Nature and Extent of Guaranty | Guaranty and Suretyship | CREDIT TRANSACTIONS

CIVIL LAW > VIII. CREDIT TRANSACTIONS > C. GUARANTY AND SURETYSHIP > 1. NATURE AND EXTENT OF GUARANTY

Definition and Concept of Guaranty

A guaranty is a contract where a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter fails to do so. This contract is governed by Articles 2047 to 2084 of the Civil Code of the Philippines.

Characteristics of a Guaranty

1. Accessory Contract - A guaranty cannot exist without a valid principal obligation. If the principal obligation is void, the guaranty is also void.
2. Subsidiary Obligation - The guarantor's liability is secondary; the creditor must exhaust the debtor's properties first (Article 2058), except in certain cases (e.g., insolvency, waiver of excussion).
3. Consensual - A guaranty is perfected by the mere agreement of the parties; no delivery of an object is necessary.
4. Unilateral or Bilateral - It may be unilateral when only the guarantor has obligations, or bilateral if the creditor has reciprocal obligations.

Kinds of Guaranty

1. As to Source:

   • Legal Guaranty: Imposed by law (e.g., liability of a guardian or administrator).
   • Conventional Guaranty: Arises from the will of the parties.
   • Judicial Guaranty: Provided by order of the court (e.g., posting of a bond).

2. As to Object:

   • Guaranty of Payment: Guarantor is liable immediately upon default.
   • Guaranty of Performance: Ensures the debtor fulfills a specific act.

3. As to Extent:

   • Specific Guaranty: Limited to a particular obligation.
   • Continuing Guaranty: Applies to a series of transactions (Article 2053).

Extent of Guarantor’s Liability

1. Limited to the Principal Obligation:

   • The guarantor is not liable for more than what is due from the debtor, including interest and other agreed-upon damages, unless otherwise stipulated (Article 2054).

2. Strict Construction:

   • A guaranty must be strictly construed against the creditor and in favor of the guarantor. Obligations not expressly included in the guaranty are not enforceable against the guarantor (Article 1378).

3. Solidary Liability:

   • A guarantor is not presumed to be solidarily liable unless explicitly stated. If solidary liability is agreed upon, the contract is treated as suretyship (Article 2047).

Obligations of the Guarantor

1. Right to Benefit of Excussion (Article 2058):

   • The guarantor can demand that the creditor exhaust the properties of the principal debtor before proceeding against the guarantor. However, this right is waived in the following cases:
     • The guarantor has expressly renounced excussion.
     • The guarantor is solidarily liable (surety).
     • The principal debtor cannot be sued within the Philippines.
     • The principal debtor has become insolvent.

2. Right to Subrogation (Article 2067):

   • Upon payment, the guarantor is subrogated to the rights of the creditor, allowing him to recover from the principal debtor.

Special Cases and Rules

1. Multiple Guarantors:

   • If several guarantors guarantee the same obligation, their liability is joint unless expressly stated as solidary (Article 2055).

2. Extinguishment of Guaranty (Articles 2076–2084):

   • Guaranty is extinguished when:
     • The principal obligation is extinguished.
     • The creditor grants an extension to the debtor without the guarantor's consent.
     • The guarantor voluntarily pays the debt without informing the debtor and without demand from the creditor, prejudicing the latter’s rights.

Guaranty vs. Suretyship

1. Nature:

   • Guaranty: Subsidiary obligation.
   • Suretyship: Primary and solidary liability with the debtor.

2. Liability:

   • Guaranty: Liability arises only after excussion.
   • Suretyship: Liability arises immediately upon default.

3. Consent of the Principal Debtor:

   • Guaranty: Generally, the debtor's consent is not necessary.
   • Suretyship: The surety typically requires consent from the debtor, though not always explicitly.

Conclusion

The provisions on guaranty and suretyship in Philippine law ensure clarity in credit transactions by defining the scope, nature, and limits of the guarantor's liability. The guarantor’s rights, such as excussion and subrogation, balance the interests of all parties. It is essential for creditors and guarantors to precisely stipulate the terms of the guaranty to avoid legal ambiguities or disputes.