CIVIL LAW > VIII. CREDIT TRANSACTIONS > C. GUARANTY AND SURETYSHIP > 2. EFFECTS OF GUARANTY

The topic of "Effects of Guaranty" under Guaranty and Suretyship is governed by the Civil Code of the Philippines. Guaranty and suretyship are governed by obligations and contract law principles, with specific provisions that regulate their effects on the principal, guarantor/surety, and creditor. Below is a meticulous and comprehensive discussion:

1. Definition and Nature of Guaranty

Guaranty is defined under Article 2047 of the Civil Code:
- It is a contract whereby a person (the guarantor) binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter fails to do so.
Nature of Liability: The guarantor’s liability is secondary and subsidiary, meaning that the guarantor only becomes liable if the principal debtor fails to perform his obligation.
Personal Obligation: The guarantor binds his own property, distinct from the principal debtor’s obligation.

2. Effects of Guaranty on the Principal Parties

A. Between the Guarantor and the Creditor

Creditor’s Rights Against the Guarantor:
- The guarantor becomes liable only upon default of the principal debtor.
- The guarantor is entitled to require the creditor to exhaust all legal remedies against the principal debtor before proceeding against him (Article 2058, Civil Code). This is the benefit of excussion.
Exceptions to the Benefit of Excussion: Under Article 2059, the guarantor cannot invoke the benefit of excussion in the following cases:
- If he has expressly renounced it.
- If he has bound himself solidarily with the principal debtor.
- If the principal debtor is insolvent.
- If the principal debtor cannot be sued within the Philippines unless he left without the creditor's consent.
- If it is evident that an execution on the debtor's property would not result in satisfaction of the obligation.
Extent of Liability:
- The guarantor cannot be held liable for more than what is stipulated in the contract (Article 2054). If the obligation is conditional, the guaranty is also conditional.
Subrogation of Rights:
- Upon payment by the guarantor, he is subrogated to all the rights of the creditor against the principal debtor (Article 2067).

B. Between the Guarantor and the Principal Debtor

Right to Reimbursement:
- The guarantor who has paid the debt has the right to reimbursement from the principal debtor (Article 2066). The amount includes:
  - The total amount paid.
  - Interest from the time of payment.
  - Any expenses incurred by the guarantor due to the guaranty, provided these are reasonable and justified.
Action for Exoneration:
- Under Article 2071, the guarantor can compel the debtor to make provisions for the payment of the debt before the guarantor has paid:
  - When the debtor becomes insolvent.
  - When the debtor has failed to pay the debt after it has become due.
  - When the debt becomes demandable by reason of the expiration of the term.
  - When the guarantor is sued for payment.
Effect of Payment Without Notification:
- If the guarantor pays without notifying the principal debtor, and the debtor pays as well, the guarantor loses his right to reimbursement (Article 2066).

C. Between Co-Guarantors

Right to Contribution:
- If there are multiple guarantors for the same debtor and debt, and one pays more than his share, he may demand proportional contribution from his co-guarantors (Article 2073).
Extent of Contribution:
- The contribution is based on the amount each guarantor agreed to be liable for. However, if a co-guarantor is insolvent, his share is borne proportionately by the others.

3. Effects of Guaranty on Third Parties

The guaranty does not create any obligation or burden on third parties unless there is a stipulation expressly binding them.

4. Defenses Available to the Guarantor

Defenses Derived from the Principal Obligation:
- The guarantor may set up defenses which the principal debtor could have invoked, such as:
  - Nullity of the principal obligation.
  - Prescription of the obligation.
  - Payment or performance by the debtor.
Defenses Personal to the Guarantor:
- The guarantor may invoke personal defenses, such as:
  - Lack of consent to the guaranty.
  - Expiration or invalidity of the guaranty.

5. Extinguishment of Guaranty

The guaranty is extinguished under the following circumstances:

Extinguishment of the Principal Obligation:
- Since the guaranty is accessory, its extinguishment follows the principal obligation.
Novation:
- Any substantial change in the terms of the principal obligation made without the guarantor’s consent releases him from liability (Article 2079).
Release by the Creditor:
- If the creditor releases the guarantor or impairs the guarantor’s rights against the principal debtor (e.g., through condonation), the guaranty is extinguished.
Loss of Security:
- If the creditor, through his fault, causes the guarantor to lose his right to be subrogated to the securities given by the debtor, the guarantor is proportionally released (Article 2080).

6. Suretyship Distinguished from Guaranty

Though often used interchangeably, guaranty and suretyship differ in key aspects:

In suretyship, the surety’s liability is primary and solidary, meaning the creditor may directly demand payment from the surety without first proceeding against the principal debtor.
In guaranty, the guarantor’s liability is subsidiary, contingent upon the debtor's default.

Key Jurisprudence

Development Bank of the Philippines v. Prudential Bank (1997):
- Established that guaranty is purely accessory and contingent.
Manila Surety and Fidelity Co., Inc. v. Batu Construction (1969):
- Highlighted that the surety’s liability is primary and akin to that of the principal debtor.

This exhaustive outline ensures clarity on the effects of guaranty under Philippine Civil Law.