LAW ON CREDIT TRANSACTIONS – GUARANTY AND CONTRACT OF PLEDGE

GUARANTY (Articles 2047-2084)

• Chapter 1 – Nature and Extent of Guaranty (Arts. 2047-2057)
• Chapter 2 – Effects of Guaranty (Arts. 2058-2084)
Section 1. – Effects of Guaranty Between the Guarantor and Creditor (Arts. 2058-2065)
Section 2. – Effects of Guaranty Between the Debtor and the Guarantor (Arts. 2066-2072)
Section 3. – Effects of Guaranty as Between Co-guarantors (Arts. 2073-2075)
• Chapter 3 – Extinguishment of Guaranty (Arts. 2076-2081)
• Chapter 4 – Legal and Judicial Bonds (Arts. 2082-2084)

PLEDGE (Articles 2085-2123)

• Chapter 1 – Provisions Common to Pledge and Mortgage (Arts. 2085-2092)
• Chapter 2 – Provisions Applicable Only to Pledge (Arts. 2093-2123)

GUARANTY (Art. 2047)

- Guaranty is a contract whereby a person binds himself to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.

Characteristics
✓ It is accessory because it is dependent for its existence upon the principal obligation guaranteed by it.
✓ It is subsidiary and conditional because it takes effect only when the principal debtor fails in his obligation subject to
limitation.
✓ It is unilateral because
(a) it gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa; and because
(b) it may be entered into even without the intervention of the principal debtor.
✓ It is a contract which requires that the guarantor must be a person distinct from the debtor because a person cannot be
the personal guarantor of himself.

Suretyship
- Suretyship may be defined as a relation which exists where one person (principal or obligor) has undertaken an
obligation and another person (surety) is also under a direct and primary obligation or other duty to a third person
(obligee), who is entitled to but one performance, and as between the two who are bound, the one rather than the other
should perform.
- Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be
answerable to a third person for the debt, default, or miscarriage of another known as the principal.

Guaranty vs. Suretyship

Guaranty Suretyship
Guarantor is secondarily liable. Surety is primarily liable and is therefore not entitled to
the exhaustion of the properties of the principal debtor.
Guarantor binds himself to pay only when the principal Surety assumes liability as a regular party to the
cannot pay. undertaking and undertakes to pay if the principal does not
pay.
Guarantor is an insurer of the debtor’s solvency. Surety is an insurer of the debt.

Guaranty vs. Warranty

Guaranty Warranty
A contract by which a person is bound to another for the An undertaking that the title, quality, or quantity of the
fulfillment of a promise or engagement of a third party. subject matter of a contract is what it has been represented
to be, and relates to some agreement made ordinarily by
the party who makes the warranty.

Classification of Guaranty
1. Guaranty in the broad sense:
a) Personal This refers to guaranty properly so-called or guaranty in the strict sense. (Art. 2047.) Here, the guarantee
is the credit given by the person who guarantees the fulfillment of the principal obligation; or
b) Real - Here, the guaranty is property, movable or immovable. If immovable, the guaranty is in the form of real
mortgage (Art. 2124.) or antichresis (Art. 2132.) and if movable, in the form of pledge (Art. 2093.) or chattel
mortgage. (Art. 2140.)

2. As to its origin:
a) Conventional. One constituted by agreement of the parties (Art. 2051, par. 1.);
b) Legal. One imposed by virtue of a provision of law; or
c) Judicial. One required by a court to guarantee the of one of the parties in a case.

3. As to consideration:
a) Gratuitous. - One where the guarantor does not receive any price or remuneration for acting as such (Art. 2048.);
or
b) Onerous. One where the guarantor receives valuable consideration for his guaranty.
4. As to the person guaranteed:
a) Single. One constituted solely to guarantee or secure performance by the debtor of the principal obligation (Art.
2051, par. 2.); or
b) Double or sub-guaranty. One constituted to secure the fulfillment by the guarantor of a prior guaranty.

5. As to its scope and extent:

a) Definite. One where the guaranty is limited to the principal obligation only, or to a specific portion thereof (Art.
2055, par. 2.); or
b) Indefinite or simple. - One where the guaranty includes not only the principal obligation but also all its accessories
(e.g., interests) including judicial costs.

Rules on the Nature and Extent of Guaranty

1. Guaranty is generally gratuitous except if there is a contrary stipulation.
2. Guaranty is an accessory contract therefore there must be a valid principal obligation for guaranty to be valid. Guarantor
may secure the performance of voidable, unenforceable, natural, conditional, and future obligations (Art. 2052).
3. Guarantor's liability cannot exceed the principal obligation (Art. 2054).
4. Guaranty cannot be presumed. If there is any doubt on the terms and conditions of the guaranty or surety agreements,
the doubt should be resolved in favor of the guarantor or surety.

Qualifications of a Guarantor
o He possesses integrity;
o He has capacity to bind himself; and
o He has sufficient property to answer for the obligation which he guarantees.

Effects of Guaranty between the Guarantor and the Creditor

General Rule: Exhaust debtor's property before he can be compelled to pay.

Exceptions: (Art. 2059)
• if guarantor has expressly renounced excussion;
• if guarantor has bound himself solidarily with the debtor (suretyship);
• in case of debtor's insolvency;
• when guarantor has absconded or cannot be sued within the Philippines unless he left a manager or representative;
• if it may be presumed that an execution on the debtor's property will not satisfy the obligation;
• if guarantor does not set up the benefit of excussion and fails to point out to the creditor available property of the debtor
within the Philippines;
• if he is a judicial bondsman and sub-surety;
• where a pledge or mortgage has been given by the guarantor as a special security;
• if guarantor fails to interpose it as a defense before judgment is rendered against him.

Effects of Guaranty between the Debtor and the Guarantor

1. Guaranty is a contract of indemnity. The guarantor who pays for a debtor must be indemnified by the latter.

The indemnity comprises:

▪ the total amount of the debt;
▪ the legal interest thereon from the time the payment was made known to the debtor, even though it did not earn
interest for the creditor;
▪ the expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him;
▪ damages, if they are due (Art. 2066)

Exceptions:
a) Where the guaranty is constituted without the knowledge or against the will of the principal debtor, the guarantor
can recover only insofar as the payment had been beneficial to the debtor (Art. 2050)
b) Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which,
however, requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted it
(Art. 1238)
c) The right to demand reimbursement is subject to waiver.

2. Guarantor has the right of subrogation against the debtor to enable him to enforce the indemnity granted in Art. 2066
and he cannot demand more than what he actually paid (Art. 2067).
3. Guarantor has the right to proceed against the debtor even before payment in the following instances:
3.1 When he is sued for the payment;
3.2 In case of insolvency of the principal debtor;
3.3 When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has
expired;
3.4 When the debt has become demandable by reason of the expiration of the period for payment;
3.5 After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period longer than ten years;
3.6 If there are reasonable grounds to fear that the principal debtor intends to abscond;
3.7 If the principal debtor is in imminent danger of becoming insolvent (Art. 2071).
Effects of Guaranty as Between Co-guarantors
- The obligation of several guarantors of the same debtor and for the same debt is joint and each is bound only to pay his
proportionate share. Therefore, one who has paid the entire debt may seek reimbursement from each of his co-guarantors
the share which is proportionately owing him.
Requisites:
• payment must have been made by virtue of a judicial demand; or
• because the principal debtor is insolvent.

EXTINGUISHMENT OF GUARANTY
1. Being accessory and subsidiary, guaranty is terminated when the principal obligation is extinguished by:
a) payment or performance;
b) loss of the thing due
c) condonation or remission of the debt
d) confusion or merger of the rights of the creditor and debtor
e) compensation
f) novation
g) Other causes of extinguishment of obligations: annulment, rescission, fulfillment of a resolutory condition, and
prescription.
2. Release of one guarantor by the creditor without the consent of the other guarantors benefits all to the extent of the share
of the guarantor released (Art. 2078).
3. An extension of the term granted by the creditor to the debtor without guarantor's consent extinguishes the guaranty
(Art. 2029).
4. The guarantor who pays is entitled to be subrogated to all the rights of the creditor (Art. 2067). If there can be no
subrogation because of the fault of the creditor, as when the creditor releases or fails to register a mortgage, the
guarantors are thereby released. The same rules apply even though the guarantors be bound solidarily (Art. 2080).

LEGAL AND JUDICIAL BONDS

- A bond, when required by law, is commonly understood to mean an undertaking that is sufficiently secured, and not
cash or currency.
- A bondsman is a surety (Art. 2047, par. 2.) offered in virtue of a provision of law or a judicial order.

Nature of bonds.
- All bonds including "judicial bonds" are contractual in nature. Bonds exist only in consequence of a meeting of minds
under the conditions essential to a contract. (see Art. 1305.)

Bondsman not entitled to excussion.

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

PLEDGE (Art. 2085)

Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable (Art. 2094) or
document evidencing incorporeal rights (Art. 2095) for the purpose of securing the fulfillment of a principal obligation with
the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions.

Kinds of Pledge
Voluntary or conventional or one which is created by agreement of the parties; or
Legal or one which is created by operation of law. (see Art. 2121.)

Characteristics
1. A real contract because it is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the
creditor who is the pledgee, or to a third person by common agreement;
2. An accessory contract because it has no independent existence of its own;
3. A unilateral contract because it creates an obligation solely on the part of the creditor to return the thing subject thereof
upon the fulfillment of the principal obligation;
4. A subsidiary contract because the obligation incurred does not arise until the fulfillment of the principal obligation to
which it is secured.

Common Provisions Governing Pledge or Mortgage

1. Contract may be constituted only by the absolute owner of the thing pledged or mortgaged otherwise, the pledge or
mortgage is void, such as that constituted by an impostor.
2. A mortgage of conjugal property by one of the spouses is valid only as to one-half (1/2) of the entire property.
3. While it is true that under Art. 2085 it is essential that the mortgagor be the absolute owner of the property mortgaged,
a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further. Stated
differently, an innocent purchaser for value (like a mortgagee) relying on a torrens title issued is protected.
4. A stipulation whereby the thing pledged or mortgaged or under antichresis (Art. 2137) shall automatically become the
property of the creditor in the event of non-payment of the debt within the term fixed is known as pactum commisorium
or pacto commissorio which is forbidden by law and declared null and void (Art. 2088)
Distinctions between Pledge and Real Mortgage
Pledge Real Mortgage
Movable property Immovable property
Delivery of the object pledged to the pledgee or a third Delivery of the thing mortgaged is not necessary.
person.
Pledge is not valid against third persons unless a description Mortgage is not valid against third persons if not registered.
of the thing pledged and the date of the pledge appear in a
public instrument.

Provisions Applicable only to Pledge

1. The pledgor retains his ownership of the thing pledged. He may, therefore, sell the same provided the pledgee consents
to the sale. As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee
subject to the rights of the pledgee, namely, that the thing sold may be alienated to satisfy the obligation (Art. 2112)
and that the pledgee must continue in possession during the existence of the pledge. (Arts. 2093, 2098).
2. The possession of the pledgee constitutes his security. Hence, the debtor cannot demand for its return until the debt
secured by it is paid. But the right of retention is limited only to the fulfillment of the principal obligation for which the
pledge was created. (Art. 2098).

3. Pledgee has the obligation to take care of the thing pledged with the diligence of a good father of the family. He is
entitled to reimbursement of the expenses incurred for its preservation and he is liable for loss or deterioration by reason
of fraud, negligence, delay or violation of the terms of the contract. (Arts. 1174, 1170).

4. Pledgee is not authorized to transfer possession of the thing pledged to a third person. Exception: stipulation authorizing
pledgee to transfer possession. (Art. 2100)

5. The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner.
But the pledgee can apply the fruits, income, dividends, or interest, if owing and thereafter to the principal of his credit.
(see Art. 2132).
Exception: contrary stipulation

6. The pledgor may ask that the thing pledged be deposited judicially or extrajudicially.
6.1 if the creditor uses the thing without authority;
6.2 if he misuses the thing in any other way (Article 2104);
6.3 if the thing is in danger of being lost or impaired because of the negligence or willful act of the pledge.

7. Pledgor cannot ask for the return of the thing pledged until said obligation is fully paid including interest due thereon
and expenses incurred for its preservation (Article 2099).
Exception: Pledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with
another thing of the same kind and quality (Article 2107).

8. The possession of the thing pledged by the debtor or owner subsequent to the perfection of the pledge gives rise to a
prima facie presumption that the thing has been returned and, therefore, that the pledge has been extinguished.

9. When the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge
is presumed remitted, not the principal obligation itself (Art. 1274).

10. The sale of the thing pledged extinguishes the principal obligation whether the price of the sale is more or less than the
amount due.
• If the price of the sale is more than the amount due the creditor, the debtor is not entitled to the excess unless the
contrary is provided;
• In the same way, if the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary
stipulation is void (Art. 2115).