGAL REMEDIES are RESORTED
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE
GUARANTOR AND THE CREDITOR:
b. EXCEPTIONS to excussion:
• Right is waived
• Guarantor binds himself SOLIDARILY
• Debtor becomes INSOLVENT
• Debtor UBSCONDED unless he left a representative
• Property of principal debtor is PRESUMED not enough
to satisfy obligation
• Guarantor is a Judicial bondsman and sub-surety
• A pledge or mortgage has been given as a special
security
• Guarantor fails to interpose it as a defense
• Guarantor fails to POINT OUT to creditor available
property of debtor
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE
GUARANTOR AND THE CREDITOR:

c. Creditor shall SUFFER THE LOSS, to the extent of

said property, if he is negligent in exhausting
the property already pointed out
d. GENERALLY, guarantor and principal cannot be
joint as party defendants EXCEPT where it
would serve merely to delay the ultimate
accounting of the guarantor
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE
GUARANTOR AND THE CREDITOR:

e. Guarantor must be NOTIFIED in every actions

brought against the principal debtor
f. Guarantor is ENTITLED TO BE HEARD before an
execution can be issued against him
g. A compromise between CREDITOR AND
PRINCIPAL DEBTOR benefits the GUARANTOR
but does not prejudice him
h. A compromise between CREDITOR AND GUARANTOR
benefits the PRINCIPAL DEBTOR but does not prejudice
him
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE
GUARANTOR AND THE CREDITOR:

i. SUB-GUARANTOR enjoys the benefit of

excussion BOTH to the guarantor and principal
debtor
j. If there are SEVERAL GUARANTORS, obligation
is divided among them UNLESS SOLIDARITY has
been expressed
k. Creditor can only demand the respective share
of the Guarantor to the obligation
l. BENEFIT OF DIVISION must be set up as a
DEFENSE
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :

a. Guarantor who pays must be INDEMNIFIED

with the following:
• Amount of debt
• Legal interest from the time payment was made
known
• Expenses incurred after notifying debtor that
payment was demanded
• Damages, if they are due
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :

b. EXCEPTIONS TO RIGHT OF INDEMNITY:

• Guaranty is WITHOUT KNOWLEDGE or AGAINST
THE WILL of the principal debtor. In this case,
Guarantor can only recover payment that had been
beneficial to the debtor
• No intention to be reimbursed
• Waived
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :

c. If Guarantor pays WITH THE KNOWLEDGE of

debtor, he SUBROGATES all the rights of the
creditor
d. In all cases, Guarantor CANNOT demand to the
debtor more than what he really paid
e. If paid WITHOUT THE KNOWLEDGE, debtor is
entitled to all defenses (e.g. Previous
extinguishment, prescription, etc.)
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :

e. If obligation is paid before it became due,

Guarantor cannot demand reimbursement until
expiration of the period EXCEPT:
• With debtor’s consent
• Debtor ratifies, express or implied
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :

f. GENERALLY, Guarantor must first notify the

debtor before he pays the obligation to claim
reimbursement EXCEPT:
• Creditor becomes INSOLVENT
• GUARANTOR was prohibited by
FORTUITOUS EVENT
• Guaranty is GRATUITOUS

NOTE: NO notification, no remedy!

EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :
g. Even BEFORE PAYING, Guarantor may proceed
against the creditor for the following reasons:
• Guarantor is sued before payment
• Insolvency of Princi pal Debtor
• Period expired where the debtor has bound himself
to relieve Guarantor within specified time
• Debt has become demandable
• Lapse of 10 years, if no fixed period of maturity
EXCEPT it be of such nature
• Reasonable ground to believe that Debtor may
abscond
• If Principal debtor is in imminent danger of
becoming insolvent
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN THE DEBTOR
AND THE GUARANTOR :

h. After payment, Guarantor who guarantees the

debt of an absentee may request
reimbursement to:
• Person who requested
• Debtor
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN AS BETWEEN
CO-GUARANTORS :
a. Obligation of several guarantor of the same
debt is JOINT.
b. RIGHT OF REIMBURSEMENT by co-guarantor
who pays PROVIDED:
• Payment has been made in virtue of
JUDICIAL DEMAND; or
• Principal Debtor is INSOLVENT
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN AS BETWEEN
CO-GUARANTORS :
c. DEFENSES available to co-guarantor:
• Obligation was extinguish
• Fraud
• Prescription
• All others available to principal debtor
against the creditor which are not purely
personal
EFFECTS OF GUARANTY
EFFECTS OF GUARANTY BETWEEN AS BETWEEN
CO-GUARANTORS :

d. Sub-guarantor, in case of insolvency of

guarantor, is liable to the co-guarantor in the
same manner as the guarantor
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