CIVIL LAW > VIII. CREDIT TRANSACTIONS > C. GUARANTY AND SURETYSHIP
Guaranty and suretyship are credit transactions under Philippine civil law that establish a relationship where one person binds themselves to answer for the debt, default, or miscarriage of another. These concepts are governed by Articles 2047 to 2084 of the Civil Code of the Philippines and applicable jurisprudence. Below is a meticulous discussion of the legal principles, distinctions, and applications of guaranty and suretyship:
I. DEFINITION AND NATURE
A. Guaranty
- Article 2047: Guaranty is a contract where a person (guarantor) binds themselves to the creditor to fulfill the obligation of the principal debtor if the latter fails to do so.
- Characteristics:
- Accessory Contract: Cannot exist without a principal obligation.
- Unilateral or Bilateral: Generally unilateral but can be bilateral if the guarantor is compensated.
- Subsidiary Nature: The guarantor becomes liable only upon the default of the principal debtor.
B. Suretyship
- Article 2047 (par. 2): If a person binds themselves solidarily with the principal debtor, it is called suretyship.
- Characteristics:
- Accessory Contract: Like guaranty, it is ancillary to a principal obligation.
- Solidary Obligation: The surety directly assumes the obligation of the debtor, effectively becoming primarily liable.
II. ELEMENTS
- Principal Obligation: A valid and existing obligation between the principal debtor and creditor.
- Consent of the Guarantor or Surety: The guarantor/surety must expressly agree to undertake the obligation.
- Capacity: The guarantor/surety must have the capacity to enter into the contract.
- Cause or Consideration: For onerous guaranties, consideration is necessary. Gratuitous guaranties rely on liberality.
III. DISTINCTIONS BETWEEN GUARANTY AND SURETYSHIP
| Aspect | Guaranty | Suretyship |
|---|---|---|
| Nature | Subsidiary | Solidary |
| Liability | Contingent on the debtor's default | Immediate and direct |
| Demand from Debtor | Required before guarantor's liability | Not required |
| Extent of Liability | Limited to what is agreed in the contract | Co-extensive with that of the principal debtor |
IV. KINDS OF GUARANTY
As to Formation:
- Conventional: By agreement of the parties.
- Legal: Imposed by law (e.g., guardians for minors).
- Judicial: Ordered by a court.
As to Consideration:
- Gratuitous: No compensation.
- Onerous: Guarantor is paid or compensated.
As to Extent:
- Simple Guaranty: Covers only the principal obligation.
- Continuing Guaranty: Covers future obligations within the agreed limit.
V. OBLIGATIONS AND RIGHTS OF THE GUARANTOR
A. Obligations of the Guarantor
- To Pay upon Default of the Debtor: The guarantor must fulfill the obligation once the principal debtor defaults.
- To Pay Interest and Expenses: If agreed or stipulated, the guarantor is liable for interest and incidental expenses.
B. Rights of the Guarantor
- Right of Exoneration: Demand that the principal debtor fulfill the obligation when due.
- Right of Indemnity: Recover from the principal debtor what the guarantor paid on their behalf.
- Right of Subrogation: Step into the shoes of the creditor once the guaranty obligation is fulfilled.
- Benefit of Excussion (Article 2058): Demand that the creditor exhausts the properties of the debtor first before enforcing the guaranty (not applicable in suretyship).
VI. EXTINCTION OF GUARANTY
Guaranty is extinguished by:
- Extinction of the Principal Obligation: If the debt is paid or otherwise discharged.
- Release by the Creditor: Voluntary relinquishment by the creditor.
- Novation: Substitution of the obligation that effectively extinguishes the original guaranty.
- Prescription or Expiry: When the period to enforce the guaranty lapses.
VII. LEGAL EFFECTS AND APPLICATIONS
In Case of Fraud, Duress, or Misrepresentation:
- If the creditor induces the guarantor through fraud, the guaranty contract is voidable.
Jurisprudential Doctrines:
- Rule of Strictissimi Juris: The guaranty is strictly interpreted and cannot be extended beyond its terms.
- Benefit of Excussion: Applies unless waived; the creditor must exhaust the debtor’s properties before going after the guarantor.
VIII. JURISPRUDENCE
Significant Supreme Court decisions clarify nuances:
- PNB v. CA (1996): Solidary surety is directly liable with the principal debtor and waives the benefit of excussion.
- Trade & Investment Dev. Corp. v. Roblett (2002): A continuing guaranty remains valid even for obligations unknown at the time of its execution, provided they fall within the agreed terms.
- Dizon v. Philippine National Bank (2008): The creditor must demand payment from the guarantor within a reasonable time after the debtor defaults.
IX. PRACTICAL APPLICATIONS
- For Banks and Financial Institutions: Suretyship is often used to secure loans.
- Corporate Setting: Corporate officers may act as sureties for corporate obligations.
- Judicial Bonding: Courts often require guaranties or sureties for the issuance of injunctions or attachments.
This comprehensive outline provides a detailed understanding of guaranty and suretyship under Philippine law. Legal practitioners must always review relevant statutory provisions, contractual terms, and case law to provide accurate advice tailored to specific situations.