Second Exam Transcript-2

8/18/2019 Second Exam Transcript-2

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CREDIT TRANSACTIONS GUARANTY TO PLEDGE

Atty. Jazzie M. Sarona, CPA 2 Manresa Roman 2ND sem, AY 2014-2015

For the use of all students of Atty Sarona

Contributors: Bagundang, Ching, Dayhon, Harun, Lopez, Montefolca, Rodriguez, Uy, Tan, Villacampa Page 1 of 40

GUARANTY & SURETYSHIP(Art 2047 – 2084)

Two Classifications of Security:

1.) Personal Security: wherein we have unsecured

securities only supported only by a promise topay. There is no person involved but only thewords of the guarantor or surety.

2.) Real Security: here you have a property which isused as security for the obligation such as apledge or antichresis.

We begin our discussion with personal guarantors andsureties.

Nature and Extent of Guaranty

Article 2047. By guaranty a person, called theguarantor, binds himself to the creditor to fulfill theobligation of the principal debtor in case the lattershould fail to do so.

If a person binds himself solidarily with the principaldebtor, the provisions of Section 4, Chapter 3, Title I ofthis Book shall be observed. In such case the contractis called a suretyship.

You have two kinds of contracts under 2047, a contract ofguaranty and a contract of suretyship.

Here you have three parties:

a.) principal debtorb.) Creditorc.) Guarantor or surety

Do take not however that when you talk about contract ofguraranty or surety it is more of a contract between thecreditor and the guarantor and the creditor and the surety.

Characteristics of a contract of a guaranty:

1. Accessory: dependent for its existence upon the

principal obligation

2. Subsidiary and conditional: takes effect when theprincipal debtor fails in his obligation subject tolimitation.

3. Unilateral: gives rise only to a duty on the part ofthe guarantor in relation to the creditor; it may beentered into even without the intervention of theprincipal debtor.

4. It requires that the guarantor must be a persondistinct from the debtor because a debtor cannot

be the personal guarantor for himself .

However, take note that in real guaranty, like pledge andmortgage, a person may guarantee his own obligationwith his personal or real property.

Under Article 2047, the first paragraph gives you definitionof a contract of guaranty, and suretyship in the secondparagraph.

Classifications of a Guaranty:1.) As to origin:

a.) Conventional: by stipulation of the partiesb.) Legal: by operation of lawc.) Judicial: required by court

2.) As to consideration:a.) Gratuitous: guarantor does not receive any

price or remuneration for acting as a guarantyb.) Onerous: gurantor receives a valuable

consideration

3.) As to the person guaranteed:a.) Single: constituted solely to guarantee the

performance by the debtor of the principalobligation

b.) Double or sub-guaranty: constituted tosecure the fulfillment by the guarantor of aprior guaranty.

4.) As to its scope and content:a.) Definite: limited to the principal obligation

only or to a specific portion thereofb.) Indefinite or simple: includes not only the

principal obligation but also all its accessoriesincluding judicial costs

Q: What is a contract of suretyship A: A contractual relation resulting from an agreementwhereby one person, the surety, engages to beanswerable to a third person, the oblige, for the debt,default or miscarriage of another known as the principalobligor. (Visayan Su rety & Insuranc e Co. v. CA )

Q: What is the difference between a guaranty andsuretyship?

A: With respect to their condition on when the obligationarises. In a contract of guaranty, the guarantor will only beheld liable when the debtor cannot pay. In a surety, whenthe debtor will not pay. At the moment of the debtor’s

default the surety can already be held liable for theobligation while in a guaranty, the guarantor will be onlhyheld liable when the debtor can no longer pay.

When does obligation arise?Guaranty: debtor cannot paySurety: debtor will not pay

Remember with regard to surety, the creditor can collectfrom him as soon as default sets in because his liability isdirect and primary.

ASSET BUILDERS CO. vs STRONGHOLD INSURANCE

Q: Is there a contract of surety here? Who is the surety here? A: Yes, the surety here is stronghold

Q: What is the principal obligation subject to the surety? A: the completion of the construction of the building.

Q: Is stronghold liable here? A: Yes. Article 2047 provides that ‘if the person binds himselfsolidarily with the principal debtor, the provisions of Sec. 4,Chapter 3, Title I of this Book shall be observed. In this casethe contract is called a suretyship.’

As a surety, Stronghold is directly and primarily bound to theconstruction contract between Lucky Star and Asset Builders

Co.

Q: Was there a valid ground for the rescission of the contracthere?

A: Yes, there was a valid ground for rescission because luckystar was not able to fulfill its obligation or complete the saidbuilding contract as it has only finished 10% of the work.

Q: If the principal obligation is rescinded isn’t it that theobligation of the surety should likewise be rescindedconsidering that it is an accessory contract dependent uponthe principal obligation?

A: No, in this case the obligation by Asset builders was to thecompletion of the building within the agreed period and at themoment Asset failed to complete the building at the day

agreed upon, they had already defaulted in their obligation inwhich the obligation or liability of Stronghold as a suretyalready arises from that moment Asset incurred delay.


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In this case, we have a suretyship. Now although acontract of surety is ancillary obligation the suretybecomes liable for the obligation of another although ithas no direct or personal interest in the obligation. Thesurety assumes liability as if he was a principal party tothe obligation. His liability to the creditor is direct, primaryand absolute. The surety is equally bound with theprinicipal debtor.

Take note here that even if there is a resccsision betweenLucky star and Stronghold it does not mean thatStronghold was automatically released from his liabilitybecause precisely the liability of the surety from the suretycontract comes to light upon the solidary obligor’s default.

What is the difference between a surety and a solidary co-debtor?

- A solidary debtor who effected the payment to acreditor may claim from his co-debtors only theshare which corresponds to him in the interest for

the payment already made. A solidary co-debtorwill not be able to claim from his co-debtors thefull amount already paid to the creditor becausehis right to recovery extends only theproportionate share of his other do-debtors.Which is different for a surety because if he paysthe creditor, he has the right to recover the fullamount paid not just any proportional share.

IllustrationSo, with that, let us say that we have 3 persons acting asco-debtors, if they borrowed money from the creditor andthey are solidarily liable, anybody can be bound to pay for

the full amount of the obligation. Let us say 9,000 – if Apays the whole amount, he can demand only 3,000 eachfrom the other co-debtors let us say B and C. But, if A actsas a surety of the obligation of B and C and he pays thefull amount to the creditor, he can demand 4,500 eachfrom B and C, in the absence of any stipulation that theybound themselves solidarily to the surety. Here, it is notimpossible that as between petitioners that there couldhave been an agreement that one of them would act as asurety. But then again, there is no evidence of such. Themere indication of the term “sureties” could not work in thesense that they will be considered solidarily liable.Especially when it does not appear who exactly here is

the principal debtor. No principal debtor whose obligationis assured or guarantied by the surety.

ESCANO vs ORTIGAS

Q: Do we have a contract of surety here? A: the contract entered into was stipulated as a suretyagreement but the SC held here that obligation of Escano toOrtigas is not surety but that of a joint liability.

Q: Why was there an issue here with regard to the obligationhere of Ortigas?

A: Because although the agreement was initiallydenominated as a contract of surety they later stipulated thatthey bound themselves jointly and severally liable. But

thereafter, when Ortigas was collecting or demandingpayment from Escano, Escanowere denying liability toOrtigas.

Q: What was the basis here of Ortigas demandingreimbursement from Escano?

A: In case, there is a concurrence of two or more creditors orof two or more debtors in one and the same obligation, Article1207 of the Civil Code states that among them, “[t]here is asolidary liability only when the obligation expressly so states,or when the law or the nature of the obligation requiressolidarity.” Article 1210 supplies further caution against thebroad interpretation of solidarity by providing: “Theindivisibility of an obligation does not necessarily give rise tosolidarity. Nor does solidarity of itself imply indivisibility.”These Civil Code provisions establish that in case of

concurrence of two or more creditors or of two or moredebtors in one and the same obligation, and in the absenceof express and indubitable terms characterizing the obligationas solidary, the presumption is that the obligation is only joint.It thus becomes incumbent upon the party alleging that theobligation is indeed solidary in character to prove such factwith a preponderance of evidence. Note that Article 2047itself specifically calls for the application of the provisions on

joint and solidary obligations to suretyship contracts. Article1217 of the Civil Code thus comes into play, recognizing theright of reimbursement from a co-debtor (the principal debtor,in case of suretyship) in favor of the one who paid (i.e. thesurety).

A significant distinction lies between a joint and severaldebtor, on one hand, and a surety on the other. Solidaritysignifies that the creditor can compel any one of the jointand several debtors or the surety alone to answer for theentirety of the principal debt. The difference lies in therespective faculties of the joint and several debtor and thesurety to seek reimbursement for the sums they paid outto the creditor. In the case of joint and several debtors,

Article1217 makes plain that the solidary debtor whoeffected the payment to the creditor “may claim from hisco-debtors only the share which corresponds to each,with the interest for the payment already made.” Suchsolidary 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 theproportional share of the other co-debtors, and not as tothe particular proportional share of the solidary debtorwho already paid. In contrast, even as the surety issolidarily bound with the principal debtor to the creditor,the surety who does pay the creditor has the right torecover the full amount paid, and not just any proportional

share, from the principal debtor or debtors. Such right tofull reimbursement falls within the other rights, actions andbenefits which pertain to the surety by reason of thesubsidiary obligation assumed by the surety.

Petitioners and Matti are jointly liable to Ortigas, Jr. in theamount of P1.3M; Legal interest of 12% per annum on P1.3M computed from March 14, 1994. Assailed rulings areaffirmed.

In this case, what we have here is not a contract ofsuretyship, but rather, an undertaking wherein the legaltie that binds the Ortigas group and the Escano group isthat “we are joint debtors.” We have here severalparagraphs in the undertaking that would show that evenif they used the term “surety,” referring to the Escano, weonly have here joint debtors.

First, upon receipt by any of the obligors - in this case theOrtigas group- of any demand from PDCP, they mustinform the sureties in order that they can timely takeappropriate measures.

Second, should any and/or all obligors be impleaded byPDCP, the sureties agree to defend the obligors on theirown expense without prejudice to any and/or all obligors

___ for confusion, indemnity, subrogation, and other

relief.

Third, if any of the obligors is for any reason made to payany amount, the sureties would reimburse obligors for thesaid amount. Now, although petitioners claim that Ortigaswas not made to pay, but rather paid voluntarily, again itwas not the intention here of the parties that they wouldonly pay if the Ortigas was not made to pay. That was notthe intention of the parties and they were alreadybenefited by Ortigas in the act of paying PDCP. The clearintent of the undertaking was for the petitioners to relievethe burden on Ortigas with the execution of theundertaking and not only when Ortigas has been

subjected to a final and executory adverse judgment.Now, on the other hand, Ortigas here alleged thatpetitioners here are solidarily liable – jointly and severally


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liable. It points out that it uses the word “sureties” all overthe document. However, take note, the obligation here inthe undertaking is presumed only to be joint. Theundertaking does not contain any express stipulation thatthe petitioners agreed to bind themselves jointly andseverally. So they are considered only as joint debtors.Likewise, there was no suretyship agreement herebecause a suretyship agreement requires a principaldebtor to whom the surety is solidarily bound by way of anancillary the obligation of segregate entity from theobligation between the principal debtor and the creditor.Now, do take note of the distinction pointed out betweena solidary co-debtor and a surety. A guarantor who bindshimself in solidum – in other words, a surety – does notbecome a solidary co-debtor for all intents and purposes.

Again, there are distinctions.

With that, take note of the distinction and take note of thenature of the obligation of a surety’s undertaking.1. It is contractual and accessory but direct. Immediate,primary and absolute.

2. Also, if you noticed in the succeeding provision andcases, the liability of a surety is limited by the terms of thecontract. His liability ordinarily restricted to the obligationexpressly stipulated therein A contract of surety is notpresumed; it cannot extend to more than what isstipulated.

3. Liability only arises if principal debtor is held liable. Thecreditor may sue separately or together, the principaldebtor and the surety. Where there are several sureties,the creditor may proceed even as against only one ofthem. Also, since it is an accessory contract, if the

principal obligation is void, then the surety agreement islikewise considered void.

4. In the distinctions, a surety is not entitled to exhaustionunlike that of a guarantor. For a surety assumes a solidaryliability for the fulfillment of the principal obligation.

5. Do remember that a surety’s undertaking is to thecreditor, not to the debtor. The surety cannot claim thatthere has been a breach of the surety’s obl igation to himunder the suretyship contract when the surety fails orrefuses to pay the debt for the principal’s account.

6. A surety is not entitled to notice of the principal debtor’sdefault. Demand on the surety is not necessary beforebringing suit against them, since the commencement ofthe suit is a sufficient demand. A surety is not evenentitled, as a matter of right, to be given notice of theprincipal’s default in the absence of an agreement to thateffect in the contract of suretyship.

7. Prior demand by the creditor upon the principal is notrequired. Because again, here, demand may be made

judicial or extrajudicial and would still result to default onthe part of the principal debtor.

8. A surety is not exonerated by neglect of creditor to sueupon principal.

Now, you will notice that a guaranty and suretyshippromise to answer for the neglect, default, or miscarriageof another. But of course there are several distinctionsbetween these two contracts.

Guaranty distinguished from Suretyship(Note: with De Leon’s discussion)

1. The surety assumes liability as a regular party to theundertaking while the liability of the guarantor dependsupon an independent agreement to pay the obligation if

the primary debtor fails to do so;

2. A surety is charged as an original promisor while theengagement of the guarantor is a collateral undertaking;

3. The guarantor is secondarily or subsidiarily liable, i.e.,he contracts to pay if, by the use of due diligence, the debtcannot be paid by the principal, while a surety is primarilyliable, i.e., he undertakes directly for the payment withoutreference to the solvency of the principal (regardless ofwhether or not the principal is financially capable to fulfillhis obligation), and is so responsible at once if the lattermakes default, without any demand by the creditor uponthe principal whatsoever or any notice of default.

4. A surety is ordinarily held to know every default of hisprincipal, while a guarantor is not bound to take notice ofthe non-performance of his principal; and

5. Usually, a surety will not be discharged either by themere indulgence of the creditor of the principal or by wantof notice of the default of the principal, no matter howmuch he may be injured thereby, while a guarantor is

often discharged by the mere indulgence of the creditor ofthe principal, and is usually not liable unless notified of thedefault of the principal.

CASTELVI vs SELLNER

Q: Who is Sellner here? Is he a surety or a guarantor? A: A guarantor.

Q: Who is the debtor here? A: The debtor here is Mining, Clarke and Maye.

Q: Why is Sellner a guarantor when it was stated in thepromissory note that he signed that he is ‘jointly and severally

liable’? A: It is because the term ‘jointly and severally liable’ in thenote refers not to Sellner’s obligation but refers to KeystoneMining and John Maye to creditor Higgins. It does not pertainto the obligation of Sellner which was a guaranty.

Q:Why was it a guaranty and not a surety? A: the nature of the obligation of Selner is evidenced by thenote executed. It was an independent agreement, his liabilitywas subject to the condition that the primary payor fails to doso. It is perfectly clear that the obligation assumed bydefendant is simply that of a guarantor.

We have here a 1920 case, Old Civil Coode pa. So fianzarefers to security and appears as a translation ofsuretyship. But again, suretyship and guaranty, take noteof its distinctions. In this case, the nature of the obligationof Sellner is evidenced by the note executed. It was anindependent agreement, his liability was subject to thecondition that the primary payor fails to do so. It isperfectly clear that the obligation assumed by defendantis simply that of a guarantor.

The letter of Sellner recites that if the promissory note isnot paid at maturity, then 15 days after notice of suchdefault and upon surrender to him of 3,000 shares ofKeystone, he will assume responsibility. Sellner is notbound with the principals by the same instrument

executed at the same time and with the sameconsideration. But rather, his liability is a secondary onefound in an independent collateral agreement. So again,take note of the distinctions between a contract ofguaranty and a suretyship.

The obligation of the guarantor is not solidary with theprincipal debtor. It is only if the principal debtor cannot payand the principal creditor has exhausted all the propertiesof the principal debtor, and that no property is present toanswer for the obligation of the debtor. That is the onlytime that the creditor can proceed against the guarantor.Unlike is suretyship, the surety is solidarily liable. The

creditor can proceed against the principal debtor, oragainst the surety, or against both of them. There is no


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benefit of excussion of property in favor of the suretyunlike in the contract of guaranty.

MACHETTI vs HOSPICIO DE SAN JOSE

Q: What is the issue here? A: Whether or not there is a contract of guaranty or surety.

Q: What do we have here? A: A contract of guaranty. The guarantor is Fidelity and SuretyCo.

Q: Why is there a contract of guaranty here and not asuretyship?

A: It is because Fidelity having bound itself to pay only in theevent it’s principal, Machetti, cannot pay it follows that itcannot be compelled to pay until it is shown that Machetti isunable to pay.

Remember that the guarantor is not an insurer of the debtguaranteed.as in this case of Machetti, Fidelity is onlyconsidered as a guarantor and not a surety even though

its company name is Fidelity and Surety Company. Whenthe surety undertakes to pay what the debtor cannot pay,the guarantor only binds himself

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

Now, while a surety undertakes to pay if the principal doesnot pay, the guarantor only binds himself to pay if theprincipal cannot pay. The one is the insurer of the debt,the other an insurer of the solvency of the debtor.

This latter liability is what the Fidelity and SuretyCompany assumed in the present case. The undertakingis perhaps not exactly that of a fianza under the CivilCode, but is a perfectly valid contract and must be giventhe legal effect if ordinarily carries. The Fidelity and SuretyCompany having bound itself to pay only the event itsprincipal, Machetti, cannot pay it follows that it cannot be

compelled to pay until it is shown that Machetti is unableto pay. Such ability may be proven by the return of a writof execution unsatisfied or by other means, but is notsufficiently established by the mere fact that he has beendeclared insolvent in insolvency proceedings under ourstatutes, in which the extent of the insolvent's inability topay is not determined until the final liquidation of hisestate.again, take note of the distinctions between a contract ofguaranty and a suretyship.

PALMARES vs CA

Q: But isn’t it that Palmares bound herself to be jointly andseverally liable? There is also a condition there that in every A: Yes, the surety here is stronghold

Q: What is the principal obligation subject to the surety? A: the completion of the construction of the building.

Now, in this case, observe that petitioner's undertaking asco-maker immediately follows the terms and conditionsstipulated between respondent corporation, as creditor,and the principal obligors. A surety is usually bound withhis principal by the same instrument, executed at thesame time and upon the same consideration; he is anoriginal debtor, and his liability is immediate and direct.

Thus, it has been held that where a written agreement onthe same sheet of paper with and immediately followingthe principal contract between the buyer and seller is

executed simultaneously therewith, providing that thesigners of the agreement agreed to the terms of theprincipal contract, the signers were "sureties" jointly liablewith the buyer.

A surety usually enters into the same obligation as thatof his principal, and the signatures of both usually appearupon the same instrument, and the same considerationusually supports the obligation for both the principal andthe surety.

There is no merit in petitioner's contention that thecomplaint was prematurely filed because the principaldebtors cannot as yet be considered in default, therehaving been no judicial or extrajudicial demand made byrespondent corporation. Petitioner has agreed thatrespondent corporation may demand payment of the loanfrom her in case the principal maker defaults, subject tothe same conditions expressed in the promissory note.Significantly, paragraph of the note states that "should Ifail to pay in accordance with the above schedule of

payment, I hereby waive my right to notice and demand."Hence, demand by the creditor is no longer necessary inorder that delay may exist since the contract itself alreadyexpressly so declares. As a surety, petitioner is equallybound by such waiver.

So you have here a contract of guaranty. Again, take noteof the distinctions between suretyship and guaranty.

1. A surety undertakes to pay if the principal doesnot pay. A guarantor only binds himself to pay ifthe principal cannot pay. . A surety is the insurerof the debt. A guarantor is the insurer of the

solvency of the debtor.

2. A guarantor only binds himself to pay if theprincipal cannot pay. . A surety is the insurer ofthe debt. A guarantor is the insurer of thesolvency

GILAS SATELITTE vs UCPB

Q: Is there a contract of surety here? Who is the surety here? A: Yes

Q: Who is the surety? A: UCPB.

Q: What was the ruling of the RTC? A: The trial court ruled that UCPB is liable to Gilat by theamount of 2 million dollars with interest and that such is finaland executory until the obligation has been settled.

Q: What was the ruling of the CA? A: The court of appeals dismissed the petition of Gilatregarding the computation of the interest and that under thesurety agrrement it required both parties to undergo firstarbitration.

In this case, the appellate court considered the Purchase Agreement entered into between petitioner and One Virtualas the principal contract, whose stipulations are also binding

on the parties to the suretyship. Bearing in mind thearbitration clause contained in the Purchase and pursuant tothe policy of the courts to encourage alternative disputeresolution methods, the trial court’s Decision was vacated;petitioner and One Virtual were ordered to proceed toarbitration.

Q:With regard to the arbitration clause of the suretyagreement, how did the SC address that?

A: The SC ruled that if the payment of UCPB to Gilat shouldundergo voluntary arbitration first then the principal of suretywill be rendered nugatory since the liability of UCPB issolidarily liable One virtual then UCPB should only pay whenOne virtual does not pay. If they will still undergo voluntaryarbitration before there is payment then the contract of surety

will baseless.


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Q: With regard to that issue, was the defense of UCPB herethat it should refer to arbitration first before it can be heldliable, was that upheld by the SC?

A: No, The existence of a suretyship agreement does not givethe surety the right to intervene in the principal contract, norcan an arbitration clause between the buyer and the seller beinvoked by a non-party such as the surety. Petitioner allegesthat arbitration laws mandate that no court can compel

arbitration, unless a party entitled to it applies for this relief.

This referral, however, can only be demanded by one who isa party to the arbitration agreement. Considering that neitherpetitioner nor One Virtual has asked for a referral, there is nobasis for the CA’s order to arbitrate.

Here the parties to the arbitration clause are only One Virtualand Gilat Satellite, UCPB is not a party thereto.Moreover, Articles 1216 and 2047 of the Civil Code clearlyprovide that the creditor may proceed against the suretywithout having first sued the principal debtor. Even the Surety

Agreement itself states that respondent becomes liable upon"mere failure of the Principal to make such prompt payment."Thus, petitioner should not be ordered to make a separateclaim against One Virtual (via arbitration) before proceeding

against respondent.

On the other hand, respondent maintains that a suretycontract is merely an accessory contract, which cannot existwithout a valid obligation. Thus, the surety may avail itself ofall the defenses available to the principal debtor and inherentin the debt – that is, the right to invoke the arbitration clausein the Purchase Agreement.

Q: Is UCPB still liable? A: Yes, UCPB is still liable. Is is the oft-repeated rule is that asurety’s liability is joint and solidary with that of the principaldebtor. This undertaking makes a surety agreement anancillary contract, as it presupposes the existence of aprincipal contract.

Although the contract of a surety is in essence secondaryonly to a valid principal obligation, its liability to thecreditor or "promise" of the principal is direct, primary andabsolute.

In this case, we have a surety. In fact in this case thesurety agreement itself states that the surety is liable uponmere failure of the principal obligor to make suchpayment. Therefore the petitioner no longer need to makea separate claim against One virtual before going after therespondent UCPB. A surety is directly and equally boundwith the principal. He becomes liable for the debt and duty

of the principal obligor, even without possessing a director personal interest in the obligations constituted by thelatter. Thus, a surety is not entitled to a separate notice ofdefault or to the benefit of excussion. It may in fact besued separately or together with the principal debtor.

Also, the acceptance does not give the surety the right tointervene in the principal contract. The surety’s role arisesonly upon the debtor’s default, at which time, it can bedirectly held liable by the creditor for payment as asolidary obligor." Hence, the surety remains a stranger tothe Purchase Agreement.

Respondent UCPB cannot invoke in its favor thearbitration clause in the Purchase Agreement, because itis not a party to that contract. An arbitration agreementbeing contractual in nature, it is binding only on the partiesthereto, as well as their assigns and heirs. It can only beGilat or One virtual who can invoke the arbitration clause.

Also take note of the distinction, sureties do not insure thesolvency of the debtor, but rather the debt itself. They arecontracted precisely to mitigate risks of non-performanceon the part of the obligor. This responsibility necessarilyplaces a surety on the same level as that of the principaldebtor. The effect is that the creditor is given the right todirectly proceed against either principal debtor or surety.This is the reason why excussion cannot be invoked.

Take note in this case that to require the creditor toproceed to arbitration would render the very essence ofsuretyship nugatory and diminish its value in commerce.The court here made mention of the ruling in Palmares v.Court of App eals that "if the surety is dissatisfied with thedegree of activity displayed by the creditor in the pursuitof his principal, he may pay the debt himself and becomesubrogated to all the rights and remedies of the creditor."

Article 2048. A guaranty is gratuitous, unless there is astipulation to the contrary.

General Rule: A contract of guaranty is gratuitous innature.Exception: (onerous) by stipulation of the parties

WILLEX PLASTIC INDUSTRIES, CO vs CA

Q: Do you have a guraranty here or suretyhip? A: A suretyship.

Q: Isn’t it that was denominated in the agreement that is wasa continuing guaranty? Why did the court rule that it was asuretyship?

A: The SC held that the name or the title of the contract is notcontrolling but it is the stipulations of the agreement thatshows the intent of the parties.

Q: Since you are saying that there was a surety contract,what was the consideration?

A: The consideration to secure the payment of Interbank(formerly IUCP) of amounts paid to Manilabank. Such, gaverise to the execution of a ‘continuing guaranty.’ Willex’scontention based on the fact that it is not a party either to the“Continuing Surety Agreement” or to the loan agreementbetween Manilabank and Inter-Resin Industria is untenable.

The consideration necessary to support a surety obligationneed not pass directly to the surety, a consideration movingto the principal alone being sufficient. For a “guarantor orsurety is bound by the same consideration that makes thecontract effective between the principal parties thereto. . . . Itis never necessary that a guarantor or surety should receiveany part or benefit, if such there be, accruing to his principal.”

Notice here that even if the document executed was acontinuing guaranty Willex was considered a suretybecause again, we have there interest in Industrial andWillex Plastic Co. jointly and severally guaranteed asuretyship agreement whereby they bound themselvessolidarily to pay Manilabank obligations of every, on which

Inter Resin may now be indebted or hereafter becomeindebted to Manilabank.

Consideration as we know is necessary to support anobligation. Because again a surety is a contract and oneof the essential elements of the contract is aconsideration. However, such consideration need notpass directly to the surety where the consideration of theprincipal alone is sufficient. Remember that the guarantoror surety is bound by the same consideration that madethe contract between the principal parties thereto. So theconsideration in the principal contract can also beconsidered for the contract of guaranty or suretyship.

The parties to the continuing guaranty clearly providedthat the parties to the “Continuing Guaranty” clearlyprovided that the guaranty would cover “sums obtainedand/or to be obtained” by Inter -Resin Industrial fromInterbank.

In Obligations and Contracts, the consideration of acontract is required for the validity thereof, noconsideration, no valid contract. But here a contract ofsurety or guaranty is an accessory contract and itsexistence is dependent upon the consideration of theprincipal contract. So in the absence of a stipulation on

the consideration of the guaranty or suretyship then thecause or consideration is the consideration of the principalcontract/obligation.


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Now of course if the principal contract has noconsideration, then there is no valid contract at all. Andtherefore, the contract of guaranty or suretyship willlikewise be considered as void.

Article 2049. A married woman may guarantee anobligation without the husband's consent, but shall notthereby bind the conjugal partnership, except in casesprovided by law.

So this emphasizes the right of a married woman to enterinto a contract of guaranty. In persons you have there thedifferent property relations between husband and wife.You have absolute community property that in theabsence of any agreement between the husband andwife, this shall govern their property relations.

Under the Law on Sales, any alienation of a propertysupported by a contract of sale, without the consent of theother spouse, will be void but it will be considered as a

continuing offer between the persons.

With regard to Art 2049 this refers to the separateproperty of a married woman. In other words, the contractof guaranty here refers to the separate property orparaphernal property of the married woman.

For example she acted as a guarantor, what property canthe creditor go after? Her paraphernal property. Now ifshe has no separate property, you have to considerwhether it has redounded to the benefit of the familybecause it is only then can the creditor go after theconjugal property of the married woman and her husband.

So how about the husband? There is no expressprohibition in the New Civil Code. He may likewise enterinto contracts of guaranty and surety and the same rulesare applicable. However, take note of the provisionsunder the Family Code that in case of disagreement thehusband’s decision shall prevail but without prejudice tothe wife to seek relief from the courts. So if the wife doesnot agree with the husband then she can seek reliefbefore the court.

Article 2050. If a guaranty is entered into without theknowledge or consent, or against the will of the

principal debtor, the provisions of articles 1236 and1237 shall apply.

Remember that in a contract of guaranty or suretyship theagreement again is only between the principal creditorand the guarantor or the principal creditor or the surety.The consent of the principal debtor as I mentioned earlieris not necessary for the validity of the contract of guaranty.It is only the consent on the part of the gurantor and thecreditor will be required. This is for the benefit of thecreditor.

If in case the principal debtor failed to fulfill his obligationthen the guarantor will be answerable to the principalcreditor.

With regard to the payment, we have a third person of theobligation of the principal debtor, he may do so withoutthe consent or against the will of the debtor. But as youremember, under 1236, the creditor cannot be compelledto accept the payment of a third person who has nointerest in the fulfillment of the obligation unless there is astipulation to the contrary. But of course the creditor canaccept it if he wants it.

Now what is the effect if he accepts payment from a thirdperson? So Article 1237:

Article 1237. Whoever pays on behalf of the debtorwithout the knowledge or against the will of the latter,

cannot compel the creditor to subrogate him in hisrights, such as those arising from a mortgage,guaranty, or penalty.

He who pays for another may demand from the debtorwhat he has paid; except that if he has paid without theknowledge or against the will of the debtor, he can recover

only insofar as the payment has been beneficial to thedebtor. In other words, that is beneficial reimbursement.

For example:Giovanni borrowed money from Ron. Here comes Jordan,who without the knowledge of Giovanni, paid hisobligation to Ron. Even if Giovanni did not give hisexpress consent to Jordan’s act of paying his obligationto Ron, Jordan can still seek reimbursement fromGiovanni. However, if it was without the consent ofGiovanni or knowledge on his part, Jordan can only bereimbursed to the extent that Giovanni was benefited.That is beneficial reimbursement.

Let’s say part of Giovanni’s debt has already prescribed,but Jordan paid the full obligation of Giovanni and Ronaccepted the payment by Jordan. Can Jordan recover thefull obligation? Jordan cannot anymore recover thepayment for the prescribed obligation of Giovanni, butonly the balance which was beneficial on the part ofGiovanni. The excess will be borne by Ron, and he will beliable to Jordan, because here there is solution indebiti.

Now, distinguish, if the payment was made with theconsent of Giovanni, Jordan is not only entitled tobeneficial reimbursement but also subrogation to all therights available to the creditor.

So if for example, Giovanni executed a chattel mortgageto Ron to secure his obligation, if Jordan pays Giovanni’sobligation with his consent, then Jordan can seek not onlybeneficial reimbursement for whatever he has paid buteventually, he can subsequently seek for the foreclosureof the chattel mortgage as he is now subrogated to therights of the creditor.

Article 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.

It may also be constituted, not only in favor of the

principal debtor, but also in favor of the other guarantor,with the latter's consent, or without his knowledge, oreven over his objection.

The first paragraph deals with the classification Imentioned earlier. The second paragraph also deals withwhat I mentioned earlier with double guaranty and subguaranty.

You have another person who guarantees theperformance of another guarantor.

Article 2052. A guaranty cannot exist without a valid

obligation.

Nevertheless, a guaranty may be constituted toguarantee the performance of a voidable or anunenforceable contract. It may also guarantee a naturalobligation

Again this emphasizes that a contract of guaranty is anaccessory contract. It cannot exist without a validobligation. Nevertheless, under your obligations andcontracts, there are certain defective contracts,rescissible, voidable, unenforceable contracts. Of course,a void cantract cannot be subject of a contract ofguaranty. However, if it is voidable, it can be subject to a

guaranty. Why? Because is valid until annulled. And whatif its rescissible? It can also, because it is valid until


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rescinded. Unenforceable? Again, it is also valid but itcannot be enforced, nevertheless it can be a validcontract of guaranty.

Also a natural obligation can also be subject to aguaranty. This obligation is valid, you cannot enforce thenatural obligation but once there is performance, thedebtor cannot demand what he has given or paid.Therefore, if the guarantor secured the performance of anatural obligation, the creditor may proceed against theguarantor although he does not have the right of actionagainst the principal debtor. So, the debtors obligation isnot unenforceable anymore. When the debtor himselfoffers to guaranty his natural obligation, he impliedlyrecognizes his liability and as to him it transforms thenatural obligation from a natural to a simple one.

Article 2053. A guaranty may also be given as securityfor future debts, the amount of which is not yet known;there can be no claim against the guarantor until thedebt is liquidated.

A conditional obligation may also be secured.

Alright we have here the concept of a continuing guarantyor a suretyship.

Q: What is the arrangement of a continuing guaranty orsuretyship?

A: A continuing guaranty is one where which isn’t limitedto a single transaction but which contemplates a futurecourse of dealings, covering a series of transactionsgenerally for an indefinite time or until revoked.

RecapCharacteristics of a guaranty:

1.) accessory: because it is dependent for itsexistence upon the principal obligation;

2.) subsidiary & conditional;3.) unilateral

Also take note on the nature of the undertaking of aSurety:

1.) Direct2.) Immediate3.) Absolute4.) Primary

In other words we can also say that it is solidary in nature.Nevertheless, distinguish or don’t forget the distinctionbetween a solidary co-debtor and a surety. Again, in thecases that we have discussed we had pointed out thedistinctions between these two different circumstances.

Also, we have mentioned the distinctions between acontract of guaranty and suretyship, always take notthese distinctions to be able to point out whether thecontract involves a guaranty or a suretyship because it isrelevant especially on the discussion on creditexhaustion.

Article 2048. A guaranty is gratuitous, unless there is astipulation to the contrary.

Under Art 2048 we have already discussed that aguaranty is a gratuitous contract unless there is astipulation to the contrary. Now, if there is no cause orconsideration in the institution of the suretyship orguaranty then the consideration will be the same as thatof the principal obligation.

Article 2049. A married woman may guarantee anobligation without the husband’s consent, but shall notthereby bind the conjugal partnership, except in cases

provided by law.

Article 2049, just take note when a married woman entersinto a contract of guaranty.

Article 2050. If a guaranty is entered into without theknowledge or consent, or against the will of theprincipal debtor, the provisions of articles 1236 and1237 shall apply.

So the effect is beneficial reimbursement or subrogation,when is there subrogation or when is there beneficialreimbursement only.

Article 2051. A guaranty may be conventional, legal or judicial, gratuitous, or by onerous title.

It may also be constituted, not only in favor of theprincipal debtor, but also in favor of the guarantor, withthe latter’s consent, or without his knowledge, or evenhis objection.

So here we have the different kinds of guaranty. We havea double guaranty or sub guaranty or one constituted toguarantee the obligation of the guarantor.

Article 2052. A guaranty cannot exist without a validobligation.

Nevertheless, a guaranty may be constituted toguarantee the performance of a voidable or anunenforceable contract. It may also guarantee a naturalobligation.

A very important provision is Article 2053.

Article 2053. A guaranty may also be given as security

for future debts, the amount of which is not yet known;there can be no claim against the guarantor until thedebt is liquidated.

Conditional obligation may also be secured.

Q: What is a continuing guaranty or suretyship? A: It is one which is not limited to a single transaction butwhich contemplates a future course of dealings, coveringa series of transactions generally for an indefinite time oruntil revoked. It covers all transactions including thosearising in the future, which are within the description orcontemplation of the contract of guaranty, until the

expiration or termination thereof.

ATOK vs CA

Q: Who is the principal debtor here? A: Sanyu Chemical Corporation.

Q: Do we have a contract of guaranty or suretyship? A: A contract of suretyship.

Q: Why? A: Because

Q: Who is the creditor? A: the creditor is Atok Finance.

Q: How did Sanyu Chemical try to pay off Atok? Whathappened in November 1981?

A: Sanyu Chemical Corporation assigned three receivablesto Atok Finance as payment for their obligation.

Q: Why did it assign to Atok Finance? A: Because it cannot pay for the obligation.

Ma’am: Because here with the assignment it gives AtokFinance the right to collect from the debtors of SanyuChemical. So the proceeds to be collected will be applied tothe obligation to pay to Atok Finance. However, they were notable to collect. That is why they were going against the

sureties of Sanyu Chemical.

Q: So are the sureties here liable?


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A: Yes, they are liable.

Q: Now when was the obligation or the contract if loanperfected?

A: It was perfected at the time of the agreement itself.

Q: What is the ruling of the court that there is no considerationfor that continuing suretyship agreement?

A: The SC held in the wise, Surety agreements may securefuture debts.

Q: Now how was this suretyship agreement one of asuretyship agreement? What was provided in theagreement?

Q: Now how was this suretyship agreement one of asuretyship agreement? What was provided in theagreement?

A:The terms any indebtedness of the Principal now orhereafter held by the Surety is hereby subordinated to theindebtedness of the Principal to the Creditor; and if theCreditor so requests, such indebtedness of the Principal ofthe Surety shall be collected, enforced and shall be paid over

to the Creditor and shall be paid over to the Creditor and shallbe paid over to the Creditor on account of the indebtednessof the Principal to the Creditor but without reducing oraffecting in any manner the liability of the Surety under theprovisions of this suretyship.

For valuable and/or other consideration . . ., jointly andseverally unconditionally guarantee to ATOK FINANCECORPORATION (hereinafter called Creditor), the full, faithfuland prompt payment and discharge of any and allindebtedness of [Sanyu Chemical] . . . (hereinafter calledPrincipal) to the Creditor. The word "indebtedness" is usedherein in its most comprehensive sense and includes any andall advances, debts, obligations and liabilities of Principal orany one or more of them, here[to]fore, now or hereafter

made, incurred or created, whether voluntary or involuntaryand however arising, whether direct or acquired by theCreditor by assignment or succession, whether due or notdue, absolute or contingent, liquidated or unliquidated,determined or undetermined and whether the Principal maybe may be liable individually of jointly with others, or whetherrecovery upon such indebtedness may be or hereafterbecome barred by any statute of limitations, or whether suchindebtedness may be or otherwise become unenforceable.

It is true that a guaranty or a suretyship agreement is anaccessory contract in the sense that it is entered into forthe purpose of securing the performance of anotherobligation which is denominated as the principal

obligation. It is also true that Article 2052 of the Civil Codestates that "a guarantee cannot exist without a validobligation." This legal proposition is not, however, likemost legal principles, to be read in an absolute and literalmanner and carried to the limit of its logic.

Future debts, even if the amount is not yet known, may beguaranteed but there can be no claim against theguarantor until the amount of the debt is ascertained orfixed or demandable.

Rationale: a contract of guaranty is subsidiary

Article 2053. — A guaranty may also be given as securityfor future debts, the amount of which is not yet known;there can be no claim against the guarantor until the debtis liquidated. A conditional obligation may also besecured.

Here the SC explained the nature of a continuing suretyin this wise: ‘Comprehensive or continuing suretyagreements are in fact quite commonplace in present dayfinancial and commercial practice.

A bank or financing company, commonly requires theprojected principal debtor to execute a continuing suretyagreement along with its sureties. By executing such anagreement, the principal places itself in a position to enterinto the projected series of transactions with its creditor;

which such surety agreement, there would be no need toexecute a separate surety contract or bond for eachfinancing or credit accommodation extended to theprincipal debtor.

Article 2054. A guarantor may bind himself for less, butnot for more than the principal debtor, both as regardsthe amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligationsshall be reduced to the limits of that of the debtor.

GATEWAY vs ASIANBANK

Q: What is the effect of the order of insolvency of gateway? A: The declaration of insolvency merely suspends the actionto collect of sum of money but it does not extinguish theobligation of gateway.

Now why is this important because, in insolvencyproceedings all the civil actions are suspended in themeantime because

Q: How about on the part of Geronimo? A: The court held here that Geronimo is also liable becausehe acted as a surety of gateway.

Q: Can I not say that the obligation here of Geronimo issuspended in the sense that it would be unfair because thecollection to gateway is suspended by reason of insolvencybut Geronimo as a surety can still be held liable?

A: The court ruled that Geronimo will still be held liablebecause to free him or to suspend him from his liabilitydefeats the very purpose of suretyship agreements which isto pay the obligation of the principal debtor in case hedefaults.

Q: What kind of a suretyship agreement is contemplatedhere? A continuing suretyship?

A: Yes, in this case Geronimo will be held liable for all thedebts Gateway has incurred with Asianbank.

Rule: Insolvency of the principal debtor does not affect theliability of the surety

In relation to Article 2054 do take note that even if theprincipal debtor has been declared insolvent, even if thecourts already ruled that all pending civil actions will besuspended it doesn’t that mean that the creditors cannotcontinue from collecting from the sureties as in this case.

Remember that a surety secures payment andresponsible in case the principal debtor defaults. Thesurety cannot at law, in the absence of anagreement/stipulation limit the application of the securityor limit the creditors right to go against the surety inrequiring the creditor to exhaust all remedies against theprincipal debtor before collecting from the him as surety.

Article 2054 is not applicable, the rule cannot possible bestretched to mean that the guarantor or surety is freedfrom liability. As such, the guarantor or the surety in theevent the principal debtor becomes insolvent is still liable.Why? Because it defeats the essence of the surety

contract.

Take note that the contract executed here was continuingsuretyship agreement wherein Geronimo is liablepayment for all the obligations of gateway under thedomestic bills purchase line and the omnibus credit linewithout any specific limitation.

SECURITY BANK vs CUENCA

Q: How is Cuenca related to the principal debtor? A: He is the president of the board of Directors of Sta. Ines.Q: Is he a gurantor or a surety?

A: He is a surety ma’am. He solidarily bound himself.

Q: Is he liable?


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A: No. The court held here that there was a novation thatextinguished the obligation.

Q: Was there a waiver of consent on the part of Cuenca thathe no longer needs to be notified in case of changes ornovation?

A: No. there was no evidence showing that Cuencadispensed with his right to be notified in case of changes.

Remember that a waiver should always be express.Otherwise if it is vague it is ivalid. There is no waiver here thathe should be notified in case of any change so therefore heSHOULD be notified. In the absence of that notice in relationto the novation or its change then the obligation of the suretywill be extinguished.

Q: Why do you think that the liability of the surety will beextinguished if there is a novation in the principal obligation?

A: Because novation is form of extinguishing an obligation. Inthis case, it was expressly stated that the principal obligationwas novated.

So the indemnity agreement that was executed here was

actually a novation. It was continuing surety but up to acertain limitation. However, do take note there was anovation here. The 1999 agreement extinguished the1980 accommodation. So we can say that there was anovation to pay the principal or extinguish the principalobligation and in connection with the extinguishment ofthe original obligation, the obligation of the surety inrelation to that, was likewise extinguished. An extensiongranted to the debtor granted by the creditor extinguishedthe guaranty.

Distinguish this from the suretyship agreements in creditcards that there is a stipulation that ‘waive or discharge in

cases of changes or novation’, in this case there wasnone. So novation extinguishes the liability of Cuenca, thesurety in this case.

Now, it was also mentioned here by the SC that it is acommon practice to require the issuance of this indemnityagreement or in a continuing suretyship agreementwherein you have this guarantor’s or surety’s act whereinsureties are joint and solidarily liable. As we have noticedin these cases, usually it is the major stockholder or thepresident of the corporation that are the sureties. This isbecause you would notice that the obligation of acorporation is limited it would only extend to the assets of

the corporation so what would happen if the corporationgets bankrupt? They cannot just go after the stockholdersor to their personal assets. The personality or identity ofthe corporation is distinct from that of its stockholder’s.That is why in order for the creditor to be secured, theyrequire corporations to execute suretyship agreements.

If the corporation has no more assets you can only runagainst those personal assets of the sureties and thatsuch surety shall make sure that the proceeds of the loanis used solely for that purpose which it has been obtainedby the corporation. If you act as a surety it can extend toyour personal assets.

However, there is a discussion of the SC that the timeframe when the indemnity agreement was executed,Cuenca was a stockholder or officer of the corporation, atthe time of the 1989 indemnity agreement he was nolonger a stockholder of the corporation. Does itautomatically mean that he is no longer liable?Not necessarily, here the SC said that he was not in aposition to ensure the payment of the obligation, there isthen no reason for Sta. Ines to assume that Cuenca wouldaccede or consent to the indemnity agreement becausehe is no longer a stockholder.

It does not necessarily mean that when you are a

stockholder and acted as a surety for the corporation’sloan and thereafter, at the time of the execution of anotherindemnity agreement you were no longer an officer, it

doesn’t mean that you cannot anymore be held liable asa surety.

Here, the main reason why Cuenca was not held liablewas because of that provision that said ‘without hisconsent’ and not because he was no longer a stockholderof the corporation then. Your obligation as a surety canstill continue even if you are no longer a stockholder it willdepend on the provisions of the agreement.

Article 2055. A guaranty is not presumed; i t must beexpress and cannot extend to more than what isstipulated therein.

If it be simple or indefinite, it shall compromise not onlythe principal obligation, but also all its accessories,including the judicial costs, provided with respect to thelatter, that the guarantor shall only be liable for thosecosts incurred after he has been judicially required topay.

There is no presumption that there is a contract ofguaranty or suretyship, you always look at the terms ofthe contract and what are the stipulations wherein for oneto be considered a contract guaranty there must be nodoubt that indeed that such person under the agreementanswers the obligation of another.

With respect to the guarantor he shall only be liable onlyat the time the principal debtor can no longer pay and notat mere default.

What is the effect if demand was made upon theguarantor and he did not pay?

Any interest penalties or judicial costs will still beshouldered by the guarantor from the time demand waspaid upon him.

PIXON vs PIXON

Q: When did he become liable as a surety? In the agreementhe was referred to as what?

A: A guarantor.

Q: Even if he was referred to as a guarantor is it possible thathe can be made as surety?

A: It can be possible that although what was denominated in

the agreement was that he was a guarantor, he can still bemade a surety in that he binds himself to be jointly andseverally liable.

Take note of that, here the SC was clear that it would beviolative to hold one as a surety when he wasdenominated as a guaranty but be careful with that, youhave to still look at the provisions clearly, the words ‘jointlyand severally liable’ it makes them not only a guarantorbut a surety as well. This is essential because the extentof the liability of the guarantor is different from that of asurety with the extent of interest and penalty. Theguarantor can only be held upon demand.

BA FINANCE vs CA

Q: Who is the principal debtor here? Who is BA Finance inthis case?

A: BA Finance should be the guarantor of Renato (debtor)Q: Who is the creditor?

A: Traders Royal Bank

Q: Suertyship or guaranty? A: Guaranty.Q: Who is the guarantor?

A: BA FinanceQ: What obligation was guaranteed by BA Finance? Whoexecuted a suretyship agreement?

The transaction here is some sort of a double guaranty,however, there was no authority to issue guaranty.


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Therefore, BA Finance cannot guaranty the obligation ofthe Cayetanos as surety of the obligation of Renatos toTraders Royal Bank.

Recap

Article 2055. A guaranty is not presumed; i t must beexpress and cannot extend to more than what isstipulated therein.

If it be simple or indefinite, it shall compromise not onlythe principal obligation, but also all its accessories,including the judicial costs, provided with respect to thelatter, that the guarantor shall only be liable for thosecosts incurred after he has been judicially required topay.

There is no presumption that a contract of guaranty exists.The obligation of the one who executed, that heundertakes to answer for the obligation of another, suchdocument must be clearly stipulated. And of course ifwe’re talking about the person who acts as a surety must

likewise be clearly stipulated clearly the nature of hisobligation, that he is solidarily bound with the principaldebtor.

Also remember the distinction between a contract ofguaranty and suretyship. The contract of guaranty iscovered by the statute of frauds. Under the statute offraud, specifically Article 1403 paragraph 2(e):

Article 1403.x x x

Section 2.(a) x x x

x x x

(e) An agreement of the leasing for a longer periodthan one year, or for the sale of real propertyor of an interest therein;

A special promise to answer for the debt or miscarriage ofanother refers to a contract of guaranty.

The requirement that the contract of guaranty be in writingis for enforceability. It is not required for validity. What isrequired from a person to be considered as a guarantor is

that it must be express, as clearly stipulated in 2055. Itmust be express and cannot extend to more than what isstipulated therein. However, there is no requirement thatthe contract of guaranty be in a public instrument.

How about on the part of the creditor regarding theacceptance of a person who acts as a guarantor orsurety? On the part of the creditor, his acceptance neednot be express or in writing.

You have 2 kinds of acceptance here in which we have toconsider:

1.) If it is merely an offer of guaranty or2.) If it an unconditional promise of guaranty.

This was emphasized in the case of Texas Company v. Alonso.

TEXAS COMPANY vs ALONSO

Q: Is there a surety or guarantor under the facts of this case? A: None.Q: Why Not?

A: There was only an offer.Q: Thomas Alonso made an offer, what is the relevance ofthe nature of the obligation or the offer here? What if it ismerely an offer of guaranty?Q: Was it stated there that it must be accepted? Why was it

considered merely as an offer and not an unconditionalpromise of guaranty?

Q: Now what is the importance, or why is there a need todetermine that it is merely an offer and not an unconditionalpromise of guaranty? Why do we have to make thedistinction? You said, it was merely an offer of guaranty. Whydo we have to determine that it was merely an offer ofguaranty that could not bind Alonso as a guarantor or suretyin this case?

Q: So the extent of the liability here of the party who executeda contract, if it is an unconditional promise, which was notaccepted by the creditor, would the person who executed theguaranty or suretyship, be liable even if it was not accepted?

A: Yes.

We have to make a distinction. We’re not saying that in allcontracts of guaranty or suretyship, there must beapproval or the acceptance of the creditor. It depends asto the nature of the contract that has been executed by(supposedly) the guarantor or the surety in order for himto be bound by such manner. If it is merely an offer ofproposition or a guaranty or merely a conditional guarantyin the sense that it requires action by the creditor before

the obligation becomes fixed, it does not become abinding obligation until it is accepted and unless there isa waiver of notice until notice of such acceptance is givento or acquired by the guarantor or until he has notice orknowledge that the creditor has performed the conditionsand he intends to act upon the guaranty. Acceptance inthis case need not be necessarily expressed or in writingbut may be indicated by acts amounting to acceptance.

Under the facts of this case, there is only have an offer ofguaranty made by Alonso. Why? In the additional securityprovision, it is stipulated, “x x x upon the Agent's faithfulperformance of this contract, in such individuals of firms

as joint and several sureties as shall be satisfactory to theCompany.” In other words, if it is satisfactory to thecompany or when the suretyship (the security) issatisfactory to the company, then that is the time that theperson who executed this document (in this case: Alonso)will be bound as a surety. But in this case there was noacceptance or notice that such offer was satisfactory tothe creditor, thus Alonso was not bound. However, if theguarantor or surety made an unconditional promise to bebound, unless notice of acceptance is a condition thereto,all that is necessary is to make the promise binding. Thepromisee should act upon it and notice of acceptance isnot necessary. Distinguish first if it is merely an offer or anunconditional promise. If it is merely an offer, then theremust be acceptance for the guarantor or surety to be heldas such.

Applying Article 2055, for a person to be considered as aguarantor or surety, the provisions in the contractexecuted are STRICTLY CONSTRUED, in the sense thatit must be expressly and clearly indicated therein thenature and indication of his obligation. So the constructionis strictly interpreted against the creditor and in favor ofthe guarantor and should not be extended beyond itsterms or specified limits.

VISAYAN SURETY vs. CA

Q; What is an action for replevin? A: An action for replevin is to recover possession of personalproperty.

Q: What is the purpose of a replevin bond? Why is Dominadorclaiming against the replevin bond that was filed by thespouses? What is the nature of a bond?

A: It is a form of security.Q: In this case, who acts as the guarantor or surety?

A: Visayan Surety – they were the ones who issued a replevinbond in case the spouses will be held liable, the bond will beused as payment.

Q: Was the claim of Ibajan against the bond granted by the

court? A: No.


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Q: Why not? Under the facts of the case, who could have theright to file a claim against the replevin bond by Visayansurety?

A: Only the spouses Bartolome because of the case betweenthe spouses Danilo and Mila Ibajan and spouses Bartolometo which Dominador is not a party thereto.

Obligation—whether a guarantor or surety, cannot be

extended by indication beyond its specified limits. Theextent of the surety’s liability is determined only by theclause of the contract of suretyship. A contract of Suretyis not presumed; it cannot extend to more than what isstipulated. In the case at bar, Spouses Danilo and MilaIbajan filed a complaint against Sps Bartolome to recoverthe possession of the jeepney. In an action for replevin,which seeks to recover possession of the personalproperty, it is also required to post a bond that in case theperson to whom you want to get the property has a betterright, then the bond would answer for the damages or anydamages that may be suffered by the defendant.

In this case, the one who has a better right is Ibajan, whowas not a party, but was merely an intervenor in the actionfor replevin filed by spouses Danilo and Mila againstBartolome. In other words, the bond is not applicable tohim. It cannot extend by implication beyond the limitsprovided therein. If it was spouses Bartolome who wasproven to have suffered damages by virtue of that actionfor replevin, then they have the right to claim against thatbond. But in this case, it was Dominador who filed againstthat bond, but the liability of Visayan cannot extend to him.

Take note that is in regard to the interpretation of acontract of guaranty as well as suretyship under Article2055.

Article 2056. One who is obliged to furnish a guarantorshall present shall present a person who possessesintegrity, capacity to bind himself, and sufficientproperty to answer for the obligation which heguarantees. The guarantor shall be subject to the

jurisdiction of the court of the place where thisobligation is to be complied with.

Qualifications of the guarantor:1.) The guarantor should have integrity2.) He must have the capacity to bind himself.

a. He must be of legal of legal age.

b. Must have capacity to enter into a contractc. Not convicted of a crime with a penalty of civil

interdiction.3.) He has sufficient property to answer for the obligation

which he guaranties.

So with these qualifications the guarantor must have atleast the amount equal to the amount of the principalobligation involved.However, what happens if the guarantor has integrity,capacity, but do not have sufficient property to answer forthe principal obligation? Does it mean that if the guarantorexecuted a contract of guaranty, it is already void because

you do not have the qualifications in 2056? Notnecessarily, because the requirements here can bewaived by the creditor. Wherein if the creditor accepts ordoes not object with the guarantor (whose qualification isnot complete) acting as a guarantor or surety, then hewaives the requirements of qualifications provided in2056. But the creditor cannot be forced to accept a personas a guarantor wherein one of these qualifications is notpresent. But again, if the requirements are lacking, but thecreditor accepted the guarantor, it constitutes as waiveron the part of the creditor. So, it is still valid. But again,the creditor cannot be forced to accept a guarantor whosequalifications is not complete.

The qualifications are not to be considered as essentialelements to a contract of guaranty. The absence of any

qualifications here does not necessarily render thecontract void.

The second sentence or the last sentence in 2056, itrefers to the jurisdiction. The place of performance and,that is the court, which has the jurisdiction over the case.This in consonance with the provisions of the Rules ofCourt regarding venue and jurisdiction.

Article 2057. If the guarantor should be convicted in thefirst instance of a crime involving dishonesty or shouldbecome insolvent, the creditor may demand anotherwho has all the qualifications required in the precedingarticle. The case is expected where the creditor hasrequired and stipulated that a specified person shouldbe the guarantor.

The qualifications under Article 2056 if all of these arepresent upon the perfection of the contract of guaranty, itis not required that it be present until the maturity of theobligation or until demand is made by the creditor. While

under Article 2056 qualifications are required at theinception of contract of guaranty, unless waived by thecreditor, it is not required that these qualifications mustcontinually subsist afterwards as emphasized in Article2057.

Under Article 2057, the guarantor is subsequentlyconvicted of a crime involving dishonesty. In other words,he is now a person without integrity or lacks integrity orbecomes insolvent so he does not have sufficient propertyto answer for the obligation. If that happens, it will notaffect the validity of the contract. But it gives the creditorthe right to demand for another guarantor. In fact under

Obligations and Contracts, if the parties have agreed forsecurities or collateral and the security becomes impairedor destroyed, the obligation becomes immediatelydemandable wherein the debtor uses the right to makeuse of the period. So these are the consequences if theguarantor loses any of the qualifications in Article 2056—the creditor may ask or may require from the debtor foranother guarantor or surety; otherwise, the obligationbecomes immediately demandable.

Will the death of the surety or guarantor extinguish hisobligation? No.

ESTATE OF HEMADY vs LUZON SURETY

Q: Is he a guarantor or a surety? A: Surety.

Q: What is the effect of the death of Hemady on his theobligation as a surety?

A: It bound his successor.Q: So his successors will now be liable to the principalobligation of which Hemady acted as a surety?

A: No. However, the estate of Hemady will be heldaccountable for his obligation as surety,Q: So what if his properties at the time of his death are notsufficient to answer his obligations as a surety?

A: His heirs cannot be asked more than what the estate of

Hemady can cover.

In the case of Estate of Hemady, under Article 1311 asemphasized:

Article 1311. Contracts take effect only between theparties, their assigns and heirs, except in case wherethe rights and obligations arising from the contract arenot transmissible by their nature, or by stipulation or byprovision of law. The heir is not liable beyond the valueof the property he received from the decedent.

If a contract should contain some stipulation in favor of

a third person, he may demand its fulfillment providedhe communicated his acceptance to the obligor beforeits revocation. A mere incidental benefit or interest of a


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person is not sufficient. The contracting parties musthave clearly and deliberately conferred a favor upon athird person.

Article 1311 is the application of the doctrine of relativity.

During his lifetime Hemady acted as a surety in this case,

wherein he will become liable to Luzon Surety Company.When such surety company demanded from the estate ofHemady, the trial court dismissed its claim on the groundthat upon Hemady’s death he ceased to be a surety.However, take note in this case, the contract he executedtakes effect as against the successors or heirs—which inthis case, the estate at the time of his death. As pointedout, his successors or heirs will not be liable more thanwhat they have received from the estate of Hemady.

Therefore, the death of Hemady did not extinguish hisliability as a surety, thus the Luzon insurance companycan go after the remaining estate of the deceasedHemady. But if it turns out that the estate is not sufficient

to answer for the liability of Hemady as against LuzonSurety, Luzon Surety has no recourse against the heirs orsuccessors of Hemady because the heirs cannot be heldpersonally liable for the obligations of Hemady.

Also in this case, it was pointed out that if any of thequalifications would supervene after the execution of thecontract of guaranty or suretyship, it will not terminate thecontract. But applying Article 2057, it gives the creditor theright to demand a replacement. The right to make ademand [a replacement] is not a duty, therefore it remainsoptional to the creditor, and he may waive it and choosesand hold the guarantor to his bargain.

In Article 2057, it provides that “in case he should beconvicted in the first instance of the crime involvingdishonesty.” Conviction in the sense that there is alreadya final judgment.

How about insolvency? Is it required that the court hasdeclared the guarantor to be insolvent? NOTNECESSARILY. As long as the guarantor is incapable ofmeeting his obligations when they become due he canalready be considered as insolvent which then be givesthe creditor the right to demand for another guarantor asprovided in Article 2057.

Those are the provisions in relation to the nature andextent of guaranty and suretyship.

Effects of Guaranty

How about the effects thereof? Article 2058:

Article 2058. The guarantor cannot be compelled topay the creditor unless the latter has exhausted all theproperty of the debtor, and has resorted to all the legalremedies against the debtor.

What we have in Article 2058 is what the main distinctionbetween a guarantor and a surety. The benefit ifexcussion or also known as the benefit of exhaustion.

What is the nature of this benefit? Remember that thisbenefit is only available to a guarantor. This benefit is infavor of the guarantor and unlike the obligation of a surety,the obligation of the guarantor is merely accessory andsubsidiary in nature. It cannot be enforced before theobligation of the principal debtor is enforced.

Before the creditor can proceed and collect from theguarantor, he must first proceed and try to collect from the

principal debtor. Because again the obligation of theguarantor is only subsidiary and secondary. Only whenthe principal debtor fails to pays, shall the guarantor be

liable. And if the principal debtor fulfills his obligation, thenthe guarantor is discharged from any responsibility.

When do we say that the benefit of excussion or benefitof exhaustion is given to the guarantor? When the creditorhas exhausted all the property of the debtor. So try tocollect first from the debtor and also resort to all legalremedies available as against the debtor. If these are notdone by the creditor, then he cannot collect from theguarantor.

The general rule with regard to guarantor —benefit ofexcussion: before you can proceed to the guarantor, goafter first the principal debtor.

WISE COMPANY vs TANGLAO

Q: Is there suretyship here? So there is no suretyship here?No contract of guaranty?

A: No.Q: Why is it that we have the term ‘guarantor ’ in the power of

attorney?

Q: Assuming that Atty. Tanglao agreed to act as a guarantor,can Wise Company demand payment from him?

A: No.Q: Why not?

Q: What are the legal remedies that are available? A: Foreclosure, because there was a mortgage that wasexecuted.

In this case, Atty. Tanglao executed a power of attorney:

“To sign for me as guarantor for himself in hisindebtedness to Wise & Company of Manila, whichindebtedness appears in civil case No. 41129, of theCourt of First Instance of Manila, and to mortgage my lot(No. 517-F of the subdivision plan Psd-20, being a portionof lot No. 517 of the cadastral survey of Angeles, G. L. R.O. Cad. Rec. No. 124), to guarantee the said obligationsto the Wise & Company, Inc., of Manila.”

Notice that the intention of Atty. Tanglao in executing thepower of attorney was only to authorize David tomortgage the property. He did not enter into a contract ofsuretyship, he did not even enter into a contract ofguaranty.

Again going back to Article 2055, the obligation of suretyor a guarantor must be expressed and cannot bepresumed.So it appears that Atty Tanglao could not have contractedany personal responsibility for the payment of the 640pesos. Of course, this is 1936 case pa.

Take note here that it in the case there is a portion whichprovides that at “any rate even granting that Tanglao beconsidered as as surety” since this was enacted in 1936,there was yet not much distinction between surety andguarantor. The term surety here refers to a guarantor.Because assuming that Tanglao is a guarantor, the action

does not yet lie against him on the ground that all the legalremedies against the debtor have not been previouslyexhausted. That is the benefit of excussion which is onlygiven to a guarantor. So if you take the term ‘surety’ (asused in this case) literally, you’ll be confused why in thiscase it state that it need not previously exhaust [otherremedies]. The term surety there is used referring to aguarantor. Again, the benefit of exhaustion or excussionis given to a guarantor and not a surety.

Take note also that when it comes to the benefit ofexcussion, it is not sufficient that you just say that thedebtor is insolvent because the creditor must resort to all

the legal remedies against the debtor. As in the case ofWise Company, there is a mortgage executed and hecould have foreclosed that mortgage before he could try


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to collect from Tanglao. All legal remedies, such as ifthere is mortgage have it foreclosed, or filing an action forsum of money against the principal debtor.

Also another remedy that may be available, isemphasized in the case of PB COM vs CA.

PB COM vs CA

Q: What is the nature of the action filed by PB Com againstChua?

A: Accion PaulianaQ: What do you mean by that?

Q: So in this case was it proven that the deed of exchangewas executed in bad faith?

Q: To whom was the property transferred? A: Jaleco Deveopment, CorpQ: Why would it constitute as a defraudation on the part ofChua in addition to your basis that it was his only property atthe time and also the fact that it was entered into after he

agreed to be a surety? What is the relation of Chua to Jaleco?

Q: After there was an execution of the deed of exchange,what happened to the property?Q: Who remains in possession of the property even after theexecution of the deed of exchange?

A: It was still Chua who remained in possession of theproperty which provides additional proof indeed the deed ofexchange and subsequent transactions were entered into todefraud the creditor.

Remember that under Obligations and Contracts, accionpauliana has already been discussed, which is an actionintended to rescind or impugn the contract or alienationmade by the debtor (or in this case, we have the suretywho is also considered as the debtor) in fraud of thecreditor. It appears here that in the case of Fortune, Chuahad only one property at the time he agreed to be a suretyin the agreement. So after the obligation was incurred hemade an alienation of such property by virtue of that deedof exchange in favor of Jaleco in exchange for the sharesof stocks. That was considered as an evidence that thealienation was intended to defraud the creditor.

This is also another legal remedy available to the creditorbefore he can actually proceed against the guarantor.

This case was just pointed out to show another legal

remedy available to a creditor emphasizing the benefit ofexhaustion. Again in this case, we have a surety. What Iam trying to point out is the nature of this accion pauliana.

In this case, it was only his property nevertheless, evenhe executed the surety agreement. His only property wassold to Jaleco after the debts became due. PetitionerPBCOM has the right to file an annulment to a deed ofExchange. The issue in this case is whether the action ofannulment was premature. In this case, it was notpremature because this was a legal remedy available tothe creditor.

Rescission requires the existence of creditors at the timeof the fraudulent alienation, and this must be proved asone of the bases of the judicial pronouncement settingaside the contract; without prior existing debts, there canbe neither injury nor fraud. The credit must be existing atthe time of the fraudulent alienation, even if it is not yetdue. But at the time the accion pauliana is brought, thecredit must already be due. Rescission is a subsidiaryaction, which presupposes that the creditor hasexhausted the property of the debtor, which is impossiblein credits which cannot be enforced because of the termor condition.

Also in this case evidence showed that Chua continued tostay in the said property despite the fact of the executionof the deed of exchange and the subsequent transaction.

Relate this again to the concept of a corporation having apersonality separate and distinct from its stockholders.That is general rule. So therefore, Jaleco has a separatepersonality from Chua.

In this case, this is an exception. Under Corporation Law,there is the doctrine of piercing the corporate fiction orcorporate entity—the corporation has no separate entitycorporation if that separation of personality is used todefraud third person. In this case, Chua and hisimmediate family was actually in control of JalecoCorporation. So the execution of that deed of exchangewas clearly not into exchange, not into sale, as all theevidences under the circumstance of this case wouldshow that it was a sham or simulated transaction, whereinthe property was not really divested from Chua as heremained in control of the property. It is clear as theevidence shown in this case that it is to defraud thecreditor so that they cannot go after Chua.

Recap

The main distinction between a guaranty and a suretyshipis that a guarantor is given the benefit of excussion. Thisis provided under Article 2058. So, the guarantor herecannot be compelled to pay the creditor unless thecreditor has exhausted all the properties of the debtor andhas resorted to all the legal remedies available against thedeb

Second Exam Transcript-2

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