Commercial Law: Suretyship

Suretyship

This Chapter discusses the rules that apply specifically to sureties.
Although other provisions on guaranty discussed in the previous Chapter are also applicable, the focus of this Chapter are bonds and other forms of suretyship.

1. Suretyship.

The surety binds himself solidarily to the creditor to fulfill the obligation of the principal debtor.
Section 177, Insurance Code:

A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee.

Specifically, suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal.
The creditor may sue the debtor and the surety.

However, the creditor may choose to sue the surety alone without impleading the debtor.
In the same manner, the principal debtor may also be sued alone without impleading the surety.
Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998:

We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.
The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.

De Guia v. Alto Surety & Insurance Co., Inc., 7 SCRA 414:

If the judgment contains no directive for the surety to pay and the creditor fails to make any claim for such directive before the judgment becomes final and executory, the surety cannot be made liable later.

Just like the contract of guaranty, the contract of suretyship is: GAUE

gratuitous unless there is a stipulation to the contrary;
accessory;
unilateral; and
express.

There is an opinion to the effect that it is not covered by the Statutes of Fraud because it does not fall under Article 1403(2)(b).

However, as will be discussed hereunder, the view that a suretyship is covered by Article 1403(2)(b) is supported by the decision in Reiss v. Memije.

1.01. Statute of Frauds.

Article 1403 of the New Civil Code provides that contracts are unenforceable, unless they are ratified if they do not comply with the Statute of Frauds.

An agreement that is covered by the Statute of Frauds shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents.
One of the contracts enumerated is "a special promise to answer for the debt, default, or miscarriage of another."

As noted in the previous Chapter, the contract of guaranty is covered by the Statutes of Fraud.

However, there is an opinion to the effect that the contract of suretyship is not within the Statute of Frauds.
It is believed that this view is erroneous. It is submitted that the Statute of Frauds covers the contract of suretyship because the promise of a surety is a special promise to answer for the debt of another.
The surety's contract is a collateral undertaking and secondary to the principal contract; it is not original or independent.

The view that the Statute of Frauds covers the contract of suretyship is supported by the decision of the Supreme Court.
Paul Reiss, et al. v. Jose M. Memije, G.R. No. L-5447, March l, 1910:

The Statute of Frauds covers the promise of a surety.
The High Court explained that the "true test as to whether a promise is within the statute had been said to lie in the answer to the question whether the promise is an original or a collateral one.

If the promise is an original or an independent one; that is, if the promisor becomes thereby primarily liable for the payment of the debt, the promise is not within the statute.
But, on the other hand, if the promise is collateral to the agreement of another and the promisor becomes thereby merely a surety, the promise must be in writing.

It was emphasized that "while, as a matter of law, a promise, absolute in form, to pay or to be 'responsible' or to be the 'paymaster,' is an original promise, and while, on the other hand, if the promisor says, 'I will see you paid,' or 'I will pay if he does not,' or uses equivalent words, the promise standing alone is collateral, yet under all the circumstances of the case, an absolute promise to pay, or a promise to be 'responsible,' may be found to be collateral, or promises deemed prima facie collateral may be adjudged original.
Perhaps the confusion lies in the use of the word "primary" in the test laid down in Reiss v. Memije.
However, it is equally clear from the case that just because the obligation is solidary does not mean that the obligation is not covered by the Statute of Frauds because as stated earlier, an absolute promise to pay, or a promise to be responsible, may still be secondary and collateral and not a primary and independent undertaking.

If the defendant (even if denominated as a surety or guarantor) is the person to whom credit has actually been given, the debt is his own and his promise is good without a writing.
If the obligation is a joint obligation, the engagement need not also be in writing because the obligation of each joint debtor is separate and original.
However, where a defendant's promise is collateral to and in aid of the third party's liability, the promise requires a writing to support it even if the collateral undertaking is solidary.

Indeed, the promise cannot be considered within the terms of the Statute of Frauds unless a legal obligation exists or is contemplated from a third person to the obligee.

"It is in this sense that the phrases 'collateral obligation' and 'original obligation' are properly used."
It is for this reason that in Common Law the contracts of suretyship as well as contracts of guaranty both fall within the Statute of Frauds.
Both are promises to answer for the debt of another although the obligation of the surety is direct while the other is subsidiary.
A several promise of suretyship is as much within the statute of frauds as a promise of guaranty.

Even if the promise is direct performance (solidary), the surety is merely lending his credit and his liability is still conditioned upon the default of the principal, the existence of the latter and the validity of the liability of the principal.
Under the so-called "original-collateral promise test" contemplated in Paul Reiss, et al. v. Jose M. Memije in relation to what is known as the "leading object or main purpose rule," if the leading object or main purpose of the promisor is to become a surety or guarantor for another's debt, the promise is a collateral one and within the Statute of Frauds.

On the other band, "where the principal purpose is to subserve or promote the interest personal to the promisor, then the promise will be deemed an original one and not controlled by the Statute of Frauds.

1.02. Distinguished from Ordinary Solidary Co-debtor.

While a surety is solidarily liable there is a difference between an ordinary solidary debtor and a surety.
Escano v. Ortigas, Jr. G.R. No. 151953, June 29, 2007:

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation.

At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to.
The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished.
At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact "become subrogated to all the rights and remedies of the creditor."

Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations to suretyship contracts.

Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).
However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other.
Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt.
The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety:

A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes.
There is a difference between a solidary co-debtor and a fiador in solidum (surety).

Fiador in solidum (surety).

Outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa;

Solidary co-debtor

while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.

The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship.

The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between the co-debtors liable in solidum is similar to the common law suretyship.

In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor "may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made."

Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid.

In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors.

Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety.

What is the source of this right to full reimbursement by the surety?

We find the right under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a debtor must be indemnified by the latter," such indemnity comprising of, among others, "the total amount of the debt."
Further, Article 2067 of the Civil Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor."

Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should apply to sureties.
We reject that argument, and instead adopt Dr. Tolentino’s observation that "[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing guaranty."

For if that were not the implication, there would be no material difference between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047.

These rights granted to the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the "indemnification" that pertains to the latter extends "only [to] the share which corresponds to each [co-debtor]."

2. Applicable Law.

Article 2047 of the New Civil Code provides that "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."

However, except for the rules that apply exclusively only to guaranty, particularly the provision on the benefit of excussion under Articles 2058 to Article 2064 of the New Civil Code, the statutory rules on guaranty apply to suretyship.

These include Article 2071 of the New Civil Code, which provides remedies to the guarantor and the surety.
Manila Surety and Fidelity Company, Inc. v. Batu Construction and Company, G.R. No. L-9353, May 21, 1957:

The main question to determine is whether the last paragraph of article 2071 of the new Civil Code taken from article 1843 of the old Civil Code may be availed of by a surety.
A guarantor is the insurer of the solvency of the debtor;
A surety is an insurer of the debt.
A guarantor binds himself to pay if the principal is unable to pay;
A surety undertakes to pay if the principal does not pay.
The reason which could be invoked for the non-availability to a surety of the provisions of the last paragraph of article 2071 of the new Civil Code would be the fact that guaranty like commodatum is gratuitous.
But guaranty could also be for a price or consideration as provided for in article 2048.

So, even if there should be a consideration or price paid to a guarantor for him to insure the performance of an obligation by the principal debtor, the provisions of article 2071 would still be available to the guarantor.

In suretyship the surety becomes liable to the creditor without the benefit of the principal debtor's exclusion of his properties, for he (the surety) maybe sued independently.

So, he is an insurer of the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous than that of guarantor.
Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety.
The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn from the applicable provisions governing guaranty.

a. Insurance Code.

Sections 177 and 178 of the Insurance Code provide:

SEC. 177. A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obliger of an obligation or undertaking in favor of a third party called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206.
SEC. 178. The liability of the surety or sureties shall be Joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.

Intra-Strata Assurance Corp. v. Republic, G.R. No. 156571, July 9, 2008:

As provided in Article 1306 of the New Civil Code, the parties in suretyship may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy.
However, the law sets limits.

It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute.
Its terms are embodied therein.
The contracting parties need not repeat them.
They do not even have to be referred to.
Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter.

For example, in some cases, the provisions of Section 1904 of the Tariff and Customs Code may apply.

PROBLEM:

The trial court dismissed a case filed by the plaintiff surety against the principal being of the opinion that the provisions of Article 2071 of the new Civil Code may be availed of by a guarantor only and not by a surety. The factual findings of the court are as follows:

That on July 8, 1950, the defendant Batu Construction & Company, as principal, and the plaintiff Manila Surety & Fidelity Co. Inc., as surety, executed a surety bond for the sum of P8,812.00 to insure faithful performance of the former's obligation as contractor for the construction of the Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte Province.
On the same date, July 8, 1950, the Batu Construction & Company and the defendants Carlos N. Baquiran and Gonzales P. Amboy executed an indemnity agreement to protect the Manila Surety & Fidelity Co. Inc., against damage, loss or expenses which it may sustain as a consequence of the surety bond executed by it jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from the Director of Public Works (Exhibit B) annulling its contract with the Government for the construction of the Bacarra Bridge because of its failure to make satisfactory progress in the execution of the works, with the warning that, any amount spent by the Government in the continuation of the work, in excess of the contract price, will be charged against the surety bond furnished by the plaintiff. It also appears that a complaint by the laborers in said project of the Batu Construction & Company was filed against it and the Manila Surety and Fidelity Co., Inc., for unpaid wages amounting to P5,960.10.

Did the trial court correctly dismiss the case?

No, the case was not correctly dismissed by the trial court. The case falls under Par. 1 of Article 2071 of the New Civil Code.

Manila Surety and Fidelity Company, Inc. v. Batu Construction and Company, G.R. No. L-9353, May 21, 1957:

The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the new Civil Code, because there is no proof of the defendants' insolvency.

The fact that the contract was annulled because of lack of progress in the construction of the bridge is no proof of such insolvency.
It does not fall under paragraph 3, because the defendants have not bound themselves to relieve the plaintiff from the guaranty within a specified period which already has expired, because the surety bond does not fix any period of time and the indemnity agreement stipulates one year extendible or renewable until the bond be completely cancelled by the person or entity in whose behalf the bond was executed or by a Court of competent jurisdiction.
It does not come under paragraph 4, because the debt has not become demandable by reason of the expiration of the period for payment.
It does not come under paragraph 5 because of the lapse of 10 years, when the principal obligation has no period for its maturity, etc., for 10 years have not yet elapsed.
It does not fall under paragraph 6, because there is no proof that "there are reasonable grounds to fear that the principal debtor intends to abscond."
It does not come under paragraph 7, because the defendants, as principal debtors, are not in imminent danger of becoming insolvent, there being no proof to that effect.

But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the new Civil Code, because the action brought by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages amounting to P5,960.10, is in connection with the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu Construction & Company, and one of the defendants therein is the herein plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article 2071 of the new Civil Code provides that the guarantor, even before having paid, may proceed against the principal debtor "to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor or from the danger of insolvency of the debtor, when he (the guarantor) is sued for payment."

It does not provide that the guarantor be sued by the creditor for the payment of the debt. It simply provides that the guarantor of surety be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor.
So, the suit filed by Ricardo Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in connection with the work done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit for the payment of an amount for which the surety bond was put up or posted to secure the faithful performance of the obligation undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines.

The order appealed from dismissing the complaint is reversed and set aside, and the case remanded to the court below for determination of the amount of security that would protect the plaintiff Company from any proceedings by the creditor or from the danger of insolvency of the defendants, the principal debtors, and direction to the defendants to put up such amount of security as may be established by competent evidence, without pronouncement as to costs.

3. Distinguished from Insurance Contracts.

A contract of suretyship may be entered into as an isolated transaction.

If a person or entity is engaged in the business of acting as surety, then that person or entity is engaged in insurance business.
However, strictly speaking, the contract of suretyship is essentially different from an insurance contract.
The two contracts are distinguished hereunder.

Suretyship

There are three parties. The principal, obligee and surety.
The surety, in theory, expects no loss to occur.
The surety has the right of reimbursement against the defaulting principal.
The surety guarantees qualities that are within the control of the insured, that is, the insured's character, honesty, and integrity to perform the obligation.

Insurance

There are two parties, the insurer and the insured.
The insurer expects loss to occur and in some cases, like life insurance, the loss is a certainty.
The insurer does not have the right of reimbursement from the insured.
Insurance covers losses that are beyond the control of the insured.

3. Distinguished from Guaranty.

The contract of suretyship and the contract of guaranty are both governed by the same Title of the New Civil Code.
However, these contracts are essentially different because the surety is an insurer of debt while the guarantor is the insurer of the solvency of the debtor.
E. Zobel, Inc. v. The Court of Appeals, G.R. No. 113931, May 6, 1998:

A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.
A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law, they may be distinguished thus:

A surety is:

Usually bound with his principal by the same instrument, executed at the same time, and on the same consideration;
He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby.

On the other hand, the contract of guaranty is:

The guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal.
The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance.
He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal.

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.

Philippine Export and Foreign Loan Guarantee Corp v V.P. Eusebio Construction Corp., et al., G.R. No. 140047, July 13, 2004:

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In both contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction, they may be distinguished thus:

As to the instrument:

A surety is usually bound with his principal by the same instrument executed at the same time and on the same consideration.
On the other hand, the contract of guaranty is the guarantor's own separate undertaking often supported by a consideration separate from that supporting the contract of the principal; the original contract of his principal is not his contract.

As to liability:

A surety assumes liability as a regular party to the undertaking;
While the liability of a guarantor is conditional depending on the failure of the primary debtor to pay the obligation.

As to obligation:

The obligation of a surety is primary.
While that of a guarantor is secondary.

As to duration:

A surety is an original promissor and debtor from the beginning;
While a guarantor is charged on his own undertaking.

As to knowledge of default:

A surety is, ordinarily, held to know every default of his principal;
Whereas a guarantor is not bound to take notice of the non-performance of his principal.

As to effect of mere indulgence:

Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by want of notice of the default of the principal, no matter how much he may be injured thereby.
A guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal.

In a case decided under the Old Civil Code, the Supreme Court explained the background of the statutory rules:

Castellvi de Higgins v. Sellner, G.R. No. L-158025, November 5, 1920:

In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la Fianza."

The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code as "security."
"Fianza" appears in the Fisher translation as "suretyship."
The Spanish world "fiador" is found in all of the English translations of the Civil Code as "surety."
The law of guaranty is not related of by that name in the Civil Code, although indirect reference to the same is made in the Code of Commerce.
In terminology at least, no distinction is made in the Civil Code between the obligation of a surety and that of a guarantor.

As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law origin, we feel free to supplement the statutory law by a reference to the precepts of the law merchant.
The points of difference between a surety and a guarantor are familiar to American authorities.

A surety and a guarantor are alike in that each promises to answer for the debt or default of another.
A surety and a guarantor are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the obligation if the primary pay or fails to do so.
A surety is charged as an original promissory;
The engagement of the guarantor is a collateral undertaking.
The obligation of the surety is primary;
The obligation of the guarantor is secondary.

Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one person binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable."

What the first portion of the cited article provides is, consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is practically equivalent to the contract of suretyship.
When in subsequent articles found in section 1 of Chapter II of the title concerning fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common law, the effect of guaranty between guarantor and creditor.
The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between codebtors liable in solidum is similar to the common law suretyship.

The use of the term 'guarantee' does not ipso facto mean that the contract is one of guaranty.

Authorities recognize that the word "guarantee' is frequently employed in business transactions to describe not the security of the debt but an intention to be bound by a primary or independent obligation.
The interpretation of a contract is not limited to the title alone but to the contents and intention of the parties.
The contract may be suretyship even if the parties call it guaranty.

The fact that the guaranty is an "unconditional guaranty" does not make the guarantor a surety.

The liability of the unconditional guarantor is still subsidiary.

PROBLEM:

Petitioner TIDCORP signed a document entitled Guarantee Agreement which secures the obligation of Philpos. The Agreement states as follows:

5.1 ORDINARY GUARANTEE. TIDCORP, with the ISSUER's express conformity, hereby waives the provision of Article 2058 of the New Civil Code of the Philippines on excussion, as well as presentment, demand, protest or notice of any kind with respect to this Guarantee Agreement. It is therefore understood that the SERIES A NOTEHOLDERS can claim under this Guarantee Agreement directly with TIDCORP without the SERIES A NOTEHOLDERS having to exhaust all the properties of the ISSUE and without need of prior recourse to the ISSUER.

Is the contract a guaranty or suretyship?

The contract involved is a contract of suretyship and not a guaranty.

Trade and Investment Development Corporation of the Philippines v. Philippine Veterans Bank, G.R. No. 233850, July 1, 2019:

Under a normal contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit of excussion. Conversely, if this benefit of excussion is waived, the guarantor can be directly compelled by the creditor to pay the entire debt even without the exhaustion of the debtor's properties.
In other words, a guarantor who engages to directly shoulder the debt of the debtor, waiving the benefit of excussion and the requirement of prior presentment, demand, protest or notice of any kind, undoubtedly makes himself/herself solidarily liable to the creditor.
Recognized Civil Law Commentator, former Court of Appeals Justice Eduardo P. Caguioa also explained that one of the hallmarks of a contract of guaranty is its subsidiary character - "that the guarantor only answers if the debtor cannot fulfill his obligation; hence the benefit of excussion in favor of the guarantor." Hence, under the Civil Code, "by virtue of [Article 2047, which states that a contract is called a suretyship when a person binds himself solidarily with the principal debtor,] when the guarantor binds himself solidarily with the debtor, the contract ceases to be a guaranty and becomes suretyship." The eminent civilist further explained that what differentiates a surety from a guaranty is that in the former, "a surety is principally liable[,] while a guarantor is [only] secondarily liable."
In the instant case, without any shadow of doubt, petitioner TIDCORP had expressly renounced the benefit of excussion and in no uncertain terms made itself directly and principally liable without any qualification to the Series A Noteholders and without the need of any prior recourse to PhilPhos.
In effect, the nature of the guarantee obligation assumed by petitioner TIDCORP under the Guarantee Agreement was transformed into a suretyship. This is the case because the defining characteristic that distinguishes a guarantee from a suretyship is that in the latter, the obligor promises to pay the principal's debt if the principal will not pay, while in the former, the obligor agrees that the creditor, after proceeding against the principal and exhausting all of the principal's properties, may proceed against the obligor.
And yet, petitioner TIDCORP insists that despite the waiver of the benefit of excussion, it is still considered a guarantor because the Guarantee Agreement expressly designates petitioner TIDCORP as an "Ordinary Guarantor."
The argument fails to convince.
The determination of whether an obligation is a suretyship is not a matter of nomenclature and semantics. That an obligor is designated as a "guarantor" or that the contract is denominated as a "guarantee agreement" does not automatically mean that the obligor is a guarantor or that the contract entered into is a contract of guarantee. As previously held by the Court, even assuming that a party was expressly made liable only as a "guarantor" in an agreement, he/she can be held immediately liable directly and immediately if the benefit of excussion was waived.
Petitioner TIDCORP downplays the waiver of the benefit of excussion by making the specious argument that the waiver does not define or characterize a guaranty and that it is supposedly merely one of the effects of a guaranty. But a0s already explained, the waiver of the benefit of excussion is the crucial factor that differentiates a surety from a guaranty. Otherwise stated, when a person/entity engages that he/she will be directly liable to the creditor as to another debtor's obligation without the need for the creditor to exhaust the properties of the debtor and to have prior recourse against the latter, then for all intents and purposes, such obligation is in the nature of a suretyship regardless of how the parties labelled the agreement.
As explained in Spouses Ong, one of the defining characteristics of a suretyship contract is that the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt:

x x x There is a sea of difference in the rights and liabilities of a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable/or the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation.

Petitioner TIDCORP argues that the Court in JN Development Corporation, et al. v. Philippine Export and Foreign Loan Guarantee Corporation supposedly considered the contract therein a contract of guarantee despite the waiver of the benefit of excussion.
Petitioner TIDCORP's assertion is not well-taken as the Court made no such pronouncement in the said case. In fact, the Court in the aforementioned case explained that what distinguishes a contract of guaranty is that the "guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor."Hence, in a contract where an obligor can be compelled to pay the creditor even when the latter has not exhausted all the property of the debtor and resorted to all the legal remedies against the debtor, such contract is not in the nature of a contract of guarantee.
In fact, in citing Philippine Export and Foreign Loan Guarantee Corporation v. VP Eusebio Construction, Inc., petitioner TIDCORP actually further strengthened the argument that it is a surety and not a guaranty. In the said case, the Court explained that one of the essential features of a suretyship is when the obligor's obligation is not discharged by the absence of a notice of default of the principal debtor. In the instant case, the Guarantee Agreement clearly states that petitioner TIDCORP will be liable to satisfy its obligations under the said agreement despite the absence of "presentment, demand, protest or notice of any kind with respect to this Guarantee Agreement."47
Hence, in accordance with the Guarantee Agreement, which states that respondent PVB can claim DIRECTLY from petitioner TIDCORP without the former having to exhaust all the properties of and without need of prior recourse to PhilPhos, in accordance with Section 18(c) of the FRIA, the issuance of the Stay Order by the Rehabilitation Court clearly did not prevent the RTC from acquiring jurisdiction over respondent PVB's Complaint, as correctly held by the RTC in the assailed Order.

5. Nature of Liability.

Under Article 2047, the surety undertakes to be bound solidarily with the principal obligor.

The liability of the surety is to the principal.
That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract.
Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.

Notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking. The Supreme Court explained the nature of the surety's liability:
Asset Builders Corporation v. Stronghold Insurance Company, Incorporated, G.R No. 187116, October 18, 2010:

... The surety's obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.

It follows however that the surety is not liable if there is no default or delay on the part of the principal.
Philippine Charter Insurance Corporation v. Central Colleges of the Philippines, G.R. Nos. 180631-33, February 22, 2012:

The civil law concept of delay or default commences from the time the obligor demands, judicially or extrajudicially, the fulfillment of the obligation from the obligee. In legal parlance, demand is the assertion of a legal or procedural right."
Hence, a building contractor incurred delay from the time the other party called its attention that it had breached the contract and extrajudicially demanded the fulfillment of its commitment against the bonds.
It is the obligor's culpable delay, not merely the time element, which gives the obligee the right to seek the performance of the obligation. As such, the building owner's cause of action accrued from the time that the contractor, the principal of the surety, incurred culpable delay as contemplated in the surety and performance bonds.

Asset Builders Corporation v. Stronghold Insurance Company Inc., G.R No. 187116, October 18, 2010:

In another case, when the obligor Lucky failed to finish the drilling work within the agreed time frame despite the obligee's demand for completion, it was already in delay.
Due to this default, the obligor's liability attached and, as a necessary consequence, the surety's liability under the surety agreement arose.

Ordinarily, the surety is not liable if no demand was given to the principal-debtor. Demand, however, is not necessary if there is waiver of such demand.
Palmares v. Court of Appeals, et al., G.R. No. 126490, March 31, 1998:

In one case, demand to the debtor was deemed not necessary because the Promissory Note provides that: "should I fail to pay in accordance with the above scheduled of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. The surety is equally bound by such waiver.

PROBLEM:

Kevin signed a loan agreement with ABC Bank. To secure payment, Kevin requested his girlfriend Rosella to execute a document entitled "Continuing Guaranty Agreement" whereby she expressly agreed to be solidarily liable for the obligation of Kevin. Can ABC Bank proceed directly against Rosella upon Kevin's default even without proceeding against Kevin first? Explain your answer. (2017 Bar)

Yes, ABC Bank may proceed directly against Rosella upon Kevin's default. A surety binds himself solidarily to the creditor to fulfill the obligation of the principal debtor. A surety can be made liable even without proceeding against the debtor. In this case, Rosella is a surety b e cause she signed the "Continuing Guaranty Agreement" whereby she expressly agreed to be solidarily liable for the obligation of Kevin. As such surety, she may be sued by the creditor without need for the latter to proceed first against the debtor.

6. Extent of Liability.

Liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed and cannot be extended by implication beyond its specified limits.

The extent of a surety's liability is determined by the language of the suretyship contract or bond itself.
It cannot be extended by implication, beyond the terms of the contract.

Visayan Surety & Insurance Corporation v. The Honorable Court of Appeals, G.R. No. 127261, September 7, 2001:

When a surety executes a bond, it does not guarantee that the plaintiffs cause of action is meritorious, and that it will be responsible for all the costs that may be adjudicated against its principal in case the action fails.
The extent of a surety's liability is determined only by the clause of the contract of suretyship.
A contract of suretyship is not presumed; it cannot extend to more than what is stipulated.
Since the obligation of the surety cannot be extended by implication, it follows that the surety cannot be held liable to the intervenor when the relationship and obligation of the surety is limited to those specified in the contract of suretyship.

Stronghold Insurance C o., Inc. v. Tokyo Construction Company, Ltd. G.R. No. 158820-21, June 5, 2009:

The surety is considered in law as possessed of the identity of the debtor in relation to whatever is adjudged touching upon the obligation of the latter.
Their liabilities are so interwoven as to be inseparable.
Although the contract of a surety is, in essence, secondary only to a valid principal obligation, the surety's liability to the creditor is direct, primary, and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.
It was further explained that "a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form.
However, a surety is not released by a change in the contract, which does not have the effect of making its obligation more onerous.

First Lepanto-Taisho Insurance Corp. v. Chevron Philippines, Inc. G.R. No. 177839 January 18, 2012:

The bond that was issued by the petitioner was supposed to secure the obligations under written contract between the respondent and the latter's distributor.
Under the circumstances, the Supreme Court ruled that respondent is charged with notice of the specified form of the agreement or at least the disclosure of basic terms and conditions of its distributorship and credit agreements with its distributor after its acceptance of the bond delivered by the latter.
However, it never made any effort to relay those terms and conditions of its contract with the distributor upon the commencement of its transactions with said client, which obligations are covered by the surety bond issued by petitioner.
Since the bond issued and accepted by respondent specifically referred to a "written agreement," then the surety is not liable in the absence of such written agreement.

PROBLEM:

AB sold to CD a motor vehicle for and in consideration of P120,000.00 to be paid in twelve monthly equal installments of P10,000.00, each installment being due and payable on the 15th day of each month starting January 1997. To secure the promissory note, CD:

executed a chattel mortgage on the subject motor vehicle, and
furnished a surety bond issued by Philam life.

CD failed to pay more than two (2) installments, AB went after the surety but he was only able to obtain three-fourths (3/4) of the total amount still due and owing from CD. AB seeks your advice on how he might, if at all, recover the deficiency. How would you counsel AB? (1997 Bar)

I would advise AB that he can recover the deficiency.

The case is covered by Article 1484 of the New Civil Code known as the Recto Law because it is a sale of personal property on installment basis. Article 1484 provides three alternative remedies, namely:

specific performance, or
foreclosure of mortgage, or
cancellation of the sale.

Deficiency cannot be recovered only if foreclosure is resorted to by the creditor-mortgagor, and not if specific performance is the remedy taken. In this case, AB resorted to specific performance when he went after the surety for payment; hence, since the surety paid only part of the amount due from CD, AB may recover the deficiency. Suretyship is an accessory contract that makes the surety solidarily liable up to the extent agreed upon. The remaining obligation is not deemed extinguished if the security is for part of the obligation only. Hence, in this case, I would advise AB to file an action against CD for the deficiency.

6.01. Debtor Not an Indispensable Party.

Because of the solidary nature of its obligation, the surety is not an indispensable party in a suit against the principal.
Living@Sense, Inc. v. Malayan Insurance Company, Inc., G.R. No. 193753, September 26, 2012:

Neither is the principal an indispensable party in an action to claim indemnity from the surety.

The surety is liable even if the principal is solvent or has enough properties to pay the obligation.

7. The Parties.

There are three persons involved in a contract of suretyship.
These are:

the principal,
the obligee, and
the surety (obligor).

CCC Insurance Corporation v. Kawasaki Steel Corporation, G.R. No. 156162, June 22, 2015:

Suretyship, in essence, contains two types of relationship:

the principal relationship between the obligee and the obligor, and
the accessory surety relationship between the principal and the surety.

In this arrangement, the obligee accepts the surety's solidary undertaking to pay if the obligor does not pay.

Such acceptance, however, does not change in any material way the obligee's relationship with the principal obliger.
Neither does it make the surety an active party to the principal obligee obligor relationship.

Thus, the acceptance does not give the surety the right t o intervene in the principal contract.

The surety's role arises only upon the obligor's default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor.

a. Principal.

The principal is the person whose obligation is secured by the bond or suretyship.
He is the person who agrees to perform certain acts — the person who fulfills certain obligations.

b. Obligee.

The obligee is the person in whose favor the bond is issued or the undertaking of the surety is made.
He will be paid or reimbursed if the principal fails to perform his obligation.
In relation to the obligation of the principal and the surety, the obligee is the creditor or the active subject.
The creditor is not the fiduciary of the surety.

c. Surety.

The surety is the party who answers for the debt, default or obligation of the principal.
The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount fixed in the agreement.
The surety undertakes that the debt shall be paid and this undertaking is usually in the form of a bond.

8. Relationships.

Suretyship involves two types of relationship:

the underlying principal relationship between the creditor and the debtor, and
he accessory surety relationship between the principal and the surety.

a. Relationship with Creditor.

The creditor accepts the surety's solidary undertaking to pay if the debtor does not pay.

Such acceptance, however, does not change in any material way the creditor's relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship.
In other words, the acceptance does not give the surety the right to intervene in the principal contract.
The surety's role arises only upon the debtor's default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor.

Although the contract of a surety is, in essence, secondary only to a valid principal obligation, the surety's liability to the creditor is direct, primary, and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.

A surety is bound equally and absolutely with the principal, and as such is deemed an original promisor and debtor from the beginning.
This is because in suretyship there is but one contract and the surety is bound by the same agreement which binds the principal.
In essence, the contract of a surety starts with the agreement.

9. No Right of Excussion.

A surety bondsman cannot demand the exhaustion of the property of the principal debtor.
Similarly, a sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety.

10. Demand Not Necessary.

Demand to pay is not necessary to make the surety liable.
The surety is not even entitled to be given notice of the principal debtor's default.
The creditor does not owe the surety any active duty to protect the surety's interest.

10.01. When Written Claim or Notice Necessary.

The bond that the surety may issue may provide for clause known as the "Time-Bar Provision" under which the obligee is required to file a written notice of claim within a certain period otherwise the claim is barred.

This provision is also sometimes r eferred to as the "Written Claim Provision."

Thus, the time-bar provision in the Performance Bond may provide that any written claim against the bond should be "discovered and presented to the company within 10 days from the expiration of this bond or from the occurrence of the default or failure of the principal, whichever is the earliest."

The purpose of this provision in the performance bond is to give the issuer, notice of the claim at the earliest possible time and to afford the issuer sufficient time to evaluate, and examine the validity of the claim while the evidence or indicators of breach are fresh.

11. Reimbursement.

A surety who paid the obligee can recover what he paid from the principal.

Article 1217 of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (the surety).

Thus, the surety is entitled to reimbursement from the obligor (principal) for the amount it may be required to pay the obligee arising from its bond.

Article 2047 of the Civil Code specifically calls for the application of the provisions on solidary obligations to suretyship contracts.

In particular, Article 1217 of the Civil Code recognizes the right of reimbursement from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).
In contrast, Article 1218 of the Civil Code is definitive on when reimbursement is unavailing, such that those payments made after the obligation has prescribed or became illegal shall not entitle a solidary debtor to reimbursement.

Diamond Builders Conglomeration, el al. v. Country Bankers Insurance Corp., G.R. No.171820, December 13, 2007:

The right of the surety to reimbursement is not lost if the surety did not intervene in the case or the execution proceedings between the obligor and the obligee.

Salvador Escano, et al. v. Ortigas, Jr., G.R. No. 151953, June 29, 2007:

As indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor.

The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation.
At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to.
The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished.

At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact "become subrogated to all the rights and remedies of the creditor."

Indemnity Agreement

Normally, this right is also covered by a separate Indemnity Agreement signed by the principal in favor of the surety whereby the principal expressly agrees to reimburse the surety whatever amount that it will be required to pay the obligee.

In other words, the Indemnity Agreement is executed in favor of the surety.
An Indemnity Agreement may provide either or both ''indemnity against payment" and "indemnity against liability."
This means that the parties may provide that the surety can recover upon actual payment to the obligee and/or the moment the liability to the principal arises.

A stipulation in an Indemnity Agreement that allows the surety to recover the moment the subject bonds become due and demandable is valid.

The stipulation is but a slightly expanded contractual expression of Article 2071 of the New Civil Code which allows that the guarantor proceed against the principal debtor the moment the debt becomes due and demandable.
Thus, the following stipulation is valid from Autocorp Group v. Intra Strata Assurance Corporation G.R. No. 166662 June 27, 2008:

Where the obligation involves a liquidated amount for the payment of which the COMPANY has become legally liable under the terms of the obligation and its suretyship undertaking, or by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY’s aforesaid liability irrespective of whether or not payment has actually been made by the COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the undersigned or either of them by court action or otherwise to enforce payment, even prior to making payment to the obligee which may hereafter be done by the COMPANY.

The Indemnity Agreement usually includes the signature of another person who makes himself solidarily liable with the principal.

In the case of a corporation, its officers often affix their signatures to make them solidarily liable.
This is known as the joint and solidary signature of the officer (JSS) or the signature of the "co-indemnitor."

For the protection of the insurer-bonding company, it is more prudent to obtain a security for the performance of the obligations of the principal under the Indemnity Agreement like a mortgage.

Otherwise, the binding company will have to go through the inconvenience of litigation.
This becomes more important if the bonding company will issue a "high risk" bond like a bond in labor cases or an appeal bond in ejectment cases.

12. Interpretation.

Any doubt on the terms and conditions of the surety agreement which is in the nature of a contract of adhesion should be resolved against the surety who unilaterally prepared the agreement.

However, as to the extent of liability the applicable provision is Article 2055.
This rule applies to accommodation sureties.

The surety agreement must also be interpreted together with the principal contract.

Thus, the "complementary contracts construed together'' doctrine applies and finds support in the principle that the surety contract is merely an accessory contract and must be interpreted with its principal contract, like the loan agreement.
Prudential Guarantee and Assurance Corp. v. Anscor Land. Inc. G.R. No. 177240, September 8, 2010:

The performance bond was silent with regard to arbitration but the construction contract that it secures was clear as to arbitration in the event of disputes.
Applying the said doctrine, the Court ruled that the silence of the accessory contract in this case could only be construed as acquiescence to the main contract.
The construction contract breathes life into the performance bond.
It is more reasonable to assume that the party who issued the performance bond carefully and meticulously studied the construction contract that it guaranteed, and if it had reservations, it would have and should have mentioned them in the surety contract.

13. Extinguishment.

The obligation of the guarantor and the surety is extinguished at the same time as that of the principal and for some causes as all other obligations.

13.01. Non-payment of Consideration by Principal.

The effectivity of the bond is not wholly dependent on the payment of premium or consideration to be paid by the principal debtor to the surety.
Section 179 of the Insurance Code expresses the rule that no contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid. except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety.

Hence, the bond may be a continuing bond with no fixed expiration date that may be cancelled by the obligee only.

Country Bankers Insurance Corp. v. Lagman, G.R. No. 165487, July 13, 2011:

The bond continues despite non payment by the principal of the premium.
The surety cannot cancel the bond despite such non-payment without prejudice to the right to recover the premium from the principal.

PROBLEMS:

1. Under the continuing surety executed by Mr. G in favor of the Bank to secure letters of credit issued by the Bank, while the Bank may extend the due date at its discretion, it should nonetheless comply with the requirements that domestic letters of credit be supported by 15% marginal deposit extendible three times for a period of 30 days for each extension, subject to 25% partial payment per extension.

It appears that several letters of credit were irrevocably extended for 0 days with alarmingly flawed and inade quate consideration — that is, the absence of the indispensable marginal deposit of 16% and of the 25% partial payment prerequisite for every extension of 30 days.

The surety agreement provides that "no act or omission of any kind on the Bank's part in the premises shall in any event affect or impair this guaranty." Is the continuing surety extinguished?

Yes, the continuing surety is extinguished because of the illicit extension of the letters of credit. The surety, Mr. G, is relieved of his obligation as surety.

Sps Toh v. Solid Bank Corporation, G.R. No. 154183, August 7, 2003:

The assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of any kind on [the Bank's] part in the premises shall in any event affect or impair this guaranty" must also be read "strictissimi juris" for the reason that petitioners are only accommodation sureties, i.e., they received nothing out of the security contract they signed. Thus said, the acts or omissions of the Bank conceded by petitioners as not affecting nor impairing the surety contract refer only to those occurring "in the premises," or those that have been the subject of the waiver in the Continuing Guaranty, and stretch to no other.
Stated otherwise, an extension of the period for enforcing the indebtedness does not by itself bring about the discharge of the sureties unless the extra time is not permitted within the terms of the waiver, i.e., where there is no payment or there is deficient settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his contract, and while he is liable to the full extent thereof, his accountability is strictly limited to that assumed by its terms.

2. On April 28, 2006, AB Corporation (ABC) entered into an agreement with LS Corp., as part of the completion of its project to construct a commercial complex. LS Corp. was to supply labor materials tools, and equipment including technical supervision to drill one exploratory production well on the project site.

The total contract price f or the said project was Pl,150,000.00. To guarantee faithful compliance with their agreement, LS Corp. engaged respondent S Corp., which issued two bonds in favor of petitioner. The first bond covers the sum of P575,000.00 or the required downpayment for the drilling work.

On May 20, 2006, ABC paid LS Corp. P575,000.00 as advance payment, representing 50% of the contract price. LS Corp., thereafter, commenced the drilling work.

By July 18, 2006, just a few days before the agreed completion date of 60 calendar days, LS Corp. managed to accomplish only 10% of the drilling work. On the same date, petitioner sent a demand letter to LS Corp. for the immediate completion of the drilling work with a threat to cancel the agreement and forfeit the bonds should it still fail to complete said project within the agreed period.

On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to LS Corp. indicating the damages it incurred and stating that should LS refuse to comply with its demand within the given period, it shall be constrained to sue LS Corp. in court, in which event ABC shall demand payment of attorney's fees in the amount of at least P100,000.00.

On August 16, 2006, ABC sent a Notice of Claim for payment to S Corp. to make good its obligation under its bonds. S Corp. denied any liability arguing that ABC's rescission of its contract with LS Corp. virtually revoked the claims against the two bonds and absolved them from further liability. Is the argument of S Corporation tenable?

No, the argument is untenable. S Corp.'s liability under the surety agreement arose when LS Corp. failed to finish the drilling work within the agreed time frame despite demand and when LS Corp. further f ailed to return the P575,000.00 downpayment that was already advanced to it. S Corp. was not automatically released from any liability when ABC resorted to the rescission of the principal contract f or failure of the other party to perform its undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary obligor's default. It should be emphasized that Chad to choose rescission in order to prevent further loss that may arise from the delay of the progress of the project. Without a doubt, LS Corp.'s unsatisfactory progress in the drilling work and its failure to complete it in due time amount to non-performance of its obligation. In fine, the surety should be answerable to ABC on account of LS Corp.'s non-performance of its obligation as guaranteed by the performance bond. (Asia Builders Corp. v. Stronghold Insurance Compariy Ltd., Inc., G.R. No. 187116, October 18, 2011)

14. Judicial Bonds

Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a judicial order shall have the qualifications prescribed In Article 2056 and in special laws.

Meaning and form of bond.

A bond, when required by law, is commonly understood to mean an undertaking that is sufficiently secured, and not cash or currency.
Of course, whatever surety bonds are submitted are subject to any objections as to their sufficiency or as to the solvency of the bondsman.

Qualifications of personal bondsman.

A bondsman is a surety offered in virtue of a provision of law or a judicial order.
He must have the qualifications required of a guarantor and in special laws like the Rules of Court.

Guarantor:

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

Rules of Court, Rule 114 Section 12:

Section 12. Qualifications of sureties in property bond. — The qualification of sureties in a property bond shall be as follows:

(a) Each must be a resident owner of real estate within the Philippines;
(b) Where there is only one surety, his real estate must be worth at least the amount of the undertaking;
(c) If there are two or more sureties, each may justify in an amount less than that expressed in the undertaking but the aggregate of the justified sums must be equivalent to the whole amount of bail demanded.

In all cases, every surety must be worth the amount specified in his own undertaking over and above all just debts, obligations and properties exempt from execution.

Nature of bonds.

All bonds including “judicial bonds” are contractual in nature.
Bonds exist only in consequence of a meeting of minds under the conditions essential to a contract.
Judicial bonds constitute merely a special class of contracts of guaranty, characterized by the fact that they are given “in virtue . . . of a judicial order.”

Art. 2083. If the person bound to give a bond in the cases of the preceding article, should not be able to do so, a pledge or mortgage considered sufficient to cover his obligation shall be admitted in lieu thereof.

Pledge or mortgage in lieu of bond.

Guaranty or suretyship is a personal security.

On the other hand, pledge or mortgage is a property or real security.

If the person required to give a legal or judicial bond should not be able to do so, a pledge or mortgage sufficient to cover the obligation shall be admitted in lieu thereof.

Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the principal debtor.

A sub-surety in the same case, cannot demand the exhaustion of the property of the debtor of the surety.

Bondsman not entitled to excussion.

A judicial bondsman and the sub-surety are not entitled to the benefit of excussion because they are not mere guarantors, but sureties whose liability is primary and solidary.

Effect of negligence of creditor.

The contract of suretyship is not that the creditor will see that the principal debtor pays his debt or fulfills his contract, but that the surety will see that the debtor pays or performs.
Hence, mere negligence on the part of the creditor in collecting from the debtor will not relieve the surety from liability.

1. Bonds.

The obligations of a surety often appear in the form of a bond.
The surety business of insurance companies usually takes the form of issuance of bonds.

2. Kinds of Bonds.

Traditionally, bonds may be classified into:

Fidelity Bond
Surety Bond

a. Fidelity Bond is a bond that answers for the loss of an employer who is the obligee, for the dishonesty of the employee.

b. Surety Bond may be further classified into the following:

Contract Bonds which include:

Bid Bond
Performance Bond
Payment Bond, and
Maintenance Bond

Legal Bonds; and
Judicial Bonds;

c. Contract Bonds.

As the term implies, this bond guarantees the performance of contractual obligations.

1. Bid Bond

A proposal or bid bond has for its purpose the assurance of the owner of the project, the good faith of the bidder and that the bidder will enter into a contract with the project owner should bis proposal be accepted.

2. Performance Bond

It is designed to afford the project owner security that the bidder (the contractor) will faithfully comply with the requirements of the contract awarded to the contractor and make good damages sustained by the project owner in case of the contractor's failure to so perform.

3. Payment Bond

This bond secures the payment of bills for the labor and materials used in building a project.

4. Maintenance Bond

This bond answers for breach of warranties in a building project; the principal agrees to correct poor workmanship and to replace defective materials.

d. Legal Bonds.

They are bonds that are submitted "in virtue of a provision of law."

These include "License and Permit Bonds" which are bonds imposed by law to guarantee that the persons concerned will comply with the provisions of the license or permit issued to him.

For example, corporations that deploy workers abroad are required by law to post a bond with the Philippine Overseas Employment Administration.
Similarly, under the Revised Corporation Code, there is a requirement for the sole stockholder of a One Person Corporation who is likewise the self appointed treasurer of the corporation to give a bond with a two year term to the SEC.
Legal bonds likewise include Customs and Internal Revenue Bonds.

e. Judicial Bonds.

They are bonds that are issued in virtue of judicial orders and/or pursuant to the Rules of Court.
Examples are:

Replevin Bond;
Injunction Bond;
Attachment Bond;
Counter-Bond to lift the Attachment;
Supersedeas Bond in ejectment cases;
Administrator's Bond; or
Bail Bond in criminal cases.

The rules on the issuance of the Certificates of Accreditation and Authority for corporate surety bonds are embodied in Circular No. 04-970-SC entitled Guidelines on Corporate Surety Bond issued by the Supreme Court on August 61 2004.

f. Classification of the Insurance Commission.

In the Rules and Regulations Governing the Issuance of Bonds in the Philippines issued by the Insurance Commission, bonds are classified into:

Judicial Civil Bonds;
Judicial Criminal Bonds;
Firearms Bonds;
Internal Revenue Bonds;
Customs Bonds;
Guaranty Bonds;
Fidelity Bonds;
Promissory Notes; and
Immigration Bond.

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Commercial Law: Suretyship

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