Course Title: CREDIT TRANSACTIONS

IV. GUARANTY

A. Nature and Extent of Guaranty (Art. 2047 to Art. 2057)

1. Nature of the Contract

Ong vs. PCIB GR. No. 160466, January 17, 2005

SPOUSES ALFREDO and SUSANA ONG

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
G.R. No. 160466
January 17, 2005
FACTS:
Baliwag Mahogany Corp. (BMC) needed additional capital for its business and
applied for various loans, amounting to a total of P 5M with the respondent bank,
PCIB. Alfredo (President) and Susana Ong (Treasurer) acted as sureties for these
loans and issued 3 promissory notes for the purpose. It was stipulated in the notes
that the bank may consider BMC in default and demand payment of the remaining
balance of the loan upon the levy, attachment or garnishment of any of its
properties, or upon BMC’s insolvency, or if it is declared to be in a state of
suspension of payments. Thereafter, BMC filed a petition for rehabilitation and
suspension of payments with SEC after the creditors attached its properties. The
bank then sought the collection of the payment of the debt from the petitioners as
sureties.
PCIB filed a case for collection of a sum of money against petitioners-spouses.
A MOA was executed by BMC, the petitioners, and the consortium of creditor banks
of BMC (including PCIB). Petitioners then moved to dismiss the complaint arguing
that the MOA suspended any pending civil action against BMC. Hence, the benefits
of the MOA should also be extended to the petitioners as sureties. The trial court
denied the motion to dismiss. The CA affirmed the trial court’s ruling that a creditor
can proceed against petitioners as surety independently of its right to proceed
against BMC.
ISSUE: Whether or not Art 2063 and 2081 of the NCC apply to suretyship contracts.
HELD:
NO, Articles 2063 and 2081 of the NCC refer to contracts of guaranty. They do not
apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of
BMCs debts. 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 for 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. Thus, a creditor can go directly against the surety although the
principal debtor is solvent and is able to pay or no prior demand is made on the
principal debtor. A surety is directly, equally and absolutely bound with the principal

Debtor for the payment of the debt and is deemed as an original promisor and
debtor from the beginning.

Machetti vs. Hospicio de San Jose, 43 Phil 297

Machetti vs. Hospicio de San Jose and Fidelity & Surety Co., 43 Phil. 297, No. 16666,
April 10, 1922

G.R. No. L-16666             April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to
construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the
Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following endorsement in
the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.

Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as
the work progressed, payments were made to him from time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found
that the work had not been carried out in accordance with the specifications which formed part of the contract and
that the workmanship was not of the standard required, and the Hospicio de San Jose therefore answered the
complaint and presented a counterclaim for damages for the partial noncompliance with the terms of the agreement
abovementioned, in the total sum of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered suspending the proceeding in
the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made
cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still
remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a complaint
against the Fidelity and Surety Company asking for a judgement for P12,800 against the company upon its guaranty.
After trial, the Court of First Instance rendered judgment against the Fidelity and Surety Company for P12,800 in
accordance with the complaint. The case is now before this court upon appeal by the Fidelity and Surety Company
form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been
converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the
original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is
written in the English language and the terms employed must of course be given the signification which ordinarily
attaches to them in that language. In English the term "guarantor" implies an undertaking of guaranty, as
distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee" or "guaranty"
circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in
the present case; on the contrary it appear affirmatively that the contract is the guarantor's separate undertaking in
which the principal does not join, that its rests on a separate consideration moving from the principal and that
 although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking
separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the
principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor.
(Saint vs. Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and
Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity
and Surety Company assumed in the present case. The undertaking is perhaps not exactly that of a  fianza under the
Civil Code, but is a perfectly valid contract and must be given the legal effect if ordinarily carries. The Fidelity and
Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it follows that it cannot
be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ
of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been
declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay
is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as the
cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff Machetti. So
ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.

Castelvi vs. Sellner, 41 Phil. 142

Castellvi de Higgins & Higgins vs. Sellner [G.R. No. L-158025, November 5, 1920]
MALCOLM, J.

Facts:
 Sellner (defendant) wrote a letter to Mcleod (Castellvi’s agent) saying that he would bound himself to pay
the promissory note of Mining, Clarke and Maye amounting 10K + interest if not fully paid at maturity, upon the
surrender 3k shares of Keystone Mining Company. 
 Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit that
if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.

Issue: WON Sellner is a guarantor or surety?

Held:
 Sellner is a GUARANTOR. The letter of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and upon surrender to him of the three thousand
shares of Keystone Mining Company stock, he will assume responsibility. 
 Sellner was not bound with Castellvi by the same instrument executed at the time and the same
consideration, but his responsibility was secondary, one founded on an independent collateral agreement. Neither
was he jointly and severally liable with Castellvi. 
 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. 
 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. 
 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.

Zobel vs. Ca, G.R. No. 113931, May 6, 1998

CASE NO.11
SM: Surety vs. Guaranty; A.2080, NCC does not apply where the liability is as a surety, not
as a guarantor.
E.ZOBEL, INC. vs. CA
GR# 113931, May 6, 1998

FACTS: Respondent Spouses Claveria, doing business under the name “ Agro Brokers”,
applied for a loan with respondent Consolidated Bank & Trust Corp. (now SOLID BANK)
amounting to P2.875M.  The loan was granted subject to the condition that respondent
spouses execute a chattel mortgage over the 3 vessels to be acquired and that a continuing
guarantee be executed by Ayala International Phils., Inc., now herein petitioner E.Zobel, Inc.
in SOLID BANK’s favor. The Claverias defaulted in the payment of the entire obligation
upon maturity.  Petitioner moved to dismiss the complaint asserting that its liability as
guarantor of the loan was extinguished pursuant to A.2080, NCC.  It argued that it has lost
its right to be subrogated to the first chattel mortgage in view of SOLIDBANK’s failure to
register the chattel mortgage with the appropriate government
agency.  SOLIDBANK meantime claimed that A.2080 is not applicable because petitioner is
not a guarantor but a surety.
HELD: In the contract executed by petitioner in SOLIDBANK’s favor, albeit denominated as
a “Continuing Guaranty”, is in fact a contract of surety.  The contract’s terms obligates
petitioner as “surety” to induce SOLIDBANK to extend credit to the Claverias. The contract
clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party the
undertaking and obligated itself as an original promissory.  It bound itself jointly and
severally to the obligation with the Claverias.  In fact, SOLIDBANK need not resort to all
other legal remedies or exhaust the Claverias’ properties before it can hold petitioner liable
for the obligation. Since the petitioner is a surety, A.2080, NCC is inapplicable.  Said article
applies where the liability is as a guaranty not as a surety.
 Philam Guaranty vs. Ramos GR No. L-2078, February 28, 1966

G.R. No. L-20978

February 28, 1966

THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.,

plaintiff-appellant,
vs.
EUGENIO B. RAMOS, and PILAR MIRANDA, defendants-appellees.
FACTS:
Associated Reclamation & Development Corporation executed a promissory note for
P11,765.00
in favor of General Acceptance & Finance Corporation. On the same day, plaintiff
also executed a surety
bond in the amount of P11,765.00 to secure payment of the aforementioned
promissory note.
Subsequently, defendants signed a counter-guaranty agreement with real estate
mortgage, in favor of
plaintiff against its liability under the surety bond. The Ramos spouses and
Associated Reclamation &
Development Corporation, then executed an indemnity agreement in favor of
plaintiff, binding themselves
"jointly and severally" to indemnify the latter for whatever it may suffer under its
aforesaid surety bond.
Few months later, plaintiff filed a complaint in the CFI against the Ramos spouses
alleging that
Associated Reclamation & Development Corporation failed to pay its obligation
under the promissory
note, as a result of which plaintiff paid its liability under its surety bond. It asked that
defendants be
ordered jointly and severally to pay plaintiff P11,765 with the stipulated 12% per
annum interest, plus
attorney's fees and costs, and in case of non-payment within 90 days from service of
judgment, the
mortgaged property be sold to realize the aforesaid sum and costs.
Defendants filed a motion to dismiss for failure to state cause of action. They alleged
that they
were guarantors only so plaintiff must first exhaust the properties of the principal
debtor, Associated
Reclamation & Development Corporation, before proceeding against them. Hence,
plaintiff filed an
amended complaint. CFI dismissed the case and ruled that defendants cannot be made
liable without first
proceeding against the principal debtor. Plaintiff appealed directly to the Supreme
Court.
ISSUE:
WON plaintiff has a cause of action so as to proceed against defendants without first
proceeding
 against Associated Reclamation & Development Corporation.
HELD:
Yes. It is clear from the foregoing that the complaint sufficiently states a cause of
action against
defendants, for the creditor may proceed against any one of the solidary debtors or
some or all of them
simultaneously, as provided under Art. 1216. Moreover, the defendants, as counter-
guarantors, are not
entitled to demand exhaustion of the properties of the principal debtor. Their
agreement is a counterguaranty with real estate mortgage. It is an accepted fact that
guarantors have no right to demand
exhaustion of the properties of the principal debtor, under Article 2058, where a
pledge or mortgage has
been given as a special security.
Wherefore, the order appealed from is hereby reversed and set aside and the case is
remanded
to the court a quo for further proceedings.

2. Characteristics of the Contract

Philexport vs. Eusebio 434 SCRA 202

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION v. V.P. EUSEBIO

CONSTRUCTION, INC., 434 SCRA 202
 What law should be applied in determining whether the respondent contractor has
defaulted in the performance of its obligations under the service contract?
 No conflicts rule on essential validity of contracts is expressly provided for in our laws.  The rule
followed by most legal systems, however, is that the intrinsic validity of a contract must be governed
by the lex contractus or “proper law of the contract.” Lex contractus may either be:  This is the law
voluntarily agreed upon by the parties (the lex loci voluntatis-expressly provided) or the law intended by
them either expressly or implicitly (the lex loci intentionis-impliedly). The law selected may be implied from
such factors as substantial connection with the transaction, or the nationality or domicile of the parties.
Philippine courts would do well to adopt the first and most basic rule in most legal systems, namely, to
allow the parties to select the law applicable to their contract, subject to the limitation that it is not against
the law, morals, or public policy of the forum and that the chosen law must bear a substantive relationship
to the transaction.
 They failed to prove the Iraq law, then applying the processual presumption.
 In the United States and Europe, the two rules that now seem to have emerged as “kings of the
hill” are  (1) the parties may choose the governing law; and (2 in the absence of such a choice, the
applicable law is that of the State that “has the most significant relationship to the transaction and the
parties.  ”
 PROCESSUAL PRESUMPTION: In this case, the laws of Iraq bear substantial connection to
the transaction, since one of the parties is the Iraqi Government and the place of performance is in Iraq.
Hence, the issue of whether respondent VPECI defaulted in its obligations may be determined by the
laws of Iraq. However, since that foreign law was not properly pleaded or proved, the presumption of
identity or similarity, otherwise known as the processual presumption, comes into play. Where foreign
law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the
same as ours.
 RECIPROCAL CONTRACT IS APPLIED: No demand from the SOB; even if there was a
demand, there was an extension.
 Issue: WON the respondent contractor has defaulted in its obligations that would justify
resort to the guaranty.
 The trial court and the Court of Appeals were in unison that the respondent contractor cannot be
considered to have defaulted in its obligations because the cause of the delay was not primarily
attributable to it. The delay or the non -completion of the Project was caused by factors not imputable to
the respondent contractor.   It was rather due mainly to the persistent violations by SOB of the terms and
conditions of the contract, particularly its failure to pay 75% of the accomplished work in US
Dollars.  Indeed, where one of the parties to a contract does not perform in a proper manner the
prestation which he is bound to perform under the contract, he is not entitled to demand the performance
of the other party.  A party does not incur in delay if the other party fails to perform the obligation
incumbent upon him.
 WON petitioner as a guarantor can secure reimbursement from the respondents for what it
has paid under Letter of Guarantee No. 81-194F.
 As a rule, a guarantor who pays for a debtor should be indemnified by the latter and would be
legally subrogated to the rights which the creditor has against the debtor. However, a person who makes
payment without the knowledge or against the will of the debtor has the right to recover only insofar as the
payment has been beneficial to the debtor. If the obligation was subject to defenses on the part of the
debtor, the same defenses which could have been set up against the creditor can be set up against the
paying guarantor.
 From the findings of the Court of Appeals and the trial court, it is clear that the payment made by
the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the
conditions obtaining at the Project site at that time.   Moreover, the respondent contractor was found to
have valid defenses against SOB, which are fully supported by evidence and which have been
meritoriously set up against the paying guarantor, the petitioner in this case.  And even if the deed of
undertaking and the surety bond secured petitioner’s guaranty, the petitioner is precluded from enforcing
the same by reason of the petitioner’s undue payment on the guaranty.  Rights under the deed of
undertaking and the surety bond do not arise because these contracts depend on the validity of the
enforcement of the guaranty. The petitioner guarantor should have waited for the natural course of
guaranty:   the debtor VPECI should have, in the first place, defaulted in its obligation and that the creditor
SOB should have first made a demand from the principal debtor.  It is only when the debtor does not or
cannot pay, in whole or in part, that the guarantor should pay. When the petitioner guarantor in this case
paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available
against the creditor SOB at the time of payment.

Texas Co. vs. Alonzo, 73 Phil 90???

HongKong Shanghai Bank vs. Aldanese, 48 Phil 990???

3. Construction of Contract

Menzi vs. Chuan, 69 Phil 46???

B. Effects of Guaranty

- right of excussion (Art. 2058, 2060, 2062)

Arroyo v. Jungsay, 34 Phil. 590

Arroyo vs Jungsay Plaintiff is Jose Arroyo, guardian of Tito Jocsing, an

imbecile. Defendant is Florentino Jungsay and his bondsmen. Florentino was the
former guardian of Jocsing. The defendants absconded with Jocsing’s funds. A
judgement was made by the lower court against the defendants for P6,000,
together with interest and costs, the bondsmen appealed. Issue: W/N the
defendants should be credited with P4,400, the alleged value of certain property
but is in the exclusive possession of third parties under claim of ownership. Held:
No. Defendants invoke the benefit of excussion in Article 1834 of the (old) Civil
Code. Excussion gives to the surety the benefit of a levy (excusion), even when a
judgment is rendered against both the surety and the principal. The effect of this is
to stay proceedings against the surety until judgment has been obtained against
the principal debtor, and execution against his property has proved insufficient.
The court however held that before the surety is entitled to this benefit, he must
point out to the creditor property of the principal debtor which can be sold and
which is sufficient to cover the amount of the debt. (Article 1832 OCC, read Art
2060 NCC). According to Manresa, the claim for the benefit of excussion have
several elements: 1.) It must be claimed in a timely manner 2.) Surety must
designate property of the debtor where the debt is to be satisfied and importantly,
3.) Such property must be realizable and that it be situated in Spanish territory.
The same requisites were cited in Hill &Co, 1.) The surety who wants to claim the
benefit of excussion must demand it in limine (on the institution of the
proceedings) 2.) He must point out creditor property of the principal debtor 3.)
The property must not be incumbered, subject to seizure; and must furnish a
sufficient sum to have the discussion carried into effect The purpose of a bond is
to secure performance and the attachment of a property situated a great distance
away or a property that is not readily realizable would be a lengthy and extremely
difficult proceeding. The surety is tasked with designating the property because he
the one to be benefitted by such task and the one most interested in avoiding
difficulties in its execution. In this case, the property the defendants want credited
to them is not sufficient to pay the indebtedness; it is not salable; it is so
incumbered that third parties have, full possession under claim of ownership. In
all these respects the sureties have failed to meet the requirements of article 1832
of the Civil Code. Where a guardian absconds or is beyond the jurisdiction of the
court, the proper method, under article 1834 of the Civil Code and section 577 of
the Code of Civil Procedure, in order to ascertain whether such guardian is liable
and to what extent, in order to bind the sureties on his official bond, is by a
proceeding in the nature of a civil action wherein the sureties are made parties and
given an opportunity to be heard. All this was done in the instant case
Disposition: Lower court affirmed.

Willex v. CA, 256 SCRA 428

Varona v. CA, G.R. No. 125625, July 19, 1999

- when the creditor may proceed directly against the guarantor

(Art. 2059, 2081, 1280)

- when guarantor may proceed against debtor before paying

(Art. 2071, 2059, 2066)

1. Rights and Remedies of Guarantors

a. When guarantor pays (Art. 2066,2067)
Philexport v. Eusebio, supra
b. Request of third person (Art. 2072)
c. Proceeds against co-guarantors (Art. 2073, 2074)
 2. Sub-guaranty (Art. 2051, par.2)

a. Excussion (Art. 2058, 2064)

b. When guarantor is insolvent (Art. 2075)
C. Extinguishment of guaranty (Art. 2076, 1231, 1276, 1280, 2077, 2078, 2079,
2080, 2067, 2061, 2063, 1261)

Toh v. Solidbank, 408 SCRA 544;

Radio Corp. v. Roa, 62 Phil. 211;
Shannon v. Phil. Lumber, 61 Phil. 872;
Castelvi v. Sellner, supra

D. Legal and judicial bonds (Art. 2082-2084)

Velasquez vs. Solidbank Corporation 550 SCRA 119

Auto Corp group vs. Intra Strater Assurance Corp. 556 SCRA 250
Delos Santos vs. Vibar 558 SCRA 437
Bitanga vs. Pyramid Construction 563 SCRA 544
Gateway Electronics Corp. vs. Asiabank Corp. 574 SCRA 698

V. SURETYSHIP

A. Nature of Contract (Art. 2047, par. 2)

1. distinguished from solidary debtor (Art 1217 par 2.)

2. subject of the same terms (Art. 1211, 2054)

Ynchausti v. Yulo 34 Phil 978

B. Liability (Art. 1216, 1222)

C. Extinguishment

1. payment (Art. 1217)

2. novation (Art. 1215)

Hospicio de San Jose vs. Fidelity 52 Phil 926

Villa vs. Garcia, 49 Phil 128
Asiatic Petroleum vs. Hizon 45 Phil 532
Mabuhay Insurance vs. CA, March 30, 1970

D. Rights of the Surety (Art. 2066,2067,2071,2079, 2080)

Manila Surety v. Almeda, July 31, 1971

Banzon vs. Cruz, June 29, 1972

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