Extinguishment of Guaranty

In the Philippine legal context, the extinguishment of a guaranty is governed primarily by the Civil Code of the Philippines and other applicable laws. A guaranty, being an accessory obligation, is extinguished when the principal obligation to which it is attached is extinguished, among other specific instances. Below is an exhaustive discussion on the rules governing the extinguishment of guaranty:

1. General Rule: Extinguishment of Principal Obligation Extinguishes Guaranty

Nature of Guaranty as Accessory Obligation
Article 2052 of the Civil Code states that a guaranty is an accessory obligation and exists only as long as the principal obligation exists. If the principal obligation is extinguished, the guaranty is also extinguished.
Modes of Extinguishment of Principal Obligation
The guaranty is extinguished if the principal obligation is extinguished by any of the following:
- Payment or performance (Art. 1231)
- Loss of the thing due (Art. 1262-1265)
- Condonation or remission of the debt (Art. 1270)
- Confusion or merger of rights of creditor and debtor (Art. 1275)
- Compensation (Art. 1278)
- Novation (Art. 1291)

2. Specific Modes of Extinguishment of Guaranty

The guaranty may also be extinguished independently of the principal obligation due to circumstances affecting the guaranty itself, as follows:

A. By the Release of the Guarantor

Article 2076: The guarantor may be released by the creditor, either expressly or impliedly.
If the creditor waives the guaranty without extinguishing the principal obligation, the guarantor is discharged from liability.

B. By the Extinguishment of the Principal Obligation

As previously noted, any valid extinguishment of the principal obligation extinguishes the guaranty.

C. By Prescription

The obligation of the guarantor prescribes at the same time as the principal obligation. However, actions to enforce the guaranty may be subject to different prescription periods, depending on the circumstances (e.g., obligations subject to the ten-year or six-year prescription periods under Articles 1144 and 1145).

D. By the Beneficiary’s Actions

Release of Securities or Collaterals
- If the creditor releases securities or collaterals given by the debtor or guarantor without the guarantor's consent, the guaranty is extinguished to the extent of the value of the released securities (Art. 2081).
Failure to Act Against the Principal Debtor
- If the creditor’s negligence or acts impair the guarantor’s right to reimbursement or subrogation against the principal debtor, the guaranty may be extinguished.

E. By Novation of the Principal Obligation

If the terms of the principal obligation are substantially changed without the guarantor's consent, the guaranty is extinguished unless the guarantor agrees to the changes (Art. 1291).

F. By the Death of the Guarantor

The Civil Code provides that the guarantor’s heirs are bound to fulfill the obligation only to the extent of the assets inherited (Art. 2060). If the estate is insufficient, the guaranty is extinguished.

G. By Other Grounds Specific to the Guaranty

If the guaranty was conditional, and the condition fails or does not occur, the guaranty is extinguished.
A guaranty may also terminate if it is limited to a specific period or amount and that period lapses or the amount is fully satisfied.

3. Legal Provisions on Continuing Guaranty

Nature of Continuing Guaranty

A continuing guaranty, which secures future debts or obligations, is extinguished upon:
- The express revocation by the guarantor as to future transactions, provided that the creditor is duly notified (Art. 2059).
- The lapse of the specified period within which the guaranty operates.

Creditor's Waiver or Acts

The creditor’s waiver of the continuing nature of the guaranty or its unilateral discharge may also extinguish it.

4. The Guarantor’s Subrogation and Extinguishment

Once a guarantor pays the obligation of the debtor, the guarantor is subrogated to the rights of the creditor against the debtor (Art. 2067).
However, if the creditor impairs these rights by condonation, release, or failure to secure the debtor's collateral, the guarantor’s obligation is proportionally extinguished.

5. Suretyship Distinguished from Guaranty

Although suretyship is closely related to guaranty, their extinguishment may differ due to the solidary nature of suretyship:

A surety may be discharged by acts of the creditor impairing its rights to reimbursement, just like a guarantor.
However, the strict application of solidary liability in suretyship may sometimes require explicit provisions to extinguish the obligation.

Key Jurisprudence

Several Supreme Court cases provide clarity on the extinguishment of guaranty:

Sps. Yu vs. CA (2002)
- Clarifies that the release of the principal obligation extinguishes the guaranty unless expressly reserved.
PNB vs. CA (1999)
- Establishes that the release of a co-guarantor does not necessarily discharge the remaining guarantors unless otherwise stipulated.

This comprehensive outline demonstrates that the extinguishment of guaranty involves both general rules tied to the principal obligation and specific rules that recognize the unique nature of the guaranty relationship.