Commercial Law: Guaranty — Nature and Extent of Guaranty (Arts. 2047-2057)

TITLE XV

GUARANTY

CHAPTER 1

Nature and Extent of Guaranty

Personal Security and Real Security.

• Acme Shoe Rubber & Plastic Corporation u. Hon. Court of Appeals:
• Contracts of security are either personal or real.
• In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). 
• In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfilment is secured by an encumbrance of property —
• in pledge
• the placing of movable property in the possession of the creditor; 
• in chattel mortgage
• by the execution of the corresponding deed substantially in the form prescribed by law;
• in real estate mortgage
• by the execution of a public instrument encumbering the real property covered thereby;
• in antichresis
• by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit  — 
• upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. 
• As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.
• "Non-traditional" Security arrangements
• Special types of security arrangements that are being used in the financing of the acquisition of goods and/or services:
• Financial Lease
• Receivables Financing
• Assignment of Credit
• Letters of Credit and
• Trust Receipts 

Nature of Guaranty and Suretyship.

• As noted earlier, guaranty and suretyship are included in what is known as contract of personal security where the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another, the guarantor or surety. 
• The discussion of suretyship, including a discussion on bonds, is in the next Chapter. 
• However, many provisions on guaranty apply to suretyship insofar as they are not inconsistent with the solidary nature of the liability of the surety.

Art. 2047. 

By guaranty, a person, called the guarantor,

binds himself to the creditor

to fulfill the obligation of the principal debtor 

in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, 

the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. 

In such case the contract is called a suretyship.

Art. 2048. 

A guaranty is gratuitous, unless there is a stipulation to the contrary. 

1. Definition of Guaranty.

• By guaranty, a person, called the guarantor, binds himself to be subsidiarily liable to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

a. Personal Security Agreement.

• The contracts of guaranty and suretyship are both personal security transactions that secure a principal obligation —  where the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another
• This should be distinguished from a Real Security Agreement like mortgage, pledge and antichresis where property is given by way of collateral. 

2. Parties.

• The parties involved in a contract of guaranty are the:
1. principal-obligor/debtor
2. obligee/creditor
3. guarantor
• The principal is the person whose obligation is secured by the guarantor. 
• The obligee-creditor is the person in whose favor the guarantee is made; he will be paid or reimbursed if the principal  fails to perform his obligation and the proper procedure is complied with.
• In reality, the contract of guaranty itself is a contract between the obligee-creditor and the guarantor. 
• The contract of guaranty or suretyship may be entered into between the guarantor (or surety) and the obligee even without the consent of the principal obligor/debtor. 
• However, the agreement may be a tripartite agreement with the obligor furnishing the guaranty in favor of the obligee. 
• The obligation to furnish the guaranty may be part of the agreement between the obligee and the obligor. 
• In addition, the guarantor agrees to enter into a contract to accommodate the obligor either:
• gratuitously or 
• for a consideration. 
• The obligor cannot claim that he is only a mere guarantor of his own obligation.  
• ❌ One cannot be both the primary debtor and the guarantor of his own debt. 
• This is inconsistent with the very purpose of a guarantee that is for the creditor to proceed against a third person if the debtor defaults m his obligation. 
• Certainly, to accept such an argument would make a mockery of commercial transactions.
• Madrigal v. Department of Justice, G.R. No. 168903, June 18, 2014.
• It is absurd to accept the submission of the petitioner that he signed as surety as a representative of a corporation if the latter corporation is also the principal debtor. 
• The principle behind suretyship will be negated if the allegation will be accepted because the borrower cannot at the same time be a guarantor/surety to assure the fulfillment of its own loan obligation. 
• The Court therefore concluded that the petitioner signed in his personal capacity as surety of the corporation's loan.
• A guarantor may enter into a contract of guaranty through an agent.
• However, just like the contract of guaranty itself, the authority of an agent to enter into a contract of guaranty cannot be presumed. 
• It cannot be inferred from the use of vague or general words. 
• The representation of the alleged agent is also not enough to serve as proof of his authority to bind another person as guarantor.

3. Characteristics of Guaranty.

• The following are the characteristics of guaranty: GASC-UEC

1. Gratuitous.
• A guaranty is gratuitous, unless there is a stipulation to the contrary.
2. Accessory. 
• Guaranty secures the payment of a principal obligation; hence, it cannot exist without a principal obligation.
3. Subsidiary. 
• The guarantor will pay only if the principal debtor cannot pay and has no properties to answer for the obligation.
4. Conditional.
• Certain conditions (example: the requirement of exhaustion) must be complied with before the guarantor can be made liable.
5. Unilateral. 
• The obligation is only on the part of the guarantor in favor of the creditor. 
• The debtor need not even give his consent..
6. Express. 
• A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein,
7. Covered by Statutes of Fraud. 
• Guaranty, which is a collateral contract, is a promise to answer for a debt; hence, it must be in writing. 
• It is not required that the guaranty be in a public instrument.

4. Analogous Transactions.

• There are undertakings that are analogous to and have similar incidents as a guaranty although they are not strictly guaranty.
• These include liabilities of the persons secondarily liable in negotiable instruments.

1. Guaranty (Risk-shifting Device)
1. Undertaking to fulfill the obligation in of the debtor. 
2. The liability is subsidiary. 
3. The contract is accessory. 
4. The guarantee is in favor of a principal, the creditor.
5. The guarantor can ask for reimbursement.
2. Insurance (Risk-distributing Device)
1. Undertaking is to indemnify in case of loss.
2. The liability is primary.
3. The contract is principal.
4. The undertaking may be in favor of the insured although there may also be a third party beneficiary. 
5. The insurer cannot ask for reimbursement from the insured although there may be subrogation. 

a. Letter of Comfort.

• A Letter of Comfort, as the term is often used, is not guaranty but a moral assurance and is not intended to be legally binding. 
• For example, the issuer of the letter of comfort may confirm that it is the issuer's policy to ensure that its subsidiaries will perform their obligations. 
• There may be a manifestation that the issuer of the letter of comfort will exert effort to make sure that there will be compliance with the obligation but it is short of a binding obligation. 
• This is similar to a Letter of Awareness which has the same effect and is referred to as such because it "contains a statement by the party issuing it that it is aware of the addressee's offer to make a loan facility available to the prospective borrower."

b. General Indorser.

• The liability of a general indorser under Section 66 of the Negotiable Instruments Law is different from the liability of a guarantor.
• The liability of the guarantor is subsidiary while the general indorser's liability is secondary. 
• The general indorser undertakes that upon due presentment, the instrument shall be accepted or paid or both and that in case of dishonor and the necessary proceedings on dishonor be duly taken, then the general indorser shall pay. 
• There is no benefit of excussion with respect to the liability of the general indorser. 

c. Warranties. 

• Warranties are affirmations of fact or any promise. 
• The person who extended a warranty may be liable if he breaches such warranty. 
• Breach of warranty means the fact affirmed is not true or if the promise was not met. 
• Thus, warranties are entirely different from guaranty which is an accessory contract that makes the guarantor subsidiarily liable. 

5. Consideration.

• The guaranty or suretyship may be:
• gratuitous or 
• onerous. 
• In other words, the guarantor or surety may secure the principal obligation without receiving any value for such purpose.
• In addition, "it is never necessary that the guarantor or surety should receive any part of the benefit, if there be such accruing to his principal.

5.01. Consideration for Principal Contract. 

• With respect to the creditor, the consideration in guaranty is the same consideration in the principal contract.
• The consideration which supports the obligation as to the principal debtor is a sufficient consideration to support the obligation of the sureties.
• It is not necessary to prove any consideration as between the sureties (or the guarantors) and the creditor. 
• The surety need not sign the promissory note between the principal parties to be liable.
• In fact, it is irrelevant that the guarantor or surety did not personally benefit from the principal obligation.
• Consistently, the true consideration of the contract may be the detriment suffered by the plaintiffs in the former action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the principal or his guarantor.

5.02. Effect on Interpretation.

• The interpretation of a gratuitous guaranty or surety arrangement is liberal in favor of the gratuitous surety or guarantor. 
• However, the Court has repeatedly decided that the rule holding sureties to be favorites of the law, and their contracts to be strictissimi juris, does not apply to compensated sureties.
• The Supreme Court relied on the following explanation:
• We are familiar with the old rule of strict construction in favor of the surety, based upon the underlying principle that formerly parties became sureties, not for hire but as a matter of accommodation, usually lending their names through motives of friendship, and hence a surety obligation would be construed most strongly in their favor. 
• But the rule "strictissimi juris" has no application to surety companies, organized for the purpose of conducting an indemnity business at established rates of compensation.

Art. 2049. 

A 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.

1. Consent.

• A spouse may guarantee an obligation without the consent of the other spouse but the guaranty shall not bind the conjugal partnership. 
• Thus, only the separate properties of the spouses are bound by the guarantee. 
• It should be noted that before the effectivity of the Family Code, conjugal partnership of gains was the default property regime of the spouses in the absence of any marriage settlement or separation of property. 
• On the other hand, under the Family Code, the general rule is that the spouses are governed by the absolute property regime. 
• The spouses shall have joint administration of the community properties. 
• The rule is that the obligations of one spouse shall not be chargeable to the absolute community properties unless the same redounded to the benefit of the family. 
• Security Bank v. Mar Tierra Co. G.R. No. 143382, November 29, 2006:
• It is a case decided under the New Civil Code.
• The Supreme Court ruled that the husband who acted as a surety cannot bind the conjugal partnership. 
• The ruling can be applied even today under an absolute community property regime. The Supreme Court ruled: 
• Under Article 161(1) of the Civil Code, the conjugal partnership is liable for "all debts and obligations contracted by the husband for the benefit of the conjugal partnership." 
• But when are debts and obligations contracted by the husband alone considered for the benefit of and there/ore chargeable against the conjugal partnership? 
• Is a surety agreement or an accommodation contract entered into by the husband in favor of his employer within the contemplation of the said provision? 
•  We ruled as early as 1969 in Luzon Surety Co., Inc. V. de Garcia that, in acting as a guarantor or surety for another, the husband does not act for the benefit of the conjugal partnership as the benefit is clearly intended for a third party. 
•  In Ayala Investment and Development Corporation v. Court of Appeals, we ruled that, if the husband himself is the principal obligor in the contract, i.e., the direct recipient of the money and services to be used in or for his own business or profession, the transaction falls within the term "obligations for the benefit of the conjugal partnership." 
• In other words, where the husband contracts an obligation on behalf of the family business, there is a legal presumption that such obligation redounds to the benefit of the conjugal partnership. 
• On the other hand, if the money or services are given to another person or entity and the husband acted only as a surety or guarantor, the transaction cannot by itself be deemed an obligation for the benefit of the conjugal partnership. 
• It is for the benefit of the principal debtor and not for the surety or his family. 
• No presumption is raised that, when a husband enters into a contract of surety or accommodation agreement, it is for the benefit of the conjugal partnership.
• Proof must be presented to establish the benefit redounding to the conjugal partnership. 
• In the absence of any showing of benefit received by it, the conjugal partnership cannot be held liable on an indemnity agreement executed by the husband to accommodate a third party. 
• In this case, the principal contract, the credit line agreement between petitioner and respondent corporation, was solely for the benefit of the latter. 
• The accessory contract (the indemnity agreement) under which individual respondent Martinez assumed the obligation of a surety for respondent corporation was similarly for the latter's benefit. 
• Petitioner had the burden of proving that the conjugal partnership of the spouses Martinez benefited from the transaction.
• It failed to discharge that burden. 
• To hold the conjugal partnership liable for an obligation pertaining to the husband alone defeats the objective of the Civil Code to protect the solidarity and well-being of the family as a unit. 
• The underlying concern of the law is the conservation of the conjugal partnership. Hence, it limits the liability of the conjugal partnership only to debts and obligations contracted by the husband for the benefit of the conjugal partnership.

Art. 2050. 

If a guaranty is entered into without the knowledge or consent, 

or against the will of the principal debtor, 

the provisions of Articles 1236 and 1237 shall apply.

1. Debtor Did Not Consent.

• Articles 1236 and 1237 on payment by third persons apply if the debtor did not consent to the guaranty.
• Art. 1236. 
• The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
• Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. 
• Art. 1237. 
• Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. 
• In other words, the payment made by the guarantor shall be considered payment by a third person. 
• Thus, the following are the effects if the debtor did not consent: 
1. There is limited right of reimbursement. The guarantor has no right of subrogation. 
2. The right of reimbursement is limited because the guarantor can recover only insofar as the payment has been beneficial to the debtor.
• For instance, if the obligation was subject to defenses on the part of the debtor, the same defenses which could have been set up against the creditor can be set up against the paying guarantor. 
• Thus, there is no right of reimbursement if the principal debtor did not benefit at all because the debtor who was the contractor of the project had valid defenses against the obligee. 
•  It should be noted however that the agreement between the creditor and the debtor may stipulate that payment may be secured from a third person who will act as a guarantor.
• It may also be stipulated that the guarantor may be secured even without prior notice to the debtor.
• In this case, the right of reimbursement is not limited and the right of subrogation is still available. 
• Article 1237 on the right of subrogation provides that "whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty." 

2. Acceptance by the Creditor. 

• The rule regarding the necessity of acceptance of a guaranty or surety by the creditor was explained in The Texas Company (Phils.), Inc. v. Alonzo:
• " ... Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty in the sense that it requires action by the creditor before the obligation becomes fixed, it does not become a binding obligation until it is accepted and, unless there is a waiver of notice, until notice of such acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that the creditor has performed the conditions and intends to act upon the guaranty.
• The acceptance need not necessarily be express or in writing but may be indicated by acts amounting to acceptance. 
• Where, upon the other hand, the transaction is not merely an offer of guaranty but amounts to a direct or unconditional promise of guaranty, unless notice of acceptance is made a condition of the guaranty, all that is necessary to make the promise binding is that the promisee should act upon it, and notice of acceptance is not necessary, the reason being that the contract of guaranty is unilateral. 
• The acceptance of the guaranty by the creditor need not necessarily be express or in writing. 
• Philippine National Bank v. Escueta:
• It is argued that it has not been shown that the plaintiff accepted the surety agreement. 
• The Court rejected the argument stating that there were sufficient facts that established.
• Thus, it was pointed out that the document evidencing the agreement was delivered to the creditor and retained by it without objection. 
• It also appears that the creditor, on the strength of the agreement, extended credit to the debtor. 

Art. 2051. 

A guaranty may be conventional, 

legal or judicial, 

gratuitous, or by onerous title.

It may also be constituted, 

not only in favor of the principal debtor, 

but also in favor of the other guarantor, 

with the latter's consent, 

or without his knowledge, 

or even over his objection.

1. Kinds.

• Guaranty may be: CLJ-GO-DI-DC

1. Conventional guaranty
• which is created by agreement of the parties; 
2. Legal guaranty
• which is one imposed by law;
• Example: Art. 583 of the New Civil Code
• Art. 583. The usufructuary, before entering upon the enjoyment of the property, is obliged:
1. To make, after notice to the owner or his legitimate representative, an inventory of all the property, which shall contain an appraisal of the movables and a description of the condition of the immovables;
2. To give security, binding himself to fulfill the obligations imposed upon him in accordance with this Chapter.
3. Judicial guaranty
• which is constituted by the court;
4. Gratuitous guaranty
• where no valuable consideration is given;
5. Onerous guaranty
• where valuable consideration is paid to the guarantor;
6. Definite guaranty
• which secures the principal obligation only;
7. Indefinite or Simple guaranty
• which secures the principal obligation but also all its accessories, including the judicial costs (the liability for costs applies only for costs incurred after he has been judicially required to pay); 
8. Discrete Guaranty
• which secures a specific transaction; 
9. Continuing Guaranty
• which secures not only a specific transaction but a flow of transactions or future advancement. 

a.  Sub-Guaranty and Co-Guarantors. 

• Sub-Guaranty is a guaranty to secure the obligation of another guarantor. 
• This should b e distinguished from a situation where there is a co-guarantor, meaning, two or more persons will be guarantors for· the same principal obligation.

b. Conditional and Unconditional. 

• A guaranty may be conditional and unconditional. 
• An unconditional guaranty "is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment of the condition, that the principal obligor should fail in his obligation at the time and in the form he bound himself. 
• In other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in bis obligation first before resort to the guarantor could be had. 
• A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the principal's default and reasonable diligence in exhausting proper remedies against the principal.

Art. 2052. 

A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted

to guarantee the performance of a voidable or an unenforceable contract. 

It may also guarantee a natural obligation.

Art. 2053. 

A guaranty may also be given as security for future debts, 

the amount of which is not yet known; 

there can be no claim against the guarantor until the debt is liquidated. 

A conditional obligation may also be secured. 

Art. 2054. 

A guarantor may bind himself for less, 

but not for more than the principal debtor, 

both as regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, 

his obligations shall be reduced to the limits of that of the debtor.

1. Binding Obligation.

• Article 2052 provides that a guaranty cannot exist without a valid obligation.
• This provision covers suretyship. 
• However, the same provision also expressly provides that the contract that is secured may be: 
  • ✅defective
  • ✅voidable or
  • ✅unenforceable. 
• Notably, the law does not include:
• ❌void and
• ❌rescissible obligations.
• While a guaranty or suretyship is an accessory obligation, the principal obligation need not be valid. 
• The obligation to be secured may be:
1. voidable
2. unenforceable
3. natural obligation
4. conditional obligation
• Necessarily, the guarantor's obligation will not arise:
• ❌if the principal obligation is not enforced or 
• ❌if it is annulled or 
• ❌if the suspensive condition does not occur.
• In the case of unenforceable obligation for non-compliance with the statute of frauds, the obligation ceases to be enforceable if the principal debtor consents to the guaranty in writing because in effect the guaranty is affirmed. 
• The same effect may result if the obligation is a natural obligation where the principal debtor acknowledges his liability and furnishes the guaranty.

2. Future Debts.

• A guaranty or surety may also be given as security for future debts, the amount of which is not yet known.
• However, there can be no claim against the guarantor or surety until the debt is liquidated.
• This type of guaranty may still be a discrete guaranty because it may pertain to a specific but future transaction. 
• However, it may also be in the nature of a continuing guaranty.

3. Continuing Guaranty or Suretyship.

• By executing a continuing guaranty or suretyship agreement, the principal debtor places himself in a position to enter into the projected series of transactions with its creditor; with such suretyship or guaranty agreement, there would be no need to execute separate contracts or bond (in surety) for each financing or credit accommodation extended to the principal debtors.
• Article 2052 of the New Civil Code speaks of a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. The Court explained: 
• Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. 
• A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked.
• It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the  uarantor becomes liable.
• Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. 
• A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. 
• Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a continuing one. 
• In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been construed to indicate a continuing guaranty.
• For example, the agreement is a valid continuing guaranty or surety if it covers "obligations that may from time to time be incurred" or "obligations that may heretofore be incurred" or "other debts that may be incurred at any time."
• It is also valid for the guarantor or surety to agree to be liable for any renewal, extension, substitution or alteration of the obligation that is being secured without need of prior notice. 
• Such stipulation does not contravene public policy or public order when such an arrangement is explicitly provided for.
• There is also a continuing suretyship agreement where the petitioner, as surety; shall, without need for any notice, demand or any other act or deed, immediately become liable and shall pay "all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as:
1. all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect; and
2. any and all expenses which the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as defined hereinbelow." 
• Such stipulations are valid and legal and constitute the law between the parties, under Article 2053 of the Civil Code. 
• Thus, petitioner is unequivocally bound by the terms of the Continuing Suretyship. 
• There can be no cavil then that the surety is liable for the principal of the loan, together with the interest and penalties due thereon, even if said loan was obtained by the principal debtor after the date of execution of the Continuing Suretyship.
• The continuing nature of the obligation of the guarantor or surety must be expressly provided for.
• The same cannot be presumed.
• Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. 
• But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.

Art. 2055. 

A guaranty is not presumed; it must be express 

and cannot extend to more than what is stipulated therein.

If it be simple or indefinite, 

it shall compromise not only the principal obligation, 

but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

1. Debts to be Guaranteed.

• The guarantor and the surety guarantee the principal obligation only. 
• However, a guarantee may also be simple or indefinite, in which case, the security extends to both the principal and accessory obligations. 
• Accessories under Article 2055 include:
• damages
• interest and charges, and 
• judicial costs incurred after the principal debtor is judicially required to pay.
• Attorney's fees may also be imposed whenever appropriate.
• Period.
• Unless a specific period is fixed in the contract or the bond, the obligation of the surety subsists so long as the principal obligation subsists.
• Amount.
• A guarantor or surety may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 
• Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor. 
• Example:
• The surety was made liable for the amount of P346,150.00 although the total obligation was P616,961.14.
• Similarly, the interest that the surety is obligated to pay may be less than the interest that is being charged by the creditor.

1.01. Liability to Pay Compensaatory Interest and Other Damages.

• The guarantor or the surety may be liable to pay interest even if the total amount of interest with result in an amount that exceeds the amount of the bond. 
• The interest is payable by the guarantor or surety as compensatory interest or penalty. 
• The interest is imposed for non-payment without any valid reason when the obligation as a surety or guarantor is due. 
• It is imposed because the surety or the guarantor defaulted in the payment of the obligation. 
• If a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes more than that in the principal obligation. 
• The increased liability is not because of the contract but because of the default and the necessity of judicial collection.
• It should be noted, however, that the interest runs from the time the complaint is filed, not from the time the debt becomes due and demandable.

2. How to Determine Extent.

• The extent of a surety's liability is determined by the language of the guaranty or suretyship contract itself. 
• It cannot be extended by implication beyond the terms of the contract even if the original debtor is liable for a bigger amount.

3. Prospective.

• A contract of guaranty or suretyship is only prospective, and not retroactive in operation unless a contrary intent is clearly shown. 
• Consequently, the guarantor or surety is entitled to assume that the notice provided by the surety bond did not, and was not intended to include any defaults incurred prior to his acceptance. 

Art. 2056. 

One who is obliged to furnish a guarantor

shall present a person who possesses 

integrity, capacity to bind himself, 

and sufficient property to answer for the obligation which he guarantees. 

The guarantor shall be subject to the jurisdiction of the court 

of the place where this obligation is to be complied with.

Art. 2057. 

If the guarantor should be convicted in first instance 

of a crime involving dishonesty or should become insolvent, 

the creditor may demand another 

who has all the qualifications required in the preceding article. 

The case is excepted where the creditor has required and stipulated 

that a specified person should be the guarantor.

1. Qualification of Guarantors.

• If the debtor is obligated to furnish a guarantor or surety, he must present one with the following characteristics: ICS

1. The guarantor must possess integrity; 
2. He must have capacity to bind himself; 
3. He must have sufficient property to answer for the obligation which he guarantees. 

• Replacement.
• If the guarantor should be convicted in the first instance of a crime involving dishonesty (even while appeal is pending) or should become insolvent, the creditor may demand another who has all the qualifications required in Article 2056. 
• Stipulation.
• The required qualifications do not apply where the creditor has required and stipulated that a specified person should be the guarantor.
• This means that the creditor should bear the risk that the guarantor is not qualified if he himself chose the guarantor.