Commercial Law: Guaranty — Effects of Guaranty (Arts. 2058-2075)

TITLE XV



Art. 2058. 
The guarantor cannot be compelled to pay the creditor 
unless the latter has exhausted all the property of the debtor, 
and has resorted to all the legal remedies against the debtor.


Art. 2059. The excussion shall not take place:
  1. If the guarantor has expressly renounced it;
  2. If he has bound himself solidarily with the debtor;
  3. In case of insolvency of the debtor;
  4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;
  5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation. 

Art. 2060. 
In order that the guarantor may make use of the benefit of exclusion,
he must set it up against the creditor 
the latter's demand for payment from him, 
and point out to the creditor available property 
of the debtor within Philippine territory, 
sufficient to cover the amount of the debt.


Art. 2061. 
The guarantor having fulfilled all the conditions 
required in the preceding article, 
the creditor who is negligent in exhausting the property 
pointed out shall suffer the loss, to the extent of said property, 
for the insolvency of the debtor resulting from such negligence. 


Art. 2062.
In every action by the creditor, 
which must be against the principal debtor alone, 
except in the cases mentioned in Article 2059, 
the former shall ask the court to notify the guarantor of the action. 

The guarantor may appear so that he may, 
if he so desire, set up such defenses as are granted him by law. 

The benefit of excussion mentioned in Article 2058
shall always be unimpaired, 
even if judgment should be rendered against the principal debtor 
and the guarantor in case of appearance by the latter.


Art. 2063. 
A compromise between the creditor and the principal debtor 
benefits the guarantor but does not prejudice him. 
That which is entered into between the guarantor and the creditor 
benefits but does not prejudice the principal debtor.


Art. 2064. 
The guarantor of a guarantor shall enjoy the benefit of excussion, 
both with respect to the guarantor and to the principal debtor.


1. Benefit of Excussion or Exhaustion.
  • The liability of the guarantor is subsidiary.
  • The guarantor (as well as the sub-guarantor) cannot be compelled to pay the creditor unless:
    1. The creditor has exhausted all the property of the debtor; and 
    2. The creditor has resorted to all the legal remedies against the debtor. 
  • Baylon v. Court of Appeals, G.R. No. 109941, August 17, 1999:
    • It is axiomatic that the liability of the guarantor is only subsidiary. 
    • All the properties of the principal debtor must first be exhausted before his own is levied upon. 
    • Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, for obviously the exhaustion of the principal's property the benefit of which the guarantor claims - cannot even begin to take place before Judgment has been obtained.
  • The Supreme Court quoted Manresa's explanation of the benefit of excussion (referred to as benefit of discussion) in Arroyo v. Jungsay, G.R. No. L-10168, July 22, 1916:
    • As explicitly stated in the article under consideration, it is not sufficient that the surety claim the benefit of discussion in time, nor that in so doing he design ate property of the debtor wherein to satisfy the debt. 
    • It is also necessary that another condition be fulfilled, to wit, that such property be realizable and that it be situated in Spanish territory. 
    • This is not only logical, but just, because the attachment of property situated a great distance away would be a lengthy and extremely difficult proceeding and one that, if actually not opposed to, yet does not very well accord with the purpose of the bond, that is, to insure the fulfillment of the obligation and at the same time furnish the creditor with the means of obtaining its fulfillment without hindrance or delays. 
    • The same may be said of property that is not readily realizable, and as the surety is the sole person who benefits by the discussion and the one most interested in avoiding difficulties in its execution, it is he, therefore, who should designate the property out of which the recovery is to be made, it being unquestionably convenient for him that the property he designates unite the conditions indicated in order to facilitate the payment of the debt, whereby he will be freed from the subsidiary obligation inherent in the bond."
  • Prudential Bank v Intermediate Appellate Court, et al., G.R. No. 74886, December 8, 1992:
    • It should be clarified that excussion is not a condition sine qua non for the institution of an action against a guarantor.
  • Southern Motors, Inc. v. Barbosa:
    • Although an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion, the creditor may, prior thereto secure a judgment against said guarantor, who shall b e entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case.
2. When Excussion Not Required.
  • The excussion shall not take place in the following cases: RBIAP-SP
  1. If the guarantor has expressly renounced it;
  2. If he has bound himself solidarily with the debtor; 
  3. In case of insolvency of the debtor; 
  4. When the guarantor has absconded, or cannot be sued within the Philippines unless he has left a manager or representative; 
  5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation; 
  6. If the guarantor did not set it up against the creditor upon the latter's demand for payment from him; and 
  7. If the guarantor did not point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. 
a. Not Applicable to Surety.
  • Since the liability of the surety is solidary, the surety is not entitled to the benefit of excussion. 
b. Waiver.
c. Special Security.
3. Filing of Case and Notice.
  • To make the guarantor liable, the creditor must take the following indispensable steps: FNJE
  1. First, the creditor must file a case against the debtor alone;
  2. In said case, the creditor must ask the court to notify the guarantor so that he may be given a chance to interpose defenses granted to him by law;
  3. A judgment in favor of the creditor must be obtained; and
  4. Execution of the judgment.

3.01. Duties of the Guarantor.
  • On the other hand, to be able to successfully invoke the benefit of excussion: 
  1. the guarantor must set up the benefit of excussion against the creditor upon the latter's demand for payment from him; and
  2. the guarantor must point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. 
  • Failure to comply with these requirements forecloses his right to set up the defense of excussion.
  • The creditor may hold the guarantor liable only:
    • after judgment has been obtained against the principal debtor and 
    • the latter is unable to pay.
  • However, it was also ruled that there is nothing procedurally objectionable in impleading the guarantor under the rule on permissive joinder of parties.
  • Prudential Bank v Intermediate Appellate Court, et al., G.R. No. 74886, December 8, 1992:
    • This is the equity rule relating to multifariousness. 
    • It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. 
    • It will save the parties unnecessary work, trouble and expense.
  • Baylon v. Court of Appeals, G.R. No. 109941, August 17, 1999:
    • The Supreme Court observed that it was premature for the Court to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting —  that is, no judgment was first obtained against the principal debtor. 
    • The Court added that it is useless to speak of a guarantor when no debtor has been held liable for the obligation that was allegedly secured by such guarantee. 
    • Although the principal debtor was impleaded as defendant, there was nothing in the records to show that summons was served upon her. 
    • Thus, the trial court never even acquired jurisdiction over the principal debtor. 
    • The Supreme Court held that creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor. 
  • Article 2060 provides that in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter's demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to  cover the amount of the debt. 
    • Thus, it was explained that a guarantor who desires to avail himself of the benefit of excussion must demand it in limine, on the institution of proceedings against him. 
    • He must, moreover, point out to the creditor property of the principal debtor, not encumbered, subject to seizure and must furnish a sufficient sum to have the excussion carried into effect. 
    • A plea which does not meet these requirements must be disregarded. 
    • The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not salable; it is so encumbered that third parties have full possession under claim of ownership without leaving to the absconding guardian a fractional or reversionary interest without determining first whether the claim of one or more of the occupants is well founded. 
  •  Arroyo v. Jungsay, G.R. No. L-10168, July 22, 1916:
    • The guarantor is not entitled to the benefit of excussion if in all these respects the guarantor has failed to meet the requirements of the Civil Code.



Art. 2065.
Should there be several guarantors 
of only one debtor and for the same debt, 
the obligation to answer for the same is divided among all. 
The creditor cannot claim from the guarantors 
except the shares which they are respectively bound to pay, 
unless solidarity has been expressly stipulated.

The benefit of division against the co-guarantors ceases 
in the same cases and for the same reasons 
as the benefit of excussion against the principal debtor.

1. Benefit of Division. 
  • Generally, the obligation of two or more guarantors for the same debt is joint. 
  • Hence, the obligation is divided among the co-guarantors (joint debtors unless solidary liability is provided for) if the following requisites are present:
    • there are several guarantors of only one debtor; 
    • they are guarantors of the same debt.
  • Example:
    • The debtor owes P3,000.00 to the creditor. 
    • There are three co-guarantors for the same obligation. 
    • In this case, the co-guarantors have the benefit of division with the result that a. each guarantor shall be liable for P1,000.00. 
  • The benefit of division against the co-guarantors ceases in the same cases and for the same reasons as the benefit of excussion against the principal debtor. 
 2. When Solidary.
  • The guaranty agreement may stipulate that the obligation of the co-guarantors is solidary. 
    • This relates to the agreement between the guarantors on one hand and the creditor on the other. 
    • However, solidarity of the obligation of the guarantors may also be limited to the liability between themselves.
  • If the liability of the guarantors to the creditor is solidary, the guarantors do not have the benefit of division against the creditor. 
    • However, the guarantors have the benefit of division with respect to each other because it is presumed that they have equal shares in the obligation. 
    • Thus, after a solidary guarantor pays the entire amount of the debt, he can ask for reimbursement from the co-guarantors but only up to the extent of their respective shares. 
  • A provision that makes the guarantors solidarily liable is known as the "solidary guaranty clause." 
    • A solidary guaranty clause does not make the guarantors solidarily liable with the debtor. 
    • The Supreme Court explained the nature of a solidary guaranty clause in Prudential Bank v Intermediate Appellate Court, et al., G.R. No. 74886, December 8, 1992:
      • Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. 
      • This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. 
      • Under Article 2068 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. 
      • Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. 
      • It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. 
      • The clause "We jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. 
      • It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. 
      • Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. 

Benefit of division among several guarantors. 

1. In whose favor applicable. 
  • In addition to the benefit of exhaustion granted under Article 2058, this article entitles the several guarantors of only one debtor and for the same debt, to what is known as the benefit of division. 
  • This benefit cannot be availed of:
    • if there are two or more debtors of one debt, even if they are bound solidarily, each with different guarantors, or 
    • if there be two or more guarantors of the same debtor but not only for the same debt.
2. Extent of liability of several guarantors. 
  • Their liability is only joint, that is, the obligation to answer for the debt is divided among all of them. (see Art. 1208.)
  • Therefore, the guarantors are not liable to the creditor beyond the shares which they are respectively bound to pay.
3. Exceptions.
  • The exception to this rule is when solidarity has been expressly stipulated.
  • The benefit of division also ceases if any of the circumstances enumerated in Article 2059 should take place, as would the benefit of exhaustion of the debtor’s property. RSIAP
    1. If the guarantor has expressly renounced it;
    2. If he has bound himself solidarily with the debtor;
    3. In case of insolvency of the debtor;
    4. When he has absconded, or cannot be sued within the Philippines unless he has left a manager or representative;
    5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.

Benefit of excussion among several guarantors.
  • In order that a guarantor may set up the benefit of exhaustion of the property of the debtor, he must point out to the creditor available property of the debtor with which to satisfy the debt. 
  • But in order that the guarantor may be entitled to the benefit of division, it is not required that he point out the property of his co-guarantors. 
    • The reason is obvious. 
    • The obligation of the guarantor with respect to his co-guarantors is not subsidiary, but direct and does not depend as to its origin on the solvency or insolvency of the latter, although afterwards, if one of them should turn out to be insolvent, his share has to be borne by the others. (Art. 2073, par. 2.)
  • Where, however, a creditor claims the share of a guarantor from the others on the ground of insolvency (Art. 2065, par. 2.), the latter can set up against the creditor the existence of the property of the supposed insolvent, possessing the same conditions as are required by Article 2060.






Art. 2066.
The guarantor who pays for a debtor 
must be indemnified by the latter.

The indemnity comprises:
  1. The total amount of the debt;
  2. The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor;
  3. The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him;
  4. Damages, if they are due.
Guaranty, a contract of indemnity.
  • Since the debtor is the one directly and principally liable, it is just that the guarantor who makes payment must be indemnified by said debtor. 
  • The indemnity comprises: DIED
    1. Total amount of the debt. 
      • It is evident that the guarantor has no right to demand reimbursement until he has actually paid the debt, unless by the terms of the contract, he is given the right before making payment. 
      • Of course, he cannot collect more than what he has paid.
      • Illustration:
        • Tuason, Tuason, Inc. vs. Machuca, 46 Phil. 561 [1924]:
          • Debtor bound himself to pay guarantor as soon as the latter may have become liable whether or not he shall have actually paid creditor.
        • Facts: G Company signed a note for P10,000.00 in favor of C Company to guarantee a liability of D Company to C. In turn, D and its president, E, the latter in his personal capacity, executed a document wherein they bound themselves solidarily to reimburse G all such sums as G may pay or become bound to pay, upon its obligation to C, whether or not it shall have actually paid such sums or any part thereof. D was declared insolvent. C brought action against G to recover the value of the note and obtained final judgment. Later, G filed a complaint against E to recover the amount which G was sentenced to pay C, plus attorney’s fees, judicial costs and sheriff’s fees, and interest, although G had not, in fact, paid the amount of the judgment. 
        • Issue: Is G entitled to the relief sought in view of the above facts? 
        • Held: Yes. It is indisputable that D became bound by virtue of the final judgment to pay the value of the note executed by it in favor of C, and according to the document executed solidarily by D and E, E bound himself to pay G as soon as the latter may have become bound and liable, whether or not it shall have actually paid. 
    2. Legal interest thereon.
      •  The guarantor is entitled to legal interest from the time notice of payment of the debt was made known to the debtor. 
      • The notice is, in effect, a demand so that if the debtor does not pay immediately, he incurs in delay (see Art. 1169.), and, hence, renders him liable for legal interest, as indemnity, from then on. (see Art. 2209.) 
      • The liability is increased not because of the contract but because of the default and the necessity of judicial collection. 
      • It is immaterial that the debt did not earn interest for the creditor, because the guarantor’s right to legal interest is granted by law by virtue of the payment he has made, and is independent of the creditor’s right to claim interest which was necessarily regulated by the stipulations between him and the debtor. 
    3. Expenses incurred by the guarantor. 
      • The expenses referred to are only those that the guarantor has to satisfy in accordance with law as a consequence of the guaranty, not those which depend upon his will or own acts  or his fault for these are his exclusive personal responsibility and it is not just that they be shouldered by the debtor
      • These expenses are limited to those incurred by the guarantor after having notified the debtor that payment has been demanded of him by the creditor. 
      • The debtor is to blame for said expenses for it is within him to free himself from the responsibility by making payment, and if he does not do so, then they are attributable to his fault. 
      • Illustration:
        • Tuason, Tuason, Inc. vs. Machuca, 46 Phil. 561 [1924]:
          • Debtor is being held liable by guarantor for expenses incurred by the latter in litigation between him and creditor.
        • Issue: Has G the right to recover from E more than the value of the note executed by G in favor of C? 
        • Held: E must not be held responsible for the expenses incurred by G in the litigation between it and C. That litigation was originated by G having failed to fulfil its obligation with C and it cannot charge E with the expenses it was compelled to make by reason of its own fault. It is entitled, however, to the expenses incurred by it in the action brought by it against E: interest on P10,000.00, the value of the note which it was sentenced to pay, from the date of the filing of the complaint until full payment thereof plus attorney’s fees.
    4. Damages, if they are due.
      • In other words, the guarantor is entitled to recover damages only if they are due in accordance with law. 
      • On this matter, the Code has not established any norm for determining the same. Consequently, the general rules on damages (Arts. 2195-2235.) shall apply. 
Exceptions to right to indemnity or reimbursement.
  • The right to indemnity of the guarantor is subject to certain exceptions or qualifications. WTW
    • See Arts. 2068, 2069, 2070, and 2081;
    • See also Secs. 68 and 69, The Insolvency Law [Act No. 1956].
  1. Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor can  recover only insofar as the payment had been beneficial to the debtor. (Art. 2050.) 
  2. Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which, however, requires the debtor’s consent. 
    • But the payment is in any case valid as to the creditor who has accepted it.
  3. The right to demand reimbursement is subject to waiver.

Art. 2067. 
The guarantor who pays is subrogated by virtue thereof 
to all the rights which the creditor had against the debtor.

If the guarantor has compromised with the creditor, 
he cannot demand of the debtor more than what he has really paid.

Guarantor’s right to subrogation.

1.  Effect of subrogation. 
  • Subrogation transfers to the person subrogated, the credit with all the rights thereto appertaining either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in conventional subrogation. (Art. 1303.) 
    • Simply stated, except only for the change in the person of the creditor by the guarantor, the obligation subsists in all respects as before payment.
    • The rights to indemnification and subrogation established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. 
2.  Accrual, basis, and nature of right. 
  • This right of subrogation is necessary to enable the guarantor to enforce the indemnity given in Article 2066. 
    1. It arises by operation of law upon payment by the guarantor.
      • It is not necessary that the creditor cede to the guarantor the former’s rights against the debtor. 
    2. The right of the guarantor who has paid a debt to subrogation stands, not upon contract but upon the principles of natural justice. 
    3. It is thus not a contractual right. The guarantor is subrogated, by virtue of the payment, to the rights of the creditor, not those of the debtor. 
      • Urrutia & Co. vs. Morena and Reyes, 28 Phil. 261 [1914]:
        • Thus, a guarantor who has been obliged to contribute to the satisfaction of a judgment rendered against him and the principal debtor can not exercise the right of redemption of his principal with respect to real property belonging to the latter which was sold by virtue of a writ of execution issued upon said payment.
    4. If the guarantor paid a smaller amount to the creditor by virtue of a compromise, he cannot demand more than he actually paid.
3. When right not available. 
  • The benefit of subrogation is the means of effectuating the right of the guarantor to indemnity or reimbursement. 
  • It cannot, therefore, be invoked in those cases where the guarantor has no right to be reimbursed.

Art. 2068. 
If the guarantor should pay without notifying the debtor, 
the latter may enforce against him all the defenses 
which he could have set up against the creditor 
at the time the payment was made. 

Effect of payment by guarantor without notice to debtor. 
  • Art. 2069 If the guarantor should pay without notifying the debtor, the latter may interpose against the guarantor, those defenses which he could have set up against the creditor at the time the payment was made. 
  • Thus, if the debtor has already paid the creditor, when the guarantor pays, the debtor can set up against the guarantor the defense of previous extinguishment of the obligation by payment. 
  • The guarantor cannot be allowed, through his own fault or negligence, to prejudice or impair the rights or interests of the debtor.

Art. 2069. 
If the debt was for a period 
and the guarantor paid it before it became due, 
he cannot demand reimbursement of the debtor 
until the expiration of the period 
unless the payment has been ratified by the debtor.

Effect of payment by guarantor before/after maturity. 
  1. If the debtor’s obligation is with a period, it becomes demandable only when the day fixed comes. (Art. 1193, par. 1.) 
    • The guarantor who pays before maturity is not entitled to reimbursement since there is no necessity for accelerating payment.  
    • A contract of guaranty being subsidiary in character, the guarantor  is not liable for the debt before it becomes due. 
    • The debtor will be liable if the payment was made with his consent or if the payment was subsequently ratified by him. 
    • The ratification may be express or implied. 
    • In any case, the guarantor can recover what he has paid upon the expiration of the period. 
  2. Where demand on the guarantor was made during the term of the guarantee, the fact that payment was actually made after said term is not material. 
    • What is controlling is that default and demand on guarantor had taken place while the guarantee was still in force.

Art. 2070. 
If the guarantor has paid
without notifying the debtor, 
and the latter not being aware of the payment, repeats the payment, 
the former has no remedy whatever against the debtor, 
but only against the creditor. 

Nevertheless, in case of a gratuitous guaranty, 
if the guarantor was prevented by a fortuitous event 
from advising the debtor of the payment, 
and the creditor becomes insolvent, 
the debtor shall reimburse the guarantor for the amount paid.

Effect of repeat payment by debtor. 
  • General rule. 
    • Before the guarantor pays the creditor, he must first notify the debtor. (Art. 
    • If he fails to give such notice and the debtor repeats the payment, the guarantor’s only remedy is to collect from the creditor, but he has no cause of action against the debtor for the return of the amount paid by him (guarantor) even if the creditor should become insolvent.
    • Being at fault for not advising the debtor, the guarantor must bear the loss.
  • Exceptions.
    • However, the guarantor may still claim reimbursement from the debtor in spite of lack of notice if the following conditions are present:
      1. the creditor becomes insolvent; 
      2. the guarantor was prevented by fortuitous event to advise the debtor of the payment; and
      3. the guaranty is gratuitous.
    • In a gratuitous guaranty, the guarantor receives nothing and it would be unfair to deny him the right to recover from the principal debtor.
    • If the creditor is solvent, the guarantor must still recover from him.

Art. 2071.
The guarantor,
even before having paid, 
may proceed against the principal debtor:
  1. When he is sued for the payment;
  2. In case of insolvency of the principal debtor;
  3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;
  4. When the debt has become demandable, by reason of the expiration of the period for payment;
  5. After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;
  6. If there are reasonable grounds to fear that the principal debtor intends to abscond;
  7. If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, 
the action of the guarantor is to obtain release from the guaranty, 
or to demand a security that shall protect him from any proceedings 
by the creditor and from the danger of insolvency of the debtor. 

Right of guarantor to proceed against debtor before payment. 
  • General rule. 
    • The guarantor has no cause of action against the debtor until after the former has paid the obligation. (Art. 2066.)
  • Exceptions.
    •  Article 2071 enumerates seven (7) instances when the guarantor may proceed against the debtor even before payment, and specifies the remedy to which the guarantor is entitled. SIRD-10-RI
      1. When he is sued for the payment;
      2. In case of insolvency of the principal debtor;
      3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;
      4. When the debt has become demandable, by reason of the expiration of the period for payment; 
      5. After the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than 10 years; 
      6. If there are reasonable grounds to fear that the principal debtor intends to abscond;
      7. If the principal debtor is in imminent danger of becoming insolvent.
    • The purpose is to enable the guarantor to take measures for the protection of his interest in view of the probability that he would be called upon to pay the debt. 
    • The provisions of Article 2071 are applicable and available to the surety.
Remedy to which guarantor entitled.
  • The guarantor cannot demand reimbursement for indemnity because he has not paid the obligation. 
  • His remedy is:
    1. to obtain release from the guaranty or
    2. to demand a security that shall protect him from any proceedings by the creditor, and against the danger of insolvency of the debtor. 
  • Remember that there are certain cases when the guarantor cannot claim the benefit of excussion (see Art. 2059.) and in such cases it is but proper that the guarantor be given the right to proceed against the debtor. 
    1. If the guarantor has expressly renounced it;
    2. If he has bound himself solidarily with the debtor; 
    3. In case of insolvency of the debtor; 
    4. When the guarantor has absconded, or cannot be sued within the Philippines unless he has left a manager or representative; 
    5. If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation; 
    6. If the guarantor did not set it up against the creditor upon the latter's demand for payment from him; and 
    7. If the guarantor did not point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt. 
  • The guarantor’s remedies are alternative. 
    • He has the right to choose the action to bring.
Suit by guarantor against creditor before payment. 
  •  The guarantor’s or surety’s action for release can only be exercised against the principal debtor and not against the creditor. 
  • The reason is plain. 
    • The creditor is not compellable to release the guarantor (which is a property right) before payment of his credit against his will. 
    • For the release of the guarantor imports an extinction of his obligation to the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation requires the creditor’s assent for its validity. 
    • Especially should this be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor against such a contingency. 
  •  Absent the creditor’s consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter-guaranty as is authorized by Article 2071.
Article 2066 and Article 2071 distinguished.
  • In their purposes, Articles 2066 and 2071 are quite distinct although in perfect harmony, the latter making more clearly effective the purpose of the former. 
  • Articles 2066  
    • It provides for the enforcement of the rights of the guarantor against the debtor after he has paid the debt; 
    • It gives a right of action after payment;
    • It is a substantive right.
  • Articles 2071 
    • It is for his protection before he has paid but after he has become liable.
    • It is a protective remedy before payment.  
    • It is in the nature of a preliminary remedy.
  • Articles 2066  gives a right of action, which, without the pro visions of the other, might be worthless. 
  • The remedy given in Article 2071 seeks to obtain for the guarantor “release from the guaranty or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.”
    • Article 2066, strictly speaking, has no such purpose.
    •  When the guarantor’s rights under this article become available, he is past the point where a preliminary protective remedy is of any value to him. 
Recovery by surety against indemnitor even before payment.

1.  Indemnity agreement for benefit of surety. 
  • An indemnity agreement is not executed for the benefit of the creditor but rather for the benefit of the surety; and if the indemnitor (principal debtor) voluntarily agrees to its terms and conditions, the obligations arising from the contract have the force of law.
2. Indemnity agreement may be against actual loss as well as liability. 
  • An indemnity agreement whereby the indemnitor binds himself to indemnify the surety for any damage or prejudice the latter may sustain under the surety bond, may provide for indemnification not only against actual loss but against liability as well. 
    • Such agreement is enforceable and not violative of any public policy. 
  • In a contract of indemnity against loss, an indemnitor will not be liable until the person to be indemnified makes payment or sustains loss.
  • In contract of indemnity against liability, the indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 
3. Such agreement valid. 
  • A stipulation, therefore, in an indemnity agreement providing that the indemnitor shall pay the surety as soon as the latter becomes liable to make payment to the creditor under the terms of the bond, regardless of whether the surety has made payment actually or not, is valid and enforceable, and in accordance therewith, the surety may demand from the indemnitor even before the creditor has paid. 
  • Hence, an action by the surety against the principal debtor and the indemnitor to enforce payment under such an agreement is not premature. 
  • And where the principal debtors are simultaneously the same persons who executed the indemnity agreement, the position occupied by them is that of a principal debtor and indemnitor at the same time, and their liability being joint and several with the surety, the creditor may proceed against either. 
    • The principle of guarantee in Article 2071 does not apply, i.e., there is no more need for the surety to exhaust all the properties of the principal debtors before it may proceed against them.

Art. 2072. 
If one, at the request of another, 
becomes a guarantor for the debt of a third person who is not present, 
the guarantor who satisfies the debt 
may sue either the person so requesting or the debtor for reimbursement.

Guarantor of a third person at request of another.
  • The guarantor who guarantees the debt of an absentee at the request of another has a right to claim reimbursement, after satisfying the debt either from: 
    1. the person who requested him to be a guarantor; or 
    2. the debtor. 


Aquino:

1. Reimbursement of Guarantor and Surety.
  • Article 2066 provides that "the guarantor who pays for a debtor must be indemnified by the latter." 
  • This provision and the right of subrogation under Article 2067, apply or are available to a surety.
  • The indemnity to the surety and guarantor comprises of: DIED
  1. The total amount of the debt;
  2. The legal interests thereon from the time the payment was made known to the debtor, even though it did not earn interest for the creditor;
  3. The expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; 
  4.  Damages, if they are due. 
  • Liability of a Third Person. 
    • If a third person requested a person to be the guarantor of a principal debtor, the third person may also be sued for reimbursement.
  • No Reimbursement. 
    • The guarantor is not entitled to reimbursement in the following cases: DNWPW
      1. In case there is double payment if the conditions under Article 2071 are present;
      2. If there is no consent to the guaranty and the payment was not beneficial to the debtor; 
      3. If payment was made without notifying the debtor and the debtor has defenses; 
      4. If there was premature payment by the guarantor, there is no right of reimbursement until the debt is due unless payment is ratified;
      5. If the guarantor waived his right of reimbursement; 

2. Double Payment.
  •  The debtor shall not be liable to the guarantor for reimbursement if the debtor already paid so long as the following requisites concur: NAR
    1. The guarantor has paid without notifying the debtor; and
    2. The debtor is not aware of the payment; and 
    3.  The debtor repeats the payment.
  • Who is liable. 
    • If the above enumerated requirements are present, the guarantor can proceed against the creditor and not against the debtor. 
  • Exception. 
    • The debtor is still liable despite double payment if all the following are present: GFI
    1. The guaranty is gratuitous;
    2. The guarantor was prevented by a fortuitous event from advising the debtor of the payment; and
    3. The creditor becomes insolvent.
3. Right of Subrogation.
  • The guarantor or the surety who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.
    • However, the right of the guarantor or surety is only up to the extent that is sufficient to pay whatever amount is due to the guarantor or surety. 
  • Effect of Compromise. 
    • If the guarantor has compromised with the creditor, he cannot demand of the debtor more than what he has really paid. 
  • Effect if Principal Obligation is Solidary. 
    • It has been opined that if the guaranty is in favor of all or any of the solidary debtors, there is subrogation in the rights of the creditor against all the solidary debtors if the guarantor paid the total obligation. 
      • The guarantor may claim reimbursement from any one of the solidary debtors.
    • However, if the liability of the debtors is solidary and the guaranty is in favor only of one of the solidary debtors, the guarantor who paid the total obligation may claim reimbursement from the solidary debtor in whose behalf he paid the principal obligation. 
      • He may also claim reimbursement from the other solidary debtors but only up to the extent of the share of each debtor.
    • With respect to the other solidary debtors, he has the same right of reimbursement as the debtor in whose behalf he paid. 
4. Right to Obtain Release or for a Security.
  • The guarantor may proceed against the principal debtor either: RS
    1. to obtain release from the guaranty; or
    2. to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor, in the following cases: SIRD-10-RI
      1. When he is sued for the payment;
      2. In case of insolvency of the principal debtor;
      3. When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;
      4. When the debt has become demandable, by reason of the expiration of the period for payment; 
      5. After the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than 10 years; 
      6. If there are reasonable grounds to fear that the principal debtor intends to abscond;
      7. If the principal debtor is in imminent danger of becoming insolvent.
  • Relief under Article 2071 is against the principal debtor and not against the creditor. 
  • Manila Surety & Fidelity Co., Inc. v. Almeda: 
    • The question was whether a surety can avail itself of the relief, specifically afforded in Article 2071 of the Civil Code and be released from its liability under the bonds, notwithstanding a prior declaration of the insolvency of the debtor-principal in an insolvency proceeding. 
    • The Supreme Court ruled that the surety can ask the principal debtor for relief but he cannot compel the principal creditor to release him from his surety obligation. The Court explained: 
      • Clearly, a contract of suretyship was thus created, the appellant becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself. 
      • Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to the courts to be released from the undertaking thus assumed would have been appropriate. 
      • Nevertheless, the guarantor's action for release can only be exercised against the principal debtor and not against the creditor, as is apparent from the precise terms of the legal provision. 
      • The guarantor' (says Article 2071 of the Civil Code of the Philippines) 'even before having paid, may proceed against the principal debtor ... to obtain a release from the guaranty...' 
      • The juridical rule grants no cause of action against the creditor for a release of the guaranty, before payment of the credit, for a plain reason: the creditor is not compellable to release the guaranty (which is a property right) against his will. 
      • For, the release of the guarantor imports an extinction of his obligation to the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation requires the creditor's assent for its validity (See Article 1270 and Article 1301). 
      • Especially should this be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor against such a contingency.
      • In what manner, then, can the article operate? 
      • Where the debtor cannot make full payment, the release of the guarantor can only be obtained with the assent of the creditor, by persuading the latter to accept an equally safe security, either another suitable guaranty or else a pledge or mortgage. 
      • Absent the creditor's consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter guaranty, as is authorized by the codal precept (Article 2071 in fine). 
      • To this effect is the opinion of the Spanish commentator, Scaevola, in his explanations to Article 1843 of the Spanish Civil Code (from which Article 2071 of our Code is derived) .... 
  • b. Effect of Failure to Pay the Guarantor. 
    • The guarantor is not entitled to the release from liability even if the debtor failed to pay the consideration for acting as a guarantor. 
    • The liability to the creditor who has accepted the guaranty remains subject to his right of reimbursement and payment of the consideration agreed upon with the debtor.





Art. 2073. 
When there are two or more guarantors 
of the same debtor and for the same debt, 
the one among them who has paid 
may demand of each of the others the share 
which is proportionally owing from him.

If any of the guarantors should be insolvent, 
his share shall be borne by the others, 
including the payer, in the same proportion.

The provisions of this article shall not be applicable,
unless the payment has been made by virtue of a judicial demand 
or unless the principal debtor is insolvent.

Right to contribution of guarantor who pays. 
  • The obligation of several guarantors of the same debtor and for the same debt is joint. 
  • Each is bound to pay only his proportionate share.
  1. Restrictions. 
    •  Article 2073 contemplates a situation which arises when one guarantor has paid the debt to the creditor and is seeking reimbursement from each of his co-guarantors the share which is proportionately owing him. 
    • It is required, however, that the payment must have been made
      1. in virtue of a judicial demand, or 
      2. because the principal debtor is insolvent.
    • Without the requirement, the guarantor who pays the debt under circumstances giving him the right to contribution may proceed directly against his co-guarantors for their respective shares, with the latter having to incur the trouble and expense of claiming afterwards from the debtor what they have paid. 
    • On the other hand, if the guarantor proceeds first against the debtor who, as a consequence, makes payment,  then not only the debtor but the co-guarantors as well would be discharged at once from their obligations.
    •  In the cases specified, the guarantor is perfectly justified in paying the debt because any delay on his part may increase the liability for interest, expenses and other items.
  2. Effect of insolvency of any guarantor.
    • If any of the guarantors should be insolvent, his share shall be borne by the others including the paying guarantor in the same joint proportion.
    • This follows the rule in solidary obligations.
  3. Accrual and basis of right. 
    • The right of the guarantor who has paid the debt in either of the cases specified to demand proportionate contribution or reimbursement from his co guarantors is acquired ipso jure by the guarantor by virtue of said payment without the need of obtaining from the creditor any prior cession of rights to such guarantor.
  • Example:
    • G, H, and I are D’s guarantors of a debt of P9,000.00 in favor of C. 
    • If D becomes insolvent, the right of G, H, and I to proportionate division of their obligation ceases as far as C is concerned. 
    • C may demand payment of the entire obligation from any of the guarantors. 
    • If G pays the whole debt of P9,000.00 he can later demand from H and I P3,000.00 each. 
    • But if H is insolvent, his share shall be borne by G and I proportionately. 
    • Under paragraph 2, G can, therefore, demand P4,500.00 from I. 
    • If the benefit of division ceases for reasons other than the insolvency of the principal debtor, the right to reimbursement granted to G against H and I may only be exercised if G makes payment in virtue of a judicial demand by C.

Art. 2074. 
In the case of the preceding article, 
the co-guarantors may set up against the one who paid, 
the same defenses which would have pertained
to the principal debtor against the creditor, 
and which are not purely personal to the debtor.

Defenses available to co-guarantors. 
  • In the action filed by the paying guarantor against his co guarantors for their proportionate shares in the obligation, the latter may avail themselves of all defenses which the debtor would have interposed against the creditor but not those which cannot be transmitted for being purely personal to the debtor.
  • Example:
    • In the preceding example, if G sues H and I, the latter may raise the defense of payment by D by virtue of which the obligation was extinguished.
    •  Other defenses such as fraud, prescription, remission, illegality, etc. may also be set up because they are defenses inherent in the obligation, the effect of which is to nullify the obligation or render it effective. 
    • But if D was a minor at the time the obligation was contracted, the defense of minority is not available to H and I because it is personal to D.

Art. 2075. 
A sub-guarantor,
in case of the insolvency of the guarantor for whom he bound himself, 
is responsible to the co-guarantors in the same terms as the guarantor.

Liability of sub-guarantor in case of insolvency of guarantor.
  • In case of the insolvency of the guarantor for whom he bound himself, a sub-guarantor is liable to the co-guarantors in the same manner as the guarantor whom he guaranteed. 
  • Example:
    • In the example given under Article 2073, if F is the guarantor of I, and I becomes insolvent, F is liable to G for P3,000.00 or P4,500.00 if H is also insolvent.

Aquino:

1. Benefit of Contribution.
  • If one of the co guarantors (one of two or more) will pay, he or she may demand reimbursement from the other co-guarantors the latter's proportional shares if:
  1. The payment has been made by virtue of a judicial demand; or 
  2. The principal debtor is insolvent. 
  • Effect of Insolvency of Any Guarantor. 
    • If any of the guarantors should be insolvent, his share shall be borne by the other co-guarantor/a, including the payer, in the same proportion. 
2. Accommodation Party.
  • The Benefit of Contribution was applied in a case involving solidary accommodation parties in negotiable instruments under Section 29 of the Negotiable Instruments Law. 
  • Intestate Estate of Victor Sevilla, Simeon Sedaya v Sevilla, G.R. No. L-17845, April 27, 1967:
  • The accommodation party is deemed as the surety of the accommodated party. 
    • An accommodation party who paid may seek reimbursement from the accommodated party or other accommodation parties subject to the following rules: 
      1. A joint and several accommodation party such as an accommodation maker may demand from the principal debtor reimbursement for the amount that he paid to the payee;
      2.  A joint and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action against the principal debtor provided that:
        1. he made the payment by virtue of a judicial demand; or
        2. a principal debtor is insolvent.
  • Prudencio, et al. v.  The Honorable Court of Appeals, G.R. No. L-34539, July 14, 1986:
    • It should be noted, however, that while he is in effect a surety of the accommodated party, the accommodation party is not exactly a surety in a contract of suretyship in all respects. 
    • Thus, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as the holder for value is concerned, he is a solidary co-debtor."
3. Sub-guaranty.
  • Article 2075 of the New Civil Code recognizes the validity of a sub-guaranty. 
  • The sub-guarantor is the person who will pay if the guarantor cannot pay. 
    • Article 2075 provides that a sub-guarantor, in case of the insolvency of the guarantor for whom he bound himself, is responsible to the co-guarantors in the same terms as the guarantor. 



Comments

Post a Comment

Popular posts from this blog

Equality and Human Rights: The United Nations and Human Rights System (September 16, 2023)

Sovereign Equality of States/Principle of sovereign equality UN Charter of 1945 All states are equal before international law no matter the size of their territory, population, economy or military. All states have equal rights and duties under international law, and that no state has the right to interfere in the internal affairs of another state. Positive Consequences: All states have a voice in international affairs .   All states have the opportunity to participate in international organizations and to negotiate and conclude treaties. This helps to ensure that the interests of all states are represented in the development of international law and policy. No state has the right to interfere in the internal affairs of another state.  This helps to protect the sovereignty of all states and to prevent the use of force or coercion to achieve political objectives. States have the right to develop their own political, economic, and social systems without interference from othe...
Read more

Commercial Laws 1: R.A. No. 11057 — Personal Property Security Act

  Commercial Law TITLE XVI Personal Property Security Act Micro, Small and Medium Enterprises are sources of growth and innovation. They contribute to and benefit from future growth. Their increased participation in global trade "can have significant impact in reducing poverty through employment creation, productivity improvements and economies of scale." Congress passed the Personal Property Security Act in order to provide Micro, Small and Medium Enterprises (MSMEs) more access to "credit at the least cost through the establishment of a unified and modern legal framework for securing obligations with personal property ." It was explained:  According to the 2015 Philippine Statistics Authority data, there are 896,839 micro-small and medium enterprises (MSMEs) that established in the Philippines.  These MSMEs generated a total of 4,784,870 jobs in 2015 versus 2,181,819 for the large enterprises.  This indicates that the MSMEs contributed almost 61 % o...
Read more

Land Title and Deeds: Chapter 1 — What Lands are Capable of Being Registered

Chapter I What Lands are Capable of Being Registered All lands in the Philippines are presumed to be lands of the public domain, and therefore, owned by the State. This rule finds support in Section 2, Article XII of the 1987 Constitution:  Section 2 . All lands of the public domain , waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State . With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60 per centum of whose capital is owned by such citizens. Such agreements may be fo...
Read more